As used
in this annual report, "we", "us", "our", "CBMG", "Company" or "our
company" refers to Cellular Biomedicine Group, Inc. and, unless the
context otherwise requires, all of its subsidiaries or deemed
controlled companies.
Overview
Cellular
Biomedicine Group, Inc. is a clinical stage biopharmaceutical
company, committed to developing therapies for cancer and
degenerative diseases utilizing proprietary cell-based
technologies. Our focus is to reduce the aggregate cost and ensure
quality products of cell therapies by leveraging our innovative
manufacturing capabilities and strong ability to process
optimization to development of our internal proprietary cell
therapy based pipelines and our ability to partner with leading
cell therapy companies seeking manufacturing capabilities for
global collaborative partnerships. CBMG is headquartered in New
York, New York, its Research & Development facilities are based
in Gaithersburg, Maryland and Shanghai, China, and its
manufacturing facilities are based in China in the cities of
Shanghai and Wuxi.
The
manufacturing and delivery of cell therapies involve complex,
integrated processes, comprised of harvesting T cells from
patients, T cell isolation, activation, viral vector transduction
and GMP grade purification. We are using a semi-automated, fully
closed system and self-made high quality viral vector for cell
therapy manufacturing, which enables us to reduce the aggregate
cost of cell therapies. Additionally, this system has the ability
to scale for commercial supply at an economical cost.
Our
technology includes two major platforms: (i) Immune cell therapy
for treatment of a broad range of cancer indications comprised of
technologies in Chimeric Antigen Receptor modified T cells
("CAR-T"),
g
enetic modified T-cell
receptors (“TCRs”), next generation neoantigen-reactive
tumor infiltrating lymphocyte (“TIL”), and (ii) human
adipose-derived mesenchymal progenitor cells ("haMPC") for
treatment of joint diseases. We expect to carry out clinical
studies leading to the eventual approval by the National Medical
Products Administration (NMPA, renamed from China Food and Drug
Administration (“CFDA”)) of our products through
Biologics License Application ("BLA") filings and authorized
clinical centers throughout Greater China. We also plan to conduct
clinical studies in the United States that could potentially lead
to FDA approval of our solid tumor clinical
assets.
Our
primary target market is China, where we believe that our
cell-based therapies will be able to help patients with high unmet
medical needs. We are focused on developing and marketing safe and
effective cell-based therapies to treat cancer and joint diseases.
We have developed proprietary technologies and know-how in our cell
therapy platforms. We are conducting clinical studies in China with
our stem cell based therapies to treat knee osteoarthritis
(“KOA”). On December 2017, the Chinese government
issued trial guidelines concerning the development and testing of
cell therapy products in China, which provides that all cell
therapy products are treated as “drug” from a
regulatory perspective, and require official approval for INDs.
Prior to this revised regulation in December 2017, we have
completed a Phase IIb autologous haMPC KOA clinical study and
released the promising results. Led by Shanghai Renji Hospital, one
of the largest teaching hospitals in China, we completed a Phase I
clinical trial of our off-the-shelf allogeneic haMPC
(AlloJoin™) therapy for treating KOA patients. We also
completed and presented the Allojoin™ Phase I 48-week data in
China, and have been approved by NMPA to initiate a Phase II
clinical trial following the filing of CBMG's IND application for
AlloJoin® for KOA. CBMG’s IND application is the first
stem cell drug application to be approved by NMPA for a Phase II
KOA clinical trial since the release of the updated regulation on
cell therapy.
In
addition to our own internal pipelinse, we have initiated
successful partnerships with other cell therapy focused companies
as it pertains to their technology and platform’s market
access into the Chinese market. We believe that our focus on
process improvement and creating cost savings on cell therapy
manufacturing will enable us to collaborate with those firms as
they enter into the Chinese market.
Prior
to September 2018, CBMG has been developing its own anti-CD19 CAR-T
cell therapy in B-cell non-Hodgkin lymphoma ("NHL")and adult
acute lymphoblastic leukemia (“ALL”) and had already
initiated IND applications in China. On September 25, 2018, we
entered into a strategic licensing and collaboration agreement with
Novartis to manufacture and supply their CAR-T cell therapy
Kymriah® (tisagenlecleucel) in China. As part of the deal,
Novartis took approximately a 9% equity stake in CBMG, and CBMG is
discontinuing development of its own anti-CD19 CAR-T cell therapy.
This collaboration with Novartis reflects our shared commitment to
bringing the first marketed CAR-T cell therapy product,
Kymriah®
,
currently approved in the US, EU and Canada for two
difficult-to-treat cancers, to China where the number of patients
remains the highest in the world. We continue to develop cell
therapies targeting other than CD19 on our own and Novartis has the
first right of negotiation on these developments. The CBMG oncology
pipeline includes CAR-T targeting CD20-, CD22- and B-cell
maturation antigen (BCMA), NKG2D, AFP TCR and TIL. We are striving
to build competitive research capabilities, a cutting edge
translational medicine unit, along with a well-established cellular
manufacturing capability and ample capacity, to support
Kymriah® in China and our development of cell therapy
products. We expect to initiate first in-human clinical trials for
multiple CAR-T and TCR-T programs in 2019.
Corporate History
Headquartered
in New York, the Company is a Delaware biopharmaceutical company
focused on developing treatment for cancer and joint diseases for
patients in China. The Company was formerly known as EastBridge
Investment Group Corporation and originally incorporated in the
State of Arizona on June 25, 2011. The Company started its
regenerative medicine business in China in 2009 and expanded to
CAR-T therapies in 2014.
Recent Developments
On February
5, 2018, Sailings Capital invested in the Company for an aggregate
of 1,719,324 shares (the “February 2018 Private
Placement”) of the Company’s common stock at $17.80 per
share, for total gross proceeds of approximately $30.6
million. Pursuant to the shares purchase agreement,
Sailings Capital nominated, and Bosun S. Hau was appointed as a
non-executive Class III director of the Company and his appointment
was subsequent ratified by the Company’s stockholders during
the Annual Stockholders Meeting on April 27, 2018.
On
February 15, 2018, we obtained a 36–month exclusive option
with Augusta University to negotiate a royalty-bearing, exclusive
license to the patent rights owned by the Augusta University
relating to an invention to identify novel alpha fetoprotein
(“AFP”) specific TCR for a hepatocellular carcinoma
(“HCC”) immunotherapy. On February 14, 2019 we
exercised our option and executed the exclusive license with
Augusta University.
On
March 16, 2018, we issued a press release announcing the
presentation of the Allojoin™ Phase I 48-week data in China,
as well as the termination of the Company’s U.S.
Allojoin™ program with CIRM to focus the clinical development
in China. Prior to termination, the Company had received $1.2
million of the potential $2.29 million available under the CIRM
grant.
On
April 18, 2018 and April 21, 2018, the NMPA CDE posted on its
website acceptance of the IND application for CAR-T cancer
therapies in treating patients with NHL and ALL submitted by two of
the wholly-owned subsidiaries of the Company,
respectively. After executing the Novartis License and
Collaboration Agreement in September 2018 described below,
we no longer pursue our own
CD-19 CAR-T program.
On June
22, 2018, we expanded and moved to a new research and development
center in Gaithersburg, Maryland.
On
September 25, 2018, the Company, together with certain of its
subsidiaries and controlled entities, entered into a License and
Collaboration Agreement (the “Collaboration Agreement”)
with Novartis, pursuant to which the Company will manufacture and
supply Novartis the T CAR-T cell therapy Kymriah®
(tisagenlecleucel) (the “Product”) in China. The
Company also granted Novartis a world-wide license certain of its
intellectual property and technology, including intellectual
property and technology related to the Product. Such license is
exclusive with respect to the development, manufacture and
commercialization of the Product and non-exclusive with respect to
the development, manufacture and commercialization of other
products.
Also,
on September 25, 2018, we entered into a Share Purchase Agreement
with Novartis pursuant to which the Company agreed to sell, and
Novartis agreed to purchase from the Company, an aggregate of
1,458,257 shares of the Company’s common stock, at a purchase
price of $27.43 per share, which was the equivalent of 130% of the
volume-weighted average price of the Common Stock for the prior 20
consecutive trading days, for total gross proceeds of approximately
$40 million (the “Private Placement”). In
connection with the Private Placement, the Company filed a Form S-3
with the SEC on October 10, 2018 to satisfy the registration
requirement. The SEC declared the registration effective on October
22 and the Company filed the Private Placement Prospectus on
October 23, 2018.
On
October 2, 2018, we entered into a non-exclusive license agreement
with The U.S. Department of Health and Human Services, as
represented by National Cancer Institute, an Institute or Center
(the “IC”) of the National Institutes of Health,
pursuant to which the Company was granted rights to the worldwide
development, manufacture and commercialization of autologous,
tumor-reactive lymphocyte adoptive cell therapy products, isolated
from tumor infiltrating lymphocytes as claimed in the IC licensed
patent rights, for the treatment of non-small cell lung, stomach,
esophagus, colorectal, and head and neck cancer(s) in
humans.
On
October 10, 2018, we announced that we commenced a stock repurchase
program (the “2018 Share Repurchase Program”) granting
the Company authority to purchase up to $8.48 million in
common shares through open market purchases pursuant to a plan
adopted in accordance with Rule 10b5-1 and Rule 10b-18 of the
Exchange Act. The program contemplated repurchases of shares of the
Company’s common stock in the open market in accordance with
all applicable securities laws and regulations. It is
contemplated that total shares to be repurchased under the 2017 and
2018 Share Repurchase Programs shall not exceed $15 million in the
aggregate. From June 2017 to December 2018 the Company repurchased
a total of 1,001,499 shares of our common stock at a total price of
$13,953,666, or an average of $13.93 per share.
On October 29, 2018, after
reassessing CBMG
broad pipelines in immune cell technologies which comprises of
CAR-T, TCRT, and TIL, CBMG notified
USF and Moffitt
to prioritize our clinical
efforts primary on cell therapy efforts
and to terminate its GVAX license
agreements.
On
November 2, 2018, we relocated our principal executive offices from
Cupertino, California to New York, New York.
On
November 7, 2018, NMPA CDE formally accepted the IND application
for allogeneic adipose-derived mesenchymal progenitor cell (haMPC)
off-the-shelf therapy AlloJoin® for Knee Osteoarthritis (KOA)
submitted by two of our wholly-owned subsidiaries.
In the
next 12 months, we aim to accomplish the following, though there
can be no assurances that we will be able to accomplish any of
these goals:
●
Execute
the technical transfer and align the manufacturing processes with
Novartis to support Novartis’ development of the
Kymriah® therapy in China;
●
Advance Allojoin™ KOA Phase II
clinical
trial to support the BLA submissions in China
;
●
Advance Rejoin™ KOA IND applications with
the NMPA’s CDE
and initiate clinical
studies to support the BLA submissions in China
;
●
Initiate
investigator sponsored and/or CBMG sponsored clinical trials and
get early proof of concept results for the following clinical
assets:
º
Anti-BCMA
CAR-T for Multiple Myeloma (MM)
º
Anti-CD22
CAR-T for anti-CD19 CAR-T relapsing ALL
º
NKG2D
CAR-T for acute myeloid leukemia (AML)
º
Alpha
Fetoprotein Specific TCR-T for HCC
º
anti-CD
20 CAR-T for anti-CD19 CAR-T relapsing NHL
●
Bolster R&D resources to fortify our
intellectual properties portfolio and scientific development.
Continue to develop a competitive cell therapy pipeline for
CBMG. Seek opportunities to file new patent applications in
potentially the rest of the world
and in
China
;
●
Leveraging
our quality system and our strong scientific expertise to develop a
platform as preferred parties for international pharmaceutical
companies to co-develop cell therapies in Chinaby implementing our
quality strategies and leveraging the experience and expertise of
our strong scientific team in the U.S. and in China;
●
Evaluate
and implement digital platform system for research, material
management, production and clinical data tracking;
●
Evaluate
new regenerative medicine technology platform for other indications
and review recent development in the competitive
landscape;
●
Advance
our Quality Management System (QMS), Validation Master
Plan (VMP) and electronic records for quality assurance
;
●
Improve
liquidity and fortify our balance sheet by courting institutional
investors; and
●
Evaluate the
addition of gene therapy for disease treatment to our portfolio;
and
●
Evaluate
possibility of dual listing on the Hong Kong Stock Exchange to
expand investor base in Asia.
Our
operating expenses for year ended December 31, 2018 were in line
with management’s plans and expectations. We have an increase
in total operating expenses of approximately $12.8 million for the
year ended December 31, 2018, as compared to the year ended
December 31, 2017, which is primarily attributable to increased
R&D expenses and clinical developments in 2018.
Corporate Structure
Our
current corporate structure is illustrated in the following
diagram:
Currently
we have the following subsidiaries (including a controlled VIE
entity):
Eastbridge
Investment Corporation (“Eastbridge Sub”), a Delaware
corporation, is a wholly owned subsidiary of the
Company.
Cellular
Biomedicine Group VAX, Inc. (“CBMG VAX”), a California
corporation, is a wholly owned subsidiary of the
Company.
Cellular
Biomedicine Group HK Limited, a Hong Kong company limited by
shares, is a holding company and wholly owned subsidiary of the
Company.
Cellular
Biomedicine Group Ltd. (Wuxi), license number 320200400034410 (the
“WFOE”) is a wholly foreign-owned entity that is 100%
owned by Cellular Biomedicine Group HK Limited. This
entity’s legal name in Chinese translates to “Xi Biman
Biological Technology (Wuxi) Co. Ltd.” WFOE
controls and holds ownership rights in the business, assets and
operations of Cellular Biomedicine Group Ltd. (Shanghai)
(“CBMG Shanghai”) through variable interest entity
(VIE) agreements. We conduct certain biopharmaceutical
business activities through WFOE, including research and
development, technical support, technical service, technology
transfer in biomedical technology field, manufaturing of non-food,
pharmaceutical polypeptides and medical devices (in vitro
diagnostic reagents) extracted by biology
;
making foreign
investment with its own funds; cosmetics, sanitary products and
biological agents wholesale, commission agents
Cellular
Biomedicine Group Ltd. (Shanghai) license number 310104000501869
(“CBMG Shanghai”), is a PRC domestic corporation, which
we control and hold ownership rights in, through WFOE and the
above-mentioned VIE agreements. This entity’s
legal name in Chinese translates to “Xi Biman Biotech
(Shanghai) Co., Ltd.” We conduct certain
biopharmaceutical business activities through our controlled VIE
entity, CBMG Shanghai, including clinical trials and certain other
activities requiring a domestic license in the PRC. Mr.
Chen Mingzhe and Mr. Lu Junfeng together are the record holders of
all of the outstanding registered capital of CBMG Shanghai.
Mr. Chen and Mr. Lu are also investors of CBMG Shanghai
constituting the entire management of the same. Mr.
Chen and Mr. Lu receive no compensation for their roles as
investors of CBMG Shanghai.
Beijing
Agreen Biotechnology Co., Ltd. is a PRC domestic corporation and
wholly owned subsidiary of CBMG Shanghai.
Wuxi
Cellular Biopharmaceutical Group Ltd., established on January 17,
2017, is a PRC domestic corporation and wholly owned subsidiary of
CBMG Shanghai.
Shanghai Cellular
Biopharmaceutical Group Ltd., established on January 18, 2017, is a
PRC domestic corporation and wholly owned subsidiary of CBMG
Shanghai.
Variable Interest Entity (VIE) Agreements
Through
our wholly foreign-owned entity and 100% subsidiary, Cellular
Biomedicine Group Ltd. (Wuxi), we control and have ownership rights
by means of a series of VIE agreements with CBMG Shanghai. The
shareholders of record for CBMG Shanghai were Cao Wei and Chen
Mingzhe, who together owned 100% of the equity interests in CBMG
Shanghai before October 26, 2016. On October 26, 2016, Cao Wei,
Chen Mingzhe and Lu Junfeng entered into an equity transfer
agreement and a supplementary agreement (“Equity Transfer
Agreement”), pursuant to which Cao Wei transferred his equity
interests in CBMG Shanghai to Chen Mingzhe and Lu Junfeng. As a
result of the transfer, each of Mr. Chen and Mr. Lu now owns a 50%
equity interest in CBMG Shanghai. On the same day, WFOE, CBMG
Shanghai, Cao Wei and Chen Mingzhe entered into a termination
agreement, pursuant to which, the series of VIE agreements executed
among the WFOE, CBMG Shanghai, Chen Mingzhe and Cao Wei were
terminated and a new set of VIE agreements were executed. The
following is a description of each of these VIE
agreements:
Exclusive Business Cooperation
Agreement
. Through the WFOE, we are a party
to an exclusive business cooperation agreement dated October 26,
2016 with CBMG Shanghai, which provides that (i) the WFOE shall
exclusively provide CBMG Shanghai with complete technical support,
business support and related consulting services; (ii) without
prior written consent of the WFOE, CBMG Shanghai may not accept the
same or similar consultancy and/or services from any third party,
nor establish any similar cooperation relationship with any third
party regarding same matters during the term of the agreement;
(iii) CBMG Shanghai shall pay the WFOE service fees as calculated
based on the time of service rendered by the WFOE multiplying the
corresponding rate, plus an adjusted amount decided by the board of
the WFOE; and (iv) CBMG Shanghai grants to the WFOE an irrevocable
and exclusive option to purchase, at its sole discretion, any or
all of CBMG Shanghai’s assets at the lowest purchase price
permissible under PRC laws. The term of the agreement is
10 years, provided however the agreement may extended at the option
of the WFOE. Since this agreement permits the WFOE to determine the
service fee at its sole discretion, the agreement in
effect provides the WFOE with rights to all earnings of the
VIE.
Loan Agreement
. Through the
WFOE, we are a party to a loan agreement with CBMG Shanghai, Lu
Junfeng and Chen Mingzhe dated October 26, 2016, in accordance with
which the WFOE agreed to provide an interest-free loan to CBMG
Shanghai. The term of the loan is 10 years, which may be
extended upon written consent of the parties. The method
of repayment of CBMG Shanghai shall be at the sole discretion of
the WFOE, including but not limited to an acquisition of CBMG
Shanghai in satisfaction of its loan obligations.
Exclusive Option Agreement with Lu
Junfeng
. Through the WFOE, we are a party to an
option agreement with CBMG Shanghai and Lu Junfeng dated October
26, 2016, in accordance with which: (i) Lu Junfeng irrevocably
granted the WFOE an irrevocable and exclusive right to purchase, or
designate another person to purchase the entire equity interest in
CBMG Shanghai as then held by him, at an aggregate purchase price
to be determined; and (ii) any proceeds obtained by Lu Junfeng
through the above equity transfer in CBMG Shanghai shall be used
for the payment of the loan provided by the WFOE under the
aforementioned Loan Agreement.
Exclusive Option Agreement with Chen
Mingzhe
. Through the WFOE, we are a party to an
exclusive option agreement with CBMG Shanghai and Chen Mingzhe
dated October 26, 2016, under which: (i) Chen Mingzhe irrevocably
granted the WFOE an irrevocable and exclusive right to purchase, or
designate another person to purchase the entire equity interest in
CBMG Shanghai for an aggregate purchase price to be determined; and
(ii) any proceeds obtained by Chen Mingzhe through the above equity
transfer in CBMG Shanghai shall be used for the payment of the loan
provided by the WFOE under the aforementioned Loan
Agreement.
Power of Attorney from Lu
Junfeng
. Through the WFOE we are the recipient of
a power of attorney executed by Lu Junfeng on October 26, 2016, in
accordance with which Lu Junfeng authorized the WFOE to act on his
behalf as his exclusive agent with respect to all matters
concerning his equity interest in CBMG Shanghai, including without
limitation to attending the shareholder meetings of CBMG Shanghai,
exercising voting rights and designating and appointing senior
executives of CBMG Shanghai.
Power of Attorney from Chen
Mingzhe
. Through the WFOE we are the recipient of
a power of attorney executed by Chen Mingzhe on October 26, 2016,
in accordance with which Chen Mingzhe authorized the WFOE to act on
his behalf as his exclusive agent with respect to all matters
concerning his equity interest in CBMG Shanghai, including without
limitation to attending the shareholders meetings of CBMG Shanghai,
exercising voting rights and designating and appointing senior
executives of CBMG Shanghai.
Equity Interest Pledge Agreement with Lu
Junfeng
. Through the WFOE, we are a party to an
equity interest pledge agreement with CBMG Shanghai and Lu Junfeng
dated October 26, 2016, in accordance with which: (i) Lu Junfeng
pledged to the WFOE the entire equity interest he holds in CBMG
Shanghai as security for payment of the consulting and service fees
by CBMG Shanghai under the Exclusive Business Cooperation
Agreement; (ii) Lu Junfeng and CBMG Shanghai submitted all
necessary documents to ensure the registration of the Pledge of the
Equity Interest with the State Administration for Industry and
Commerce (“SAIC”), and the pledge became effective
on November 22, 2016; (iii) on the occurrence of any event of
default, unless it has been successfully resolved within 20 days
after the delivery of a rectification notice by the WFOE, the WFOE
may exercise its pledge rights at any time by a written notice to
Lu Junfeng.
Equity Interest Pledge Agreement with Chen
Mingzhe
. Through the WFOE we are a party to
an equity interest pledge agreement with CBMG Shanghai and Chen
Mingzhe dated October 26, 2016, in accordance with which: (i) Chen
Mingzhe pledged to the WFOE the entire equity interest he holds in
CBMG Shanghai as security for payment of the consulting and service
fees by CBMG Shanghai under the Exclusive Business Cooperation
Agreement; (ii) Chen Mingzhe and CBMG Shanghai submitted all
necessary documents to ensure the registration of the Pledge of the
Equity Interest with SAIC, and the pledge became effective
on November 22, 2016; (iii) on the occurrence of any event of
default, unless it has been successfully resolved within 20 days
after the delivery of a rectification notice by the WFOE, the WFOE
may exercise its pledge rights at any time by a written notice to
Chen Mingzhe.
Our
relationship with our controlled VIE entity, CBMG Shanghai,
through the VIE agreements, is subject to various operational and
legal risks. Management believes that Mr. Chen and Mr.
Lu, as record holders of the VIE’s registered capital, have
no interest in acting contrary to the VIE
agreements. However, if Mr. Chen and Lu as shareholders
of the VIE entity were to reduce or eliminate their ownership of
the registered capital of the VIE entity, their interests may
diverge from that of CBMG and they may seek to act in a manner
contrary to the VIE agreements (for example by controlling the VIE
entity in such a way that is inconsistent with the directives of
CBMG management and the board; or causing non-payment by the VIE
entity of services fees). If such circumstances were to
occur the WFOE would have to assert control rights through the
powers of attorney and other VIE agreements, which would require
legal action through the PRC judicial system. While we
believe the VIE agreements are legally enforceable in the PRC,
there is a risk that enforcement of these agreements may involve
more extensive procedures and costs to enforce, in comparison to
direct equity ownership of the VIE entity. We believe
based on the advice of local counsel that the VIE agreements are
valid and in compliance with PRC laws presently in
effect. Notwithstanding the foregoing, if the applicable
PRC laws were to change or are interpreted by authorities in the
future in a manner which challenges or renders the VIE agreements
ineffective, the WFOE’s ability to control and obtain all
benefits (economic or otherwise) of ownership of the VIE entity
could be impaired or eliminated. In the event of
such future changes or new interpretations of PRC law, in an effort
to substantially preserve our rights we may have to either amend
our VIE agreements or enter into alternative arrangements which
comply with PRC laws as interpreted and then in
effect.
For
further discussion of risks associated with the above, please see
the section below titled “Risks Related to Our
Structure.”
BIOPHARMACEUTICAL BUSINESS
The
biopharmaceutical business was founded in 2009 by a team of
seasoned Chinese-American executives, scientists and doctors. In
2010, we established a facility designed and built to China's Good
Manufacture Practice (GMP) standards in Wuxi, China and in 2012 we
established a U.S. Food and Drug Administration (FDA) GMP standard
protocol-compliant manufacturing facility in Shanghai. In October
2015, we opened a facility designed and built to GMP standards in
Beijing. In November 2017, we opened our Zhangjiang facility in
Shanghai, of which 40,000 square feet was designed and built to GMP
standards and dedicated to advanced cell manufacturing. Our focus
has been to serve the rapidly growing health care market in China
by marketing and commercializing immune cell and stem cell
therapeutics, related tools and products from our patent-protected
homegrown and acquired cell technology, as well as by utilizing
in-licensed and other acquired intellectual
properties.
Our
current treatment focal points are KOA and cancer.
Cancer.
We are focusing our
clinical development efforts on CD20-, CD22- and B-cell maturation
antigen (BCMA)-specific CAR-T therapies, T-cell receptor (TCR) and
tumor infiltrating lymphocyte (TIL) technologies. With the
execution of the Novartis Collaboration Agreement we have
prioritized our efforts on working with Novartis to bring
Kymriah® to patients in China as soon as practicable. In view
of our collaboration with Novartis, we will no longer pursue our
own ALL and DLBCL BLA submission with the NMPA. On the research and
development side we will endeavor to bring our CD22 HCL and CD19
CAR-T relapsing ALL, CD 20 for CD19 CAR-T Relapsing NHL, BCMA in
Multiple Myeloma (MM), NKG2D in acute myeloid leukemia (AML), AFP
TCR-T in Hepatocellular carcinoma (HCC) and neoantigen reactive TIL
on solid tumors, respectively, in first in human trial as soon as
possible. We plan to continue to leverage our quality system and
our strong scientific expertise to develop a platform as preferred
parties for international pharmaceutical companies to co-develop
cell therapies with the Company in China by implementing our
quality strategies and leveraging the experience and expertise of
our strong scientific team in the U.S and in China.
KOA.
In 2013, we completed a
Phase I/IIa clinical study, in China, for our KOA therapy named
Re-Join®. The trial tested the safety and efficacy of
intra-articular injections of autologous haMPCs in order to reduce
inflammation and repair damaged joint cartilage. The 6-month
follow-up clinical data showed Re-Join® therapy to be both
safe and effective.
In Q2
of 2014, we completed patient enrollment for the Phase IIb clinical
trial of Re-Join® for KOA. The multi-center study enrolled 53
patients to participate in a randomized, single blind trial. We
published 48 weeks’ follow-up data of Phase I/IIa on December
5, 2014. The 48-week data indicated that patients
have reported a decrease in pain and a significant improvement in
mobility and flexibility, while the clinical data shows our
Re-Join® regenerative medicine treatment to be
safe. We announced the interim 24 week results for
Re-Join® on March 25, 2015 and released positive Phase
IIb 48 week follow-up data in January 2016, which shows the primary
and secondary endpoints of Re-Join® therapy group having all
improved significantly compared to their baseline, which has
confirmed some of the Company’s Phase I/IIa results. Our
Re-Join® human adipose-derived mesenchymal progenitor cell
(haMPC) therapy for KOA is an interventional therapy using
proprietary process, culture and medium.
Our
process is distinguishable from sole Stromal Vascular Fraction
(SVF) therapy. The immunophenotype of our haMPCs exhibited a
homogenous population expressing multiple biomarkers such as CD73+,
CD90+, CD105+, HLA-I+, HLA-DR-, Actin-, CD14-, CD34-, and
CD45-. In contrast, SVF is merely a heterogeneous
fraction including preadipocytes, endothelial cells, smooth muscle
cells, pericytes, macrophages, fibroblasts, and adipose-derived
stem cells.
In
January 2016, we launched the Allogeneic KOA Phase I Trial in China
to evaluate the safety and efficacy of AlloJoin™, an off-the
shelf allogeneic adipose derived progenitor cell (haMPC) therapy
for the treatment of KOA. On August 5, 2016 we completed patient
treatment for the Allogeneic KOA Phase I trial, and on December 9,
2016 we announced interim 3-month safety data from the Allogenic
KOA Phase I Trial in China. The interim analysis of the trial has
preliminarily demonstrated a safety and tolerability profile of
AlloJoin™ in the three doses tested, and no serious adverse
events (SAE) have been observed. On March 16, 2018, we announced
the positive 48-week Allojoin™ Phase I data in China, which
demonstrated good safety and early efficacy for the prevention of
cartilage deterioration. China has finalized its cell therapy
policy in December, 2017. Our AlloJoin
TM
Phase I IND
application with the NMPA has been approved and we plan to
implement our Phase II clinical trial soon. We plan to advance the
KOA IND application for Rejoin™ with NMPA in the near
future.
The
unique lines of adult adipose-derived progenitor cells and the
immune cell therapies enable us to create multiple cell
formulations in treating specific medical conditions and diseases.
The quality management systems of CBMG Shanghai were issued a
Certificate of ISO-9001:2015 in 2018 and to be updated to 9001:2015
with full components. (i)The cleanrooms in our new facility are ISO
14644 certified and in compliance with China’s Good
Manufacture Practice (GMP) requirement (2010 edition); (ii) the
process equipment and analytical equipment in the new Shanghai
facility has been calibrated and qualified, and the biological
safety cabinets were also qualified. The quality management systems
of WX SBM were also certified as meeting the requirement of
ISO-9001:2015, and the facility and equipment were also
qualified.
Our
proprietary processes and procedures include (i) banking of
allogenic cellular product and intermediate product; (ii)
manufacturing procedures of GMP-grade viral vectors; (iii)
manufacturing procedures of GMP-grade cellular product; (iv)
analytical testing to ensure the safety, identity, purity and
potency of cellular product.
Recent Developments in Adoptive Immune Cell Therapy
(ACT)
The
immune system plays an essential role in cancer development and
growth. In the past decade, immune checkpoint blockade has
demonstrated a major breakthrough in cancer treatment and has
currently been approved for the treatment of multiple tumor types.
Adoptive immune cell therapy (ACT) with tumor-infiltrating
lymphocytes (TIL) or gene-modified T cells expressing novel T cell
receptors (TCR) or chimeric antigen receptors (CAR) is another
strategy to modify the immune system to recognize tumor cells and
thus carry out an anti-tumor effector function.
The
TILs consist tumor-resident T cells which are isolated and expanded
ex vivo after surgical resection of the tumor. Thereafter, the TILs
are further expanded in a rapid expansion protocol (REP). Before
intravenous adoptive transfer into the patient, the patient is
treated with a lymphodepleting conditioning regimen. TCR gene
therapy and CAR gene therapy are ACT with genetically modified
peripheral blood T cells. For both treatment modalities, peripheral
blood T cells are isolated via leukapheresis. These T cells are
then transduced by viral vectors to either express a specific TCR
or CAR, respectively. These treatments have shown promising results
in various tumor types.
CAR-Ts
According to the
U.S. National Cancer Institute’s 2013 cancer topics research
update on CAR-T-Cells, excitement is growing for
immunotherapy—therapies that harness the power of a
patient’s immune system to combat their disease, or what some
in the research community are calling the “fifth
pillar” of cancer treatment.
One
approach to immunotherapy involves engineering patients’
own immune cells to recognize and attack their tumors. This
approach is called adoptive cell transfer (ACT). ACT’s
building blocks are T cells, a type of immune cell collected
from the patient’s own blood. One of the well-established ACT
approaches is CAR-T cancer therapy. After collection, the T
cells are genetically engineered to produce special
receptors on their surface called chimeric antigen receptors
(CARs). CARs are proteins that allow the T cells to recognize
a specific protein (antigen) on tumor cells. These engineered
CAR-T cells are then grown until the number reaches dose level. The
expanded population of CAR-T cells is then infused into the
patient. After the infusion, if all goes as planned, the T
cells multiply in the patient’s body and, with guidance
from their engineered receptor, recognize and kill cancer
cells that harbor the antigen on their surfaces. This process
builds on a similar form of ACT pioneered from
NCI’s Surgery Branch for patients with advanced
melanoma. According to
www.cancer.gov/.../research-updates/2013/CAR-T-Cells
,
in 2013 NCI’s Pediatric Oncology Branch commented that
the CAR-T cells are much more potent than anything they can
achieve with other immune-based treatments being
studied. Although investigators working in this field caution
that there is still much to learn about CAR T-cell therapy,
the early results from trials like these have generated
considerable optimism.
CAR-T
cell therapies, such as anti-CD19 CAR-T and anti-BCMA CAR-T, have
been tested in several hematological indications on patients
that are refractory/relapsing to chemotherapy, and many of
them have relapsed after stem cell transplantation. All
of these patients had very limited treatment option prior
to CAR-T therapy. CAR-T has shown encouraging clinical
efficacy in many of these patients, and some of them have durable
clinical response for years. However, some adverse effects, such as
cytokine release syndrome (CRS) and neurological toxicity, have
been observed in patients treated with CAR-T cells. For example, in
July 2016, Juno Therapeutics, Inc. reported the death of
patients enrolled in the U.S. Phase II clinical trial of
JCAR015 (anti-CD19 CAR-T) for the treatment of relapsed or
refractory B cell acute lymphoblastic leukemia (B-ALL). The US
FDA put the trial on hold and lifted the hold within a
week after Juno provided satisfactory explanation and
solution. Juno attributed the cause of patient deaths to the
use of Fludarabine preconditioning and they switched to use
only cyclophosphamide pre-conditioning in subsequent
enrollment.
In
August 2017, the U.S. FDA approved Novartis’
Kymriah® (tisagenlecleucel), a CD19-targeted CAR-T therapy,
for the treatment of patients up to 25 years old for relapsed or
refractory (r/r) acute lymphoblastic leukemia (ALL), the most
common cancer in children. Current treatments show a rate of
80% remission using intensive
chemotherapy. However, there are almost no conventional
treatments to help patients who have relapsed or are
refractory to traditional treatment. Kymriah® has shown
results of complete and long lasting remission, and was the
first FDA-approved CAR-T therapy. In October 2017, the U.S.
FDA approved Kite Pharmaceuticals’ (Gilead) CAR-T
therapy for diffuse large B-cell lymphoma (DLBCL), the most
common type of NHL in adults. The initial results
of axicabtagene ciloleucel (Yescarta), the prognosis of
high-grade chemo refractory NHL is dismal with a medium
survival time of a few weeks. Yescarta is a therapy
for patients who have not responded to or who have relapsed
after at least two other kinds of treatment.
In May
2018, the FDA approved Novartis’ Kymriah® for
intravenous infusion for its second indication - the treatment of
adult patients with relapsed or refractory (r/r) large B-cell
lymphoma after two or more lines of systemic therapy including
diffuse large B-cell lymphoma (DLBCL) not otherwise specified, high
grade B-cell lymphoma and DLBCL arising from follicular lymphoma.
Kymriah® is now the only CAR-T cell therapy to receive FDA
approval for two distinct indications in non-Hodgkin lymphoma (NHL)
and B-cell ALL. On September 25, 2018, we entered into the
Collaboration Agreement with Novartis to manufacture and supply
Kymriah® to Novartis in China.
Besides
anti-CD19 CAR-T, anti-BCMA CAR-T has shown promising clinical
efficacy in treatment of multiple myeloma. For example, bb2121, a
CAR-T therapy targeting BCMA, has been developed by Bluebird bio,
Inc. and Celgene for previously treated patients with multiple
myeloma. Based on preliminary clinical data from the ongoing phase
1 study CRB-401, bb2121 has been granted Breakthrough Therapy
Designation by the U.S. FDA and PRIME eligibility by the European
Medicines Agency (EMA) in November 2017. We plan to initiate our
anti-BCMA CAR-T investigator initiated trial in the near
future.
Recent
progress in Universal Chimeric Antigen Receptor (UCAR) T-cells
showed benefits such as ease of use, availability and the drug
pricing challenge. Currently, most therapeutic UCAR products have
been developed with gene editing platforms such as CRISPR or TALEN.
For example, UCART19 is an allogeneic CAR T-cell product candidate
developed by Cellectis for treatment of CD19-expressing
hematological malignancies. UCART19 Phase I clinical trials started
in adult and pediatric patients in Europe in June 2016 and in the
U.S. in 2017. The use of UCAR may has the potential to overcome the
limitation of the current autologous approach by providing an
allogeneic, frozen, “off-the-shelf” T cell product for
cancer treatment.
TILs
While
CAR-T cell therapy has been proven successful in treatment of
several hematological malignancies, other cell therapy approaches,
including Tumor Infiltrating Lymphocytes (TIL) are being developed
to treat solid tumors. For example, Iovance Biotherapeutics is
focused on the development of autologous tumor-directed TILs for
treatments of patients with various solid tumor
indications. Iovance is conducting several Phase 2
clinical trials to assess the efficacy and safety of autologous TIL
for treatment of patients with Metastatic Melanoma, Squamous Cell
Carcinoma of the Head and Neck, Non-Small Cell Lung Cancer (NSCLC)
and Cervical Cancer in the US and Europe.
TCRs
Adaptimmune
is
partnering with GlaxoSmithKline to develop
TCR-T
therapy targeting the NY-ESO-1 peptide, which is present across
multiple cancer types. Their NY-ESO SPEAR T-cell has been used in
multiple Phase 1/2 clinical trials in patients with solid tumors
and haematological malignancies, including synovial sarcoma, myxoid
round cell liposarcoma, multiple myeloma, melanoma, NSCLC and
ovarian cancer. The initial data suggested positive clinical
responses and evidence of tumor reduction in patients. NY-ESO
SPEART T-cell has been granted breakthrough therapy designation by
the U.S. FDA and PRIME regulatory access in Europe.
Adaptimmune’s other TCR-T product, AFP SPEAR T-cell targeting
AFP peptide, is aimed at the treatment of patients with
hepatocellular carcinoma (HCC). AFP SPEAR T-cell is in a Phase I
study and enrolling HCC patients in the U.S.
CBMG’s Adoptive Immune Cell Therapy (ACT)
Programs
In
December 2017, the Chinese government issued trial guidelines
concerning the development and testing of cell therapy products in
China. Although these trial guidelines are not yet codified as
mandatory regulation, we believe they provide a measure of clarity
and a preliminary regulatory pathway for our cell therapy
operations in a still uncertain regulatory environment. On April 18
and April 21, 2018, the CDE posted on its website acceptance of the
IND application for CAR-T cancer therapies in treating patients
with NHL and adult ALL submitted by the Company’s
wholly-owned subsidiaries Cellular Biomedicine Group (Shanghai)
Ltd. and Shanghai Cellular Biopharmaceutical Group Ltd. On
September 25, 2018 we entered into a strategic licensing and
collaboration agreement with Novartis to manufacture and supply
Kymriah® in China. As part of the deal, Novartis took
approximately a 9% equity stake in CBMG, and CBMG is discontinuing
development of its own anti-CD19 CAR-T cell therapy. This
collaboration with Novartis reflects our shared commitment to
bringing the first marketed CAR-T cell therapy, Kymriah®, a
transformative treatment option currently approved in the US, EU
and Canada for two difficult-to-treat cancers, to China where the
number of patients in need remains the highest in the world.
Together with Novartis, we plan to bring the first CAR-T cell
therapy to patients in China as soon as possible. We continue to
develop CAR-T therapies other than CD 19 on our own and Novartis
has the first right of negotiation on these CAR-T developments. The
CBMG oncology pipeline includes CAR-T targeting CD20-, CD22- and
B-cell maturation antigen (BCMA), AFP TCR-T, which could
specific eradicate AFP positive HCC tumors and TIL
technologies. Our current priority is to collaborate with Novartis
to bring Kymriah® to China. At the same time, we remain
committed to developing our existing pipeline of immunotherapy
candidates for hematologic and solid tumor cancers to help deliver
potential new treatment options for patients in China. We are
striving to build a competitive research and development function,
a translational medicine unit, along with a well-established
cellular manufacturing capability and ample capacity, to support
Kymriah® in China and our development of multiple assets in
multiple indications. We believe that these efforts will allow us
to boost the Company's Immuno-Oncology presence. We have initiated
a clinical trial to evaluate anti-BCMA CAR-T therapy in Multiple
Myeloma (“MM”) and expect to initiate first in-human
studies for multiple CAR-T and TCR-T programs in 2019.
Market for Stem Cell-Based Therapies
The
forecast is that in the United States, shipments of treatments with
stem cells or instruments which concentrate stem cell preparations
for injection into painful joints will fuel an overall increase in
the use of stem cell based treatments and an increase to $5.7
billion in 2020, with key growth areas being Spinal Fusion, Sports
Medicine and Osteoarthritis of the joints. According to Centers for
Disease Control and Prevention. Prevalence of doctor-diagnosed
arthritis and arthritis-attributable activity limitation United
States. 2010-2012, Osteoarthritis (OA) is a chronic disease that is
characterized by degeneration of the articular cartilage,
hyperosteogeny, and ultimately, joint destruction that can affect
all of the joints. According to Dillon CF, Rasch EK, Gu Q et al.
Prevalence of knee osteoarthritis in the United States: Arthritis
Data from the Third National Health and Nutrition Examination
Survey 1991-94. J Rheumatol. 2006, the incidence of OA is 50% among
people over age 60 and 90% among people over age 65. KOA accounts
for the majority of total OA conditions and in adults, OA is the
second leading cause of work disability and the disability
incidence is high (53%). The costs of OA management have grown
exponentially over recent decades, accounting for up to 1% to 2.5%
of the gross national product of countries with aging populations,
including the U.S., Canada, the UK, France, and Australia.
According to the American Academy of Orthopedic Surgeons (AAOS),
the only pharmacologic therapies recommended for OA symptom
management are non-steroidal anti-inflammatory drugs (NSAIDs) and
tramadol (for patients with symptomatic osteoarthritis). Moreover,
there is no approved disease modification therapy for OA in the
world. Disease progression is a leading cause of hospitalization
and ultimately requires joint replacement surgery. According to an
article published by the Journal of the American Medical
Association, approximately 505,000 hip replacements and 723,000
knee replacements were performed in the United States in 2014 and
they cost more than $20 billion. International regulatory
guidelines on clinical investigation of medicinal products used in
the treatment of OA were updated in 2015, and clinical benefits (or
trial outcomes) of a disease modification therapy for KOA has been
well defined and recommended. Medicinal products used in the
treatment of osteoarthritis need to provide both a symptom relief
effect for at least 6 months and a structure modification effect to
slow cartilage degradation by at least 12 months. Symptom relief is
generally measured by a composite questionnaire Western Ontario and
McMaster Universities Osteoarthritis Index (WOMAC) score, and
structure modification is measured by MRI, or radiographic image as
accepted by international communities. The Company uses the WOMAC
as primary end point to demonstrate symptom relief, and MRI to
assess structure and regeneration benefits as a secondary
endpoint.
According to the
Foundation for the National Institutes of Health, there are 27
million Americans with Osteoarthritis (OA), and symptomatic Knee
Osteoarthritis (KOA) occurs in 13% of persons aged 60 and older.
The International Journal of Rheumatic Diseases, 2011 reports that
approximately 57 million people in China suffer from KOA. Currently
no treatment exists that can effectively preserve knee joint
cartilage or slow the progression of KOA. Current common drug-based
methods of management, including anti-inflammatory medications
(NSAIDs), only relieve symptoms and carry the risk of side effects.
Patients with KOA suffer from compromised mobility, leading to
sedentary lifestyles; doubling the risk of cardiovascular diseases,
diabetes, and obesity; and increasing the risk of all causes of
mortality, colon cancer, high blood pressure, osteoporosis, lipid
disorders, depression and anxiety. According to the Epidemiology of
Rheumatic Disease (Silman AJ, Hochberg MC. Oxford Univ. Press,
1993:257), 53% of patients with KOA will eventually become
disabled.
Our Strategy
CBMG is
a drug development company focusing on developing cell therapies
first in China, and seek opportunity globally when appropriate. Our
goal is to develop safe and effective cellular therapies for
indications that represent a large unmet need in China. We intend
to use our first-mover advantage in China, against a backdrop of
enhanced regulation by the central government, to differentiate
ourselves from the competition and establish a leading position in
the China cell therapeutic market. We
believe that few competitors in China are as well-equipped as we
are in the clinical trial development, diversified international
standard compliant manufacturing facilities, quality assurance and
control processes, regulatory compliance vigor, as well as
continuous process improvement to speed up manufacturing timelines
for its cell therapy clinical trials and commercial
launch.
The key
issues with cell therapy as a modality are drug therapeutic index,
institutionalized, scalable manufacturing and an affordable price
for the patients. Our continuous improvement approach in our
manufacturing platform is unique as we utilize a semi-automatic,
fully closed system, which is expected to lead to economies of
scale. Additionally, our focus on being a fully integrated, cell
therapy company has enabled us to be one of only a few companies
that are able to manufacture clinical grade lentivirus in
China.
In
China, the Good Clinical Practice (“GCP”) compliant
Investigator Initialized Trial (“IIT”) only requires
IRB from hospital and local approval. IITs can provide early
evidences of proof concept for novel drugs which are time and cost
efficient. IITs are also good ways to identify and develop novel
platforms. Currently, we have our own drug development pipeline in
CAR-T, AFP TCR-T, TIL and KOA. Our R&D team continues to
identify additional platform cell therapy technologies to develop
internally or acquire established technologies.
In
addition to the manufacturing Novartis’ Kymriah® for
patients in China that is contemplated by the Collaboration
Agreement and Manufacture and Supply Agreement with Novartis, we
are also actively developing and evaluating other therapies
comprised of other CAR-T, TCR-T and TIL. We plan to advance our KOA
Allojoin™ to Phase II clinical trial and IND applications for
Rejoin™ with the NMPA in the near future.
In
addition to our drug development efforts, we also actively seek
co-development opportunities with international partners. Such
partnership will enable us to take advantage of the technologies of
our partners while leveraging our quality control and manufacturing
infrastructure and further expand our pipelines in a relatively
rapid fashion.
In
order to expedite fulfillment of patient treatment, we have been
actively developing technologies and products with a strong
intellectual properties protection, including haMPC, derived from
fat tissue, for the treatment of KOA and other indications.
CBMG’s world-wide exclusive license to the AFP TCR-T patent
rights owned by the Augusta University provides an enlarged
opportunity to expand the application of CBMG’s cancer
therapy-enabling technologies and to initiate clinical trials with
leading cancer hospitals.
Our
proprietary and patent-protected production processes enable us to
produce raw material, manufacture cells, and conduct cell banking
and distribution. Our clinical protocols include medical assessment
to qualify each patient for treatment, evaluation of each patient
before and after a specific therapy, cell transplantation
methodologies including dosage, frequency and the use of adjunct
therapies, handling potential adverse effects and their proper
management. Applying our proprietary intellectual property, we plan
to customize specialize formulations to address complex diseases
and debilitating conditions.
We have
a total of approximately 70,000 square feet of manufacturing space
in three locations, the majority of which is in the new Shanghai
facility. We operate our manufacturing facilities under the design
of the standard GMPconditions as well ISO standards. We employ
institutionalized and proprietary process and quality management
system to optimize reproducibility and to hone our efficiency. Our
Beijing, Shanghai and Wuxi facilities are designed and built to
meet international GMP standards. With our integrated Plasmid,
Viral Vectors platforms, our T cells manufacturing capacities are
highly distinguishable from other companies in the cellular therapy
industry.
Most
importantly, our seasoned cell therapy team members have decades of
highly-relevant experience in the United States, China, and
European Union. We believe that these are the primary factors that
make CBMG a high quality cell products manufacturer in
China.
Our Targeted Indications and Potential Therapies
The
chart below illustrates CBMG’s pipelines:
** NMPA
has approved our Phase I IND application under the new regulation.
We plan to start our Phase II clinical trial as soon as
practicable.
*
December 2017, Chinese government issued trial guidelines
concerning development and testing of cell therapy products in
China. Albeit we finished the Phase IIb study prior to December
2017 we have yet to file the IND anew under the new regulation. We
plan to apply for IND under the new regulation as soon as
practicable.
Immuno-oncology (I/o)
Our
CAR-T platform is built on lenti-virial vector and
second-generation CAR design, which is used by most of the current
trials and studies. We select the patient population for each asset
and indication to allow the optimal path forward for potential
regulatory approval. We integrate the state of art translational
medicine effort into each clinical study to aid in dose selection,
to confirm the mechanism of action and proof of concept, and to
attempt to identify the optimal targeting patient population. We
plan to continue to grow our translational medicine team and engage
key opinion leaders to support our development
efforts.
We have
developed a serial of CAR-Ts to treat hematological malignancies
including CD20, CD22, and BCMA CAR-Ts, which have been proved to be
potent and effective in treating hematology tumors in early phase
of clinical studies.
CD20 CAR
CD20 is
broadly overexpressed in a serial of B cell malignant tumors. In
the patients relapsed after CD19 CAR-T treatment, the expression of
CD20 on target tumor cells is relatively stable. It is proven to be
an optimal target for treating CD19 CAR-T relapsing patients. We
have developed a novel CD20 CARs clinical lead, which demonstrated
strong anti-tumor activity in both
in vitro
assays and
in vivo
animal studies. We have filed
patent in China and plan to initiate first in human investigator
initiated trial with
CD19
CAR-T relapsed NHL patients in 2019.
CD22 CAR
CD22 is
another surface maker highly expressed in B cell malignancies
especially in Hairy cell leukemia. It also expresses in the
patients relapsed after CD19 CAR-T treatment. We have developed a
novel CD22 CARs clinical lead, which displayed effective anti-tumor
activity in
in vitro
cytotoxicity assays. We plan to initiate investigator initiated
trial with CD19 CAR-T relapsing ALL patients and Hairy cell
leukemia in the first half of 2019.
BCMA CAR
BCMA is
a member of the TNF receptor superfamily, universally expressed in
multiple myeloma (MM) cells. It is not detectable in normal tissues
except plasma and mature B cells. It is proven to be an effective
and safer target for treating refractory MM patients in several
clinical trials. We have developed unique BCMA CARs. Our BCMA CAR
clinical lead exhibits potent anti-tumor activity both
in vitro
and
in vivo
. We have filed patent for BCMA
CAR in China and initiated investigator initiated trial in
refractory MM patients in January, 2019.
NKG2D CAR
Early
studies on CAR-T therapy targeting NK cell signaling has shown
promising clinical benefits. We are developing novel second
generation CARs using NKG2D extracellular fragment as antigen
binding domain. These CARs can recognize targets tumor cells
expressing NKG2D ligands. We plan to initiate first in human
investigator initiated trial with R/R AML patients in the second
half of 2019.
Solid
tumors pose more challenges than hematological
cancers. The patients are more heterogeneous, making it
difficult to have one drug to work effectively in the majority of
the patients in any cancer indication. The duration of
response is most likely shorter and patients are likely to relapse
even after initial positive clinical response. We will
continue our effort in developing cell based therapies to target
both hematological cancers and solid tumors.
AFP TCR
We
license the technology from Augusta University. We are continuing
our evaluation on the efficacy and specificity of the AFP TCRs to
identity the most appropriate candidate for first time in human
(FTIH) study. We plan to redirect Human T cells with the AFP TCRs
and evaluate their anti-tumor activity on in vitro cytokine release
and cytotoxicity assays; and potential on/off-target toxicity
including allo-reactivity as well as
in vivo
efficacy tests in animal
models.
TIL
Augmented by the
U.S. National Cancer Institute (“NCI”) technology
license, CBMG is developing neoantigen reactive TIL therapies to
treat immunogenic cancers. In the early stages of cancer,
lymphocytes infiltrate into the tumor, specifically recognizing the
tumor targets and mediating anti-tumor response. These cells are
known as TIL. TIL based therapies have shown encouraging clinical
results in early development. For example, in Phase-2 clinical
studies in patients with metastatic melanoma performed by Dr.
Rosenberg at NCI, TIL therapy demonstrated robust efficacy in
patients with metastatic melanoma with objective response rates of
56% and complete response rates of 24%. We plan to start our
development with NSCLC in 2019, and eventually expand into other
cancer indications.
Knee Osteoarthritis (KOA)
We are
currently pursuing two primary therapies for the treatment of KOA:
Re-Join® therapy and
AlloJoin™ therapy.
We
completed the Phase I/IIa clinical trial for the
treatment of KOA. The trial tested the safety and efficacy of
intra-articular injections of autologous haMPCs in order to reduce
inflammation and repair damaged joint cartilage. The 6-month
follow-up clinical data showed Re-Join® therapy to be
both safe and effective.
In the
second quarter of 2014, we completed patient enrollment for the
Phase IIb clinical trial of Re-Join® for KOA. The multi-center
study has enrolled 53 patients to participate in a randomized,
single blind trial. We published 48 weeks’ follow-up data of
Phase I/IIa on December 5, 2014. The 48 weeks’
data indicated that patients have reported a decrease in pain and a
significant improvement in mobility and flexibility, while the
clinical data shows our Re-Join® regenerative medicine
treatment to be safe. We announced positive Phase IIb 48-week
follow-up data in January 2016, with statistical significant
evidence that Re-Join® enhanced cartilage regeneration, which
concluded the planned phase IIb trial.
In
January 2016, we launched the Allogeneic KOA Phase I Trial in
China to evaluate the safety and efficacy of AlloJoin™,
an off-the shelf haMPC therapy for the treatment of KOA. On August
5, 2016 we completed patient treatment for the Allogeneic KOA
Phase I trial. On August 5, 2016 we completed patient treatment for
the Allogenic KOA Phase I Trial, and on December 9, 2016, we
announced interim 3-month safety data from the Allogenic KOA Phase
I Trial in China. The interim analysis of the trial has
preliminarily demonstrated a safety and tolerability profile of
AlloJoin™ in the three doses tested, and no SAEs have been
observed. On March 16, 2018, we announced the positive 48-week
Allojoin™ Phase I data in China, which demonstrated good
safety and early efficacy for the prevention of cartilage
deterioration. In January 2019, the NMPA approved the
Company’s Phase I AlloJoin™ IND application. We plan to
initiate our Phase II AlloJoin™ clinical trial as soon as
practicable.
Osteoarthritis is a
degenerative disease of the joints. KOA is one of the most common
types of osteoarthritis. Pathological manifestation of
osteoarthritis is primarily local inflammation caused by immune
response and subsequent damage of joints. Restoration of immune
response and joint tissues are the objective of
therapies.
According
to
International Journal of
Rheumatic Diseases, 2011
, 53% of KOA patients will
degenerate to the point of disability. Conventional treatment
usually involves invasive surgery with painful recovery and
physical therapy. As drug-based methods of management are
ineffective, the same journal estimates that some 1.5 million
patients with this disability will degenerate to the point of
requiring artificial joint replacement surgery every year. However,
only 40,000 patients will actually be able to undergo replacement
surgery, leaving the majority of patients to suffer from a
life-long disability due to lack of effective
treatment.
Adult
mesenchymal stem cells can currently be isolated from a variety of
adult human sources, such as liver, bone marrow, and adipose (fat)
tissue. We believe the advantages in using adipose tissue (as
opposed to bone marrow or blood) are that it is one of the richest
sources of multipotent cells in the body, the easy and repeatable
access to fat via liposuction, and the simple cell isolation
procedures that can begin to take place even on-site with minor
equipment needs. The procedure we are testing for autologous KOA
involves extracting a very small amount of fat using a minimally
invasive extraction process which takes up to 20 minutes and leaves
no scarring. The haMPC cells are then processed and isolated on
site, and injected intra articularly into the knee joint with
ultrasound guidance. For allogeneic KOA we use donor haMPC
cells.
These
haMPC cells are capable of differentiating into bone, cartilage,
and fat under the right conditions. As such, haMPCs are an
attractive focus for medical research and clinical development.
Importantly, we believe both allogeneic and autologously sourced
haMPCs may be used in the treatment of disease. Numerous studies
have provided preclinical data that support the safety and efficacy
of allogeneic and autologous haMPC, offering a choice for those
where factors such as donor age and health are an
issue.
haMPCs
are currently being considered as a new and effective treatment for
osteoarthritis, with a huge potential
market. Osteoarthritis is one of the ten most disabling
diseases in developed countries. Worldwide estimates are that 9.6%
of men and 18.0% of women aged over 60 years have symptomatic
osteoarthritis. It is estimated that the global OA therapeutics
market was worth $4.4 billion in 2010 and is forecast to grow at a
compound annual growth rate of 3.8% to reach $5.9 billion by
2018.
In
order to bring haMPC-based KOA therapy to market, our market
strategy is to: (a) establish regional laboratories that comply
with cGMP standards in Shanghai and Beijing that meet Chinese
regulatory approval; and (b) submit to the NMPA an IND package for
Allojoin™ to treat patients with donor haMPC cells, and (c)
file joint applications with Class AAA hospitals to use
Re-Join® to treat patients with their own haMPC
cells.
Our
competitors are pursuing treatments for osteoarthritis with knee
cartilage implants. However, unlike their approach, our
KOA therapy is not surgically invasive – it uses a small
amount (30ml) of adipose tissue obtained via liposuction from the
patient, which is cultured and re-injected into the patient. The
injections are designed to induce the body’s secretion of
growth factors promoting immune response and regulation, and
regrowth of cartilage. The down-regulation of the patient’s
immune response is aimed at reducing and controlling inflammation
which is a central cause of KOA.
We believe
our proprietary method, subsequent haMPC proliferation and
processing know-how will enable haMPC therapy to be a low cost and
relatively safe and effective treatment for KOA. Additionally,
banked haMPCs can continue to be stored for additional use in the
future.
Based
on current estimates, we expect to generate collaboration payment
and revenues through our sale of Kymriah® products to Novartis
within the next two to three years. We plan to systematically
advance our own cell therapy pipeline and timely seek BLA
opportunities to commercialize our products within the next three
to four years although we cannot assure you that we will be
successful at all or within the foregoing timeframe.
Competition
Many
companies operate in the cellular biopharmaceutical
field. Currently there are several approved stem cell
therapies on the market including Canada’s pediatric
graft-versus-host disease and the European Commission’s
approval in March 2018 for the treatment of complex perianal
fistulas in adult Crohn’s disease. There are several
public and private cellular biopharmaceutical-focused companies
outside of China with varying phases of clinical trials addressing
a variety of diseases. We compete with these companies in
bringing cellular therapies to the market. However, our
focus is to develop a core business in the China market. This
difference in focus places us in a different competitive
environment from other western companies with respect to fund
raising, clinical trials, collaborative partnerships, and the
markets in which we compete.
The PRC
central government has a focused strategy to enable China to
compete effectively in certain designated areas of biotechnology
and the health sciences. Because of the aging population in
China, China’s Ministry of Science and Technology (MOST) has
targeted stem cell development as high priority field, and
development in this field has been intense in the agencies under
MOST. For example, the 973 Program has funded a number of
stem cell research projects such as differentiation of human
embryonic stem cells and the plasticity of adult stem cells.
To the best of our knowledge, none of the companies in China are
utilizing our proposed international manufacturing protocol and our
unique technologies in conducting what we believe will be fully
compliant NMPA-sanctioned clinical trials to commercialize cell
therapies in China. Our management believes that it is
difficult for most of these Chinese companies to turn their results
into translational stem cell science or commercially successful
therapeutic products using internationally acceptable
standards.
We
compete globally with respect to the discovery and development of
new cell-based therapies, and we also compete within China to bring
new therapies to market. In the biopharmaceutical
specialty segment, namely in the areas of cell processing and
manufacturing, clinical development of cellular therapies and cell
collection, processing and storage, are characterized by rapidly
evolving technology and intense competition. Our
competitors worldwide include pharmaceutical, biopharmaceutical and
biotechnology companies, as well as numerous academic and research
institutions and government agencies engaged in drug discovery
activities or funding, in the U.S., Europe and Asia. Many of these
companies are well-established and possess technical, research and
development, financial, and sales and marketing resources
significantly greater than ours. In addition, many of our smaller
potential competitors have formed strategic collaborations,
partnerships and other types of joint ventures with larger, well
established industry competitors that afford these companies
potential research and development and commercialization advantages
in the technology and therapeutic areas currently being pursued by
us. Academic institutions, governmental agencies and
other public and private research organizations are also conducting
and financing research activities which may produce products
directly competitive to those being commercialized by us. Moreover,
many of these competitors may be able to obtain patent protection,
obtain government (e.g. FDA) and other regulatory approvals and
begin commercial sales of their products before
us.
Our
primary competitors in the field of stem cell therapy for
osteoarthritis, and other indications include Cytori Therapeutics
Inc., Caladrius Biosciences, Inc. and others. Among our
competitors, to our knowledge, the only ones based in and operating
in Greater China are Lorem Vascular, which has partnered with
Cytori to commercialize Cytori Cell Therapy for the cardiovascular,
renal and diabetes markets in China and Hong Kong, and
OLife Bio, a Medi-Post joint venture with JingYuan Bio in Taian,
Shandong Province, who planned to initiate clinical trial in China
in 2016. To our knowledge, none of the aforementioned
companies have made any progress or advancement in the clinical
development in China.
Our
primary competitors in the field of cancer immune cell therapies
include pharmaceutical, biotechnology companies such as Eureka
Therapeutics, Inc., Iovance Biotherapeutics Inc., Juno
Therapeutics, Inc. (BMS), Kite Pharma, Inc. (Gilead), CARSgen,
Sorrento Therapeutics, Inc. and others. Among our
competitors, the ones based in and operating in Greater China are
CARsgen, Hrain Biotechnology, Nanjing Legend
Biotechnology
(
Cooperated with
Johnson-Johnson
)
, Galaxy Biomed,
Persongen and Anke Biotechnology, Shanghai Minju Biotechnology,
Unicar Therapy (Cooperated with Terumo BCT), Wuxi Biologics, Junshi
Pharma, BeiGene, Immuno China Biotech, Chongqing Precision Biotech,
SiDanSai Biotechnology and China Oncology Focus Limited, which has
licensed Sorrento’s anti-PD-L1 monoclonal antibody for
Greater China. Other western big pharma and biotech companies in
the cancer immune cell therapies space have made inroads in China
by partnering with local companies. For example, in April, 2016,
Seattle-based Juno Therapeutics, Inc. (Celgene) started a new
company with WuXi AppTec in China named JW Biotechnology (Shanghai)
Co., Ltd. by leveraging Juno's CAR-T and TCR technologies together
with WuXi AppTec's R&D and manufacturing platform and local
expertise to develop novel cell-based immunotherapies for patients
with hematologic and solid organ cancers. In January 2017, Shanghai
Fosun Pharmaceutical created a joint venture with Santa
Monica-based Kite Pharma Inc. (Gilead) to develop, manufacture and
commercialize CAR-T and TCR products in China. In late 2017 Gilead
acquired Kite Pharma for $11.9 billion. On March 6, 2018 Celgene
completed its acquisition of Juno Therapeutics for approximately $9
billion. On January 3, 2019, Bristol-Myers Squibb announced it will
acquire Celgene in a cash and stock transaction with an equity
value of approximately $74 billion.
The
NMPA has received IND applications for CD19 chimeric antigen
receptor T cells cancer therapies from many companies and have
granted the initial phase of acceptance to several companies thus
far.
Additionally, in
the general area of cell-based therapies for knee osteoarthritis
ailments, we potentially compete with a variety of companies, from
big pharma to specialty medical products or biotechnology
companies. Some of these, such as Abbvie, Merck KGaA, Sanofi, Teva,
GlaxosmithKline, Baxter, Johnson & Johnson, Sanumed, Medtronic
and Miltenyi Biotech, are well-established and have substantial
technical and financial resources compared to
ours. However, as cell-based products are only just
emerging as viable medical therapies, many of our more direct
competitors are smaller biotechnology and specialty medical
products companies comprised of Vericel Corporation, Regeneus Ltd.,
Advanced Cell Technology, Inc., Nuo Therapeutics, Inc., Arteriocyte
Medical Systems, Inc., ISTO technologies, Inc., Ember Therapeutics,
Athersys, Inc., Bioheart, Inc., Cytori Therapeutics, Inc., Harvest
Technologies Corporation, Mesoblast, Pluristem, Inc., TissueGene,
Inc. Medipost Co. Ltd. and others. There are also several
non-cell-based, small molecule and peptide clinical trials
targeting knee osteoarthritis, and several other FDA approved
treatments for knee pain.
Certain
CBMG competitors also work with adipose-derived stem
cells. To the best of our knowledge, none of these
companies are currently utilizing the same technologies as ours to
treat KOA, nor to our knowledge are any of these companies
conducting government-approved clinical trials in
China.
Some of
our targeted disease applications may compete with drugs from
traditional pharmaceutical or Traditional Chinese Medicine
companies. We believe that our chosen targeted disease
applications are not effectively in competition with the products
and therapies offered by traditional pharmaceutical or Traditional
Chinese Medicine companies.
We
believe we have a strategic advantage over our competitors based on
our outstanding quality management system, robust and efficient
manufacturing capability which we believe is possessed by few to
none of our competitors in China, in an industry in which meeting
exacting standards and achieving extremely high purity levels is
crucial to success. In addition, in comparison to the
broader range of cellar biopharmaceutical firms, we believe we have
the advantages of cost and expediency, and a first mover advantage
with respect to commercialization of cell therapy products and
treatments in the China market.
Intellectual Property
We have
built our intellectual property portfolio with a view towards
protecting our freedom of operation in China within our specialties
in the cellular biopharmaceutical field. Our portfolio contains
patents, trade secrets, and know-how.
The
production of stem cells for therapeutic use requires the ability
to purify and isolate these cells to an extremely high level of
purity. Accordingly, our portfolio is geared toward protecting our
proprietary process of isolation, serum free-cell expansion, cell
processing and related steps in stem cell production. The
combination of our patents and trade secrets protects various
aspects of our cell line production methods and methods of use,
including methods of isolation, expansion, freezing, preservation,
processing and use in treatment.
For our
haMPC therapy:
●
|
We
believe our intellectual property portfolio for haMPC is well-built
and abundant. It covers aspects of adipose stem cell medicine
production, including acquisition of human adipose tissue,
preservation, and storage, tissue, processing, stem cell
purification, expansion, and banking, formulation for
administration, and administration methods.
|
●
|
Our
portfolio also includes adipose derived cellular medicine
formulations and their applications in the potential treatment of
degenerative diseases and autoimmune diseases, including
osteoarthritis, rheumatoid arthritis, as well as potential
applications to anti-aging.
|
●
|
Our
haMPC intellectual property portfolio:
|
°
|
provides
coverage of all steps in the production process;
|
°
|
enables
achievement of high yields of Stromal Vascular Fraction (SVF), i.e.
stem cells derived from adipose tissue extracted by
liposuction;
|
°
|
makes
adipose tissue acquisition convenient and useful for purposes of
cell banking; and
|
°
|
employs
preservation techniques enabling long distance shipment of finished
cell medicine products.
|
For our
CAR-T and Tcm cancer immune cell therapy:
●
|
Our
recent amalgamation of technologies from AG and PLAGH in the cancer
cell therapy is comprehensive and well-rounded. It
comprises of T cell clonality, Chimeric Antigen Receptor T cell
(CAR-T) therapy, its recombinant expression vector CD19, CD20, CD30
and Human Epidermal Growth Factor Receptor's (EGFR or HER1)
Immuno-Oncology patents applications, several preliminary clinical
studies of various CAR-T constructs targeting CD19-positive acute
lymphoblastic leukemia, CD20-positive lymphoma, CD30-positive
Hodgkin's lymphoma and EGFR-HER1-positive advanced lung cancer, and
Phase I/II clinical data of the aforementioned therapies and
manufacturing knowledge.
|
In
addition, our intellectual property portfolio covers various
aspects of other therapeutic categories including umbilical
cord-derived huMPC therapy, bone marrow-derived hbMPC
therapy.
Moreover, our
clinical trial protocols are proprietary, and we rely upon trade
secret laws for protection of these protocols.
We
intend to continue to vigorously pursue patent protection of the
technologies we develop, both in China and under the Patent
Cooperation Treaty (“PCT”). Additionally, we require
all of our employees to sign proprietary information and invention
agreements, and compartmentalize our trade secrets in order to
protect our confidential information.
Patents
The
following is a brief list of our patents, patent applications and
work in process as of December 31, 2018:
|
|
|
|
|
Patent Cooperation Treaty (PCT)
|
|
|
|
|
|
|
|
|
Work
in Process
|
8
|
-
|
-
|
-
|
-
|
8
|
Patents
Filed, Pending
|
29
|
2
|
1
|
-
|
7
|
39
|
Granted
|
24
|
3
|
1
|
2
|
-
|
30
|
Total
|
61
|
5
|
2
|
2
|
7
|
77
|
|
|
|
|
|
|
|
Generally, our
patents cover technology, methods, design and composition of and
relating to medical device kits used in collecting cell specimens,
cryopreservation of cells, purification, use of stem cells in a
range of potential therapies, adipose tissue extraction, cell
preservation and transportation, preparation of chimeric antigen
receptor,
gene detection
and quality control.
Manufacturing
We
manufacture cells for our own research, testing and clinical
trials. We are scaling up and optimizing our manufacturing
capacity. Our facilities are operated by a manufacturing and
technology team with decades of relevant experience in China, EU,
and the U.S.
In any
precision setting, it is vital that all controlled environment
equipment meet certain design standards. We operate our
manufacturing facilities under good manufacturing practice ("GMP")
conditions as well the ISO standards. We employ an
institutionalized and proprietary process and quality management
system to optimize reproducibility and to hone our efficiency.
Three of our facilities designed and built to GMP in Beijing,
Shanghai and Wuxi, China meet international standards.
Specifically, our Shanghai cleanroom facility underwent rigorous
cleanroom certification since 2013.
The
quality management systems of CBMG Shanghai have been assessed and
certified as meeting the requirements of ISO 9001: 2015. (i)The
cleanrooms in our new facility have been inspected and certified to
meet the requirements of ISO 14644 and in compliance
with China’s Good Manufacture Practice (GMP)
requirements (2010 edition); (ii) the equipment in the new
Shanghai facility has been calibrated and qualified, and the
biological safety cabinets were also qualified. The quality
management systems of
WX SBM
were
certified as meeting the requirements of ISO 9001: 2015, and the
facility and equipment in Wuxi Site were also
qualified.
With
our integrated GMP level plasmid, viral vectors, and CAR-T cell
chemistry, manufacturing, and controls processes as well as planned
capacity expansion, we believe that we are highly distinguishable
with other companies in the cellular therapy industry.
In
January 2017, we leased a 113,038-square foot building located in
the “Pharma Valley” of Shanghai, the People’s
Republic of China. We are establishing 43,000 square foot
facilities there with 25 clean-rooms and equipped with 12
independent production lines to support clinical batch production
and commercial scale manufacturing. With the above expansion, the
Company could support up to thousands of patients with CAR-T
therapy and thousands of KOA patients with the stem cell therapy
per annum.
Employees
As of
December 31, 2018, the total enrollment of full time employees of
the Company is 193. Among these 193 professionals, 122
have postgraduate and PhD degrees, 61 have undergraduate
degrees. In other words, 94.8% of our employees have
germane educational background. As a biotech company, 139 out of
our 193 employees have medical or biological scientific credentials
and qualifications.
Facilities
Our
corporate headquarters are located at 1345 Avenue of Americas, 15th
Floor, New York, New York 10105. Our aggregate monthly rental
expense for our New York, Maryland and China’s offices for
administration, R&D and manufacturing facilities is $265,000
for a combined approximately 181,000 square feet.
Certain Tax Matters
Following the
completion of our merger with EastBridge Investment Group
Corporation (Delaware) on February 6, 2013, CBMG and its controlled
subsidiaries (the “CBMG Entities”) became a Controlled
Foreign Corporation (CFC) under U.S. Internal Revenue Code Section
957. As a result, the CBMG Entities are subject to anti-deferral
provisions within the U.S. federal income tax system that were
designed to limit deferral of taxable earnings otherwise achieved
by putting profit in low taxed offshore entities. While the CBMG
Entities are subject to review under such provisions, the CBMG
Entities’ earnings are from an active business and should not
be deemed to be distributions made to its U.S. parent
company.
On
December 22, 2017, the tax reform bill was passed (Tax Cut and Jobs
Act (H.R.1)) and reduced top corporate tax rate from 35% to 21%
effective from January 1, 2018. Pursuant to this new Act,
non-operating loss carry back period is eliminated and the loss
carry forward period was expanded from 20 years to an indefinite
period.
Pursuant to the
Corporate Income Tax Law of the PRC, all of the Company’s PRC
subsidiaries are liable to PRC CIT at a rate of 25% except for AG,
Cellular Biomedicine Group Ltd. (Shanghai) (“CBMG
Shanghai”) and Shanghai Cellular Biopharmaceutical Group Ltd.
(“SH SBM”). According to Guoshuihan 2009 No. 203, if an
entity is certified as an “advanced and new technology
enterprise”, it is entitled to a preferential income tax rate
of 15%. CBMG Shanghai obtained the certificate of “advanced
and new technology enterprise” dated October 30, 2015 with an
effective period of three years. CBMG Shanghai re-applied and SH
SBM applied for the certificate of “advanced and new
technology enterprise” in 2018. Both of them received
preliminary approval in November 2018 and are now in the public
announcement period. Final approval will be obtained if there is no
objection raised during the public announcement period. AG was
certified as a “small and micro enterprise” in its 2017
annual tax filing and enjoys the preferential income tax rate of
20%. AG’s eligibility for the reduced tax rate will need to
be verified annually.
BIOPHARMACEUTICAL REGULATION
PRC Regulations
Our
cellular medicine business operates in a highly regulated
environment. In China, aside from provincial and local
licensing authorities, hospitals and their internal ethics and
utilization committees, and a system of institutional review boards
(“IRBs”) which in many cases have members appointed by
provincial authorities. With respect to cell therapies, however,
the Chinese regulatory infrastructure is less established and China
has not yet codified any mandatory regulations governing the
development of cell therapy products.
In December 2017, the Chinese government
issued
trial guidelines
concerning development and testing of cell
therapy products, including stem cell treatments
and immune cell therapies such as CAR-T cell therapeutics. These
trial guidelines are not mandatory regulation but provide some
general principles and basic requirements for cell therapy products
in the areas of
pharmaceutical
research, non-clinical research and clinical research. The cell
therapy products provided in the trial guideline refer to the
human-sourced living cell products which are used for human disease
therapy, whose source, operation and clinical trial process are in
line with ethics and whose research and registration application
are in line with regulations on pharmaceutical administration. The
competent authority of pharmaceutical administration is the NMPA.
It is further clarified by the NMPA that the non-registered
clinical trial data would be acceptable for drug registration on a
case by case basis, pending on the consistency of the samples used
for the clinical trial and the drug applied for registration, the
generation process of the clinical trial data, whether the data is
authentic, complete, accurate and traceable to the source, and the
inspection outcome of the NMPA on the clinical trial. Moreover, an
applicant of the clinical trial of the said cell therapy products
can propose the phases of the clinical trial and the trial plan by
itself (generally the trial can be divided into early stage
clinical trial phase and confirmatory clinical trial phase),
instead of the application of the traditional phases I, II and III
of a clinical trial.
However, it remains unclear if any of
our clinical trials will be offered U.S.FDA-like Fast Track
designation as maintenance therapy in subjects with advanced cancer
who have limited options following surgery and front-line
platinum/taxane chemotherapy to improve their progression-free
survival. By applying U.S. standards and protocols and following
authorized treatment plans in China, we believe we are
differentiated from our competition as we believe we have first
mover’s advantage in an undeveloped industry. In
addition, we have begun to review the feasibility of
performing synergistic U.S. clinical studies.
PRC Operating Licenses
Our
business operations in China are subject to customary regulation
and licensing requirements under regulatory agencies including the
local Administration for Market Regulation, General Administration
of Quality Supervision, Inspection and Quarantine, and the State
Taxation
Administration
,
for each of our business locations. Additionally, our clean room
facilities and the use of reagents is also regulated by local
branches of the Ministry of Ecology and Environment. We are in good
standing with respect to each of our business operating
licenses.
U.S. Government Regulation
The
health care industry is one of the most highly regulated industries
in the United States. The federal government, individual state and
local governments, as well as private accreditation organizations,
oversee and monitor the activities of individuals and businesses
engaged in the development, manufacture and delivery of health care
products and services. Federal laws and regulations seek to protect
the health, safety, and welfare of the citizens of the United
States, as well as to prevent fraud and abuse associated with the
purchase of health care products and services with federal monies.
The relevant state and local laws and regulations similarly seek to
protect the health, safety, and welfare of the states’
citizens and prevent fraud and abuse. Accreditation organizations
help to establish and support industry standards and monitor new
developments.
HCT/P Regulations
Manufacturing
facilities that produce cellular therapies are subject to extensive
regulation by the U.S. FDA. In particular, U.S. FDA regulations set
forth requirements pertaining to establishments that manufacture
human cells, tissues, and cellular and tissue-based products
(“HCT/Ps”). Title 21, Code of Federal Regulations, Part
1271 (21 CFR Part 1271) provides for a unified registration and
listing system, donor-eligibility, current Good Tissue Practices
(“cGTP”), and other requirements that are intended to
prevent the introduction, transmission, and spread of communicable
diseases by HCT/Ps. While we currently have no plans to conduct
these activities within the United States, these regulations may be
relevant to us if in the future we become subject to them, or if
parallel rules are imposed on our operations in China.
We
currently collect, process, store and manufacture HCT/Ps, including
manufacturing cellular therapy products. We also collect, process,
and store HCT/Ps. Accordingly, we comply with cGTP and cGMP
guidelines that apply to biological products. Our management
believes that certain other requirements pertaining to biological
products, such as requirements pertaining to premarket approval, do
not currently apply to us because we are not currently
investigating, marketing or selling cellular therapy products in
the United States. If we change our business operations in the
future, the FDA requirements that apply to us may also
change.
Certain
state and local governments within the United States also regulate
cell-processing facilities by requiring them to obtain other
specific licenses. Certain states may also have enacted laws and
regulations, or may be considering laws and regulations, regarding
the use and marketing of stem cells or cell therapy products, such
as those derived from human embryos. While these laws and
regulations should not directly affect our business, they could
affect our future business. Presently we are not subject to any of
these state law requirements, because we do not conduct these
regulated activities within the United States.
Pharmaceutical and Biological Products
In the
United States, pharmaceutical and biological products, including
cellular therapies, are subject to extensive pre- and post-market
regulation by the FDA. The Federal Food, Drug, and Cosmetic Act
(“FD&C Act”), and other federal and state statutes
and regulations, govern, among other things, the research,
development, testing, manufacture, storage, recordkeeping,
approval, labeling, promotion and marketing, distribution,
post-approval monitoring and reporting, sampling, and import and
export of pharmaceutical products. Biological products are approved
for marketing under provisions of the Public Health Service Act, or
PHS Act. However, because most biological products also meet the
definition of “drugs” under the FD&C Act, they are
also subject to regulation under FD&C Act provisions. The PHS
Act requires the submission of a biologics license application
(“BLA”), rather than a New Drug Application ("NDA"),
for market authorization. However, the application process and
requirements for approval of BLAs are similar to those for NDAs,
and biologics are associated with similar approval risks and costs
as drugs. Presently we are not subject to any of these
requirements, because we do not conduct these regulated activities
within the United States. However, these regulations may
be relevant to us should we engage in these activities in the
United States in the future.
WHERE YOU CAN FIND MORE INFORMATION
You are
advised to read this Form 10-K in conjunction with other reports
and documents that we file from time to time with the SEC. In
particular, please read our Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K that we file from time to time. You may
obtain copies of these reports directly from us or from the SEC at
the SEC's Public Reference Room at 100 F. Street, N.E. Washington,
D.C. 20549, and you may obtain information about obtaining access
to the Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains information for electronic filers at
its website
http://www.sec.gov
.
RISKS RELATED TO OUR COMPANY
We have a limited operating history and expect significant
operating losses for the next few years.
We are
a company with a limited operating history and have incurred
substantial losses and negative cash flow from operations through
the year ended December 31, 2018. Our cash flow from operations may
not be consistent from period to period, our biopharmaceutical
business has not yet generated substantial revenue, and we may
continue to incur losses and negative cash flow in future periods,
particularly within the next several years.
Our biopharmaceutical product development programs are based on
novel technologies and are inherently risky.
We are
subject to the risks of failure inherent in the development of
products based on new biomedical technologies. The novel nature of
these cell-based therapies creates significant challenges in regard
to product development and optimization, manufacturing, government
regulation, third party reimbursement, and market acceptance,
including the challenges of:
●
Educating medical
personnel regarding the application protocol;
●
Sourcing clinical
and commercial supplies for the materials used to manufacture and
process our product candidates;
●
Developing a
consistent and reliable process, while limiting contamination risks
regarding the application protocol;
●
Conditioning
patients with chemotherapy in conjunction with delivering immune
cell therapy treatment, which may increase the risk of adverse side
effects;
●
Obtaining
regulatory approval, as the NMPA, and other regulatory authorities
have limited experience with commercial development of cell-based
therapies, and therefore the pathway to regulatory approval may be
more complex and require more time than we anticipate;
and
●
Establishing sales
and marketing capabilities upon obtaining any regulatory approval
to gain market acceptance of cell therapy.
These
challenges may prevent us from developing and commercializing
products on a timely or profitable basis or at all.
We face risks relating to the cell therapy industry, clinical
development and commercialization.
Cell
therapy is still a developing field and a significant global market
for our services has yet to emerge. Our cellular therapy candidates
are based on novel cell technologies that are inherently risky and
may not be understood or accepted by the marketplace. The current
market principally consists of providing manufacturing of cell and
tissue-based therapeutic products for clinical trials and
processing of stem cell products for therapeutic
programs.
The
degree of market acceptance of any future product candidates will
depend on a number of factors, including:
●
the clinical safety
and effectiveness of the product candidates, the availability of
alternative treatments and the perceived advantages of the
particular product candidates over alternative
treatments;
●
the relative
convenience and ease of administration of the product
candidates;
●
ethical concerns
that may arise regarding our commercial use of stem cells,
including adult stem cells, in the manufacture of the product
candidates;
●
the frequency and
severity of adverse events or other undesirable side effects
involving the product candidates or the products or product
candidates of others that are cell-based; and
●
the cost of the
products, the reimbursement policies of government and third-party
payors and our ability to obtain sufficient third-party coverage or
reimbursement.
Laws and the regulatory infrastructure governing cellular
biopharmaceuticals in China are relatively new and less established
in comparison to the U.S. and other countries; accordingly,
regulation may be less stable and predictable than desired, and
regulatory changes may disrupt our commercialization
process.
In
December 2017, the Chinese government issued trial guidelines
concerning development and testing of cell therapy products,
including stem cell treatments and immune cell therapies such as
CAR-T cell therapeutics. These trial guidelines are not mandatory
regulation but provide some general principles and basic
requirements for cell therapy products in the areas of
pharmaceutical research, non-clinical research and clinical
research. The cell therapy products provided in the trial guideline
refer to the human-sourced living cell products which are used for
human disease therapy, whose source, operation and clinical trial
process are in line with ethics and whose research and registration
application are in line with regulations on pharmaceutical
administration. The competent authority of pharmaceutical
administration is the NMPA. It is further clarified by the NMPA
that the non-registered clinical trial data would be acceptable for
drug registration on a case by case basis, pending on the
consistency of the samples used for the clinical trial and the drug
applied for registration, the generation process of the clinical
trial data, whether the data is authentic, complete, accurate and
traceable to the source, and the inspection outcome of the NMPA on
the clinical trial. Moreover, an applicant of the clinical trial of
the said cell therapy products can propose the phases of the
clinical trial and the trial plan by itself (generally the trial
can be divided into early stage clinical trial phase and
confirmatory clinical trial phase), instead of the application of
the traditional phases I, II and III of a clinical trial. However,
remains unclear if any of our clinical trials will be offered
U.S.FDA-like Fast Track designation as maintenance therapy in
subjects with advanced cancer who have limited options following
surgery and front-line platinum/taxane chemotherapy to improve
their progression-free survival. We do not know if our animal
studies documentation will be approved to support trials in humans.
We also do not know if our cell lines will be accepted by the PRC
health authorities. These factors could adversely affect the timing
of the clinical trials, the timing of receipt and reporting of
clinical data, the timing of Company-sponsored IND filings, and our
ability to conduct future planned clinical trials, and any of the
above could have a material adverse effect on our
business.
NMPA’s regulations may limit our ability to develop, license,
manufacture and market our products and services.
Some or
all of our operations in China will be subject to oversight and
regulation by the NMPA and MOH. Government regulations, among other
things, cover the inspection of and controls over testing,
manufacturing, safety and environmental considerations, efficacy,
labeling, advertising, promotion, record keeping and sale and
distribution of pharmaceutical products. Such government
regulations may increase our costs and prevent or delay the
licensing, manufacturing and marketing of any of our products or
services. In the event we seek to license, manufacture, sell or
distribute new products or services, we likely will need approvals
from certain government agencies such as the future growth and
profitability of any operations in China would be contingent on
obtaining the requisite approvals. There can be no assurance that
we will obtain such approvals.
In
2003, the CFDA implemented new guidelines for the licensing of
pharmaceutical products. All existing manufacturers with licenses
were required to apply for the Good Manufacturing Practices
(“cGMP”) certifications. According to Good
Manufacturing Practices for Pharmaceutical Products (revised
edition 2010), or the New GMP Rules promulgated by the Ministry of
Health of the PRC on January 17, 2011 which became effective on
March 1, 2011, all the newly constructed manufacturing facilities
of drug manufacture enterprises in China shall comply with the
requirements of the New GMP Rules, which are stricter than the
original GMP standards.
In
addition, delays, product recalls or failures to receive approval
may be encountered based upon additional government regulation,
legislative changes, administrative action or changes in
governmental policy and interpretation applicable to the Chinese
pharmaceutical industry. Our pharmaceutical activities also may
subject us to government regulations with respect to product prices
and other marketing and promotional related activities. Government
regulations may substantially increase our costs for developing,
licensing, manufacturing and marketing any products or services,
which could have a material adverse effect on our business,
operating results and financial condition.
The
NMPA and other regulatory authorities in China have implemented a
series of new punitive and stringent measures regarding the
pharmaceuticals industry to redress certain past misconducts in the
industry and certain deficiencies in public health reform policies.
Given the nature and extent of such new enforcement measures, the
aggressive manner in which such enforcement is being conducted and
the fact that newly-constituted local level branches are encouraged
to issue such punishments and fines, there is the possibility of
large scale and significant penalties being levied on
manufacturers. These new measures may include fines, restriction
and suspension of operations and marketing and other unspecified
penalties. This new regulatory environment has added significantly
to the risks of our businesses in China and may have a material
adverse effect on our business, operating results and financial
condition.
Our technology platforms, including our CAR-T, AFP-TCR and TIL,
whether preclinical or clinical, are new approaches to cancer
treatment that present significant challenges.
We have
concentrated our research and development efforts on T cell
immunotherapy technology, and our future success in cancer
treatment is dependent on the successful development of T cell
immunotherapies in general and our CAR technologies and product
candidates in particular. Our approach to cancer treatment aims to
alter T cells ex vivo through genetic modification using viruses
designed to reengineer the T cells to recognize specific proteins
on the surface or inside cancer cells. Because this is a new
approach to cancer immunotherapy and cancer treatment generally,
developing and commercializing our product candidates subjects us
to many challenges.
We
cannot be sure that our T cell immunotherapy and will yield
satisfactory products that are safe and effective, scalable, or
profitable. Additionally, because our technology involves the
genetic modification of patient cells ex vivo using viral vector,
we are subject to many of the challenges and risks that gene
therapies face, including regulatory requirements governing gene
and cell therapy products have evolved frequently.
Moreover, public
perception of therapy safety issues, including adoption of new
therapeutics or novel approaches to treatment, may adversely
influence the willingness of subjects to participate in clinical
trials, or if approved, of physicians to subscribe to the novel
treatment mechanics. Physicians, hospitals and third-party payers
often are slow to adopt new products, technologies and treatment
practices that require additional upfront costs and training.
Physicians may not be willing to undergo training to adopt this
novel and personalized therapy, may decide the therapy is too
complex to adopt without appropriate training and may choose not to
administer the therapy. Based on these and other factors, hospitals
and payers may decide that the benefits of this new therapy do not
or will not outweigh its costs.
Our near term ability to generate significant product revenue
is dependent on the success of one or more of our CAR-T, AFP TCR-T,
and TIL product candidates, each of which are at an early-stage of
development and will require significant additional clinical
testing before we can seek regulatory approval and begin commercial
sales.
Our
near term ability to generate significant product revenue is
highly dependent on the proof of concept results of our cell
therapy assets, and our ability to obtain regulatory approval of
and successfully commercialize these products. All of these
products are in the early stages of development, and will require
additional pre-clinical and clinical development, regulatory review
and approval in each jurisdiction in which we intend to market the
products, substantial investment, access to sufficient commercial
manufacturing capacity, and significant marketing efforts before we
can generate any revenue from product sales. Before obtaining
marketing approval from regulatory authorities for the sale of our
product candidates, we must conduct extensive clinical studies to
demonstrate the safety, purity, and potency of the product
candidates in humans. We cannot be certain that any of our product
candidates will be successful in clinical studies and they may not
receive regulatory approval even if they are successful in clinical
studies.
If our
products, once developed, encounter safety or efficacy
problems, developmental delays, regulatory issues, or other
problems, our development plans and business could be significantly
harmed. Further, competitors who are developing products with
similar technology may experience problems with their products that
could identify problems that would potentially harm our
business.
Our CAR-T, AFP TCR-T and TIL product candidates are biologics and
the manufacture of our product candidates is complex and we may
encounter difficulties in production, particularly with respect to
process development or scaling-out of our manufacturing
capabilities. If we or any of our third-party manufacturers
encounter such difficulties, our ability to provide supply of our
product candidates for clinical trials or our products for
patients, if approved, could be delayed or stopped, or we may be
unable to maintain a commercially viable cost
structure.
Our
immune cell CAR-T, AFP TCR-T and TIL product candidates are
biologics and the process of manufacturing our products is complex,
highly- regulated and subject to multiple risks. The manufacture of
our product candidates involves complex processes, including
harvesting T cells from patients, genetically modifying the T cells
ex vivo, multiplying the T cells to obtain the desired dose, and
ultimately infusing the T cells back into a patient’s body.
As a result of the complexities, the cost to manufacture these
biologics in general, and our genetically modified cell product
candidates in particular, is generally higher than the adipose stem
cell, and the manufacturing process is less reliable and is more
difficult to reproduce. Our manufacturing process will be
susceptible to product loss or failure due to logistical issues
associated with the collection of white blood cells, or starting
material, from the patient, shipping such material to the
manufacturing site, shipping the final product back to the patient,
and infusing the patient with the product, manufacturing issues
associated with the differences in patient starting materials,
interruptions in the manufacturing process, contamination,
equipment or reagent failure, improper installation or operation of
equipment, vendor or operator error, inconsistency in cell growth,
and variability in product characteristics. Even minor deviations
from normal manufacturing processes could result in reduced
production yields, product defects, and other supply disruptions.
If for any reason we lose a patient’s starting material or
later-developed product at any point in the process, the
manufacturing process for that patient will need to be restarted
and the resulting delay may adversely affect that patient’s
outcome. If microbial, viral, or other contaminations are
discovered in our product candidates or in the manufacturing
facilities in which our product candidates are made, such
manufacturing facilities may need to be closed for an extended
period of time to investigate and remedy the contamination. Because
our product candidates are manufactured for each particular
patient, we will be required to maintain a chain of identity with
respect to materials as they move from the patient to the
manufacturing facility, through the manufacturing process, and back
to the patient. Maintaining such a chain of identity is difficult
and complex, and failure to do so could result in adverse patient
outcomes, loss of product, or regulatory action including
withdrawal of our products from the market. Further, as product
candidates are developed through preclinical to late stage clinical
trials towards approval and commercialization, it is common that
various aspects of the development program, such as manufacturing
methods, are altered along the way in an effort to optimize
processes and results. Such changes carry the risk that they will
not achieve these intended objectives, and any of these changes
could cause our product candidates to perform differently and
affect the results of planned clinical trials or other future
clinical trials.
Although we
continue to develop our own manufacturing facilities to support our
clinical and commercial manufacturing activities, we may, in any
event, never be successful in establishing our own manufacturing
facilities. We have not yet caused our product
candidates to be manufactured or processed on a commercial scale
and may not be able to do so for any of our product candidates.
Although our manufacturing and processing approach is based upon
the current approach undertaken by our third-party research
institution collaborators, we do not have experience in managing
the clinical and commercial manufacturing process, and our process
may be more difficult or expensive than the approaches currently in
use. We will make changes as we work to optimize the manufacturing
process, and we cannot be sure that even minor changes in the
process will not result in significantly different CAR-T, AFP
TCR-T, TIL or stem cell that may not be as safe and effective as
the current products deployed by our third-party research
institution collaborators. As a result of these challenges, we may
experience delays in our clinical development and/or
commercialization plans. The manufacturing risks could delay or
prevent the completion of our clinical trials or the approval of
any of our product candidates by the FDA, NMPA or other regulatory
authorities, result in higher costs or adversely impact
commercialization of our product candidates. In addition, we will
rely on third parties to perform certain specification tests on our
product candidates prior to delivery to patients. If these tests
are not appropriately done and test data are not reliable, patients
could be put at risk of serious harm and the FDA, NMPA or other
regulatory authorities could require additional clinical trials or
place significant restrictions on our company until deficiencies
are remedied. We may ultimately be unable to reduce the
cost of goods for our product candidates to levels that will allow
for an attractive return on investment if and when those product
candidates are commercialized.
We rely heavily on third parties to conduct clinical trials on our
product candidates.
We
presently are party to, and expect that we will be required to
enter into, agreements with hospitals and other research partners
to perform clinical trials for us and to engage in sales, marketing
and distribution efforts for our products and product candidates we
may acquire in the future. We may be unable to establish or
maintain third-party relationships on a commercially reasonable
basis, if at all. In addition, these third parties may have similar
or more established relationships with our competitors or other
larger customers. Moreover, the loss for any reason of one or more
of these key partners could have a significant and adverse impact
on our business. If we are unable to obtain or retain third party
sales and marketing vendors on commercially acceptable terms, we
may not be able to commercialize our therapy products as planned
and we may experience delays in or suspension of our marketing
launch. Our dependence upon third parties may adversely affect our
ability to generate profits or acceptable profit margins and our
ability to develop and deliver such products on a timely and
competitive basis.
Outside scientists and their third-party research institutions on
whom we rely for research and development and early clinical
testing of our product candidates may have other commitments or
conflicts of interest, which could limit our access to their
expertise and harm our ability to leverage our technology
platform.
We
currently have limited internal research and development
capabilities in solid tumors. We therefore rely at present on our
third-party research institution collaborators for both
capabilities.
The
outside scientists who conduct the clinical testing of our current
product candidates, and who conduct the research and development
upon which our product candidate pipeline depends, are not our
employees; rather they serve as either independent contractors or
the primary investigators under collaboration that we have with
their sponsoring academic or research institution. Such scientists
and collaborators may have other commitments that would limit their
availability to us. Although our scientific advisors generally
agree not to do competing work, if an actual or potential conflict
of interest between their work for us and their work for another
entity arises, we may lose their services. We are
currently evaluating the feasibility of conducting these trials
ourselves or commencing the trial in the United States or
elsewhere. These factors could adversely affect the timing of the
clinical trials, the timing of receipt and reporting of clinical
data, the timing of Company-sponsored IND filings, and our ability
to conduct future planned clinical trials. It is also possible that
some of our valuable proprietary knowledge may become publicly
known through these scientific advisors if they breach their
confidentiality agreements with us, which would cause competitive
harm to, and have a material adverse effect on our
business.
If we are unable to maintain our licenses, patents or other
intellectual property we could lose important protections that are
material to continuing our operations and our future
prospects.
We
operate in the highly technical field of development of
regenerative and immune cellular therapies. In addition to patents,
we rely in part on trademark, trade secret and protection to
protect our intellectual properties comprised of proprietary know
how, technology and processes. However, trade secrets are difficult
to protect. We have entered and expect to continue to enter into
confidentiality and intellectual property assignment agreements
with our employees, consultants, outside scientific
collaborators, sponsored researchers, affiliates, other advisors
and potential investors. These agreements generally require that
the other party keep confidential and not disclose to third parties
all confidential information developed by the party or made known
to the party by us. These agreements may also provide that
inventions conceived by the party in the course of rendering
services to us will be our exclusive property. However, these
agreements may be difficult to enforce, or can be breached and may
not effectively protect our intellectual property
rights.
In
addition to contractual measures, we try to protect the
confidential nature of our proprietary information by
compartmentalize our intellectual properties as well as using other
security measures. Such physical and technology measures may not
provide adequate protection for our proprietary information. For
example, our security measures may not prevent an employee or
consultant with authorized access from misappropriating our trade
secrets and providing them to a competitor, and the recourse we
have available against such misconduct may be inadequate to
adequately protect our interests. Enforcing a claim that a party
illegally disclosed or misappropriated a trade secret can be
difficult, expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the United States may be
less willing to protect trade secrets. Furthermore, others may
independently develop our proprietary information in a manner that
could prevent legal recourse by us. If any of our confidential or
proprietary information, including our trade secrets and know how,
were to be disclosed or misappropriated, or if a competitor
independently developed any such information, our competitive
position could be harmed.
We may be unable to obtain or maintain patent protection for our
products and product candidates, which could have a material
adverse effect on our business.
Our
commercial success will depend, in part, on obtaining and
maintaining patent protection for new technologies, product
candidates, products and processes and successfully defending such
patents against third party challenges. To that end, we file or
acquire patent applications, and have been issued patents that are
intended to cover certain methods and uses relating to stem cells
and cancer immune cell therapies.
The
patent positions of biotechnology companies can be highly uncertain
and involve complex legal, scientific and factual questions and
recent court decisions have introduced significant uncertainty
regarding the strength of patents in the industry. Moreover, the
legal systems of some countries do not favor the aggressive
enforcement of patents and may not protect our intellectual
property rights to the same extent as they would, for instance,
under the laws of the United States. Any of the issued patents we
own or license may be challenged by third parties and held to be
invalid, unenforceable or with a narrower or different scope of
coverage that what we currently believe, effectively reducing or
eliminating protection we believed we had against competitors with
similar products or technologies. If we ultimately engage in and
lose any such patent disputes, we could be subject to competition
and/or significant liabilities, we could be required to enter into
third party licenses or we could be required to cease using the
disputed technology or product. In addition, even if such licenses
are available, the terms of any license requested by a third party
could be unacceptable to us.
The
claims of any current or future patents that may issue or be
licensed to us may not contain claims that are sufficiently broad
to prevent others from utilizing the covered technologies and thus
may provide us with little commercial protection against competing
products. Consequently, our competitors may independently develop
competing products that do not infringe our patents or other
intellectual property. To the extent a competitor can develop
similar products using a different chemistry, our patents and
patent applications may not prevent others from directly competing
with us. Product development and approval timelines for certain
products and therapies in our industry can require a significant
amount of time (i.e. many years). As such, it is possible that any
patents that may cover an approved product or therapy may have
expired at the time of commercialization or only have a short
remaining period of exclusivity, thereby reducing the commercial
advantages of the patent. In such case, we would then rely solely
on other forms of exclusivity which may provide less protection to
our competitive position.
Litigation relating to intellectual property is expensive, time
consuming and uncertain, and we may be unsuccessful in our efforts
to protect against infringement by third parties or defend
ourselves against claims of infringement.
To
protect our intellectual property, we may initiate litigation or
other proceedings. In general, intellectual property litigation is
costly, time-consuming, diverts the attention of management and
technical personnel and could result in substantial uncertainty
regarding our future viability, even if we ultimately
prevail. Some of our competitors may be able to sustain
the costs of such litigation or other proceedings more effectively
than can we because of their substantially greater financial
resources. The loss or narrowing of our intellectual property
protection, the inability to secure or enforce our intellectual
property rights or a finding that we have infringed the
intellectual property rights of a third party could limit our
ability to develop or market our products and services in the
future or adversely affect our revenues. Furthermore, any public
announcements related to such litigation or regulatory proceedings
could adversely affect the price of our common stock. Third parties
may allege that the research, development and commercialization
activities we conduct infringe patents or other proprietary rights
owned by such parties. This may turn out to be the case even though
we have conducted a search and analysis of third-party patent
rights and have determined that certain aspects of our research and
development and proposed products activities apparently do not
infringe on any third-party Chinese patent rights. If we are found
to have infringed the patents of a third party, we may be required
to pay substantial damages; we also may be required to seek from
such party a license, which may not be available on acceptable
terms, if at all, to continue our activities. A judicial finding or
infringement or the failure to obtain necessary licenses could
prevent us from commercializing our products, which would have a
material adverse effect on our business, operating results and
financial condition.
We will not seek to protect our intellectual property rights in all
jurisdictions throughout the world and we may not be able to
adequately enforce our intellectual property rights even in the
jurisdictions where we seek protection.
Filing,
prosecuting and defending patents on our product candidates in all
countries and jurisdictions throughout the world would be
impracticable and cost prohibitive, and our intellectual property
rights in some countries could be less extensive than those in the
People’s Republic of China or the United States, assuming
that rights are obtained in these jurisdiction. In addition, the
laws of some foreign countries may not protect all of our
intellectual properties.
If we are unable to protect the confidentiality of trade secrets,
our competitive position could be impaired.
A
significant amount of our technology, particularly with respect to
our proprietary manufacturing processes, is unpatented and is held
in the form of trade secrets. Our efforts to protect
these trade secrets are comprised of the use of confidentiality and
proprietary information agreement, physically secured
documentation, and knowledge segmentation among our staff. Even so,
improper use or disclosure of our confidential information could
occur and in such cases adequate remedies may be insufficient to
protect our competitive position or may not exist. The inadvertent
disclosure of our trade secrets could also impair our competitive
position.
PRC intellectual property law requires us to compensate our
employees for the intellectual property that they may help to
develop.
We have
entered and expect to continue to enter into confidentiality and
intellectual property assignment agreements with most of our
employees, consultants, outside scientific collaborators, sponsored
researchers, affiliates and other advisors. These agreements
generally require that the other party keep confidential and not
disclose to third parties all confidential information developed by
the party or made known to the party by us. These agreements may
also provide that inventions conceived by the party in the course
of rendering services to us will be our exclusive property.
However, these agreements may be difficult to enforce, or can be
breached and may not effectively protect our intellectual property
rights.
The PRC
laws codify a “reward/award” policy which entitles
employees to certain levels of compensation and bonus from their
service invention-creations for which their employers filed for
patent protection. In the absence of any contractual understanding,
the Implementing Rules of the Patent Law require a minimum
compensation and bonus to such employees as below: bonus: (i) for
each invention patent, a one-time reward of no less than 3,000 RMB,
or (ii) for each utility model or design patent, a one-time reward
of no less than 1,000 RMB, and compensation: (i) for each invention
patent and utility model, at least 2% of annual operating profits
derived from the use of the patent, (ii) for each design patent, at
least 0.2% of annual operating profits derived from the use of the
design patent, and (iii) at least 10% of royalties received from
the licensing the patent to a third party.
Although our bylaws
allow for us to issue bonuses to our employees, we have not
contractually limited the amount of compensation that we may pay
them for filing patents for their ideas, developments, discoveries
or inventions. As such, should any of our employees and consultants
who have not contractually agreed otherwise seek to enforce these
rights, we may be required to pay the statutorily mandated minimum
to our employees as required by this law. Our product candidates
are still in the clinical trial stage and as of the date of this
annual report, we have not derived any revenue from our
product-related patents. However, if and when we commercialize our
product candidates or therapies, or if we are required to pay our
employees any compensation for patents relating to our technical
services, such compensation could be substantial and may harm our
business prospects, financial condition and results of
operations.
Our technologies are at early stages of discovery and development,
and we may fail to develop any commercially acceptable or
profitable products.
We have
yet to develop any therapeutic products that have been approved for
marketing, and we do not expect to become profitable within the
next several years, but rather expect our biopharmaceutical
business to incur additional and increasing operating losses.
Before commercializing any therapeutic product in China, we may be
required to obtain regulatory approval from the MOH NMPA, local
regulatory authorities, and/or individual hospitals, and outside
China from equivalent foreign agencies after conducting extensive
preclinical studies and clinical trials that demonstrate that the
product candidate is safe and effective.
We may
elect to delay or discontinue studies or clinical trials based on
unfavorable results. Any product developed from, or based on, cell
technologies may fail to:
●
survive and persist
in the desired location;
●
provide the
intended therapeutic benefit;
●
engraft or
integrate into existing tissue in the desired manner;
or
●
achieve therapeutic
benefits equal to, or better than, the standard of treatment at the
time of testing.
In
addition, our therapeutic products may cause undesirable side
effects. Results of preclinical research in animals may not be
indicative of future clinical results in humans.
Ultimately if
regulatory authorities do not approve our products or if we fail to
maintain regulatory compliance, we would be unable to commercialize
our products, and our business and results of operations would be
harmed. Even if we do succeed in developing products, we will face
many potential obstacles such as the need to develop or obtain
manufacturing, marketing and distribution capabilities.
Furthermore, because transplantation of cells is a new form of
therapy, the marketplace may not accept any products we may
develop.
Most potential applications of our technology are
pre-commercialization, which subjects us to development and
marketing risks.
We are
in a relatively early stage on the path to commercialization with
many of our products. Successful development and market acceptance
of our products is subject to developmental risks, including
failure to achieve innovative solutions to problems during
development, ineffectiveness, lack of safety, unreliability,
failure to receive necessary regulatory clearances or approvals,
approval by hospital ethics committees and other governing bodies,
high commercial cost, preclusion or obsolescence resulting from
third parties’ proprietary rights or superior or equivalent
products, competition, and general economic conditions affecting
purchasing patterns. There is no assurance that we or our partners
will successfully develop and commercialize our products, or that
our competitors will not develop competing products, treatments or
technologies that are less expensive or superior. Failure to
successfully develop and market our products would have a
substantial negative effect on our results of operations and
financial condition.
Market acceptance of new technology such as ours can be difficult
to obtain.
New and
emerging cell therapy and cell banking technologies may have
difficulty or encounter significant delays in obtaining market
acceptance in some or all countries around the world due to the
novelty of our cell therapy and cell banking technologies.
Therefore, the market adoption of our cell therapy and cell banking
technologies may be slow and lengthy with no assurances that the
technology will be successfully adopted. The lack of market
adoption or reduced or minimal market adoption of cell therapy and
cell banking technologies may have a significant impact on our
ability to successfully sell our future product(s) or therapies
within China or in other countries. Our strategy depends in part on
the adoption of the therapies we may develop by state-owned
hospital systems in China, and the allocation of resources to new
technologies and treatment methods is largely dependent upon ethics
committees and governing bodies within the hospitals. Even if our
clinical trials are successful, there can be no assurance that
hospitals in China will adopt our technology and therapies as
readily as we may anticipate.
Future clinical trial results may differ significantly from our
expectations.
While
we have proceeded incrementally with our clinical trials in an
effort to gauge the risks of proceeding with larger and more
expensive trials, we cannot guarantee that we will not experience
negative results with larger and much more expensive clinical
trials than we have conducted to date. Poor results in our clinical
trials could result in substantial delays in commercialization,
substantial negative effects on the perception of our products, and
substantial additional costs. These risks are increased by our
reliance on third parties in the performance of many of the
clinical trial functions, including the clinical investigators,
hospitals, and other third party service
providers.
If clinical trials of our technology fail to demonstrate safety and
efficacy to the satisfaction of the relevant regulatory
authorities, including the PRC’s National Medicinal Product
Administration and the Ministry of Health, or do not otherwise
produce positive results, we may incur additional costs or
experience delays in completing, or ultimately be unable to
complete, the development and commercialization of such product
candidates.
Currently, a
regulatory structure has not been established to standardize the
approval process for products or therapies based on the technology
that exists or that is being developed in our field. Therefore we
must conduct, at our own expense, extensive clinical trials to
demonstrate the safety and efficacy of the product candidates in
humans, and then archive our results until such time as a new
regulatory regime is put in place. If and when this new regulatory
regime is adopted it may be easier or more difficult to navigate
than CBMG may anticipate, with the following potential
barriers:
●
regulators or
institutional review boards may not authorize us or our
investigators to commence clinical trials or conduct clinical
trials at a prospective trial site;
●
clinical trials of
product candidates may produce negative or inconclusive results,
and we may decide, or regulators may require us, to conduct
additional clinical trials or abandon product development programs
that we expect to be pursuing;
●
the number of
patients required for clinical trials of product candidates may be
larger than we anticipate, enrollment in these clinical trials may
be slower than we anticipate, or participants may drop out of these
clinical trials at a higher rate than we anticipate;
●
third party
contractors may fail to comply with regulatory requirements or meet
their contractual obligations to us in a timely manner or at
all;
●
we might have to
suspend or terminate clinical trials of our product candidates for
various reasons, including a finding that the participants are
being exposed to unacceptable health risks;
●
regulators or
institutional review boards may require that we or our
investigators suspend or terminate clinical research for various
reasons, including noncompliance with regulatory
requirements;
●
the cost of
clinical trials of our product candidates may be greater than
anticipated;
●
we may be subject
to a more complex regulatory process, since cell-based therapies
are relatively new and regulatory agencies have less experience
with them as compared to traditional pharmaceutical
products;
●
the supply or
quality of our product candidates or other materials necessary to
conduct clinical trials of these product candidates may be
insufficient or inadequate; and
●
our product
candidates may have undesirable side effects or other unexpected
characteristics, causing us or our investigators to halt or
terminate the trials.
We may
be unable to generate interest or meaningful revenue in out-license
our Intellectual Property.
The results of preclinical studies may not correlate with the
results of human clinical trials. In addition, early stage clinical
trial results do not ensure success in later stage clinical trials,
and interim trial results are not necessarily predictive of final
trial results.
To
date, we have not completed the development of any products through
regulatory approval. The results of preclinical studies in animals
may not be predictive of results in a clinical trial. Likewise, the
outcomes of early clinical trials may not be predictive of the
success of later clinical trials. New information regarding the
safety and efficacy of such product candidates may be less
favorable than the data observed to date. AG’s de minimis
technical service revenue in the Jilin Hospital should not be
relied upon as evidence that later or larger-scale clinical trials
will succeed. In addition, even if the trials are successfully
completed, we cannot guarantee that the NMPA will interpret the
results as we do, and more trials could be required before we
submit our product candidates for approval. To the extent that the
results of the trials are not satisfactory to the NMPA or other
foreign regulatory authorities for support of a marketing
application, approval of our product candidates may be
significantly delayed, or we may be required to expend significant
additional resources, which may not be available to us, to conduct
additional trials in support of potential approval of our product
candidates.
If we encounter difficulties enrolling patients in our clinical
trials, our clinical development activities could be delayed or
otherwise adversely affected.
We may
experience difficulties in patient enrollment in our clinical
trials for a variety of reasons. The timely completion of clinical
trials in accordance with their protocols depends, among other
things, on our ability to enroll a sufficient number of patients
who remain in the study until its conclusion. The enrollment of
patients depends on many factors, including:
●
the patient
eligibility criteria defined in the protocol;
●
the size of the
patient population required for analysis of the trial’s
primary endpoints;
●
the proximity of
patients to study sites;
●
the design of the
trial;
●
our ability to
recruit clinical trial investigators with the appropriate
competencies and experience;
●
our ability to
obtain and maintain patient consents; and
●
the risk that
patients enrolled in clinical trials will drop out of the trials
before completion.
In
addition, our clinical trials may compete with other clinical
trials for product candidates that are in the same therapeutic
areas as our product candidates, and this competition may reduce
the number and types of patients available to us, because some
patients who might have opted to enroll in our trials may instead
opt to enroll in a trial being conducted by one of our competitors.
Since the number of qualified clinical investigators is limited, we
expect to conduct some of our clinical trials at the same clinical
trial sites that some of our competitors use, which will reduce the
number of patients who are available for our clinical trials in
such clinical trial site. Moreover, because our product candidates
represent a departure from more commonly used methods for cancer
treatment, potential patients and their doctors may be inclined to
use conventional therapies, such as chemotherapy and or traditional
Chinese medicine, rather than enroll patients in any future
clinical trial.
Upon
commencing clinical trials, delays in patient enrollment may result
in increased costs or may affect the timing or outcome of the
planned clinical trials, which could prevent completion of these
trials and adversely affect our ability to advance the development
of our product candidates.
We are exposed to general liability, non-clinical and clinical
liability risks which could place a substantial financial burden
upon us, should lawsuits be filed against us.
Our
business exposes us to potential liability risks that are inherent
in the testing, manufacturing and marketing of our therapies and
product candidates. We expect that such claims are likely to be
asserted against us at some point. In addition, the use in our
clinical trials of our therapies and products and the subsequent
sale of these therapies or product candidates by us or our
potential collaborators may cause us to bear a portion of or all
product liability risks. We currently have insurance coverage
relating to inventory, property plant and equipment and office
premises. The Company also purchased in insurance covering personal
injury, medical expenses and several clinical
trials. However, any claim under such insurance policies
may be subject to certain exceptions, and may not be honored fully,
in part, in a timely manner, or at all, and may not cover the full
extent of liability we may actually face. Therefore, a successful
liability claim or series of claims brought against us could have a
material adverse effect on our business, financial condition and
results of operations.
We currently have no CAR-T, TCR-T, TIL or KOA product marketing and
sales organization and have no experience in marketing such
products. If we are unable to establish product marketing and sales
capabilities or enter into agreements with third parties to market
and sell our product candidates, we may generate less product
revenue than expected.
We
currently have no CAR-T, TCR-T, TIL or KOA product sales, marketing
or distribution capabilities and have no experience in marketing
products. We intend to develop an in-house product marketing
organization and sales force, which will require significant
capital expenditures, management resources and time. We will have
to compete with other pharmaceutical and biotechnology companies to
recruit, hire, train and retain marketing and sales
personnel.
If we
are unable or decide not to establish internal sales, marketing and
distribution capabilities, we will pursue collaborative
arrangements regarding the sales and marketing of our products,
however, there can be no assurance that we will be able to
establish or maintain such collaborative arrangements, or if we are
able to do so, that they will have effective sales forces. Any
revenue we receive will depend upon the efforts of such third
parties, which may not be successful. We may have little or no
control over the marketing and sales efforts of such third parties
and our revenue from product sales may be lower than if we had
commercialized our product candidates ourselves. We also face
competition in our search for third parties to assist us with the
sales and marketing efforts of our product candidates. There can be
no assurance that we will be able to develop in-house sales and
distribution capabilities or establish or maintain relationships
with third-party collaborators to commercialize any product in
China or overseas.
Coverage and reimbursement may be limited or unavailable in certain
market segments for our product candidates, which could make it
difficult for us to sell our product candidates
profitably.
Successful sales of
our product candidates, if approved, depend on the availability of
adequate coverage and reimbursement from third-party payers. In
addition, because our product candidates represent new approaches
to the treatment of cancer, we cannot accurately estimate the
potential revenue from our product candidates.
Patients who are
provided medical treatment for their conditions generally rely on
third-party payers to reimburse all or part of the costs associated
with their treatment. Adequate coverage and reimbursement from
governmental healthcare programs and commercial payers is critical
to new product acceptance. In China, government authorities decide
which drugs and treatments they will cover and the amount of
reimbursement. Obtaining coverage and reimbursement approval of a
product from a government or other third-party payer is a
time-consuming and costly process that could require us to provide
to the payer supporting scientific, clinical and cost-effectiveness
data for the use of our products. Even if we obtain coverage for a
given product, the resulting reimbursement payment rates might not
be adequate for us to achieve or sustain profitability or may
require co-payments that patients find unacceptably high. Patients
are unlikely to use our product candidates unless coverage is
provided and reimbursement is adequate to cover a significant
portion of the cost of our product candidates. If we
obtain approval in one or more jurisdictions outside of China for
our product candidates, we will be subject to rules and regulations
in those jurisdictions. In some foreign countries, particularly
those in the EU, the pricing of biologics is subject to
governmental control. In these countries, pricing negotiations with
governmental authorities can take considerable time after obtaining
marketing approval of a product candidate. In addition, market
acceptance and sales of our product candidates will depend
significantly on the availability of adequate coverage and
reimbursement from third-party payers for our product candidates
and may be affected by existing and future health care reform
measures. The continuing efforts of the government,
insurance companies, managed care organizations and other payers of
healthcare services to contain or reduce costs of healthcare and/or
impose price controls may adversely affect:
●
the demand for our
product candidates, if we obtain regulatory approval;
●
our ability to set
a price that we believe is fair for our products;
●
our ability to
generate revenue and achieve or maintain
profitability;
●
the level of taxes
that we are required to pay; and
●
the availability of
capital.
Any
reduction in reimbursement from any government programs may result
in a similar reduction in payments from private payers, which may
adversely affect our future profitability.
Our product candidates may cause undesirable side effects or have
other properties that could interrupt our clinical development,
prevent or delay regulatory approval, and limit our commercial
value or result in significant negative consequences.
Undesirable or
unacceptable side effects caused by our product candidates could
cause us or regulatory authorities to delay, suspend or stop
clinical trials and could result in the delay or denial of
regulatory approval by the regulatory authorities. Results of our
trials could reveal unacceptable severe adverse effects or
unexpected characteristics.
There
have been reported patient deaths in immune cell therapies as a
result of factors comprised of cytokine release syndrome and
neurotoxicity. Immune Cell therapy treatment-related adverse side
effects could also affect patient recruitment or the ability of
enrolled subjects to complete the trial or result in potential
liability claims. In addition, these side effects may not be
recognized or properly managed by the treating medical staff, as
medical personnel do not normally encounter in the general patient
population toxicities resulting from personalized immune cell
therapy. We plan to conduct training for the medical personnel
using immune cell therapy to understand the adverse side effect
profile for our clinical trials and upon any commercialization of
any immune cell product candidates. Inability of the medical
personnel in recognizing or managing immune cell therapy’s
potential adverse side effects could result in patient deaths. Any
of these occurrences may harm our business, financial condition and
prospects significantly.
Our manufacturing facilities are subject to extensive government
regulation, and existing or future regulations may adversely affect
our current or future operations, increase our costs of operations,
or require us to make additional capital expenditures.
Environmental
advocacy groups and regulatory agencies in China have been focusing
considerable attention on the industries’ potential role in
climate change. Stringent government safety, environmental and
bio-hazardous materials disposal regulations at the city,
provincial, and local level may have substantial impact on our
business and our third-party service providers. A number of complex
laws, rules, orders, and interpretations govern environmental
protection, health, safety, land use, zoning, transportation, and
related matters. The adoption of laws and regulations to implement
controls of bio-hazardous material disposal and environmental
compliance, including the imposition of fees or taxes, could
adversely affect the operations with which we do business. Among
other things, timeliness in navigating the compliance of these
regulations may restrict our operations, our third-party service
providers’ operations and adversely affect our financial
condition, results of operations, and cash flows by imposing
conditions including, but not limited to new permits requirement,
limitations or bans on disposal or transportation of certain
bio-hazardous materials or certain categories of materials.
We
have started the environmental assessment and permit application
process for our new Zhenjiang facility, which is required to be in
place prior to the approval of production permit. We have
terminated our Beijing facility lease.
Technological and medical developments or improvements in
conventional therapies could render the use of cell therapy and our
services and planned products obsolete.
Advances in other
treatment methods or in disease prevention techniques could
significantly reduce or entirely eliminate the need for our cell
therapy services, planned products and therapeutic efforts. There
is no assurance that cell therapies will achieve the degree of
success envisioned by us in the treatment of disease. Nor is there
any assurance that new technological improvements or techniques
will not render obsolete the processes currently used by us, the
need for our services or our planned products. Additionally,
technological or medical developments may materially alter the
commercial viability of our technology or services, and require us
to incur significant costs to replace or modify equipment in which
we have a substantial investment. We are focused on novel cell
therapies, and if this field is substantially unsuccessful, this
could jeopardize our success or future results. The occurrence of
any of these factors may have a material adverse effect on our
business, operating results and financial condition.
We face significant competition from other Chinese biotechnology
and pharmaceutical companies, and our operating results will suffer
if we fail to compete effectively.
There
is intense competition and rapid innovation in the Chinese cell
therapy industry, and in the cancer immunotherapy space in
particular. Our competitors may be able to develop other herbal
medicine, compounds or drugs that are able to achieve similar or
better results. Our potential competitors are comprised of
traditional Chinese medicine companies, major multinational
pharmaceutical companies, established and new biotechnology
companies, specialty pharmaceutical companies, state-owned
enterprises, universities and other research institutions. Many of
our competitors have substantially greater scientific, financial,
technical and other resources, such as larger research and
development staff and experienced marketing and manufacturing
organizations and well-established sales forces. Smaller or
early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large,
established companies or are well funded by venture capitals.
Mergers and acquisitions in the biotechnology and pharmaceutical
industries may result in even more resources being concentrated in
our competitors. Competition may increase further as a result of
advances in the commercial applicability of technologies and
greater availability of capital for investment in these industries.
Our competitors, either alone or with collaborative partners, may
succeed in developing, acquiring or licensing on an exclusive basis
drug or biologic products that are more effective, safer, more
easily commercialized or less costly than our product candidates or
may develop proprietary technologies or secure patent protection
that we may need for the development of our technologies and
products. We believe the key competitive factors that will affect
the development and commercial success of our product candidates
are efficacy, safety, tolerability, reliability, and convenience of
use, price and reimbursement.
Even if
we obtain regulatory approval of our product candidates, the
availability and price of our competitors’ products could
limit the demand and the price we are able to charge for our
product candidates. We may not be able to implement our business
plan if the acceptance of our product candidates is inhibited by
price competition or the reluctance of doctors to switch from
existing methods of treatment to our product candidates, or if
doctors switch to other new drug or biologic products or choose to
reserve our product candidates for use in limited
circumstances.
We may be unable to attract or retain key employees for our
business if our share-based or other compensation programs cease to
be viewed as competitive and valuable benefits.
To be
competitive, we must attract, retain, and motivate executives and
other key employees. Hiring and retaining qualified executives,
scientists, technical staff, and professional staff are critical to
our business, and competition for experienced employees can be
intense. To help attract, retain, and motivate key employees, we
use share-based and other performance-based incentive awards such
as stock options, restricted stock units (RSUs) and cash bonuses.
If our share-based or other compensation programs cease to be
viewed as competitive and valuable benefits, our ability to
attract, retain, and motivate key employees could be weakened,
which could harm our results of operations.
There is a scarcity of experienced professionals in the field of
cell therapy and we may not be able to retain key officers or
employees or hire new key officers or employees needed to implement
our business strategy and develop our products. If we are unable to
retain or hire key officers or employees, we may be unable to grow
our biopharmaceutical business or implement our business strategy,
and the Company may be materially and adversely
affected.
Given
the specialized nature of cell therapy and the fact that it is a
young field, there is an inherent scarcity of experienced personnel
in the field. The Company is substantially dependent on the skills
and efforts of current senior management, , for their management,
operations and the implementation of their business strategy. As a
result of the difficulty in locating qualified new management, the
loss or incapacity of existing members of management or
unavailability of qualified management or as replacements for
management who resign or are terminated could adversely affect the
Company’s operations. The future success of the Company also
depends upon our ability to attract and retain additional qualified
personnel (including medical, scientific, technical, commercial,
business and administrative personnel) necessary to support our
anticipated growth, develop our business, perform our contractual
obligations to third parties and maintain appropriate licensure, on
acceptable terms. There can be no assurance that we will be
successful in attracting or retaining personnel required by us to
continue to grow our operations. The loss of a key employee, the
failure of a key employee to perform in his or her current position
or our inability to attract and retain skilled employees, as
needed, could result in our inability to grow our biopharmaceutical
business or implement our business strategy, or may have a material
adverse effect on our business, financial condition and operating
results.
We may fail to successfully integrate our acquired businesses,
operations and assets in the expected time frame, which may
adversely affect the combined company’s future
results.
We
believe that our immune oncology acquisitions will result in
certain benefits, including certain manufacturing, sales and
distribution and operational efficiencies. However, to
realize these anticipated benefits, our existing business and the
acquired technologies must be successfully combined. We may
be unable to effectively integrate the acquired technologies into
our organization, make the acquired technologies profitable, and
may not succeed in managing the acquired technologies. The
process of integration of an acquired technologies may subject us
to a number of risks, including:
●
Failure to
successfully manage relationships with hospitals, patients and
suppliers;
●
Demands on
management related to the increase in complexity of the company
after the acquisition;
●
Diversion of
management and scientists’ attention;
●
Potential
difficulties integrating and harmonizing large scale multi-site
clinical trials;
●
Difficulties in the
assimilation and retention of employees;
●
Exposure to legal
claims for activities of the acquired technologies;
and
●
Incurrence of
additional expenses in connection with the integration
process.
If the
acquired technologies is not successfully integrated into our
company, our business, financial condition and results of
operations could be materially adversely affected, as well as our
professional reputation. Furthermore, if we are unable to
successfully integrate the acquired technologies, or if there are
delays in implementing clinical trials using the acquired
technologies, the anticipated benefits of the acquisition may not
be realized fully or at all or may take longer to realize than
expected. Successful integration of the acquired technologies
will depend on our ability to manage large scale cancer clinical
trials and to realize opportunities in monetizing these
technologies.
We will need to grow the size of our organization, and we may
experience difficulties in managing this growth.
As our
development and commercialization plans and strategies develop, and
as we continue to expand operation as a public company, we expect
to grow our personnel needs in the managerial, operational, sales,
marketing, financial and other departments. Future growth would
impose significant added responsibilities on members of management,
including:
●
identifying,
recruiting, integrating, maintaining and motivating additional
employees;
●
managing our
internal development efforts effectively, including the clinical
trials and NMPA review process for our product candidates, while
complying with our contractual obligations to contractors and other
third parties; and
●
improving our
operational, financial and management controls, reporting systems
and procedures.
Our
future financial performance and our ability to commercialize our
product candidates will depend, in part, on our ability to
effectively manage any future growth, and our management may also
have to divert a disproportionate amount of its attention away from
day-to-day activities in order to devote a substantial amount of
time to managing these growth activities.
We
currently rely, and for the foreseeable future will continue to
rely, in substantial part on certain independent organizations such
as contract research organizations and hospitals to provide certain
services comprised of regulatory approval and clinical management.
There can be no assurance that the services of independent
organizations will continue to be available to us on a timely basis
when needed, or that we can find qualified replacements. In
addition, if we are unable to effectively manage our outsourced
activities or if the quality or accuracy of the services provided
by the independent organizations is compromised for any reason, our
clinical trials may be extended, delayed or terminated, and we may
not be able to obtain regulatory approval of our product candidates
or otherwise advance our business. If we are not able to
effectively expand our organization by hiring new employees, we may
not be able to successfully implement the tasks necessary to
further develop and commercialize our product candidates and,
accordingly, may not achieve our research, development and
commercialization goals.
We may form or seek strategic alliances or enter into licensing
arrangements in the future, and we may not realize the benefits of
such alliances or licensing arrangements.
We may
form or seek strategic alliances, create joint ventures or
collaborations or enter into licensing arrangements with third
parties, including but not limited to our collaboration with
Novartis, that we believe will complement or augment our
development and commercialization efforts with respect to our
product candidates and any future product candidates that we may
develop. Any of these relationships may require us to incur
non-recurring and other charges, increase our near and long-term
expenditures, issue securities that dilute our existing
stockholders or disrupt our management and business. In addition,
we face significant competition in seeking appropriate strategic
partners and the negotiation process is time-consuming and complex.
Moreover, we may not be successful in our efforts to establish a
strategic partnership or other alternative arrangements for our
product candidates because they may be deemed to be at too early of
a stage of development for collaborative effort and third parties
may not view our product candidates as having the requisite
potential to demonstrate safety and efficacy. If we license
products or businesses, we may not be able to realize the benefit
of such transactions if we are unable to successfully integrate
them with our existing operations and company culture. We cannot be
certain that, following a strategic transaction or license, we will
achieve the revenue or specific net income that justifies such
transaction. Any delays in entering into new strategic partnership
agreements related to our product candidates could delay the
development and commercialization of our product candidates in
certain geographies for certain indications, which would harm our
business prospects, financial condition and results of
operations.
Among
other challenges in connection with our strategic alliances and
licensing transactions, our partnership with Novartis may not be
successful or profitable. We may face unfavorable regulatory,
technical or market developments. While our manufacturing
capabilities on CAR-T products set us apart from many of our
competitors, we have yet to commercialize any of our drug
candidates and have yet to generate any revenue from the sale of
our products, and there is no assurance that we will be able to
generate revenue or net profit from our production of Kymriah®
for Novartis. There is no assurance that we can successfully
transfer Kymriah® to our manufacturing facility and receive
regulatory approval to commence commercial production. We cannot be
assured that after a drug candidate is eventually made available
for sale that it will gain market acceptance from physicians,
patients, third-party payers and others in the medical community.
Market acceptance after the drug approval may cause us not be able
to generate sufficient revenue to recuperate our investment in the
partnership. Any unfavorable developments before or after
Kymriah® is commercialized in China may have a material
adverse effect on our business. Any unfavorable regulatory,
technical or market development could render the partnership with
Novartis untenable.
We, our strategic partners and our customers conduct business in a
heavily regulated industry. If we or one or more of our strategic
partners or customers fail to comply with applicable current and
future laws and government regulations, our business and financial
results could be adversely affected.
The
healthcare industry is one of the most highly regulated industries.
Federal governments, individual state and local governments and
private accreditation organizations may oversee and monitor all the
activities of individuals and businesses engaged in the delivery of
health care products and services. Therefore, current laws, rules
and regulations could directly or indirectly negatively affect our
ability and the ability of our strategic partners and customers to
operate each of their businesses.
In addition,
as we expand into other parts of the world, we will need to comply
with the applicable laws and regulations in such foreign
jurisdictions. We have not yet thoroughly explored the requirements
or feasibility of such compliance. It is possible that we may not
be permitted to expand our business into one or more foreign
jurisdictions.
Although we intend
to conduct our business in compliance with applicable laws and
regulations, the laws and regulations affecting our business and
relationships are complex, and many aspects of such relationships
have not been the subject of judicial or regulatory interpretation.
Furthermore, the cell therapy industry is the topic of significant
government interest, and thus the laws and regulations applicable
to us and our strategic partners and customers and to their
business are subject to frequent change and/or reinterpretation and
there can be no assurance that the laws and regulations applicable
to us and our strategic partners and customers will not be amended
or interpreted in a manner that adversely affects our business,
financial condition, or operating results.
We anticipate that we will need substantial additional financing in
the future to continue our operations; if we are unable to raise
additional capital, as and when needed, or on acceptable terms, we
may be forced to delay, reduce or eliminate one or more of our
product or therapy development programs, cell therapy initiatives
or commercialization efforts and our business will be
harmed.
Our
current operating plan will require significant levels of
additional capital to fund, among other things, the continued
development of our cell therapy product or therapy candidates and
the operation, and expansion of our manufacturing operations to our
clinical development activities.
We plan
to continue to launch several new Immune Oncology clinical trials
and continue to advance our KOA clinical trials in China. We also
plan to conduct solid tumor clinical trials in the United States.
If these trials are successful, we will require significant
additional investment capital over a multi-year period in order to
conduct subsequent phases, gain approval for these therapies by the
NMPA and FDA, and to commercialize these therapies. Subsequent
phases may be larger and more expensive than the initial trials. In
order to raise the necessary capital, we will need to raise
additional money in the capital markets, enter into collaboration
agreements with third parties or undertake some combination of
these strategies. If we are unsuccessful in these efforts, we may
have no choice but to delay or abandon the trials.
The
amount and timing of our future capital requirements also will
likely depend on many other factors, including:
●
the scope,
progress, results, costs, timing and outcomes of our other cell
therapy product or therapy candidates;
●
our ability to
enter into, or continue, any collaboration agreements with third
parties for our product or therapy candidates and the timing and
terms of any such agreements;
●
the timing of and
the costs involved in obtaining regulatory approvals for our
product or therapy candidates, a process which could be
particularly lengthy or complex given the lack of precedent for
cell therapy products in China; and
●
the costs of
maintaining, expanding and protecting our intellectual property
portfolio, including potential litigation costs and
liabilities.
To fund
clinical studies and support our future operations, we would likely
seek to raise capital through a variety of different public and/or
private financings vehicles. This could include, but not be limited
to, the use of loans or issuances of debt or equity securities in
public or private financings. If we raise capital
through the sale of equity, or securities convertible into equity,
it would result in dilution to our then existing
stockholders. Servicing the interest and principal
repayment obligations under debt facilities could divert funds that
would otherwise be available to support clinical or
commercialization activities. In certain cases, we also
may seek funding through collaborative arrangements, that would
likely require us to relinquish certain rights to our technology or
product or therapy candidates and share in the future revenues
associated with the partnered product or therapy.
Ultimately, we may
be unable to raise capital or enter into collaborative
relationships on terms that are acceptable to us, if at all. Our
inability to obtain necessary capital or financing to fund our
future operating needs could adversely affect our business, results
of operations and financial condition.
The agreements governing the loan facilities we currently have
contain restrictions and limitations that could significantly
affect our ability to operate our business, raise capital, as well
as significantly affect our liquidity, and therefore could
adversely affect our results of operations.
Under
the Credit Agreement with the Merchants Bank, SH SBM has the
obligation to notify the Merchants Bank prior to certain corporate
actions and assist the bank in taking measures to ensure repayment
of the loans provided under the Credit Agreement upon occurrence of
such events. Such corporation actions include: (i) major financial
losses and assets losses, (ii) loans to or guarantees for third
parties or mortgages on its properties, (iii) revocation or
cancellation of business license or applications for bankruptcy,
(iv) major operational or financial crises of its controlling
shareholder or other related entities that affect its business
operations, (v) related party transactions that involve 10% or more
of SH SBM’s net assets and (vi) legal proceeding that have
material adverse effects on its operations or financial condition.
Pursuant to the Credit Agreement, SH SBM cannot enter into a
merger, an acquisition or a joint venture, transfer its equity
interest or consummate a reorganization or share ownership
restructuring without prior written consent of the Merchants Bank.
The Credit Agreement also contains a covenant requiring that SH SBM
maintain or improve its existing operations and preserve or
increase the value of its existing assets.
The
foregoing provisions restrict, among other aspects, SH SBM’s
ability to:
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●
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incur
or permit to exist any additional indebtedness or
liens;
|
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●
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guarantee
or otherwise become liable with respect to the obligations of
another party or entity;
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acquire
any assets or enter into merger or joint venture transactions;
and
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consummate
certain related party transactions.
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Our ability to comply with these provisions may be
affected by events beyond our control. A failure to comply
with any of such provisions will constitute an event of default
under the Credit Agreement, upon which the Merchant Bank will have
the right to take a number of remedial actions that could adversely
affect our liquidity and results of operations. See “
-
Defaults
under our loan agreements with the Merchants Bank could result in a
substantial loss of our assets
.”
Defaults under our loan agreements with the Merchants Bank could
result in a substantial loss of our assets.
We
have pledged $17 million of cash as collateral under the loan
agreements with the Merchants Bank. A failure to repay any of the
indebtedness under our agreements with the Merchants Bank as it
becomes due or to otherwise comply with the covenants contained
therein could result in an event of default thereunder. In
addition, a default under any other loan agreement of SH SBM that
is not cured within three months of such default will be deemed an
event of default under the loan agreements with the Merchants
Bank. If not cured or waived, an event of default under any
of loan agreements with the Merchant Bank could enable the lender
to declare all borrowings outstanding on such debt, together with
accrued and unpaid interest and fees, to be due and payable and
terminate all commitments to extend further credit. The lender
could also elect to foreclose on our assets securing such debt. In
such an event, we may not be able to refinance or repay our
indebtedness, pay dividends or have sufficient liquidity to meet
operating and capital expenditure requirements. Any such
acceleration could cause us to lose a substantial portion of our
assets and will substantially adversely affect our ability to
continue our operations.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act could have a
material adverse effect on our business and operating
results.
It may
be time consuming, difficult and costly for us to develop and
implement the additional internal controls, processes and reporting
procedures required by the Sarbanes-Oxley Act. We may need to hire
additional financial reporting, internal auditing and other finance
staff in order to develop and implement appropriate additional
internal controls, processes and reporting
procedures.
If we
fail to comply in a timely manner with the requirements of Section
404 of the Sarbanes-Oxley Act regarding internal controls over
financial reporting or to remedy any material weaknesses in our
internal controls that we may identify, such failure could result
in material misstatements in our financial statements, cause
investors to lose confidence in our reported financial information
and have a negative effect on the trading price of our common
stock.
In
connection with our on-going assessment of the effectiveness of our
internal control over financial reporting, we may discover
“material weaknesses” in our internal controls as
defined in standards established by the Public Company Accounting
Oversight Board (“PCAOB”). A material weakness is a
significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not
be prevented or detected. The PCAOB defines “significant
deficiency” as a deficiency that results in more than a
remote likelihood that a misstatement of the financial statements
that is more than inconsequential will not be prevented or
detected.
During
the year ended December 31, 2015, we made improvements in our
internal control and have remediated the deficiencies identified in
2014. In the event that future material weaknesses are
identified, we will attempt to employ qualified personnel and adopt
and implement policies and procedures to address any material
weaknesses we identify. However, the process of designing and
implementing effective internal controls is a continuous effort
that requires us to anticipate and react to changes in our business
and the economic and regulatory environments and to expend
significant resources to maintain a system of internal controls
that is adequate to satisfy our reporting obligations as a public
company.
Any
failure to complete our assessment of our internal control over
financial reporting, to remediate any material weaknesses that we
may identify or to implement new or improved controls, or
difficulties encountered in their implementation, could harm our
operating results, cause us to fail to meet our reporting
obligations or result in material misstatements in our financial
statements. Any such failure could also adversely affect the
results of the periodic management evaluations of our internal
controls and, in the case of a failure to remediate any material
weaknesses that we may identify, would adversely affect the annual
management reports regarding the effectiveness of our internal
control over financial reporting that are required under Section
404 of the Sarbanes-Oxley Act. Inadequate internal controls could
also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our common stock.
The Company’s revenue may become subject to tightened
regulation that may affect the Company’s financial
condition.
Currently we are
not generating any meaningful revenue, which revenue is currently
primarily comprised of technical services relating to the
preparation of subset T Cell and clonality assay platform
technology for treatment of cancers. Nonetheless our revenue may be
subject to the risk of progressive regulatory actions by the PRC
government. From time to time there may also be adverse publicity
relating to the practice of cell therapy treatments in China, which
due to the sensitive and experimental nature of the treatment, may
trigger further governmental scrutiny. Any progressive regulatory
action in China arising out of such scrutiny may adversely affect
the Company’s financial condition or cash flows.
Litigation and other proceedings relating to intellectual property
is expensive, time consuming and uncertain, and we may be
unsuccessful in our efforts to protect against infringement by
third parties or defend ourselves against claims of infringement or
otherwise.
To
protect our intellectual property, we may initiate litigation or
other proceedings. Third parties may also initiate proceedings to
challenge our intellectual property rights. For instance, in
April 2018, a company based in Hangzhou, China, submitted a
petition with the PRC Trademark Office to challenge our
Rejoin™ trademark on the basis of a lack of use. Upon such
petition, the PRC Trademark Office has issued a notice, requesting
us to provide evidence of use by August 30, 2018. We
collected evidence in response to such notice and timely submitted
a response to refute the claim. In December 2018, the State
Trademark Office accepted our response and overruled the Hangzhou
company’s application for revoking Rejoin™. The
Hangzhou company is entitled to appeal to the State Trademark
Review and Adjudication Board within fifteen (15) days after
receiving the above decision. Although we are dedicated to
protecting our intellectual property in such proceedings and
believe that we have resources to do so, there is no assurance that
we will succeed or defend such notice in each of these
matters. The loss or narrowing of our intellectual property
protection, the inability to secure or enforce our intellectual
property rights or a finding that we have infringed the
intellectual property rights of a third party could limit our
ability to develop or market our products and services in the
future or adversely affect our revenues. In addition, intellectual
property litigation and other adverse proceedings are costly and
time-consuming in general, divert the attention of management and
technical personnel and could result in substantial uncertainty
regarding our future viability, even if we ultimately
prevail. Furthermore, any public announcements related to
such litigation or regulatory proceedings could adversely affect
the price of our common stock.
Third
parties may allege that the research, development and
commercialization activities we conduct infringe patents or other
proprietary rights owned by such parties. This may turn out to be
the case even though we have conducted a search and analysis of
third-party intellectual property rights and have determined that
certain aspects of our research and development and proposed
products activities apparently do not infringe on any third-party
Chinese intellectual property rights. If we are found to have
infringed the intellectual property of a third party, we may be
required to pay substantial damages; we also may be required to
seek from such party a license, which may not be available on
acceptable terms, if at all, to continue our activities. A judicial
finding or infringement or the failure to obtain necessary licenses
could prevent us from commercializing our products, which would
have a material adverse effect on our business, operating results
and financial condition.
RISKS RELATED TO OUR STRUCTURE
Our operations are subject to risks associated with emerging
markets.
The
Chinese economy is not well established and is only recently
emerging and growing as a significant market for consumer goods and
services. Accordingly, there is no assurance that the market will
continue to grow. Perceived risks associated with investing in
China, or a general disruption in the development of China’s
markets could materially and adversely affect the business,
operating results and financial condition of the
Company.
A substantial portion of our assets are currently located in the
PRC, and investors may not be able to enforce federal securities
laws or their other legal rights.
A
substantial portion of our assets are located in the PRC. As a
result, it may be difficult for investors in the U.S. to enforce
their legal rights, to effect service of process upon certain of
our directors or officers or to enforce judgments of U.S. courts
predicated upon civil liabilities and criminal penalties against
any of our directors and officers located outside of the
U.S.
The PRC government has the ability to exercise significant
influence and control over our operations in China.
In
recent years, the PRC government has implemented measures for
economic reform, the reduction of state ownership of productive
assets and the establishment of corporate governance practices in
business enterprises. However, many productive assets in China are
still owned by the PRC government. In addition, the government
continues to play a significant role in regulating industrial
development by imposing business regulations. It also exercises
significant control over the country’s economic growth
through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or
companies.
There
can be no assurance that China’s economic, political or legal
systems will not develop in a way that becomes detrimental to our
business, results of operations and financial condition. Our
activities may be materially and adversely affected by changes in
China’s economic and social conditions and by changes in the
policies of the government, such as measures to control inflation,
changes in the rates or method of taxation and the imposition of
additional restrictions on currency conversion.
Additional factors
that we may experience in connection with having operations in
China that may adversely affect our business and results of
operations include:
●
our inability to
enforce or obtain a remedy under any material
agreements;
●
PRC restrictions on
foreign investment that could impair our ability to conduct our
business or acquire or contract with other entities in the
future;
●
restrictions on
currency exchange that may limit our ability to use cash flow most
effectively or to repatriate our investment;
●
fluctuations in
currency values;
●
cultural, language
and managerial differences that may reduce our overall performance;
and
●
political
instability in China.
Cultural, language and managerial differences may adversely affect
our overall performance.
We have
experienced difficulties in assimilating cultural, language and
managerial differences with our subsidiaries in China. Personnel
issues have developed in consolidating management teams from
different cultural backgrounds. In addition, language translation
issues from time to time have caused miscommunications. These
factors make the management of our operations in China more
difficult. Difficulties in coordinating the efforts of our
U.S.-based management team with our China-based management team may
cause our business, operating results and financial condition to be
materially and adversely affected.
We may not be able to enforce our rights in China given certain
features of its legal and judicial system.
China’s legal
and judicial system may negatively impact foreign investors. The
legal system in China is evolving rapidly, and enforcement of laws
is inconsistent. It may be impossible to obtain swift and equitable
enforcement of laws or enforcement of the judgment of one court by
a court of another jurisdiction. China’s legal system is
based on civil law or written statutes and a decision by one judge
does not set a legal precedent that must be followed by judges in
other cases. In addition, the interpretation of Chinese laws may
vary to reflect domestic political changes.
Since a
significant portion of our operations are presently based in China,
service of process on our business and officers may be difficult to
effect within the United States. Also, some of our assets are
located outside the United States and any judgment obtained in the
United States against us may not be enforceable outside the United
States.
There
are substantial uncertainties regarding the interpretation and
application to our business of PRC laws and regulations, since many
of the rules and regulations that companies face in China are not
made public. The effectiveness of newly enacted laws, regulations
or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that apply to future
businesses may be applied retroactively to existing businesses. We
cannot predict what effect the interpretations of existing or new
PRC laws or regulations may have on our
business.
Our operations in China are subject to government regulation that
limit or prohibit direct foreign investment, which may limit our
ability to control operations based in China.
The PRC
government has imposed regulations in various industries, including
medical research and the stem cell industry, that limit foreign
investors’ equity ownership or prohibit foreign investments
altogether in companies that operate in such industries. We are
currently structured as a U.S. corporation (Delaware) with
subsidiaries and controlled entities in China. As a result of these
regulations and the manner in which they may be applied or
enforced, our ability to control our existing operations based in
China may be limited or restricted.
If the
relevant Chinese authorities find us or any business combination to
be in violation of any laws or regulations, they would have broad
discretion in dealing with such violation, including, without
limitation: (i) levying fines; (ii) revoking our business and other
licenses; (iii) requiring that we restructure our ownership or
operations; and (iv) requiring that we discontinue any portion or
all of our business.
We may suffer losses if we cannot utilize our assets in
China.
The
Company’s Shanghai and Wuxi laboratory facilities were
originally intended for stem cell research and development, but has
been equipped to provide comprehensive cell manufacturing,
collection, processing and storage capabilities to provide cells
for clinical trials. If the Company does not determine to renew the
lease due to limitations on its utility under the new regulatory
initiatives in China or otherwise, the Company may incur certain
expenses in connection with returning the premises to the landlord.
Management believes it will be able to renew all leases without
difficulty.
Restrictions on currency exchange may limit our ability to utilize
our cash flow effectively.
Our
interests in China will be subject to China’s rules and
regulations on currency conversion. In particular, the initial
capitalization and operating expenses of the VIE (CBMG Shanghai)
are funded by our WFOE, Cellular Biomedicine Group Ltd. (Wuxi). In
China, the State Administration for Foreign Exchange (the
“SAFE”), regulates the conversion of the Chinese
Renminbi into foreign currencies and the conversion of foreign
currencies into Chinese Renminbi. Foreign investment enterprises
are allowed to open currency accounts including a “basic
account” and “capital account.” However,
conversion of currency in the “capital account,”
including capital items such as direct investments, loans, and
securities, require approval of the SAFE even though according
to the Notice of the State Administration of Foreign Exchange on
Reforming the Administration of the Settlement of Foreign Exchange
Capital of Foreign-invested Enterprise promulgated on April 8,
2015, or the SAFE Notice 19, and Notice of the State Administration
of Foreign Exchange on Reforming and Regulating the Policies for
the Administration of Settlement of Foreign Exchange under Capital
Accounts promulgated on June 9, 2016, or the SAFE Notice 16,
foreign-invested enterprises are able to settle foreign exchange
capital at their discretion, Chinese banks restricts foreign
currency conversion for fear of “hot money” going into
China and may continue to limit our ability to channel funds to the
VIE entities for their operation. There can be no assurance that
the PRC regulatory authorities will not impose further restrictions
on the convertibility of the Chinese currency. Future restrictions
on currency exchanges may limit our ability to use our cash flow
for the distribution of dividends to our stockholders or to fund
operations we may have outside of China, which could materially
adversely affect our business and operating results.
Fluctuations in the value of the Renminbi relative to the U.S.
dollar could affect our operating
results.
We
prepare our financial statements in U.S. dollars, while our
underlying businesses operate in two currencies, U.S. dollars and
Chinese Renminbi. It is anticipated that our Chinese operations
will conduct their operations primarily in Renminbi and our U.S.
operations will conduct their operations in dollars. At the present
time, we do not expect to have significant cross currency
transactions that will be at risk to foreign currency exchange
rates. Nevertheless, the conversion of financial information using
a functional currency of Renminbi will be subject to risks related
to foreign currency exchange rate fluctuations. The value of
Renminbi against the U.S. dollar and other currencies may fluctuate
and is affected by, among other things, changes in China’s
political and economic conditions and supply and demand in local
markets. As we have significant operations in China, and will rely
principally on revenues earned in China, any significant
revaluation of the Renminbi could materially and adversely affect
our financial results. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities
into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar could have a material adverse effect on our
business, financial condition and results of
operations.
Some of the laws and regulations governing our business in China
are vague and subject to risks of interpretation.
Some of
the PRC laws and regulations governing our business operations in
China are vague and their official interpretation and enforcement
may involve substantial uncertainty. These include, but are not
limited to, laws and regulations governing our business and the
enforcement and performance of our contractual arrangements in the
event of the imposition of statutory liens, death, bankruptcy and
criminal proceedings. Despite their uncertainty, we will be
required to comply.
New
laws and regulations that affect existing and proposed businesses
may be applied retroactively. Accordingly, the effectiveness of
newly enacted laws, regulations or amendments may not be clear. We
cannot predict what effect the interpretation of existing or new
PRC laws or regulations may have on our business.
The PRC government does not permit direct foreign investment in
stem cell research and development businesses. Accordingly, we
operate these businesses through local companies with which we have
contractual relationships but in which we do not have direct equity
ownership.
PRC
regulations prevent foreign companies from directly engaging in
stem cell-related research, development and commercial applications
in China. Therefore, to perform these activities, we conduct much
of our biopharmaceutical business operations in China through a
domestic variable interest entity, or VIE, a Chinese domestic
company controlled by the Chinese employees of the Company. Our
contractual arrangements may not be as effective in providing
control over these entities as direct ownership. For example, the
VIE could fail to take actions required for our business or fail to
conduct business in the manner we desire despite their contractual
obligation to do so. These companies are able to transact business
with parties not affiliated with us. If these companies fail to
perform under their agreements with us, we may have to rely on
legal remedies under PRC law, which may not be effective. In
addition, we cannot be certain that the individual equity owners of
the VIE would always act in our best interests, especially if they
have no other relationship with us.
Although other
foreign companies have used VIE structures similar to ours and such
arrangements are not uncommon in connection with business
operations of foreign companies in China in industry sectors in
which foreign direct investments are limited or prohibited,
recently there has been greater scrutiny by the business community
of the VIE structure and, additionally, the application of a VIE
structure to control companies in a sector in which foreign direct
investment is specifically prohibited carries increased
risks.
In
addition, the Ministry of Commerce (“MOFCOM”),
promulgated the Rules of Ministry of Commerce on Implementation of
Security Review System of Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors in August 2011, or the MOFCOM
Security Review Rules, to implement the Notice of the General
Office of the State Council on Establishing the Security Review
System for Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors promulgated on February 3, 2011, or Circular No.
6. The MOFCOM Security Review Rules came into effect on September
1, 2011 and replaced the Interim Provisions of the Ministry of
Commerce on Matters Relating to the Implementation of the Security
Review System for Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors promulgated by MOFCOM in March 2011. According
to these circulars and rules, a security review is required for
mergers and acquisitions by foreign investors having
“national defense and security” concerns and mergers
and acquisitions by which foreign investors may acquire the
“de facto control” of domestic enterprises having
“national security” concerns. In addition, when
deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review,
the MOFCOM will look into the substance and actual impact of the
transaction. The MOFCOM Security Review Rules further prohibit
foreign investors from bypassing the security review requirement by
structuring transactions through proxies, trusts, indirect
investments, leases, loans, control through contractual
arrangements or offshore transactions. There is no explicit
provision or official interpretation stating that our business
falls into the scope subject to the security review, and there is
no requirement for foreign investors in those mergers and
acquisitions transactions already completed prior to the
promulgation of Circular No. 6 to submit such transactions to
MOFCOM for security review. The enactment of the MOFCOM National
Security Review Rules specifically prohibits circumvention of the
rules through VIE arrangement in the area of foreign investment in
business of national security concern. Although we believe that our
business, judging from its scale, should not cause any concern for
national security review at its current state, there is no
assurance that MOFCOM would not apply the same concept of
anti-circumvention in the future to foreign investment in
prohibited areas through VIE structure, the same way that our
investment in China was structured.
Our relationship with our controlled VIE entity, CBMG Shanghai,
through the VIE agreements, is subject to various operational and
legal risks.
Management believes
the holders of the VIE’s registered capital, Messrs. Chen
Mingzhe and Lu Junfeng, have no interest in acting contrary to the
VIE agreements. However, if Messrs. Chen or Lu as
shareholders of the VIE entity were to reduce or eliminate their
ownership of the registered capital of the VIE entity, their
interests may diverge from that of CBMG and they may seek to act in
a manner contrary to the VIE agreements (for example by controlling
the VIE entity in such a way that is inconsistent with the
directives of CBMG management and the board; or causing non-payment
by the VIE entity of services fees). If such
circumstances were to occur the WFOE would have to assert control
rights through the powers of attorney, pledges and other VIE
agreements, which would require legal action through the PRC
judicial system. We believe based on the advice of local
counsel that the VIE agreements are valid and in compliance with
PRC laws presently in effect. However, there is a risk that the
enforcement of these agreements may involve more extensive
procedures and costs to enforce, in comparison to direct equity
ownership of the VIE entity. Notwithstanding the foregoing, if the
applicable PRC laws were to change or are interpreted by
authorities in the future in a manner which challenges or renders
the VIE agreements ineffective, the WFOE’s ability to control
and obtain all benefits (economic or otherwise) of ownership of the
VIE entity could be impaired or eliminated. In the
event of such future changes or new interpretations of PRC law, in
an effort to substantially preserve our rights, we may have to
either amend our VIE agreements or enter into alternative
arrangements which comply with PRC laws as interpreted and then in
effect.
Failure to comply with the U.S. Foreign Corrupt Practices Act could
subject us to penalties and other adverse
consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, which generally
prohibits U.S. companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some
that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in the PRC. There can
be no assurance, however, that our employees or other agents will
not engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial
condition and results of operations.
If we make share compensation grants to persons who are PRC
citizens, they may be required to register with SAFE. We may also
face regulatory uncertainties that could restrict our ability to
adopt share compensation plans for our directors and employees and
other parties under PRC laws.
On
April 6, 2007, SAFE issued the “Operating Procedures for
Administration of Domestic Individuals Participating in the
Employee Stock Ownership Plan or Stock Option Plan of An Overseas
Listed Company, also known as Circular 78. On February 15, 2012,
SAFE promulgated the Circular on Relevant Issues Concerning Foreign
Exchange Administration for Domestic Individuals Participating in
an Employees Share Incentive Plan of an Overseas-Listed Company,
often known as Circular 7. Circular 7 has superseded Circular 78.
Under Circular 7, PRC resident individuals who participate in a
share incentive plan of an overseas listed company are required to
register with SAFE and complete certain other procedures. All such
participants need to retain a PRC agent through PRC subsidiary to
handle issues like foreign exchange registration, account opening,
funds transfer and remittance. Circular 7 further requires that an
offshore agent should also be designated to handle matters in
connection with the exercise or sale of share awards and proceeds
transferring for the share incentive plan participants. We have
obtained the SAFE approvals under Circular 7 for one PRC
subsidiary. If we or our PRC employees who have been granted stock
options fail to comply with these regulations, we or our PRC
employees who have been granted stock options may be subject to
fines and legal sanctions and will be unable to grant share
compensation to our PRC employees. In that case, our ability to
compensate our employees and directors through share compensation
would be hindered and our business operations may be adversely
affected.
The labor contract law and its implementation regulations may
increase our operating expenses and may materially and adversely
affect our business, financial condition and results of
operations.
Substantial
uncertainty of the PRC Labor Contract Law, or Labor Contract Law,
and the Implementation Regulation for the PRC Labor Contract Law,
or Implementation Regulation, remains as to their potential impact
on our business, financial condition and results of operations. The
implementation of the Labor Contract Law and the Implementation
Regulation may increase our operating expenses, in particular our
human resources costs and our administrative expenses. In addition,
as the interpretation and implementation of these regulations are
still evolving, we cannot assure you that our employment practices
will at all times be deemed to be in full compliance with the law.
In the event that we decide to significantly modify our employment
or labor policy or practice, or reduce the number of our sales
professionals, the Labor Contract Law and the Implementation
Regulation may limit our ability to effectuate the modifications or
changes in the manner that we believe to be most cost-efficient or
otherwise desirable, which could materially and adversely affect
our business, financial condition and results of operations. If we
are subject to severe penalties or incur significant liabilities in
connection with labor disputes or investigations, our business and
results of operations may be adversely affected.
If relations between the United States and China worsen, our stock
price may decrease and we may have difficulty accessing the U.S.
capital markets.
At
various times during recent years, the United States and China have
had disagreements over trade, economic and other policy issues.
Controversies may arise in the future between these two countries.
Any political or trade controversies between the United States and
China could adversely affect the market price of our common stock
and our and our clients' ability to access U.S. capital
markets.
PRC regulations of loans to PRC entities and direct investment in
PRC entities by offshore holding companies may delay or prevent us
from using the proceeds of this offering to make loans or
additional capital contributions to our PRC
subsidiary.
We may
transfer funds to our PRC subsidiary or finance our PRC subsidiary
by means of shareholder loans or capital contributions. Any loans
from us to our PRC subsidiary, which is a foreign-invested
enterprise, is subject to a quota based on the statutory formulas
and there are two alternative applicable quotas: the difference
between the registered capital and total investment of the PRC
subsidiary; certain times of the net asset value of PRC subsidiary
(currently up to twice of the net assets value), and shall be
registered with the State Administration of Foreign Exchange, or
SAFE, or its local counterparts. Any capital contributions we make
to our PRC subsidiary shall be approved by or registered with (as
the case may be) the Ministry of Commerce or its local
counterparts. We may not be able to obtain these government
registrations or approvals on a timely basis, if at all. If we fail
to receive such registrations or approvals, our ability to provide
loans or capital contributions to our PRC subsidiary in a timely
manner may be negatively affected, which could materially and
adversely affect our liquidity and our ability to fund and expand
our business.
In
addition, registered capital of a foreign-invested company settled
in RMB converted from foreign currencies may only be used within
the business scope approved by the applicable governmental
authority. Foreign-invested companies may not change how they use
such capital without SAFE’s approval, and may not in any case
use such capital to repay RMB loans if proceeds of such loans have
not been utilized. Violations of these regulations may result in
severe penalties. These regulations may significantly limit our
ability to transfer the net proceeds from offshore offering and
subsequent offerings or financings to our PRC subsidiary, which may
adversely affect our liquidity and our ability to fund and expand
our business in China.
We may be subject to penalties, including restriction on our
ability to inject capital into our PRC subsidiary and our PRC
subsidiary’s ability to distribute profits to us, if our PRC
resident shareholders beneficial owners fail to comply with
relevant PRC foreign exchange rules.
The
Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound
Investment via Offshore Special Purpose Vehicles, often known as
Circular 75, was issued by SAFE in 2005. Circular 75 requires PRC
residents to register with the local SAFE branch in connection with
their establishment or control of any offshore special purpose
vehicle for the purpose of overseas equity financing involving a
roundtrip investment whereby the offshore special purpose vehicle
acquires or controls onshore assets or equity interests held by the
PRC residents. On July 4, 2014, SAFE issued the Notice on Relevant
Issues Concerning Foreign Exchange Administration for PRC Residents
to Engage in Outbound Investment and Financing and Inbound
Investment via Special Purpose Vehicles, or Circular 37, which has
superseded Circular 75. Under Circular 37 and other relevant
foreign exchange regulations, PRC residents who make, or have made,
prior to the implementation of these foreign exchange regulations,
direct or indirect investments in offshore companies are required
to register those investments with SAFE. In addition, any PRC
resident who is a direct or indirect shareholder of an offshore
company is also required to file or update the registration with
SAFE, with respect to that offshore company for any material change
involving its round-trip investment, capital variation, such as an
increase or decrease in capital, transfer or swap of shares,
merger, division, long-term equity or debt investment or the
creation of any security interest. If any PRC shareholder fails to
make the required registration or update the registration, the PRC
subsidiary of that offshore company may be prohibited from
distributing its profits and the proceeds from any reduction in
capital, share transfer or liquidation to that offshore company,
and that offshore company may also be prohibited from injecting
additional capital into its PRC subsidiary. Moreover, failure to
comply with the foreign exchange registration requirements
described above could result in liability under PRC laws for
evasion of applicable foreign exchange restrictions.
We cannot
provide any assurance that all of our shareholders and beneficial
owners who are PRC residents have fully complied or will obtain or
update any applicable registrations or have fully complied or will
fully comply with other requirements required by Circular 37 or
other related rules in a timely manner. The failure or inability of
our shareholders resident in China to comply with the registration
requirements set forth therein may subject them to fines and legal
sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute profits and other
proceeds to our company or otherwise adversely affect our
business.
We and/or our Hong Kong subsidiary may be classified as a
“PRC resident enterprise” for PRC enterprise income tax
purposes. Such classification would likely result in unfavorable
tax consequences to us and our non-PRC shareholders and have a
material adverse effect on our results of operations and the value
of your investment.
The
Enterprise Income Tax Law provides that an enterprise established
outside China whose “de facto management body” is
located in China is considered a “PRC resident
enterprise” and will generally be subject to the uniform 25%
enterprise income tax on its global income. Under the
implementation rules of the Enterprise Income Tax Law, “de
facto management body” is defined as the organizational body
which effectively manages and controls the production and business
operation, personnel, accounting, properties and other aspects of
operations of an enterprise.”
Pursuant to the
Notice Regarding the Determination of Chinese-Controlled Offshore
Incorporated Enterprises as PRC Tax Resident Enterprises on the
Basis of De Facto Management Bodies, issued by the State
Administration of Taxation in 2009, a foreign enterprise controlled
by PRC enterprises or PRC enterprise groups is considered a PRC
resident enterprise if all of the following conditions are met:
(i) the senior management and core management departments in
charge of daily operations are located mainly within the PRC;
(ii) financial and human resources decisions are subject to
determination or approval by persons or bodies in the PRC;
(iii) major assets, accounting books, company seals and
minutes and files of board and shareholders’ meetings are
located or kept within the PRC; and (iv) at least half of the
enterprise’s directors with voting rights or senior
management reside within the PRC. Although the notice states that
these standards only apply to offshore enterprises that are
controlled by PRC enterprises or PRC enterprise groups, such
standards may reflect the general view of the State Administration
of Taxation in determining the tax residence of foreign
enterprises.
We
believe that neither our company nor our Hong Kong subsidiary is a
PRC resident enterprise because neither our company nor our Hong
Kong subsidiary meets all of the conditions enumerated. For
example, board and shareholders’ resolutions of our company
and our Hong Kong subsidiary are adopted in Hong Kong and the
minutes and related files are kept in Hong Kong. However, if the
PRC tax authorities were to disagree with our position, our company
and/or our Hong Kong subsidiary may be subject to PRC enterprise
income tax reporting obligations and to a 25% enterprise income tax
on our global taxable income, except for our income from dividends
received from our PRC subsidiary, which may be exempt from PRC tax.
If we and/or our Hong Kong subsidiary are treated as a PRC resident
enterprise, the 25% enterprise income tax may adversely affect our
ability to satisfy any of our cash needs.
In
addition, if we were to be classified as a PRC “resident
enterprise” for PRC enterprise income tax purpose, dividends
we pay to our non-PRC enterprise shareholders and gains derived by
our non-PRC shareholders from the sale of our shares and ADSs may
be become subject to a 10% PRC withholding tax. In addition, future
guidance may extend the withholding tax to dividends we pay to our
non-PRC individual shareholders and gains derived by such
shareholders from transferring our shares and ADSs. In addition to
the uncertainty in how the new “resident enterprise”
classification could apply, it is also possible that the rules may
change in the future, possibly with retroactive effect. If PRC
income tax were imposed on gains realized through the transfer of
our ADSs or ordinary shares or on dividends paid to our
non-resident shareholders, the value of your investment in our ADSs
or ordinary shares may be materially and adversely
affected.
Any limitation on the ability of our PRC subsidiary to make
payments to us, or the tax implications of making payments to us,
could have a material adverse effect on our ability to conduct our
business or our financial condition.
We are
a holding company, and we rely principally on dividends and other
distributions from our PRC subsidiary for our cash needs, including
the funds necessary to pay dividends to our shareholders or service
any debt we may incur. Current PRC regulations permit our PRC
subsidiary to pay dividends only out of its accumulated profits, if
any, determined in accordance with PRC accounting standards and
regulations. In addition, our PRC subsidiary is required to set
aside at least 10% of its after tax profits each year, if any, to
fund certain statutory reserve funds until the aggregate amount of
such reserve funds reaches 50% of its registered capital. Apart
from these reserves, our PRC subsidiary may allocate a
discretionary portion of its after-tax profits to staff welfare and
bonus funds at its discretion. These reserves and funds are not
distributable as cash dividends. Furthermore, if our PRC subsidiary
incurs debt, the debt instruments may restrict its ability to pay
dividends or make other payments to us. We cannot assure you that
our PRC subsidiary will generate sufficient earnings and cash flows
in the near future to pay dividends or otherwise distribute
sufficient funds to enable us to meet our obligations, pay interest
and expenses or declare dividends.
Distributions made
by PRC companies to their offshore parents are generally subject to
a 10% withholding tax under the Enterprise Income Tax Law. Pursuant
to the Enterprise Income Tax Law and the Arrangement between the
Mainland of China and the Hong Kong Special Administrative Region
for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income, the withholding tax rate
on dividends paid by our PRC subsidiary to our Hong Kong subsidiary
would generally be reduced to 5%, provided that our Hong Kong
subsidiary is the beneficial owner of the PRC sourced income. Our
PRC subsidiary has not obtained approval for a withholding tax rate
of 5% from the local tax authority and does not plan to obtain such
approval in the near future as we have not achieved
profitability. However, the Notice on How to Understand and
Determine the Beneficial Owners in a Tax Agreement, also known as
Circular 601, promulgated by the State Administration of Taxation
in 2009, provides guidance for determining whether a resident of a
contracting state is the “beneficial owner” of an item
of income under China’s tax treaties and similar
arrangements. According to Circular 601, a beneficial owner
generally must be engaged in substantive business activities. An
agent or conduit company will not be regarded as a beneficial owner
and, therefore, will not qualify for treaty benefits. For this
purpose, a conduit company is a company that is set up for the
purpose of avoiding or reducing taxes or transferring or
accumulating profits. Although our PRC subsidiary is wholly owned
by our Hong Kong subsidiary, we will not be able to enjoy the 5%
withholding tax rate with respect to any dividends or distributions
made by our PRC subsidiary to its parent company in Hong Kong if
our Hong Kong subsidiary is regarded as a “conduit
company.”
In
addition, if CBMG HK were deemed to be a PRC resident enterprise,
then any dividends payable by CBMG HK to CBMG Delaware Corporation
may become subject to PRC dividend withholding
tax.
A new
China taxation rule about the “beneficial owner” in a
tax agreement became effective on April 1, 2018 which superseded
Circular 601 and could affect the determination of whether a
resident of a contracting state is the “beneficial
owner” of an item of income under China’s tax treaties
and similar arrangements.
Restrictions on the remittance of RMB into and out of China and
governmental control of currency conversion may limit our ability
to pay dividends and other obligations, and affect the value of
your investment.
The PRC
government imposes controls on the convertibility of the RMB into
foreign currencies and the remittance of currency out of China. We
receive substantially all of our revenues in RMB and substantially
all of our cash inflows and outflows are denominated in RMB. Under
our current corporate structure, our revenues are primarily derived
from dividend payments from our subsidiary in China after it
receives payments from the VIE under various service and other
contractual arrangements. We may convert a portion of our revenues
into other currencies to meet our foreign currency obligations,
such as payments of dividends declared in respect of our ordinary
shares, if any. Shortages in the availability of foreign currency
may restrict the ability of our PRC subsidiary to remit sufficient
foreign currency to pay dividends or other payments to us, or
otherwise satisfy its foreign currency denominated
obligations.
Under
existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments
and trade and service-related foreign exchange transactions, can be
made in foreign currencies without prior SAFE approval as long as
certain routine procedural requirements are fulfilled. Therefore,
our PRC subsidiary is allowed to pay dividends in foreign
currencies to us without prior SAFE approval by following certain
routine procedural requirements. However, approval from or
registration with competent government authorities is required
where the RMB is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans
denominated in foreign currencies. The PRC government may at its
discretion restrict access to foreign currencies for current
account transactions in the future. If the foreign exchange control
system prevents us from obtaining sufficient foreign currencies to
satisfy our foreign currency demands, we may not be able to pay
dividends in foreign currencies to our shareholders, including the
U.S. shareholders.
Our financial condition and results of operations could be
materially and adversely affected if recent value added tax reforms
in the PRC become unfavorable to our PRC subsidiary or
VIE.
In
2012, China introduced a value added tax, or VAT, to replace the
previous 5% business tax. Our PRC subsidiary and the VIE have been
subject to VAT at a base rate of 6% since September 1, 2012.
The VIE’s subsidiary has been subject to VAT at a base rate
of 6% since July 1, 2013. Our financial condition and results
of operations could be materially and adversely affected if the
interpretation and enforcement of these tax rules become materially
unfavorable to our PRC subsidiary and VIE.
Failure to comply with PRC regulations regarding the registration
requirements for stock ownership plans or stock option plans may
subject PRC plan participants or us to fines and other legal or
administrative sanctions.
Under
SAFE regulations, PRC residents who participate in an employee
stock ownership plan or stock option plan in an overseas publicly
listed company are required to register with SAFE or its local
branch and complete certain other procedures. Participants of a
stock incentive plan who are PRC residents must retain a qualified
PRC agent, which could be a PRC subsidiary of such overseas
publicly listed company, to conduct the SAFE registration and other
procedures with respect to the stock incentive plan on behalf of
these participants. Such participants must also retain an overseas
entrusted institution to handle matters in connection with their
exercise or sale of stock options. In addition, the PRC agent is
required to amend the SAFE registration with respect to the stock
incentive plan if there is any material change to the stock
incentive plan, the PRC agent or the overseas entrusted institution
or other material changes.
We and
our PRC resident employees who participate in our share incentive
plans are subject to these regulations as our company is publicly
listed in the United States. We have obtained the SAFE approvals
regarding our PRC resident employees participating in our share
incentive plans. If we or any our PRC resident option grantees fail
to follow the compliance with above regulations, we or our PRC
resident option grantees may be subject to fines and other legal or
administrative sanctions.
Fluctuation in the value of the RMB may have a material adverse
effect on the value of the investment.
The
value of the RMB against the U.S. dollar and other currencies is
affected by changes in China’s political and economic
conditions and China’s foreign exchange policies, among other
things. On July 21, 2005, the PRC government changed its
decades-old policy of pegging the value of the RMB to the U.S.
dollar, and the RMB appreciated more than 20% against the U.S.
dollar over the following three years. Between July 2008 and June
2010, this appreciation halted and the exchange rate between the
RMB and the U.S. dollar remained within a narrow band. The PRC
government has allowed the RMB to appreciate slowly against the
U.S. dollar again, and it has appreciated more than 10% since June
2010. It is difficult to predict how market forces or PRC or U.S.
government policy may impact the exchange rate between the RMB and
the U.S. dollar in the future. In addition, there remains
significant international pressure on the PRC government to adopt a
substantial liberalization of its currency policy, which could
result in further appreciation in the value of the RMB against the
U.S. dollar. In 2015, due to the slow-down of China economic growth
rate and environment, RMB depreciated against the U.S. dollar from
third quarter.
Our
revenues and costs are mostly denominated in RMB, and a significant
portion of our financial assets are also denominated in RMB,
whereas our reporting currency is the U.S. dollar. Any significant
depreciation of the RMB may materially and adversely affect our
revenues, earnings and financial position as reported in U.S.
dollars. To the extent that we need to convert U.S. dollars we
received from this offering into RMB for our operations,
appreciation of the RMB against the U.S. dollar would have an
adverse effect on the RMB amount we would receive from the
conversion. Conversely, if we decide to convert our RMB into U.S.
dollars for the purpose of making payments for dividends on our
ordinary shares or for other business purposes, appreciation of the
U.S. dollar against the RMB would have a negative effect on the
U.S. dollar amount available to us.
PRC laws and regulations establish more complex procedures for some
acquisitions of Chinese companies by foreign investors, which could
make it more difficult for us to pursue growth through acquisitions
in China.
A
number of PRC laws and regulations, including the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors adopted by six PRC regulatory agencies in 2006, or the
M&A Rules, the Anti-monopoly Law, and the Rules of
Ministry of Commerce on Implementation of Security Review System of
Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors promulgated by the Ministry of Commerce in August
2011, or the Security Review Rules, have established procedures and
requirements that are expected to make merger and acquisition
activities in China by foreign investors more time consuming and
complex. These include requirements in some instances that the
Ministry of Commerce be notified in advance of any change of
control transaction in which a foreign investor takes control of a
PRC domestic enterprise, or that the approval from the Ministry of
Commerce be obtained in circumstances where overseas companies
established or controlled by PRC enterprises or residents acquire
affiliated domestic companies. PRC laws and regulations also
require certain merger and acquisition transactions to be subject
to merger control review or security review.
The
Security Review Rules were formulated to implement the Notice of
the General Office of the State Council on Establishing the
Security Review System for Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, also known as Circular 6,
which was promulgated in 2011. Under these rules, a security review
is required for mergers and acquisitions by foreign investors
having “national defense and security” concerns and
mergers and acquisitions by which foreign investors may acquire the
“de facto control” of domestic enterprises have
“national security” concerns. In addition, when
deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review,
the Ministry of Commerce will look into the substance and actual
impact of the transaction. The Security Review Rules further
prohibits foreign investors from bypassing the security review
requirement by structuring transactions through proxies, trusts,
indirect investments, leases, loans, control through contractual
arrangements or offshore transactions.
There
is no requirement for foreign investors in those mergers and
acquisitions transactions already completed prior to the
promulgation of Circular 6 to submit such transactions to the
Ministry of Commerce for security review. As we have already
obtained the “de facto control” over our affiliated PRC
entities prior to the effectiveness of these rules, we do not
believe we are required to submit our existing contractual
arrangements to the Ministry of Commerce for security
review.
However, as these
rules are relatively new and there is a lack of clear statutory
interpretation on the implementation of the same, there is no
assurance that the Ministry of Commerce will not apply these
national security review-related rules to the acquisition of equity
interest in our PRC subsidiary. If we are found to be in violation
of the Security Review Rules and other PRC laws and regulations
with respect to the merger and acquisition activities in China, or
fail to obtain any of the required approvals, the relevant
regulatory authorities would have broad discretion in dealing with
such violation, including levying fines, confiscating our income,
revoking our PRC subsidiary’s business or operating licenses,
requiring us to restructure or unwind the relevant ownership
structure or operations. Any of these actions could cause
significant disruption to our business operations and may
materially and adversely affect our business, financial condition
and results of operations. Further, if the business of any target
company that we plan to acquire falls into the ambit of security
review, we may not be able to successfully acquire such company
either by equity or asset acquisition, capital contribution or
through any contractual arrangement. We may grow our business in
part by acquiring other companies operating in our industry.
Complying with the requirements of the relevant regulations to
complete such transactions could be time consuming, and any
required approval processes, including approval from the Ministry
of Commerce, may delay or inhibit our ability to complete such
transactions, which could affect our ability to expand our business
or maintain our market share.
On July
30, 2017, MOFCOM issued the Interim Measures on Filing
Administration of Establishment and Changes of Foreign-Invested
Enterprises (2017 Revision) which came into force as of July 30,
2017. It is stipulated in the Interim Measures that the
transformation of a non-foreign invested enterprise into a foreign
invested enterprise through M&A, merger by absorption, foreign
investor’s strategic investment into non-foreign invested
listed company, etc. would no longer be subject to MOFCOM approval,
but instead would only need to undergo the simplified filing
procedures with MOFCOM, in case the business of the target
enterprise does not fall into the foreign investment negative list.
But, if any business of the target enterprise falls into the
foreign investment negative list, the complex procedures for an
acquisition of the target enterprise by foreign investors would be
still applicable.
The heightened scrutiny over acquisition transactions by the PRC
tax authorities may have a negative impact on our business
operations, our acquisition or restructuring strategy or the value
of your investment in us.
Pursuant to the
Notice on Strengthening Administration of Enterprise Income Tax for
Share Transfers by Non-PRC Resident Enterprises, or Circular 698,
issued by the State Administration of Taxation in
December 2009 with retroactive effect from January 1,
2008, where a non-PRC resident enterprise transfers the equity
interests of a PRC resident enterprise indirectly by disposition of
the equity interests of an overseas non-public holding company, or
an Indirect Transfer, and such overseas holding company is located
in a tax jurisdiction that: (i) has an effective tax rate of
less than 12.5% or (ii) does not impose income tax on
foreign income of its residents, the non-PRC resident
enterprise, being the transferor, must report to the competent tax
authority of the PRC resident enterprise this Indirect Transfer and
may be subject to PRC enterprise income tax of up to 10% of the
gains derived from the Indirect Transfer in certain
circumstances.
To
clarify the issues related to Circular 698, the State
Administration of Taxation released the Announcement of the State
Administration of Taxation on Several Issues Relating to the
Administration of Income Tax on Non-resident Enterprises in 2011,
known as Notice 24, and the Announcement on Issues Related to
Applications of Special Tax Treatment for Equity Transfer by
Non-resident Enterprises in 2013.
On
February 3, 2015, the State Administration of Taxation issued the
Announcement on Several Issues Concerning the Enterprise Income Tax
on Indirect Property Transfers by Non-PRC Resident Enterprises, or
Notice 7. Notice 7 introduces a new tax regime that is
significantly different from that under Circular 698. It superseded
the previous tax rules in relation to the offshore indirect equity
transfer, including those under Circular 698 as described above. It
extends the tax jurisdiction of State Administration of Taxation to
capture not only the Indirect Transfer but also the transactions
involving indirect transfer of (i) real properties in China and
(ii) assets of an “establishment or place” situated in
China, by a non-PRC resident enterprise through a disposition of
equity interests in an overseas holding company.
However, Notice 7
also brings uncertainties to the parties of the offshore indirect
transfers as the transferee and the transferor have to make
self-assessment on whether the transactions should be subject to
the corporate income tax and file or withhold the corporate income
tax accordingly. In addition, the PRC tax authorities have
discretion under Notice 7 to adjust the taxable capital gains based
on the difference between the fair value of the transferred equity
interests and the investment cost. We may pursue acquisitions in
the future that may involve complex corporate structures. If we are
considered as a non-PRC resident enterprise under the EIT Law and
if the PRC tax authorities make adjustments to the taxable income
of the transactions under Notice 7, our income tax expenses
associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and
results of operations.
We face certain risks relating to the real properties that we
lease.
We
primarily lease office and manufacturing space from third parties
for our operations in China. Any defects in lessors’ title to
the leased properties may disrupt our use of our offices, which may
in turn adversely affect our business operations. For example,
certain buildings and the underlying land are not allowed to be
used for industrial or commercial purposes without relevant
authorities’ approval, and the lease of such buildings to
companies like us may subject the lessor to pay premium fees to the
PRC government. We cannot assure you that the lessor has obtained
all or any of approvals from the relevant governmental authorities.
In addition, some of our lessors have not provided us with
documentation evidencing their title to the relevant leased
properties. We cannot assure you that title to these properties we
currently lease will not be challenged. In addition, we have not
registered any of our lease agreements with relevant PRC
governmental authorities as required by PRC law, and although
failure to do so does not in itself invalidate the leases, we may
not be able to defend these leases against bona fide third
parties.
As of
the date of this filing, we are not aware of any actions, claims or
investigations being contemplated by government authorities with
respect to the defects in our leased real properties or any
challenges by third parties to our use of these properties.
However, if third parties who purport to be property owners or
beneficiaries of the mortgaged properties challenge our right to
use the leased properties, we may not be able to protect our
leasehold interest and may be ordered to vacate the affected
premises, which could in turn materially and adversely affect our
business and operating results.
Our auditor, like other independent registered public accounting
firms operating in China, is not permitted to be subject to
inspection by Public Company Accounting Oversight Board, and
consequently investors may be deprived of the benefits of such
inspection.
Our
auditor, the independent registered public accounting firm that
issued the audit reports included elsewhere in this report, as an
auditor of companies that are traded publicly in the United States
and a firm registered with the Public Company Accounting Oversight
Board (United States), or PCAOB, is required by the laws of the
United States to undergo regular inspections by the PCAOB to assess
its compliance with the laws of the United States and applicable
professional standards. Our auditor is located in China and the
PCAOB is currently unable to conduct inspections on auditors in
China without the approval of the PRC authorities. Therefore, our
auditor, like other independent registered public accounting firms
operating in China, is currently not inspected by the
PCAOB.
In May
2013, the PCAOB announced that it has entered into a Memorandum of
Understanding (“MOU”) on Enforcement Cooperation with
the China Securities Regulatory Commission (the “CSRC”)
and the Ministry of Finance (the “MOF”). The MOU
establishes a cooperative framework between the parties for the
production and exchange of audit documents relevant to
investigations in both countries’ respective
jurisdictions. More specifically, it provides a mechanism for
the parties to request and receive from each other assistance in
obtaining documents and information in furtherance of their
investigative duties. In addition to developing enforcement
MOU, the PCAOB has been engaged in continuing discussions with the
CSRC and MOF to permit joint inspections in China of audit firms
that are registered with the PCAOB and audit Chinese companies that
trade on U.S. exchanges.
Inspections of
other firms that the PCAOB has conducted outside of China have
identified deficiencies in those firms’ audit procedures and
quality control procedures, and such deficiencies may be addressed
as part of the inspection process to improve future audit quality.
The inability of the PCAOB to conduct inspections of independent
registered public accounting firms operating in China makes it more
difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures, and to the extent
that such inspections might have facilitated improvements in our
auditor’s audit procedures and quality control procedures,
investors may be deprived of such benefits.
On
November 18, 2016, the PCAOB issued its 2016 to 2020 Strategic Plan
on improving the quality of the audit for the protection and
benefits of investors, which revised the plan to update initiatives
relating to the PCAOB’s new standard-setting process,
planning for and adopting a permanent broker-dealer inspection
program, inspecting firms located in China, audit quality
indicators, monitoring and developing reports related to
independence and the business model of the firms, and business
continuity. This may eventually improve PCAOB’s ability to
conduct inspections of independent registered public accounting
firms operating in China.
On
December 7, 2018, the SEC and PCAOB issued a joint “Statement
on the Vital role of Audit Quality and Regulatory Access to Audit
and Other Information Internationally—Discussion of Current
Information Access Challenges with Respect to U.S.-listed Companies
with Significant Operations in China”. The statement
discussed challenges with respect to inspection of PCAOB-registered
auditing firms in China. (
https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other
).
Efforts with
Chinese
r
egulators to
i
mprove
i
nformation
a
ccess and
a
udit
i
nspections are
o
ngoing
and no
t
y
et
m
ade
s
atisfactory
p
rogress
.
RISKS RELATED TO OUR COMMON STOCK
If we fail to meet all applicable Nasdaq Global Market requirements
and Nasdaq determines to delist our common stock, the delisting
could adversely affect the market liquidity of our common stock,
impair the value of your investment, adversely affect our ability
to raise needed funds and subject us to additional trading
restrictions and regulations.
Our
common stock trades on the Nasdaq Global Market. If we fail to
satisfy the continued listing requirements of The Nasdaq Global
Market, such as the corporate governance requirements or the
minimum closing bid price requirement, The Nasdaq Stock Market (or
Nasdaq) may take steps to de-list our common stock. Such a
de-listing would likely have a negative effect on the price of our
common stock and would impair your ability to sell or purchase our
common stock when you wish to do so. In the event of a de-listing,
we would take actions to restore our compliance with Nasdaq's
listing requirements, but we can provide no assurance that any such
action taken by us would allow our common stock to become listed
again, stabilize the market price or improve the liquidity of our
common stock, prevent our common stock from dropping below the
Nasdaq minimum bid price requirement or prevent future
non-compliance with Nasdaq's listing requirements.
If we
fail to meet all applicable Nasdaq requirements and Nasdaq delists
our securities from trading on its exchange, we expect our
securities could be quoted on the Over-The-Counter Bulletin Board
("OTCBB") or the "pink sheets." If this were to occur, we could
face significant material adverse consequences,
including:
●
a limited
availability of market quotations for our securities;
●
reduced liquidity
for our securities;
●
a determination
that our common stock is "penny stock" which will require brokers
trading in our common stock to adhere to more stringent rules and
possibly result in a reduced level of trading activity in the
secondary trading market for our securities;
●
a limited amount of
news and analyst coverage; and
●
a decreased ability
to issue additional securities or obtain additional financing in
the future.
Furthermore, The
National Securities Markets Improvement Act of 1996 ("NSMIA"),
which is a federal statute, prevents or preempts the states from
regulating the sale of certain securities, which are referred to as
"covered securities." Because our common stock is listed on Nasdaq,
they are covered securities for the purpose of NSMIA. If our
securities were no longer listed on Nasdaq and therefore not
"covered securities", we would be subject to regulation in each
state in which we offer our securities.
We do not intend to pay cash dividends.
We do
not anticipate paying cash dividends on our common stock in the
foreseeable future. We may not have sufficient funds to legally pay
dividends. Even if funds are legally available to pay dividends, we
may nevertheless decide in our sole discretion not to pay
dividends. The declaration, payment and amount of any future
dividends will be made at the discretion of the board of directors,
and will depend upon, among other things, the results of our
operations, cash flows and financial condition, operating and
capital requirements, and other factors our board of directors may
consider relevant. There is no assurance that we will pay any
dividends in the future, and, if dividends are declared, there is
no assurance with respect to the amount of any such
dividend.
Our operating history and lack of profits could lead to wide
fluctuations in our share price. The market price for our common
shares is particularly volatile given our status as a relatively
unknown company with a small and thinly traded public
float.
The
market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that
our share price will continue to be more volatile than a seasoned
issuer for the indefinite future. The volatility in our share price
is attributable to a number of factors. First, as noted above, our
common shares are sporadically and thinly traded. As a consequence
of this lack of liquidity, the trading of relatively small
quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price
for our shares could, for example, decline precipitously in the
event that a large number of our common shares are sold on the
market without commensurate demand, as compared to a seasoned
issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky"
investment due to our limited operating history and lack of profits
to date. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and
at greater discounts than would be the case with the stock of a
seasoned issuer. Many of these factors are beyond our control and
may decrease the market price of our common shares, regardless of
our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common
shares will be at any time, including as to whether our common
shares will sustain their current market prices, or as to what
effect that the sale of shares or the availability of common shares
for sale at any time will have on the prevailing market
price.