UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20172020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37695001-38549

 

PROTEOSTASIS

YUMANITY THERAPEUTICS, INC.

(Exact Namename of Registrantregistrant as Specifiedspecified in its Charter)charter)

 

 

Delaware

Delaware20-8436652

(State or Other Jurisdictionother jurisdiction of

Incorporationincorporation or Organization)organization)

(I.R.S. Employer


Identification No.)

40 Guest Street, Suite 4410

Boston, MA

02135

200 Technology Square, 4th Floor

Cambridge, Massachusetts

02139

(Address of Principal Executive Offices)

principal executive offices)

(Zip Code)

(617) 225-0096

(Registrant’s Telephone Number, Including Area Code)telephone number, including area code: 617-409-5300

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange

on which registered

Common Stock, $0.001 par value

$0.001 per share

NASDAQ GlobalYMTX

The Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  YES      No      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

   (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 

The aggregate market valueBased on the closing price of the registrant’s common stock held by non-affiliates of the registrant as ofon the last business day of the registrant’s most recently completed second fiscal quarter, which was June 30, 2017, based2020, the aggregate market value of its common stock (based on a closing price of $1.37 per share on June 30, 2020 as reported on the last reported sale price of the registrant’s common stock of $4.68Nasdaq Global Market) held by non-affiliates was $85,266,450.  The calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. approximately $60,454,412.

As of March 12, 2018, there were 34,482,57419, 2021, the registrant had 10,193,831 shares of common stock, $0.001 par value per share, issued and outstanding.

Documents Incorporated by ReferenceDOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 20182021 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


Yumanity Therapeutics, Inc.

TABLE OF CONTENTSIndex

 

Page

Part I.PART I

Item 1.

Business

1

Item 1A.

Risk Factors

37

47

Item 1B.

Unresolved Staff Comments

79

96

Item 2.

Properties

79

97

Item 3.

Legal Proceedings

79

97

Item 4.

Mine Safety Disclosures

79

97

PART II

Part II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

80

98

Item 6.

Selected Consolidated Financial DataReserved

82

99

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

84

99

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

104

116

Item 8.

Financial Statements and Supplementary Data

104

117

Item 9.

Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure

105

154

Item 9A.

Controls and Procedures

105

154

Item 9B9B.

Other Information

105

154

PART III

Part III.

Item 10.

Directors, Executive Officers and Corporate Governance

106

155

Item 11.

Executive Compensation

106

155

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

106

155

Item 13.

Certain Relationships and Related Transactions, and Director Independence

106

155

Item 14.

Principal Accounting Fees and Services

106

155

PART IV

Part IV.

Item 15.

Exhibits, and Financial Statement Schedules

107

156

Item 16.

Form 10-K Summary

110

156

Signatures

111

160


EXPLANATORY NOTE

On December 22, 2020, Proteostasis Therapeutics, Inc. (“Proteostasis”) completed its previously announced merger transaction with Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of August 22, 2020, as amended on November 6, 2020 (the “Merger Agreement”), by and among Pangolin Merger Sub, Inc., a wholly-owned subsidiary of Proteostasis (“Merger Sub”), Yumanity Holdings, LLC (“Holdings”) and Yumanity, Inc., pursuant to which Merger Sub merged with and into Yumanity, Inc., with Yumanity, Inc. surviving as a wholly owned subsidiary of Proteostasis (the “Merger”). Immediately prior to the effective time of the Merger, Holdings merged with and into Yumanity, Inc. and Yumanity, Inc. continued to exist as the surviving corporation. On December 22, 2020, in connection with, and prior to the completion of, the Merger, Proteostasis effected a 1-for-20 reverse stock split of its common stock (the “Reverse Stock Split”). Immediately following the Merger, Proteostasis changed its name to “Yumanity Therapeutics, Inc.”

Unless the context otherwise requires, references to the “Company,” “Yumanity,” the “combined organization,” “we,” “our” or “us” in this report refer to Holdings and its subsidiary prior to completion of the Merger and to Yumanity Therapeutics, Inc. and its subsidiary after completion of the Merger. In addition, references to “Proteostasis” or “PTI” refer to the registrant prior to the completion of

the Merger.

For accounting purposes, the Merger was treated as an “asset acquisition” under generally accepted accounting principles in the United States (“GAAP”) and Yumanity was considered the acquirer. Accordingly, Yumanity’s historical results of operations will replace the Proteostasis historical results of operations for all periods prior to the Merger and, for all periods following the Merger, the results of operations of the combined organization will be included in the Company’s financial statements. Following the Merger, the business conducted by Yumanity became our primary business.

Except as otherwise noted, references to “common stock” in this report refer to common stock, $0.001 par value per share, of the Company.


Summary of the Material Risks Associated with Our Business

We are subject to various risks associated with our businesses and industries. These risks include the following:

 


we have incurred significant operating losses since our inception and anticipate we will incur continued losses for the foreseeable future;

 

we will need additional funding to advance Cautionary Note Regarding Forward-Looking StatementsYTX-7739 through clinical development, which funding may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit, or terminate our product development efforts or other operations;

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

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

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

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

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

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

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

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

we may 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.

The summary risk factors described above should be read together with the text of the full risk factors below, in the section entitled “Risk Factors” in Part I, Item 1A. and the other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects.


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K or this report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant towithin the safe harbor provisionsmeaning of the U.S. Private Securities Litigation Reform Act and Section 21E of 1995the Securities Exchange Act of 1934, as amended, that involve substantial risks and other federal securities laws.uncertainties. All statements, other than statements of historical factsfact, contained in this reportAnnual Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”The words “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or the negative of these termswords or other comparable terminology. Thesesimilar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Annual Report include, but are not limited to,among other things, statements about:

our estimates regarding ourthe timing, progress and results of preclinical studies and clinical trials for our programs and product candidates, including without limitation,statements regarding the timing of the initiation of,and completion of enrollment in,studies or trials and data fromrelated preparatory work, the period during which the results of the trials will become available and our trials;research and development programs;

our estimates regarding anticipated filingability to recruit and enroll suitable patients in our clinical trials;

the potential attributes and benefits of INDs for nominated drugour product candidates;

our estimates regarding expenses, future revenuesability to develop and capital requirements;advance product candidates into, and successfully complete, clinical studies;

the timing, scope or likelihood of regulatory filings and approvals;

our ability to obtain and maintain regulatory approval for our product candidates, and any related restrictions, limitations or warnings in the label of PTI-428, PTI-801 and PTI-808,an approved product candidate;

the implementation of our business model and our combination solutions,strategic plans for any indication,our business, product candidates, technology and our discovery engine;

our commercialization, marketing and manufacturing capabilities and strategy;

the labeling under any approval we may obtain;pricing and reimbursement of our product candidates, if approved;

the rate and degree of market acceptance of our product candidates, if approved;

our ability to establish or maintain collaborations or strategic relationships or obtain additional funding;

our ability to contract with and rely on third parties to assist in conducting our clinical trials and manufacturing our product candidates;

the size and growth potential of the markets for our product candidates, and our ability to serve those markets, either alone or in partnership with others;

our ability to obtain funding for our operations, including funding necessary to complete further development, approval and, maintain sanctioning or favorable scoringif approved, commercialization of our clinical trials or protocols from other third parties, such as the Therapeutics Development Network of the Cystic Fibrosis Foundation or the Clinical Trial Network of the European Cystic Fibrosis Society;

intense competition in the CF market and the ability of our competitors, many of whom have greater resources than we do, to offer different, better or lower cost therapeutic alternatives than our product candidates;

anticipated regulatory developmentsthe period over which we anticipate our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements;

the potential for our business development efforts to maximize the potential value of our portfolio;

our ability to compete with other companies currently marketing or engaged in the United States and foreign countries;development of treatments for the indications that we are pursuing for our product candidates;

 

anticipated developments with respect to, and the commercial availability of, CFTR modulators with which PTI-428 or PTI-801 are intended to be or may in the future be administered, including Vertex’s Kalydeco®, Orkambi® and SymdekoTM;

our plans to develop and commercialize PTI-428, PTI-801 and our combination solutions, including expected preclinical and clinical results and timing;

expectations regarding our ability to obtain and maintain intellectual property protection for our proprietary assets;product candidates;

the size and growth of the potential markets for PTI-428, PTI-801 and our combination solutions, and our ability to serve those markets;financial performance;

the rate and degree of market acceptance of PTI-428, PTI-801 and our combination solutions for any indication

the benefits of FDA designations such as, including, without limitation, Fast Track, Orphan Drug and Breakthrough Therapy;

our ability to obtainretain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;


our expectations related to the use of our cash reserves;

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

the lossimpact of key scientific or management personnel;laws and regulations, including without limitation recently enacted tax reform legislation;

our expectations regarding the time during which we are an emerging growth company under the JOBS Act;

the effect of COVID-19 on the foregoing; and

other forward-looking statements discussed elsewhererisks and uncertainties, including those listed under the caption “Risk Factors” in this report.

Any forward-looking statements in this report reflect our current views with respect to future events and with respect to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part I, Item 1A. Risk Factors

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and elsewhere in this report. Given these uncertainties, you should not place undue reliance on theseour forward-looking statements. Except as required by law, we assume no obligation to updateActual results or revise these forward-looking statements for any reason, even if new information becomes available in the future.


This report contains estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events circumstances or numbers, including actual disease prevalence rates and market size, maycould differ materially from the information reflectedplans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may,Annual Report, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Moreover, we operate in a competitive and rapidly changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures, or investments we may make or enter into.

You should read this Annual Report and the documents that we file with the Securities and Exchange Commission with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Annual Report are made as of the date of this Annual Report, and we do not proveassume any obligation to have been accurate.update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Kalydeco, Orkambi


PART I

All brand names or trademarks appearing in this report are the property of their respective owners. Except where the context otherwise requires or where otherwise indicated, the terms “we,” “us,” “our,” “our company,” “the company,” and Symdeko are trademarks of Vertex Pharmaceuticals Incorporated.“our business” refer to Yumanity Therapeutics, Inc. and its consolidated subsidiary.

 


PART I

Item 1. Business
ITEM 1.

BUSINESS

Overview

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

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

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

At the center of our scientific foundation is our drug discovery engine, which is based on technology licensed from the Whitehead Institute, an affiliate of the Massachusetts Institute of Technology. This core technology, combined with investments and advancements by us, is designed to enable rapid screening to identify drug

1


candidates with the potential to modify disease by overcoming toxicity in disease-causing gene networks. Toxicity in many neurodegenerative diseases results from an aberrant accumulation of misfolded proteins in the brain. We leverage our proprietary discovery engine to identify and screen novel drug targets and drug molecules for their ability to protect nerve cells from toxicity arising from misfolded proteins. To date, we have identified over one dozen targets, most of which have not previously been linked to neurodegenerative diseases. We believe this discovery platform will allow it to replenish its pipeline as programs graduate towards the clinic.

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

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

Neurodegenerative Disease Market and Challenges

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

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

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

2


In Parkinson’s disease, the cornerstone of pharmacological therapy for the past several decades has focused on either temporarily replenishing dopamine or mimicking the action of dopamine such as with the dopamine precursor levodopa. Levodopa, which is very helpful to patients in managing some of the motor symptoms of the disease, does not alter disease progression. Certain disease-modifying molecules are currently being investigated in early clinical trials for the potential of removing or reducing levels of α-synuclein. These programs, however, are predominantly focused on the development of antibodies. Therapeutic antibodies are large molecules that are administered systemically, and as such have significant challenges crossing the blood brain barrier and penetrating into the brain, which is the target tissue for neurodegenerative diseases. Even if some limited amount of antibody can penetrate into the brain, antibodies face a further challenge. α-Synuclein functions within cells to facilitate vesicle trafficking, however when α-synuclein misfolds it is thought to have an increased propensity to aggregate and disrupt multiple critical processes inside the cell. The ultimate expression of this pathology is the formation of Lewy bodies within neurons, which are a hallmark of dystrophic and degenerating cells. Therapeutics that target pathological processes within cells would be expected to prevent this toxic progression. α-Synuclein can also be secreted by neurons, and although the function is unclear, this results in α-synuclein outside of cells. It is this population that would be a target for antibody therapeutics which are generally believed to interact with protein extracellularly, or abundanceoutside the cell. We believe antibodies therefore have less access to α-synuclein, and recently, two antibody drug candidates that target α-synuclein failed to meet primary clinical endpoints in Phase 2 trials. By contrast, we are developing small molecules that the yeast platform pre-selects by design to cross the blood brain barrier and diffuse into the cell where α-synuclein causes cellular toxicity and damage. YTX-7739 and YTX-9184 both target the enzyme SCD, the inhibition of cystic fibrosis transmembrane conductance regulator,which has been shown to help overcome the toxicity of α-synuclein and promote protection of neurons.

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

Our CFApproach and Pipeline

Our approach is to unlock the path to new therapies by addressing the fundamental and persistent barriers in neurodegeneration research: the poor understanding of disease mechanisms and lack of new biological targets. We believe that a dramatically expanded portfolio of programs focused pipeline consistson novel drug targets, which are grounded in an improved understanding of novel CFTR modulators including correctors, potentiatorsdisease biology, will enable a higher likelihood of success in developing disease-modifying therapies.

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

The discovery engine is centered on the key insight that protein misfolding, a phenomenon at the root of virtually all neurodegenerative diseases, can be modeled in yeast cells. These yeast models are then screened against large

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

We believe our proprietary discovery engine has the potential to dramatically expand the knowledge around the complex biology of CFTR modulators,neurodegeneration, and further allows initiation of discovery programs outside of the traditional, limited set of hypotheses that exist today. Screening for hits in a living yeast system can save time by providing a biological-relevant readout sooner than some of the more typical practice of starting in non-live, test tube systems. Additionally, shared features between yeast cell membranes and the blood brain barrier, such as comparable membrane permeability, polarity, and drug pumps for removal of non-native compounds, mean that molecules that can permeate a yeast cell to effect intracellular rescue may also be likely to penetrate the blood brain barrier. Furthermore, our molecules get tested in diseased human cells ex-vivo at the beginning rather than at the end of preclinical development. We believe that success in this setting confers increased confidence in programs compared to the more traditional paradigm of multiple rounds of animal studies before any actual testing in human tissues.

Key Differentiators of Our Discovery Engine

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We leverage the power of our discovery engine to generate a robust portfolio of promising novel drug targets and molecules. We then prioritize the most promising targets to accelerate drug discovery programs and advance compounds into preclinical and ultimately clinical development. To date, this approach has already uncovered

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over one dozen novel targets, pathways, mechanisms, and molecules that we believe have exploited its novel mechanismthe potential to ameliorate the fundamental cellular toxicities associated with neurodegenerative diseases. We expect that this list of actionnew targets and subsequent programs will continue to grow as we iterate through our discovery engine. The list shown below illustrates our current 14 most advanced targets.

Novel Neurodegeneration Targets Discovered at Yumanity

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

Our Pipeline

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

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

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

YTX-7739 is now in Phase 1 clinical development consisting of two initial studies: a SAD study in healthy volunteers and a MAD study in healthy volunteers with a Phase 1b part in patients with Parkinson’s disease. The SAD study in healthy volunteers has completed.

The MAD study was initiated in the third quarter of 2020. Enrollment of healthy volunteers has completed and data is anticipated for such healthy volunteers in the beginning of the second quarter of 2021. The Phase 1b part will be a continuation of the MAD study, conducted in patients with Parkinson’s disease, and will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for early effects of YTX-7739. This Phase 1b part has been initiated, and early results are expected to be available by mid-2021, assuming no further clinical trial delays due to the COVID-19 pandemic. We then plan to initiate a Phase 2 trial in patients with Parkinson’s disease in 2022. GLP safety pharmacology and toxicological studies for YTX-9184, our second program, were initiated in the second quarter of 2020. YTX-9184 is being developed as a potential treatment for dementia with Lewy bodies and is anticipated to enter Phase 1 clinical development in 2021.

Our potential third and fourth programs are novel targets for the treatment of ALS and FTLD. Activities for these potential programs are currently being conducted through a research collaboration with Merck, with up to $530 million in potential milestones for us plus royalties. If these potential programs are successful and achieve

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full target validation with small molecule agents, representativethey will advance to IND-enabling safety pharmacology and toxicology studies to be conducted by Merck, who will also be responsible for any subsequent clinical development and commercialization.

Beyond our first two programs, YTX-7739 and YTX-9184 and two potential programs partnered with Merck, we have additional targets that constitute a rich discovery pipeline. Targets C through M in the chart above are all progressing towards target validation in human neuron systems and development of all three classessmall molecule inhibitors with drug-like properties.

Leadership Team and Scientific Team

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

Our Chief Executive Officer is Richard Peters, M.D., Ph.D., the former President, Chief Executive Officer and director at Merrimack Pharmaceuticals, and former Senior Vice President and Head of Global Rare Diseases at Sanofi Genzyme. Paulash Mohsen is our Chief Business Officer, and he was the former Country Manager (Canada) at Cubist (acquired by Merck) and Vice President of Strategy and Business Operations at Optimer Pharmaceuticals (acquired by Cubist), and also a Vice President of Strategy and Multi-Channel Management at Pfizer. Our Chief Medical Officer is Brigitte Robertson, M.D., who was previously the Vice President, Therapeutic Area Head of Neuroscience, Global Clinical Development at Shire/Takeda, the Chief Medical Officer at Neurovance and has held senior roles at Sunovion Pharmaceuticals in clinical development and include PTI-428,experimental medicine, and at GlaxoSmithKline in the Center for Excellence in Drug Discovery.

Our co-founder and Executive Chair of our board of directors is N. Anthony Coles, M.D., previously the Chief Executive Officer of Onyx Pharmaceuticals until its sale to Amgen in 2013, and current Chief Executive Officer of Cerevel Therapeutics. Our other co-founder is the late Susan Lindquist, Ph.D., a renowned cell biologist, National Medal of Science recipient, Howard Hughes Medical Institute investigator and former director of the Whitehead Institute.

Our Priorities

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

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

Progress YTX-9184 into clinical development.YTX-9184 is our second program. Like YTX-7739, YTX-9184 is also an amplifier,inhibitor of the SCD enzyme. YTX-9184 is chemically distinct from YTX-7739 and PTI-801may serve as a potential option for patients with other disorders of α-synuclein such as dementia with Lewy bodies as well as a potential back-up to YTX-7739.

Advance our potential third generation corrector,and fourth programs for ALS and FTLD in partnership with Merck. We expect to continue preclinical development of these two potential programs in partnership with Merck, from which we are eligible to receive potential milestone payments of up to $530 million plus royalties.

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

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

Our Discovery Engine Platform

Overview – Protein Misfolding and Toxicity Cascades

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

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

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

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

The toxic consequences of protein misfolding and aggregation ultimately result in cell death, and the accumulation of dead cells within specific brain regions marks the progression of disease symptoms and severity. It is our goal to keep cells alive by protecting them from the consequences of these misfolded proteins, thereby slowing disease progression. Our discovery engine is designed to better understand the processes through which protein misfolding and aggregation trigger cellular toxicity, and to do so in a manner that allows us to identify a network of new targets and biological processes which, when modulated using a therapeutic drug, we believe will ameliorate the toxicities initiated by protein misfolding, allow the cells to continue to function normally, and

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halt the progression of disease. We believe the identification of these new targets and close-in biology networks, and the molecules that modulate them, enables us to provide a new treatment approach to neurodegenerative drug discovery.

The Yeast Model

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

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

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

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

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Phenotypic Screening in Yeast

Since the dawn of the genomics revolution in biology and widespread availability of recombinant DNA methods, the conventional approach employed by the biopharmaceutical industry for drug discovery has been the target-based screen. In this approach, one begins with a known ‘target,’ or a specific protein involved in a defined cellular process considered to be relevant to disease pathology. Large chemical libraries are then screened for compounds that bind to or modulate the activity of this target. This screening is usually performed in a cell-free environment, meaning no membranes, with just the protein target in solution in a test tube or assay plate. The successful screening hit then undergoes iterative rounds of chemical optimization and refinement to improve affinity and activity at the target, again in a cell free environment. Once a molecule with favorable properties is obtained, standard preclinical development processes occur, including further optimization, pharmacology and toxicity testing and formulation. In the field of neurodegeneration, the very small number of hypothesized targets has proven to be a significant limitation of the productivity of the target-based screening approach. Moreover, the iterative rounds of optimization and screening occasionally yield advanced compounds that do not readily cross the blood brain barrier or do not cross cell membranes efficiently.

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

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

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

Target Identification

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

The second technology platform in our discovery engine overcomes this limitation of phenotypic screening by uncovering the target implicated in the toxicity rescue. Our target identification capability takes advantage of the

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fact that yeast is uniquely well-studied and characterized from a genetic perspective. Our proprietary capability leverages pre-existing gene knockout libraries, gene-gene interaction networks, and other readily available tools in yeast to identify, in a high-throughput manner, the targets implicated in the phenotypic screen’s successful hits. This information, collected across hundreds of screening hits across multiple independent screening libraries, gives us a growing understanding of the genes and pathways involved in rescuing cells from the consequences of misfolding protein induced toxicity. Using the set of experimental tools available in yeast, we are able to narrow down and eventually identify the specific genetic targets associated with the hits that result from the phenotypic screens.

Once the targets have been identified within the yeast genome, we then use informatics to discern the analogous targets within the human genome. We can compare the sequence, structure, and function of yeast genes with a database of human gene sequences to identify the closest yeast-to-human match. Yeast genes may have a range of relationships to their human counterparts, including one-to-one,one-to-many, or other configurations. Importantly, like the phenotypic screening platform in yeast, the methods involved in target identification in yeast (and subsequent translation to human targets) are high throughput. We have used this process multiple times to identify a portfolio of potentially attractive novel targets.

Human Cell Translation

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

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

Reprogramming patient cells to create human neurons in culture

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Integration of Technology Platforms

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

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

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

Drug Candidate Selection Process

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

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Our Programs

We have leveraged our discovery engine to identify more than one dozen diverse biological targets not previously linked to neurodegenerative disease that we believe are amenablesuitable for add-on therapy to standard-of-care CFTR modulatora future disease-modifying drug discovery program. Our lead program, YTX-7739 for the potential treatment and PTI-808,disease-modification of Parkinson’s disease, is currently in Phase 1 clinical trials. Our second program, YTX-9184, has a potentiator intendeddistinct profile and is from a different chemical series than YTX-7739. YTX-9184 entered GLP toxicology studies in the second quarter of 2020. In collaboration with Merck, we are also currently in the lead optimization process for our potential third program for the potential treatment of ALS and FTLD. We believe these potential programs and the others in our portfolio will enable us to be developed as partreach our goal of a dual combination with PTI-801 and a triple combination that also includes PTI-428 and PTI-801. one new program entering human clinical trials every year. The status of our pipeline is reflected below:

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Our Lead Program – YTX-7739

We are developing YTX-7739 for the treatment of Parkinson’s disease. YTX-7739 is the first prioritized drug candidate identified by our discovery engine and if approved, intendis designed to commercialize our own therapies, including add-on and combination therapies for CF patients who have at least one F508del mutation, representing the majorityreduce α-synuclein toxicity by inhibiting SCD, an enzyme that metabolizes saturated fatty acids to their monounsaturated form.

Parkinson’s Disease Overview

Parkinson’s disease is a chronic, progressive neurological disorder of the patient population.

There is presently no cure for CF. CF affects an estimated 70,000 to 100,000 patients worldwide withcentral nervous system and the vast majority of the diagnosed patients residingsecond most prevalent neurodegenerative disorder in the United States Canada, Europeafter Alzheimer’s disease, with an estimated 500,000 to one million prevalent cases. More than 10 million people worldwide are believed to have Parkinson’s disease. In patients with Parkinson’s disease, the premature death of neurons in the brain reduces levels of the neurotransmitter dopamine, causing motor dysfunction including tremor, slow movement, muscle rigidity, and Australia. CFdifficulty with balance, falling, swallowing, speech, and writing. Other changes in the brain associated with the disease may result in cognitive and sensory symptoms. Additional features of the disease include disruptions in nerves connecting the brain to other systems such as cardiovascular, gastrointestinal, and urogenital systems, as well as sleep disturbances, constipation, and loss of sense of smell. Later-stage Parkinson’s disease is severely debilitating, and its symptoms make sufferers more likely to experience life-threatening medical issues. As a progressive disease andresult, while Parkinson’s does not directly cause death, it is nevertheless the most common fatal inherited disease among Caucasians. Without normal CFTR protein activity, thick mucus accumulates in vital organs, particularly the lungs, pancreas and gastrointestinal tract, and causes many complications, including respiratory infections, chronic lung inflammation, poor absorption of nutrients and in most cases, progressive respiratory failure. CF patients require lifelong treatment with multiple daily medications, hours of self-care, and frequent hospitalizations. In 2016, the median agefourteenth leading cause of death in the United States.

Approximately 60,000 people are diagnosed with Parkinson’s disease in the United States from CF was 30 years.each year, most often after the age of 50. The National Institutes of Health estimates the annual cost of treating Parkinson’s disease in the United States to be $14 billion, with indirect costs such as lost productivity adding at least another $6 billion. As with many other neurodegenerative diseases, the greatest risk factor for Parkinson’s disease is increasing age. The growing population of older adults and longer average lifespans are therefore likely to increase the number of Parkinson’s patients and the need for effective treatments. Currently, it is estimated that the number people diagnosed with Parkinson’s disease in the United States will double by the year 2040.

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

Limitations of Current Therapies

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

The approvaldopamine precursor levodopa is the most commonly prescribed pharmacotherapy. While extremely helpful overall, some symptoms do not respond as well to levodopa, like difficulty with balance, falling, difficulty with speech and swallowing, and memory issues. It can also be challenging to titrate and find the optimal dose and patients may experience “on” and “off” periods when the drug concentration falls to below their individual needs. Unfortunately, the long-term use of CFTR modulatorlevodopa is frequently associated with the development of additional motor complications, for example dyskinesias, or uncontrolled, involuntary movements. Additional therapies attempt to slow the degradation of dopamine using monoamine oxidase-B inhibitors. Catechol-o-methyltransferase inhibitors and carbidopa may be used to reduce levodopa degradation. Amantadine, an N-methyl-D-aspartate, or

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NMDA, receptor antagonist, is also used and may act through more than one mechanism. Drug treatment for Parkinson’s disease is commonly individualized by patient and disease characteristics, and patients may receive multiple drug therapies throughout their course of disease, including other medications for comorbid conditions and symptomatic management such as antidepressants, anxiolytics, and anti-psychotics. While these therapies address the symptoms of Parkinson’s disease, they are unable to halt disease progression over the longer-term. As a result, these symptomatic therapies lose their efficacy over time, leaving patients with few treatment options.

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

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

Our Solution

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

The α-Synuclein Toxicity Cascade

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

In yeast, the overexpression of care for eligible CF patients.α-synuclein causes severe cellular toxicity by disrupting multiple cellular mechanisms, including vesicle trafficking. These developments have spurred drug discoverydisruptions occur in both yeast models and development initiatives that include a combinational approachmammalian systems, where mutations or overexpression of multiple modulators. To our knowledge there are only two pharmaceutical companies currently developing combined uses of three CFTR modulators whose goal is the restoration of CFTR protein activity in CF patients by using one potentiator and two corrector molecules. Correctors, such as lumacaftor or tezacaftor, are believed to improve protein folding and trafficking to enable abnormally folded CFTR protein to achieve a higher level of activity without repairing the actual protein mutation. Potentiators, such as ivacaftor, are believed to increase the opening time of the CFTR protein channel resulting in higher ion flow across the cell membrane.

Unlike other triple combination drug discovery and development approaches for CF that are based on potentiators and correctors, our program includes PTI-428, an amplifier, a novel CFTR modulator with unique and distinguished molecular properties. PTI-428 is an orally bioavailable CFTR modulator belonging to the amplifier class. CFTR modulators are compounds that affect the folding, trafficking, function and clearance of CFTR protein and can be classified according to the ways in which they affect CFTR protein. Amplifiers, which include PTI-428, are CFTR modulators that selectively increase the amount of the newly synthesized unfolded form of CFTR protein, thereby providing additional substrate for other CFTR modulators, such as correctors and potentiators, to act upon. Using industry-standard in vitro studies, we have demonstrated that co-administration of PTI-428 with correctors and potentiators significantly improves the in vitro CFTR protein activity achieved by these CFTR modulators alone.


Due to the unique ability of amplifiers to selectively increase the amount of the unfolded form of CFTR protein and its synergistic mechanism of action with certain other types of CFTR modulators, we believe that PTI-428 could become the anchor therapeutic agent for combination therapies comprising multiple classes of CFTR modulators for the treatment of CF. A triple combination regimen that includes PTI-428 with PTI-801, a corrector, and PTI-808, a potentiator, has been shown to restore in vitro CFTR protein activity to approximately 100% of normal, in patient-derived human bronchial epithelial, or HBE, cells homozygous for F508del.

With the recent advent of CFTR modulators, the CF treatment paradigm is shifting from palliative care, which addresses only the symptoms of CF, to disease-modifying agents that target the genetic cause of the disease or the mutated CFTR protein. We are developing and, if approved, intend to commercialize a proprietary combination therapy for patients with an F508del mutation of the CFTR gene, the most common CFTR gene mutation. In the United States, approximately 86% of all CF patients have an F508del mutation of the CFTR gene, of which approximately 53% are homozygous (having two copies of the F508del mutation), and approximately 47% are heterozygous (having an F508del mutation and one other mutation).

We and others have analyzed published data by Vertex Pharmaceuticals Incorporated, or Vertex, on its CFTR modulators (the potentiator ivacaftor and the correctors lumacaftor and tezacaftor) and combinations thereof, which show a strong correlation between the in vitro CFTR protein activity and lung function improvement. We have shown in vitro that PTI-428α-synuclein increases the amount of available CFTR proteinmembrane-associated α-synuclein, which in turn impairs vesicle trafficking and when combinedincreases cellular stress and toxicity. Importantly, human genetic studies indicate mutations and overexpression of α-synuclein lead to severe and rapidly progressing forms of Parkinson’s disease, and this relationship to disease severity almost certainly involves toxic effects of α-synuclein aggregates on the functions of cell membranes.

YTX-7739’s Target

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

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

The chart below demonstrates the impact of inhibiting the SCD enzyme in a diseased human cell line prepared from a patient with Parkinson’s disease. This patient had a single amino acid mutation in the α-synuclein protein sequence. The red line shows the risk of cell compared todeath in cells containing the α-synuclein mutation. The black line, which shows lower risk of death, is a combination of only ivacaftor and either lumacaftor or tezacaftor. In December 2015, the investigational new drug application, or IND, that we submittedcontrol cell line – genetically identical to the U.S. FoodParkinson’s disease patient cell line but with a correction of the α-synuclein mutation generated using CRISPR technology. The increasing shades of blue lines represent the survival of the mutation-containing cells upon exposure to increasing concentrations of a potent SCD inhibitor. As the chart shows, inhibition of SCD reduces cell death in the mutation-containing cell line down to the levels of the mutation-corrected control. The improved survival effect is dependent upon the concentration of SCD inhibitor.

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

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

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Motor Behavior at Six Months of Age

LOGO         LOGO

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

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

Preclinical Studies

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

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

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

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

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

LOGO

We have a reliable and quality-controlled manufacturing process for the active pharmaceutical ingredient, or API, of YTX-7739 to support future clinical trials. IND-enabling safety pharmacology and toxicology studies have been completed and YTX-7739 is currently in Phase 1 clinical trial to evaluate our PTI-428 product candidate became effective. We initiated our firsttrials.

Clinical Trials

YTX-7739 is currently in Phase 1 clinical development consisting of a single ascending dose (SAD) study in healthy volunteers, and a multiple ascending dose (MAD) study in healthy volunteers, with a Phase 1b part in patients with Parkinson’s disease. The SAD study was a randomized, double-blind, placebo-controlled single ascending dose study to investigate the safety, tolerability, and pharmacokinetics of YTX-7739 in healthy volunteers, and has completed. The SAD study was conducted in three parts at one site in the Netherlands. The first part was to investigate the safety, tolerability and pharmacokinetics of increasing doses of YTX-7739 in

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healthy subjects. The second and third parts were to study the effect of food on the pharmacokinetics of YTX-7739 after administration in a fed state in healthy subjects.

Fifty-six healthy volunteers (aged 19-39 years of age; 22 males; 34 females) were administered single oral dose of YTX-7739, from 5 mg to 400 mg in the SAD study. Forty subjects participated in the placebo controlled, randomized, double blind part of the study which included seven cohorts of eight subjects each, randomized to YTX-7739 or placebo in a 6:2 ratio. Sixteen of these subjects also participated in two cohorts where YTX-7739 was administered with food. In addition, two cohorts of eight subjects each (16 subjects in total) participated in an open label fashion to further inform dose selection for the MAD study. Safety assessments included, but were not limited to, adverse events, serious adverse events, safety laboratory tests, vital signs and electrocardiograms (ECG). In addition, plasma drug levels were collected to assess pharmacokinetic variables and a pharmacodynamic biomarker was also included to explore the potential of YTX-7739 to change plasma levels of fatty acids. There were no safety concerns identified and YTX-7739 was found to be well tolerated with most adverse events being mild or moderate in severity.    The half-life of YTX-7739 combined with a favorable dose-proportional pharmacokinetic (PK) profile, in the fed state, supports that low daily doses administered with food will sustain the target range of exposure.

There were dose-linear increases in the maximum serum concentration achieved and the 24-hour area under the concentration-time curve observed at 5 mg, 10 mg, 30 mg and 250 mg dose levels in the fed state, suggesting dose-proportionality of YTX-7739 exposure in the 5 – 250 mg dose range, when administered in a fed state. Drug plasma concentrations in the trial exceeded levels of exposure estimated to be sufficient for target engagement based on pharmacodynamic modeling. Consistent with preclinical data, YTX-7739 also demonstrated clinically relevant drug concentrations in CF patientsthe cerebral spinal fluid (CSF). The results of this SAD trial supported progression to the MAD trial.

The safety and biopharmaceutical profile observed after single oral doses in healthy volunteers supported progression to a MAD study, which we are conducting at one site in the Netherlands. We initiated a Phase 1a MAD study in healthy volunteers in the first halfthird quarter of 2016. The2020 with results anticipated by the beginning of the second quarter of 2021. This is a Phase 1 trial in CF patients included single ascending dose, or SAD, and multiple ascending dose, or MAD, cohorts. The Phase 1 trial in healthy volunteers included SAD and MAD cohorts to assess1a, placebo-controlled, randomized, double-blind study, investigating the safety, pharmacokinetictolerability, and exploratory biomarker results. We reported preliminary safety, pharmacokineticpharmacokinetics of once daily oral administration of two doses of YTX-7739 (15 mg and exploratory biomarker data from SAD and MAD cohorts in the PTI-428 Phase 1 clinical trial in CF subjects receiving PTI-428 or placebo25 mg) for 7 days in addition14 to Orkambi® (lumacaftor/ivacaftor) as their background, standard of care therapy, as well as a cohort of CF subjects receiving PTI-428 or placebo for 7 days who were not taking CFTR modulator based therapies.

We have completed a 28-day Phase 2 clinical trial for PTI-428 in CF patients randomized to receive either PTI-428 or placebo for 28 days in addition16 healthy male and female volunteers. This part of the study includes two cohorts of eight subjects each, randomized to Orkambi® as their background, standardtreatment or placebo in a 6:2 ratio. The study is also exploring plasma and CSF biomarker measures of care therapypharmacodynamic activity. We expect to evaluate the efficacy, safety, and tolerability of 50 mg of once-a-day PTI-428. In December of 2017, we announcedreport the results of this part of the MAD study which showed that the addition of PTI-428 to Orkambi® demonstrated mean absolute improvements in ppFEV1 of 5.2 percentage points from baseline compared to placebo (p≤0.05), with mean relative improvements of 9.2 percent (p≤0.05). This treatment effect was achieved by day 14 and sustained through 28 days of dosing.

In CF subjects on Orkambi® therapy, it has been shown in two registrational Phase 3 studies that the magnitude of response to Orkambi varied according to patient lung function at screening suggesting that the overall efficacy captured in these studies was mainly driven by the subgroup with baseline ppFEV1 below 70% (+3.3 percentage points) while the changes in the group with FEV1 ≥70% were not statistically significant. A similar analysis was performed in our 28-day study with PTI-428 and it showed an average +6.6 percentage points (p<0.05) increase in absolute ppFEV1 compared to placebo for patients who had lower baseline ppFEV1 value (<70%). The resultsbeginning of the subgroup analysis are consistentsecond quarter of 2021.

A subsequent Phase 1b part in patients with Phase 3 data with Orkambi®, suggesting that PTI-428 potentially amplifies the Orkambi® effect in the responder population.

Additional endpoints in the study included measurement of changes in sweat chloride (secondary endpoint) and CFTR expression in nasal epithelia (exploratory endpoint). In this study, a positive increase in CFTR protein from baselineParkinson’s disease was observed in PTI-428 treated subjects and the magnitude of change was consistent with the changes in CFTR protein levels observed in an in vitro human bronchial cell (HBE) cell model. In contrast, changes in sweat chloride did not correlate with changes in lung function.


In the 28-day study, PTI-428 was generally well tolerated and lacked clinically meaningful drug-drug interactions with ivacaftor and lumacaftor. Fourteen of 20 subjects receiving PTI-428 and two of four subjects receiving placebo experienced at least one treatment emergent adverse event. There were no serious adverse events, or SAEs, and there were two adverse events, or AEs, that led to study discontinuation. Both cases were thrombocytopenia of mild grade and comparable magnitude and value. One occurred while a subject was on Orkambi® only and one in a subject receiving PTI-428 with both subjects resolving spontaneously.

In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi® as background therapy.  The designation was based on the FDA’s review of available clinical evidence, including the observed increase in FEV1 and CFTR protein levels in the 28-day study.  Breakthrough Therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). Also in March 2018, the FDA granted Orphan Drug designation for PTI-428. The FDA grants orphan designation to promote the development of product candidates for rare conditions affecting fewer than 200,000 U.S. patients annually. This designation provides for a seven-year marketing exclusivity period against competition, as well as certain incentives, including federal grants, tax credits and a waiver of certain administrative filing fees.  

Our IND for the Phase 1 study of PTI-801, a corrector molecule, was submitted to the FDAinitiated in the first quarter of 20172021 and is now active. In March 2017, we received Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. We completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, towill assess the safety, tolerability and PKpharmacokinetics of PTI-801,YTX-7739 and reported initial data on this portionwill explore biomarkers of target engagement as well as potential correlative clinical markers such as neuroimaging measurements to monitor for early effects of YTX-7739. Dosing has initiated and early results from the study in 2017.

We have initiated a 14-day once-a-day dosing study with PTI-801 in CF subjects on background Orkambi® therapy. In December of 2017, we reported initial data from a preliminaryPhase 1b part are expected by ad hocmid-2021 analysis ofassuming no delays due to the first five subjects (four PTI-801 treated and one placebo) of the first dose level tested.  All four subjects who received once-a-day 100 mg of PTI-801 completed two weeks of dosing. The pharmacokinetic (PK) profile observed from these four subjects was consistent with the PK profile observed for healthy volunteers. These initial data also showed no clinically meaningful drug-drug interactions with either lumacaftor or ivacaftor.  There were no serious adverse safety events reported that were considered as possibly drug related.  Mean absolute improvements in ppFEV1 of approximately 4 percentage points from baseline, with mean relative improvements of approximately 7 percent, were observed in the four PTI-801 subjects who completed two weeks of dosing. This study, designed to investigate the effect of PTI-801 in escalating doses in multiple cohorts, is ongoing.COVID-19 pandemic.

Our INDSecond Program

Our second program in development, known as YTX-9184, also inhibits SCD and is being investigated as a potential treatment for the Phase 1 study of PTI-808,dementia with Lewy Bodies and may also provide a potentiator molecule, was submittedpotential back-up to the FDAYTX-7739. YTX-9184 started GLP toxicology and safety pharmacology in the second quarter of 20172020. We plan to continue development for YTX-9184 with the goal of advancing it as our second drug candidate into the clinic in 2021. YTX-9184 is chemically distinct from YTX-7739 and has different properties, but functions by inhibiting the same enzyme, SCD. Pharmacokinetic and pharmacodynamic studies have been completed with YTX-9184, and YTX-9184 exhibits similar dose and exposure dependent effects on the brain and plasma C16 FA-DI across several small and large animal species.

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Our Potential Third and Fourth Programs

We are currently performing lead optimization to identify compounds that inhibit the activity of the enzyme that is now active. PTI-808the target of our potential third program as a potential treatment for ALS and FTLD. The undisclosed target in our potential third program is implicated in the rescue of toxicity created by a gene linked to ALS and FTLD. Our potential fourth program is currently in the hit-to-lead stage of identifying small molecule inhibitors for its target enzyme. Inhibition of this target has completed investigationbeen correlated with prevention of neurodegeneration associated with alterations in 48a gene, which has been correlated with increased risk of developing ALS. Both of these potential programs are being progressed through a research collaboration with Merck, and Merck will be responsible for IND-enabling toxicology and safety pharmacology studies, as well as subsequent clinical development and commercialization.

ALS and FTLD Disease Overview

ALS, also referred to as Lou Gehrig’s disease, is a neurodegenerative disease that affects nerve cells in the brain and the spinal cord. In healthy volunteersindividuals, upper motor neurons in the brain send signals to lower motor neurons in the spinal cord and brainstem, which send signals to muscles, thereby generating body movement. In ALS, both the upper motor neurons and the lower motor neurons degenerate or die, resulting in loss of muscle function with upprogression to 300 mg in singlesevere impairment of mobility, speech, and multiple dose cohorts. PTI-808 was foundcommunication.

Early symptoms of ALS usually include muscle weakness or stiffness, and over time, all muscles under voluntary control are affected. As ALS progresses, individuals lose their strength and the ability to be generally well tolerated.  One subject experienced a serious adverse event from a pre-existing conditionspeak, eat and move. Many sufferers lose the muscular ability to maintain breathing, requiring permanent ventilatory support. Individuals with ALS usually retain their ability to perform higher mental processes such as reasoning, remembering, understanding, and problem solving, so they are entirely aware of transverse myelitis. This serious adverse event was considered unlikelytheir progressive loss of muscle function. Continued deterioration of muscle control leads to be relatedrespiratory failure and death, with an average survival time of three years. About 20 percent of people with ALS live five years, 10 percent will survive 10 years and 5 percent will live 20 years or longer.

According to the study drug. No adverse events leading to discontinuationALS Association, in 2016, between 14,000 and 15,000 Americans had ALS. ALS is most commonly diagnosed between the ages of treatment were reported.  All other adverse events that have been reported to date were55 and 75, and only ten percent of mildpeople with ALS will survive for ten years or moderate severity. Preliminary PK assessmentmore. Medical and non-medical costs of PTI-808 suggests that it could potentially be suitable for once daily dosing.

Co-administration of PTI-428, PTI-808ALS, including lost income, range between $256 million and PTI-801 has been completed in 20 healthy volunteer subjects.  Safety and PK profiles achieved with seven days of once-a-day oral dosing of PTI-428, PTI-801 and PTI-808 indicated these compounds were generally well-tolerated and could potentially be amenable for once a day dosing. No SAEs or AEs leading to discontinuation of treatment were reported.  The PK data demonstrated a lack of clinically meaningful drug-drug interactions.  

Combination study protocols for trials in CF patients have been reviewed by key patient advocacy and regulatory authorities$433 million each year in the United States, with annual costs from ALS exceeding $60,000 per patient.

FTLD is an umbrella term for a group of related syndromes and Europe. In January of 2018, we announcedprocesses, often also called frontotemporal lobar dementia, frontotemporal degeneration or dementia or Pick’s disease, that our triple combination clinical study protocol received endorsementimpacts the frontal and a high strategic fit score from the Therapeutics Development Network (TDN) and the Clinical Trial Network (CTN). Our double combination protocol has also received the endorsementtemporal lobes of the TDN. The TDNbrain. Formally, the process of frontotemporal degeneration results in the condition of frontotemporal dementia. Disease processes cause the degeneration of neurons and CTN are the drug development armsshrinking of the Cystic Fibrosis Foundation (CFF)frontal and temporal brain regions, which causes progressive alterations in personality, behavior, and language. There are different types of FTLD, which manifest as a frontal or behavioral variant affecting behavior and personality, or as a primary progressive aphasia variant, which results in difficulty communicating due to loss of speech and inability to use and understand language. FTLD patients often exhibit aggressive and compulsive behaviors and have various changes in sexual behaviors.

It is believed that the European CF Society (ECFS), respectively.

In 2018, we aim to (1) produce additional data from our 14-day studyprevalence of PTI-801 in CF patients on background Orkambi in the first half, (2) continue dosing CF patients in a double combination trial consisting of


PTI-801 and PTI-808, and produce initial data by mid-year, (3) initiate a triple combination of our proprietary agents PTI-428, PTI-801 and PTI-808 in CF patients in the first half, and produce preliminary data in the second half and (4) initiate a clinical study with PTI-428 in patients on background Symdeko in the second half with initial data in early 2019.

We have exclusive worldwide commercial rights to PTI-428, PTI-801 and PTI-808, as well as our proprietary combinations. We plan to pursue regulatory approval for add-on therapies based on PTI-428 and/or PTI-801 in regions where ivacaftor and lumacaftor (and ivacaftor and tezacaftor, as applicable) are commercially available. Given the well-characterized and clearly identified patient populations with CFFTLD in the United States Canada, Europeis around 60,000 cases. There is a wide range of onset, from 21 to 80 years of age, with most cases occurring between 45 and Australia,64 years of age. Given the younger age of onset as compared to Alzheimer’s disease, FTLD has been cited as the most common form of dementia in people under 60. Annual medical and nonmedical costs of FTLD are estimated at approximately $120,000 per patient, indicating a societal disease impact in the United States alone of over $7 billion annually.

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

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Limitations of Current Therapies

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

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

Our Solution

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

Competition

The biotechnology and pharmaceutical industries, including in the neurodegenerative disease field, are highly competitive and subject to rapid and significant technological change. While we plan to independently commercialize PTI-428 and/or PTI-801believe that its discovery engine platform and its employees and consultants, scientific knowledge and development experience provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical, and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions. Several of these entities have commercial products, robust drug pipelines, readily available capital, and established research and development organizations. Many of our competitors may have significantly greater financial resources and expertise in those regions. Our commercialization strategy will target key prescribing physiciansresearch and advocacy groups,development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology, and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as provide patientsin acquiring technologies complementary to, or necessary for, our programs. Small or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with support programs, ensurelarge and established companies. The key competitive factors affecting the success of our product accesscandidates, if approved, are likely to be their efficacy, safety, convenience, price, the level of branded and secure reimbursement.generic competition, and the availability of reimbursement from government and other third-party payors.

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

Parkinson’s disease: Currently available therapies for Parkinson’s disease include Levodopa, D2/D3-preferring agonists, monoamine oxidase B inhibitors as monotherapy or in combination, anticholinergics as well as deep brain stimulation devices by Medtronic Inc. and St. Jude Medical Inc., among others. We are also aware of several large and specialty pharmaceutical and biotechnology companies developing potentially disease modifying therapeutics for Parkinson’s disease, including

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Denali, Prothena, Roche (in partnership with Prothena), Novartis, AbbVie (in partnership with BioArctic AB), Voyager Therapeutics, Prevail Therapeutics, Sage Therapeutics, Neurocrine Biosciences, Eli Lilly, Biogen (in partnership with Ionis and Neurimmune), AstraZeneca, Takeda, IRLAB Therapeutics, Avanir Pharmaceuticals, and Lundbeck, that are in various stages of clinical development.

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

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

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

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

Collaboration Agreement with Merck

In additionJune 2020, we entered into an exclusive license and research collaboration agreement, or the Merck Collaboration Agreement, with Merck to our wholly owned CF programs, we have partnered with a major pharmaceutical company, Astellas Pharma Inc., or Astellas, on our unfolded protein response, or UPR, program. The UPR program is intended to reducesupport the accumulationresearch, development and commercialization of unfolded proteins in the endoplasmic reticulum, or ER, which is observed in many diseases caused by an imbalance in the proteostasis network and characterized by defects in protein folding, trafficking and clearance, including genetic, neurodegenerative and retinal degenerative diseases. In August 2016, we announced the achievement of a preclinical milestone by demonstrating that selective modulation of the UPR pathway is an effective disease-modifying approach inproducts for the treatment of multiple diseasesALS and FTLD.

Pursuant to the Merck Collaboration Agreement, we granted Merck an exclusive, worldwide license with fewthe right to grant and authorize sublicenses, under certain intellectual property rights related to two certain undisclosed targets in connection with our ALS and FTLD programs to make, have made, use, import, offer to sell and sell compounds and products covered by such intellectual property rights. In the event that the exploitation of such compound or no therapies currently available.product would infringe during the term of the Merck Collaboration Agreement a claim of an issued patent controlled by us, we also granted Merck a non-exclusive, sublicensable, royalty-free license under such issued patent to exploit such compound and product.

StrategyUnder the terms of the Merck Collaboration Agreement, we and Merck are each responsible to perform certain research activities in accordance with a mutually agreed upon research plan. Upon the completion of certain stages of the research plan, Merck will elect to either advance or terminate the applicable research program.

Our mission

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Following completion of the research program, Merck is responsible for the development and commercialization of the compounds developed pursuant to improve the livesresearch program and any product containing such compounds.

As consideration for the licenses granted to Merck under the Merck Collaboration Agreement, Merck paid us a one-time upfront payment and also purchased Class C preferred units of patients who suffer from rare diseases for which thereHoldings. Under the terms of the Merck Collaboration Agreement, we are limited or no available treatments, with an initial therapeutic focus on CF. To accomplish our objectives, we intend to:

Develop our own proprietary combination product candidates, including a triple combination (PTI-428, PTI-801, PTI-808) and a double combination (PTI-801 and PTI-808), to address a broad spectrum of CFTR gene mutations.

We have identified novel correctorseligible to receive up to $280 million upon achievement of specified research and potentiators that, when combined with an amplifier, have restored in vitro CFTR protein activitydevelopment milestones, and up to approximately 100%$250 million upon achievement of normal in cells homozygous for F508del. We have nominated PTI-801, a corrector molecule, and PTI-808, a potentiator molecule, as drug development candidates that, when combined with PTI-428, are active components of our triple combination. All three compounds have active INDs under FDA and we have completed co-administration of our triple combination consisting of PTI-428, PTI-801 and PTI-808 in healthy volunteers. Additionally, PTI-428 has completed a Phase 1 study in healthy volunteers and CF patients,specified sales-based milestones as well as a Phase 2 studytiered, mid-single digit royalty on net sales of licensed products, subject to customary reductions. Merck’s royalty obligations for each licensed product continue on a country-by-country basis until the later of (i) the last-to-expire valid claim of the patent rights in CF patients stablesuch country or (ii) the tenth anniversary of the first commercial sale of such product in such country.

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

License Agreement with Whitehead Institute

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

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

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

As consideration for the licenses granted to us under the Whitehead License Agreement, we paid an initial license fee and reimbursed the Whitehead Institute for certain expenses incurred in connection with the patent rights. Holdings also issued 3,000 common units (which, following a 100:1 unit split, represented 300,000 units) to the Whitehead Institute and certain persons and entities as directed by the Whitehead Institute in satisfaction of the Whitehead Institute’s policy on Orkambi. Phase 1 studies in healthy volunteersequity sharing.] Under the terms of the Whitehead License Agreement, we

23


are also required to pay an annual license maintenance fee which is creditable against royalties on net sales earned during the same calendar year. In addition, we are obligated to make payments to the Whitehead Institute upon achievement of certain milestones, the amount of which depends on the licensed product and indication, with up to an aggregate of $1.9 million for each of the first two licensed products for the first indication and less for subsequent licensed products and additional indications. We are also required to pay the Whitehead Institute a low single digit royalty percentage of net sales of licensed products and a low single digit royalty on net sales of products determined to have been completed for PTI-801 and PTI-808 and exploration of PTI-801 in CF patients on background Orkambi are underway.

o

Triple Combination.  We believe that the treatment paradigm in CF for the vast majority of patients could be based on combination therapies of CFTR modulators anchoredbiological activity or utility by PTI-428. Subject to positive results from our PTI-801 program, we aim to initiate dosing of our triple combination in CF patients in the first half of 2018 with preliminary data expected in the second half of 2018. More specifically, we expect that the PTI-808 study will explore ascending doses of PTI-808 in CF patients homozygous for F508del not taking Orkambi or Symdeko and who are also receiving PTI-428 and PTI-801.  The TDN and CTN have endorsed the protocol for our triple combination and have assigned it a high strategic fit score.

o

Double Combination.  In addition, we have commenced dosing CF patients for a double combination study consisting of PTI-801 and PTI-808, and plan to produce initial data by mid-year 2018.  In vitro data in patient cells showed that the combination of PTI-801 and PTI-808 restored CFTR protein activity to levels beyond those observed in cells from healthy carriers. The TDN has endorsed the protocol for our double combination.


Rapidly advance clinical development of PTI-801 and PTI-428 as potential add-on therapies to existing and possible future standard of care CFTR modulator therapies by conducting additional studies to support a registrational path as add-on options.

In vitro data showed that our proprietary amplifier PTI-428 and our corrector PTI-801 synergize with currently available CFTR modulator combinations ivacaftor/lumacaftor and ivacaftor/tezacaftor, approved as Orkambi and Symdeko, respectively, suggesting that they may provide additional therapeutic benefit in CF subjects who take the approved products as their standard of care.

o

PTI-801 as Add-on.  In the first quarter of 2017, we filed an IND for our proprietary corrector, PTI-801, which is now active. In March 2017, we received Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. We completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801, and reported initial data on this portion of the study in 2017.  In December of 2017, we shared initial data from a preliminary ad hoc analysis of the first five subjects (four PTI-801 treated and 1 placebo) of the first dose level tested in the 14-day dosing study of PTI-801 in CF patients on background Orkambi® therapy.  All four subjects who received once-a-day 100 mg of PTI-801 completed two weeks of dosing. The pharmacokinetic (PK) profile observed from these four subjects was consistent with the PK profile observed for healthy volunteers. These initial data also showed no clinically meaningful drug-drug interactions with either lumacaftor or ivacaftor.  There were no serious adverse safety events reported that were considered as possibly drug related.  Mean absolute improvements in ppFEV1 of approximately 4 percentage points from baseline, with mean relative improvements of approximately 7 percent, were observed in the four PTI-801 subjects who completed two weeks of dosing.

o

PTI-428 as Add-on.  We have shown that PTI-428, combined with ivacaftor and either lumacaftor or tezacaftor, nearly doubles in vitro CFTR protein activity in cells homozygous for F508del compared to a combination of only ivacaftor and either lumacaftor or tezacaftor. We completed the Phase 1 trial in healthy volunteers which included SAD and MAD cohorts to assess the safety, pharmacokinetic and exploratory biomarker results. In December of 2017, we announced the completion of a Phase 2 study designed to evaluate the efficacy, safety, and tolerability of 50 mg once-a-day PTI-428 over a 28-day treatment period with CF patients on background Orkambi® (lumacaftor/ivacaftor) and we plan to initiate a clinical study with PTI-428 in subjects on background Symdeko in the second half of this year. In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi® as background therapy. Also in March 2018, the FDA granted Orphan Drug designation for PTI-428.

The addition of PTI-428 to Orkambi® demonstrated mean absolute improvements in ppFEV1 of 5.2 percentage points from baseline compared to placebo (p≤0.05), with mean relative improvements of 9.2 percent (p≤0.05). This treatment effect was achieved by day 14 and sustained through 28 days of dosing. In the 28-day study, PTI-428 was generally well tolerated and lacked clinically meaningful drug-drug interactions with ivacaftor and lumacaftor. Fourteen of 20 subjects receiving PTI-428 and two of four subjects receiving placebo experienced at least one treatment emergent adverse event. There were no serious adverse events and there were 2 adverse events that led to study discontinuation. Both cases were thrombocytopenia of mild grade and comparable magnitude and value. One occurred while a subject was on Orkambi® only and one in a subject receiving PTI-428 with both subjects resolving spontaneously. We plan to generate additional evidence supporting the use of PTI-428a licensed product or process, or Identified Products. Additionally, we are required to pay a mid single to low double digit percentage of certain income received from sublicensees and certain partners. Our royalty obligation continues on a licensed product-by-licensed product and country-by-country basis for so long as the manufacture, use or sale of such licensed product in combinationsuch country infringes a valid claim of the patent rights or, with other CFTR modulatorsrespect to each Identified Product, for ten years after the first sale for consumption by an end user patient of such Identified Product.

Unless terminated earlier, the Whitehead License Agreement will expire upon the expiration or abandonment of all issued patents and broadenfiled patent applications within the patient population beyondlicensed patent rights, which is currently projected to occur in 2035. The Whitehead Institute may terminate the initially targeted F508del homozygous subjects. BasedWhitehead License Agreement upon notice to us if we cease to carry on preclinical studiesour business related to date, PTI-428,the Whitehead License Agreement, if we fail to make required payments within a certain period time or if we commit a material breach and fail to cure such breach within a certain period of time. The Whitehead Institute may also terminate the Whitehead License Agreement and/or the licenses granted to us if we bring or assist others in combination with other CFTR modulators, has shownbringing a consistent positive effect on in vitro CFTR protein activity across multiple CFTR gene mutation classes.patent challenge against the Whitehead Institute. We may terminate the Whitehead License Agreement for any reason upon certain notice to the Whitehead Institute.


Generate highly selective drug candidates in CF and other diseases caused by dysfunctional protein processing by leveraging our knowledge of small molecules that could help restore protein function and of the proteostasis network. We are focused on developing drugs based on our unique and comprehensive expertise regarding agents that could help restore protein function, the proteostasis network and its role in protein biosynthesis, folding, trafficking and clearance. We believe that this expertise will enable us to identify and develop drug candidates that are transformative for diseases caused by dysfunctional protein processing. In CF, we are exploiting the mechanism of action of PTI-428 which enhances the yield of HTS of small molecule libraries and has enabled the identification of several novel proprietary CFTR modulators. We plan to continue to run HTS campaigns to continue to discover novel drug candidates for diseases caused by dysfunctional protein processing, including diseases where amplifiers can have a clinically meaningful impact.

Enter into additional collaborative partnershipsIntellectual Property

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

As of February 28, 2021, our patent portfolio as it pertains to certain of its product candidates included:

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

Our Second Program – YTX-9184:three pending U.S. non-provisional patent applications, one pending international patent (PCT) application, and nineteen pending patent applications outside the U.S., which, if pursued and granted in the U.S., would be expected to expire in 2037-2040, without taking a potential patent term adjustment or extension into account, with composition of matter claims directed to YTX-9184 and method claims directed to the treatment of neurological disorders, for example SCD-associated disorders, or inhibiting toxicity in a cell relating to a protein;

Our Potential Third Program: seven pending U.S. provisional patent applications, which, if pursued and granted in the U.S., would be expected to expire in 2041, without taking a potential

24


patent term adjustment or extension into account, with composition of matter and claims directed to compounds and method claims directed to the treatment of neurological disorders using inhibitors of our undisclosed target.

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

In addition, we have in-licensed an estate of patents and patent applications relating to our discovery engine from the Whitehead Institute which is directed to compositions and methods for identifying novel disease-modifying therapies for neurodegenerative diseases such as Alzheimer’s disease, Parkinson’s disease and ALS. For example, this estate includes granted and pending claims to a number of yeast models of protein misfolding and methods of use thereof. As of February 28, 2021, this estate includes twenty-two granted U.S. patents, projected to expire between 2022-2035; three pending U.S. patent applications, which if granted in the U.S., would be expected to expire between 2034-2038, without taking a potential patent term adjustment or extension into account; forty-three granted foreign patents, projected to expire between 2022-2035; and eleven pending foreign patent applications, which if granted, would be expected to expire between 2034-2038. We do not control the prosecution and maintenance of all of our key strategic areas.in-licensed patents and patent applications, and our rights to enforce the patents are limited in certain ways. For additional detail regarding the risks associated with our license agreements, see “Risk Factors—Risks Related to Our existing corporate alliance with Astellas provides for future aggregate milestone paymentsIntellectual Property.”

The term of up to approximately $400 million. We plan to enter into other arrangements that leverage our expertise. Partnership opportunities will be screened and evaluatedindividual patents may vary based on their potential to generate additional value by giving us a stakethe countries in the resulting products’ future revenues and to maximize the value of our assets and screening techniques to discover novel drug candidateswhich they are obtained. Generally, patents issued for use in additional disease indications.

Industry Overview—Cystic Fibrosis

CF is an orphan disease that affects an estimated 70,000 to 100,000 diagnosed patients worldwide, with the vast majority of individualsapplications filed in the United States Canada, Europeare effective for 20 years from the earliest effective non-provisional filing date in the absence, for example, of a terminal disclaimer shortening the term of the patent or patent term adjustment increasing the term of the patent. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of FDA regulatory review periods. The restoration period cannot be longer than five years and Australia. CF is the most common fatal inherited disease in Caucasians.total patent term, including the restoration period, must not exceed 14 years following FDA approval. The incidenceduration of CF varies across the globe. CF affects one outpatents outside of 3,500 births in the United States one outvaries in accordance with provisions of 2,000 to 3,000 in Europe, and one out of 2,500 in Australia.

There is presently no cure for CF. It is a progressive disease caused by a deficiency in CFTR protein activity, resulting in the accumulation of thick mucus in vital organs, particularly the lungs, pancreas and gastrointestinal tract. As a result, CF patients experience, among many other conditions, respiratory infections, chronic lung inflammation, poor absorption of nutrients and, in most cases, progressive respiratory failure. Although the life expectancy of CF patients has improved, the median age of death in the United States in 2016 was only 30 years, with a vast majority of such deaths resulting from respiratory failure.

CF patients require lifelong treatment with multiple daily medications, hours of self-care, frequent hospitalizations and lung transplants, which if available, are life-extendingapplicable local law, but not curative.

Kalydeco, Orkambi and Symdeko, products that contain CFTR modulators, are the only products currently approved to treat the underlying cause of the disease and are available to eligible CF patients in the United States, and certain other territories where they have received marketing and reimbursement approvals. The three products combined address genotypes present in approximately half of all CF patients, leaving a substantial portion of the global CF patient population without access to disease targeting therapies either due to label exclusion or lack of market access.

In 2017, worldwide sales of Orkambi and Kalydeco were approximately $2.2 billion with analysts currently forecasting the cumulative sales of the two drugs to surpass $4 billion by 2020.

Patient advocacy and charitable not-for-profit organizations play an important role in raising disease awareness and advancing research and development of new therapeutic options.  In the United States, the Cystic Fibrosis Foundation, or CFF, a not-for-profit organization with $3.9 billion in cash, cash equivalents and investments (as of December 31, 2016), contributes to clinical development by funding basic research and clinical trials, and granting awards for development of new drug candidates, thereby playing an important role in shaping the drug development landscape.


Cause and Pathophysiology

CF is caused by mutations in the gene that encodes CFTR protein, which plays a critical role in regulating the viscosity of the mucus layer that lines human organs. CFTR protein forms an ion channel that regulates the flow of ions in and out of the cells of vital organs such as the lungs, pancreas and gastrointestinal tract. We refer to this as ion flow. When CFTR protein expels the ions, osmosis draws water out of the cell and hydrates the cell surface. Through regulation of the location of the ions across the cell membrane, the amount of salts in the fluid both inside and outside the cell remains balanced.

In CF patients, the CFTR gene is defective, and as a result, CF patients lack the functional CFTR protein ion channel necessary to regulate ion flow. Altered ion concentration gradient between the inside and the outside of the cell reduces the amount of water molecules outside the cell, causing the accumulation of thick mucus on the epithelial surface as shown in Figure 1.

Figure 1: Ion Flow in Normal CFTR Protein Compared to Mutant CFTR Protein

The deficiency in CFTR protein activity in CF patients is particularly problematic in the lungs, where the build-up of thick mucus obstructs air flow and impairs proper immune response, which leads to chronic infection and persistent inflammation. In the pancreas and the gastrointestinal tract, the build-up of mucus prevents the release of digestive enzymes that help the body break down food and impairs the absorption of nutrients, resulting in poor growth and development.

Classes of CFTR Gene Mutations

CF is an autosomal, recessive genetic disease caused by mutations in the CFTR gene. A person must have a mutation in both copies of the CFTR gene to be afflicted. If both mutations are the same, the person has a homozygous mutation. If the mutations on both copies of the genes are different from one another, the person has a heterozygous mutation. If someone has a mutation in only one copy of the CFTR gene and the other copy is normal, he or she is a carrier but will not suffer from CF.

The vast majority of CF patients whose gene mutations have been identified have gene mutations that can be classified into five classes according to the biological process they affect: “Stop Codon,” “Processing,” “Gating,” “Conductance,” and “Synthesis.”


Table 1: Overview of CFTR Gene Mutation Classes

 

 

 

 

 

 

Class

I

Stop Codon
Mutation

II

Processing
Mutation

III

Gating
Mutation

IV

Conductance
Mutation

V

Synthesis
Mutation

Defect

Protein translation prematurely stopped

Misfolded protein fails to reach surface

Regulation
of ion flow
is abnormal

Faulty channel conductance slows ion flow

Less CFTR protein is made

Example Mutation

G542X

F508del

G551D

R117H

3849+10kbC->T

Prevalence in the United States and Canada*

12%

87%

5%

5%

5%

CFTR Modulators with POC**

Read Through Compound

Corrector and

Potentiator

Potentiator

Potentiator

Potentiator

Our Approach

*

The sum of the percentages in all classes exceeds 100% because individual CF patients might carry more than one mutation.

**

“POC”, or proof of concept, means demonstrated statistically significant clinical benefit in a controlled clinical trial.

Although F508del is the most common CFTR gene mutation, the frequency of its occurrence in CF patients can vary from region to region. For example, Table 2 summarizes the prevalence of F508del in CF patients in the regions where CF is most common.

Table 2: Summary of Largest CF Patient Populations by Region

 

 

Number of Patients in

National CF Registries

 

 

% of Patients

Homozygous for F508del

 

 

% of Patients

Heterozygous for F508del

 

United States

 

 

28,000

 

 

 

47

%

 

 

39

%

Canada

 

 

4,100

 

 

 

49

%

 

 

38

%

Europe (32 countries)

 

 

40,000

 

 

 

44

%

 

 

38

%

Australia

 

 

3,000

 

 

 

52

%

 

 

33

%

Epidemiological forecasts predict that the total number of CF patients will grow significantly in the near term due to improvements in the standard of care, which has improved life expectancy. It is anticipated that the European CF population will grow by approximately 40% by 2025, reaching over 57,000 patients. The improvements in life expectancy in the United States and Canada suggest similar trends in CF population growth will likely occur in those territories.


Current Standard of Care

There presently is no cure for CF. Kalydeco, Orkambi and Symdeko are the only products currently approved to treat the underlying cause of CF. Kalydeco is a potentiator believed to increase CFTR protein activity by keeping the ion channel of the CFTR protein open for longer periods of time. However, Kalydeco is presently approved only for the treatment of CF patients with Gating mutations and R117H Conductance mutations, which impact less than 10% of the CF patient population in the United States and Canada. Although other potentiators may be developed, it is expected that potentiators, when used alone as a monotherapy, would likely address only Gating, Conductance and some Synthesis mutations, impacting only approximately 15% of all CF patients in those regions. Orkambi and Symdeko include correctors believed to improve protein folding and trafficking to enable abnormally folded protein to achieve some level of activity without repairing the actual protein, which works together with the same potentiator in Kalydeco, to enhance overall CFTR protein activity. However, both products are only approved for the treatment of CF patients who are homozygous for F508del, a genotype that represents approximately 45% of the CF patient population in the United States and Europe, although Symdekotypically is also approved for 22 specific additional mutations.

The current standard of care for all other CF patients remains20 years from the management of the disease symptoms. The thick mucus that builds up in the lungs, the pancreas and gastrointestinal tract leads to airway obstruction and difficulty absorbing nutrients, resulting in poor growth and development. CF patients take numerous prescribed and over-the-counter medications to alleviate symptoms and reduce complications. Primary treatment options include inhaled therapies, which thin the mucus in the lungs, as well as pancreatic enzyme replacement therapy, which improves absorption of nutrients. In addition, because thick mucus in the lungs impairs CF patients’ immune response, they also often develop chronic bacterial lung infections that require treatment with inhaled antibiotics.

Pipeline Approaches to Improving Standard of Care

The current CF drug development pipeline includes several therapeutic approaches aimed at either restoration of CFTR activity or improved symptoms management. One of the most promising approaches includes combinations of complementary CFTR modulators which tackle specific steps in the lifecycle of the mutated protein. The approvals of Orkambi and Symdeko validate the rationale for the combination of CFTR modulators, a corrector and a potentiator.  Two companies are exploring the therapeutic potential of triple combinations that involve co-administration of one potentiator and two correctors with most advanced studies currently in Phase 3. We believe that disease modifying therapies in CF will shift towards a triple combination approach which will become the new standard of care.  earliest effective non-provisional filing date.

In addition to drug candidates targeting CFTR protein several other companies are pursuing different cellular targetspatents and patent applications that might have a beneficial effectwe own and license, we rely on CF related symptoms. Recently, several companiestrade secrets and academic groups have begun to explore the application of early gene editing technologies, such as CRISPR-Cas9, to CF; if successful, these techniques could potentially address the underlying gene mutation defect. However, these technologies are in their infancy and are expected to take many yearsknow-how to develop and evaluate.maintain its competitive position. However, trade secrets can be difficult to protect. We seeks to protect our proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors, and commercial partners.

CorrelationOur future commercial success depends, in part, on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business; defend and enforce our patents; preserve the confidentiality of CFTR Protein Activityour trade secrets; and operate without infringing valid enforceable patents and proprietary rights of third parties. Our ability to Clinical Benefit

FEV1: Clinical Measurement of Lung Function

Because CF causes significant loss of lung function,stop third parties from making, using, selling, offering to sell, or importing its products may depend on the severity of CF progression is often measured by FEV1 (forced expiratory volume in one second),extent to which is expressed as a percentagewe have rights under valid and enforceable patents or trade secrets that cover these activities. With respect to our intellectual property, we cannot be sure that patents will issue from any of the maximum volume of airpending patent applications to which we own or that a healthy individual of the same height, sex and race could forcefully exhale from the lungs in one second. FEV1 is considered to be the industry-standard efficacy endpoint in clinical trials of CF product candidates. Rate of decline in FEV1 has been demonstrated to correlate with life expectancy and to be the strongest clinical predictor of mortality.


The decline in lung function is progressive and occurs throughout the life of a CF patient andwe may file in the vast majority of cases, leads to respiratory failure and death. The severity of lung disease is categorized as mild (FEV1 >70%), moderate (40%< FEV1<69%) or severe (FEV1<40%). The ultimate goal of CF therapy is to halt and reverse the decline of lung functionfuture, nor can we be sure that any patents that may be issued in the hopefuture to us will be commercially useful in protecting our product candidates and methods of extendingusing or manufacturing the life expectancysame. Moreover, we may be unable to obtain patent protection for certain aspects of patients, eliminating the need for lung transplants, and reclassifying the disease from a lethal to a chronic condition.

Sweat Chloride: Measurement of CFTR Activity

Cystic fibrosis is a ‘whole body' disease with many clinical manifestations. Reduced CFTR function causes a defect in the sweat ducts of CF patients which leads their sweat to contain higher concentration of chloride. The sweat test, which measures the amount of chloride in the sweat, is considered the gold standard for diagnosing CF.

It is believed that sweat chloride can predict clinical outcomes at the population level, supporting its role as a key outcome measure for clinical trials.

Analysis of published clinical data with Kalydeco, a CFTR potentiator, found that short-term changes in the sweat chloride concentration in CF patients show a high likelihood for longer-term improvement in pulmonary function and weight gain.  

Ussing Chamber Assay: In vitro Measurement of CFTR Protein Activity

CFTR modulators are typically evaluated by measuring CFTR protein activity in vitro using the Ussing Chamber Assay. In this assay, HBE cells derived from the lungs of CF patients are cultured in a manner to resemble the lung epithelium and then placed in the Ussing Chamber between two compartments filled with media, one containing ions that can only flow to the other compartment through the epithelium. The CFTR protein activity is measured by recording the electrical current generated by ions flowing across the cultured epithelium. CFTR protein activity is expressed as a percentage of the measured current relative to the current generated by ion flow in HBE cells with normal CFTR protein activity.


Strong Correlation between CFTR Protein Activity and Lung Function

Our analyses of published data on Vertex’s CFTR modulators (the potentiator ivacaftor and correctors lumacaftor and tezacaftor) show a strong correlation between the in vitro CFTR protein activity as measured by the Ussing Chamber Assay and lung function improvement measured by FEV1 improvement in clinical trials of these CF product candidates. Importantly, as shown in Figure 2, in vitro CFTR protein activity of these modulators at 50% of normal correlates with an absolute improvement of approximately 10% in FEV1 as seen in clinical trials.

Figure 2: CFTR Protein Activity is Highly Correlated with Observed Clinical Efficacy

Strong Correlation between CFTR Protein Activity and Sweat Chloride

The analysis of published data on CFTR modulators (the potentiators ivacaftor and GLPG1837; and the correctors lumacaftor and tezacaftor) suggest a strong correlation between the in vitro CFTR protein activity as measured by the Ussing Chamber Assay and reductions in sweat chloride concentration of treated CF patients. We believe the analysis supports the predictive value of in vitro CFTR protein activity with sweat chloride reductions seen in clinical trials observed with approved CFTR modulators.


Our Solution

We are developing and, if approved, intend to commercialize proprietary combination therapies for CF patients carrying at least one F508del allele, which may consist of a double and/or a triple combination.  Our current pipeline includes a double comprised of PTI-801, a corrector, and PTI-808, a potentiator, and a triple combination of PTI-428, an amplifier, together with PTI-801 and PTI-808. The three classes of CFTR modulators have pharmacological characteristics and a mechanism of action that is synergistic and act in different cellular compartments as shown in Figure 3. Amplifiers, a novel class of CFTR modulators, have been shown in in vitro studies to selectively increase the amount of the newly synthesized and unfolded form of CFTR protein in the cell, thereby providing additional substrate for other CFTR modulators, such as correctors and potentiators, to act upon, leading to improved overall CFTR protein activity. The combined effect of amplifiers and marketed or investigational correctors and potentiators further increases the CFTR protein activity, which, as described above, is predicted to correlate with improved clinical outcomes in CF.

Figure 3: CFTR Modulators

Our approach to building a comprehensive franchise of CFTR modulators has leveraged amplifiers as a screening tool for discovering novel CFTR modulators such as potentiators, correctors and read through agents. We plan to continue drug discovery and development programs and broaden our CF pipeline with additional CFTR modulators that have the potential for combined use and full restoration of CFTR activity in various genotypes.

Our Product Candidates

By combining our understanding of protein homeostasis with our discovery and development expertise, we have built a robust pipeline of programs targeting the key mechanisms underlying CF and other rare diseases.

CFTR modulators are compounds that affect the folding, trafficking and clearance of CFTR protein and can be classified according to ways in which they affect CFTR protein. Despite the approval of Kalydeco, a potentiator, and Orkambi and Symdeko, each a combination of a potentiator and corrector, we believe there is still significant potential for improvement in clinical outcomes beyond existing treatments and therapies presently in clinical development for the treatment of CF. We have identified a novel class of CFTR modulators, amplifiers, that we believe are synergistic with Orkambi and Symdeko and could potentially enhance their ability to improve CFTR function. We have subsequently identified proprietary correctors and potentiators that are complementary to our amplifiers and designed to work synergistically to restore CFTR function to approximately normal levels.


Our product candidate PTI-428, an orally bioavailable amplifier, is a novel, first-in-class drug candidate that, when used in combination with existing treatments and therapies presently in clinical development, has shown a consistent positive effect on CFTR protein activity in vitro. We have identified novel correctors and potentiators that, when combined with an amplifier, have restored in vitro CFTR protein activity to approximately 100% of normal in cells homozygous for F508del.  PTI-428 has completed Phase 1 and 2 studies in the United States in healthy volunteers and CF subjects.

PTI-801, our lead corrector agent, and PTI-808, our lead potentiator agent, are drug development candidates in clinical development as a double combination and, when combined with PTI-428, are active components of our triple combination. We intend to initiate a triple combination study during 2018. We submitted an IND for PTI-801, a corrector molecule, to the FDA in the first quarter of 2017, which is now active, and are in clinical development to study PTI-801 as an add-on to CF patients on background Orkambi. We also submitted an IND for PTI-808, during the second quarter of 2017, which is now active. We have completed a Phase 1 study in healthy volunteers of both PTI-808 and a co-administration of our triple combination agents. We believe that the treatment paradigm in CF for the majority of patients could be based on combination therapies of CFTR modulators as a double combination of our proprietary corrector PTI-801 and potentiator PTI-808 and/or as a triple combination anchored by PTI-428.  We also believe that our PTI-801 corrector and PTI-428 amplifier candidates have the potential to be add-on therapies to existing and possible future standard of care CFTR modulator therapies Orkambi and Symdeko.

Our studies show that amplifiers selectively increase the amount of the newly synthesized, unfolded form of CFTR protein in the cell, thus increasing the amount of CFTR protein available for trafficking. When combined with ivacaftor and either lumacaftor or tezacaftor, PTI-428 nearly doubles the in vitro CFTR protein activity in cells homozygous for F508del in our Ussing Chamber Assays compared to a combination of only ivacaftor and lumacaftor.

Our CF product pipeline is described in more detail in Figure 4.

Figure 4: Our CF Product Pipeline

We have identified novel correctors and potentiators that, when combined with an amplifier, have restored in vitro CFTR protein activity to approximately 100% of normal in cells homozygous for F508del. PTI-801 and PTI-808 are drug development candidates which, when combined with PTI-428, are active components of our triple combination.


We believe that combinations of our own CFTR modulators in double or triple combination, and PTI-428 and PTI-801 as single agents as add-ons to current and future standard of care CFTR modulator therapies, have the potential to address a significant portion of underserved patients. We have shown that PTI-428, when used in combination with ivacaftor and either lumacaftor or tezacaftor, nearly doubles in vitro CFTR protein activity in the Ussing chamber assay compared to treatment without PTI-428.

We have also demonstrated that the combination of one of our proprietary amplifiers, together with a proprietary corrector and a proprietary potentiator, can achieve mechanistic synergy and restore in vitro CFTR protein activity to approximately 100% of normal in patient-derived HBE cells homozygous for F508del. We believe that with these results, our combination therapies have the potential to deliver a more clinically meaningful benefit to a broader set of mutation classes than those addressed by presently approved therapies and those under development.

Combination Therapies

Combination therapy of compounds that act synergistically on CFTR protein biosynthesis, folding, trafficking and conductance has been validated in preclinical models and clinical studies in CF patients. With the approval of CFTR modulators, the CF treatment paradigm is shifting from palliative care to the advancement of disease-modifying modulators that target the underlying cause of the disease which is CFTR protein malfunction. We are taking advantage of the potential ability of PTI-428 to enhance clinical efficacy of potentiators and correctors to develop novel proprietary combinations.

Using our expertise to screen compounds that are complementary with PTI-428, we are designing and developing correctors and potentiators that are optimized to work more synergistically with our proprietary CFTR modulators than third-party CFTR modulators. We are in clinical development with PTI-801, a corrector molecule, and PTI-808, a potentiator molecule, which, when combined with PTI-428, are active components of our triple combination product and we aim to initiate a triple combination study in 2018. We are currently in clinical development with CF patients taking a double combination of PTI-801 and PTI-808.  In addition to having desirable drug-like properties, the molecules have differentiated features. PTI-801 acts in a complimentary and synergistic way with other correctors, such as lumacaftor, suggesting a different mechanism of action. Furthermore, we have seen in vitro that it prevents ivacaftor induced destabilization of F508del CFTR upon chronic exposure.

We have demonstrated that our triple combination of PTI-428 together with PTI-801, our novel corrector, and PTI-808, our novel potentiator, can achieve mechanistic synergy leading to a full restoration of in vitro CFTR protein activity in patient-derived HBE cells homozygous for F508del. Additionally, the combination of PTI-801 and PTI-808 has demonstrated superior in vitro efficacy compared to the combination of lumacaftor and ivacaftor. We anticipate that these findings, described in Figure 5 below, could potentially translate into a more clinically meaningful benefit to a broader set of mutation classes than those addressed by therapies that are presently approved or known to be under development.


Figure 5: Amplifier-Based Triple Combination Restored F508del-CFTR Function to Almost Normal CFTR Function in In Vitro Assays

Mechanism of Action of PTI-428

While the specific molecular target for PTI-428 remains unknown, our in vitro studies show that PTI-428 has a unique effect on in vitro CFTR protein activity. PTI-428 has been observed to selectively increase the amount of the newly synthesized and unfolded form of CFTR protein in the patient-derived HBE cells.

As shown in Figure 6, during the translation process of mRNA into protein, the signal recognition particle, or SRP, binds to a special portion of the emerging chain of amino acids, called the signal sequence, and shuttles the entire mRNA-ribosome complex to the ER surface, where the emerging chain of amino acids can be properly folded into the protein. Increased SRP recognition of the signal sequence facilitates protein synthesis and, by blocking RNA degradation processes, stabilizes mRNA. Because our in vitro studies show that PTI-428 increases both the CFTR mRNA and the amount of the newly synthesized and unfolded form of the CFTR protein, we believe that PTI-428 improves the translation of CFTR protein at the ER membrane, resulting in more of the newly synthesized and unfolded form of CFTR protein being made. By providing more CFTR protein, PTI-428 can significantly increase the effect of correctors and potentiators on in vitro CFTR protein activity in HBE cells homozygous and heterozygous for F508del.


Figure 6: PTI-428 Improves the Efficiency of Translation and as a Result Decreases mRNA Decay

Although the mechanism of action is not fully characterized, we have confirmed that PTI-428 does not belong to a known class of potentiators or correctors. Potentiators, such as ivacaftor, are believed to increase CFTR protein activity by keeping the ion channel of the CFTR protein open for longer periods of time. The distinguishing feature of potentiators is the so-called “acute effect” observed in vitro as measured by increased CFTR protein activity immediately upon the addition of the molecule to the cells. However, our in vitro studies show that acute addition of PTI-428 does not immediately affect CFTR protein activity.

Likewise, correctors, such as lumacaftor and tezacaftor, alter the ratio of unfolded to fully folded form of CFTR protein by acting on the protein folding process to increase the amount of the mature form. Our in vitro studies show that PTI-428 does not affect the ratio of the two protein forms, but rather leads to increases in the total amount of both forms of CFTR protein in a dose-dependent fashion.

Accordingly, we believe that PTI-428 represents a new class of CFTR modulator, which we call amplifiers, distinct from correctors and potentiators that target CFTR biosynthesis at the upstream translational level by enhancing successful signal-sequence targeting to the ER membrane. Furthermore, the effect on CFTR mRNA is specific and genotype agnostic. PTI-428 does not appear to increase mRNA levels in vitro for the so-called housekeeping genes that are needed for the normal functioning of the cell. In a surface and total protein expression assay, which measures changes in the abundance of proteins both on the plasma membrane and within the cell, PTI-428 was shown to increase the levels of CFTR, but not PgP, a closely related membrane protein. Additionally, we have confirmed that cells exposed to PTI-428 do not activate stress response pathways that are typically triggered by pathological accumulations of unfolded protein, further suggesting the specificity of this pharmacological class and lack of cellular stress induction.

PTI-428 – In Vitro Studies

An Ussing Chamber Assay study with HBE cells homozygous for F508del was conducted to assess the effects of PTI-428 in combination with ivacaftor and lumacaftor on in vitro CFTR protein activity. HBE cells were incubated with lumacaftor with or without PTI-428 for 24 hours before adding ivacaftor during the measurement of ion flow in the Ussing Chamber Assay. As shown in Figure 7, addition of PTI-428 to a combination of ivacaftor and lumacaftor resulted in an approximately 1.8-fold increase in in vitro CFTR protein activity, as measured by ion flow, compared to the potentiator and corrector combination alone. We then replicated the study with ivacaftor and another corrector, tezacaftor, with similar results as those indicated in Figure 7.


Figure 7: Ion Flow in Patient-Derived HBE Cells with F508del Mutations

Furthermore, similar experiments using HBE cells heterozygous for F508del mutation (G542X/F508del) showed that the addition of PTI-428 to ivacaftor and lumacaftor led to a 1.9-fold increase in ion flow compared to ivacaftor and lumacaftor alone. Similarly, the addition of PTI-428 to ivacaftor in R117H/F508del HBE cells led to a greater than 1.9-fold increase in ion flow compared to ivacaftor alone. In addition, our experiments show that PTI-428 added to ivacaftor demonstrates a 1.6-fold increase in in vitro CFTR protein activity to that observed with ivacaftor in G551D/F508del HBE cells.

Experiments using HBE cells homozygous for a Class I G542X showed that the addition of PTI-428 led to a 2.0-fold increase in ion flow compared to negative control and an additive effect with NB124, a molecule used as a research tool to study nonsense mutations. Similarly, the addition of PTI-428 to HBE cells carrying Class V and II mutations 3849+10kbC->T/N1303K led to a greater than 1.3-fold increase in ion flow compared to negative control and an additive effect with ivacaftor.

Additionally, in experiments using patient-derived HBE cells homozygous for F508del, exposure to PTI-428 led to an increase in CFTR mRNA and higher CFTR protein activity, with both changes in the 1.5 to 2.0-fold range, suggesting a positive correlation and predictive value of CFTR mRNA measurement for the drug’s efficacy.

We are not aware of other compounds presently in development for the treatment of CF that increase the amount of CFTR mRNA or CFTR protein.

Clinical Development Programs

In December 2015, the investigational new drug application, or IND, that we submitted to the U.S. Food and Drug Administration, or FDA, for a Phase 1 clinical trial to evaluate our PTI-428 product candidate became active. We initiated our first Phase 1 clinical trial in CF patients and healthy volunteers in the first half of 2016. The Phase 1 trial in CF patients included single ascending dose, or SAD, and multiple ascending dose, or MAD, cohorts. The Phase 1 trial in healthy volunteers included SAD and MAD cohorts to assess the safety, pharmacokinetic and exploratory biomarker results. We reported preliminary safety, pharmacokinetic and exploratory biomarker data from SAD and MAD cohorts in the PTI-428 Phase 1 clinical trial in CF subjects receiving PTI-428 or placebo for 7 days in addition to Orkambi® as their background, standard of care therapy,generally, as well as a cohort of CF subjects receiving PTI-428 or placebo for 7 days who were not taking CFTR modulator based therapies.


We have completed a 28-day Phase 2 clinical trial for PTI-428 in CF patients randomizedwith respect to receive either PTI-428 or placebo for 28 days in additioncertain indications. See the section titled “Risk Factors—Risks Related to Orkambi® as their background, standard of care therapy to evaluate the efficacy, safety, and tolerability of 50 mg of once-a-day PTI-428. In December of 2017, we announced the results of the study which showed that the addition of PTI-428 to Orkambi® demonstrated mean absolute improvements in ppFEV1 of 5.2 percentage points from baseline compared to placebo (p≤0.05), with mean relative improvements of 9.2 percent (p≤0.05). This treatment effect was achieved by day 14 and sustained through 28 days of dosing.

In CF subjects on Orkambi® therapy, it has been shown in two registrational Phase 3 studies that the magnitude of response to Orkambi varied according to patient lung function at screening suggesting that the overall efficacy captured in these studies was mainly driven by the subgroup with baseline ppFEV1 below 70% (+3.3 percentage points) while the changes in the group with FEV1 ≥70% were not statistically significant. A similar analysis was performed in our 28-day study with PTI-428 and it showed an average +6.6 percentage points (p<0.05) increase in absolute ppFEV1 compared to placebo for patients who had lower baseline ppFEV1 value (<70%). The results of the subgroup analysis are consistent with phase 3 data with Orkambi®, suggesting that PTI-428 potentially amplifies the Orkambi® effect in the responder population.

Additional endpoints in the study included measurement of changes in sweat chloride (secondary endpoint) and CFTR expression in nasal epithelia (exploratory endpoint). In this study, a positive increase in CFTR protein from baseline was observed in PTI-428 treated subjects and the magnitude of change was consistent with the changes in CFTR protein levels observed in an in vitro human bronchial cell (HBE) cell model. In contrast, changes in sweat chloride did not correlate with changes in lung function.

In the 28-day study, PTI-428 was generally well tolerated and lacked clinically meaningful drug-drug interactions with ivacaftor and lumacaftor.   Fourteen of 20 subjects receiving PTI-428 and two of four subjects receiving placebo experienced at least one treatment emergent adverse event. There were no serious adverse events and there were 2 adverse events that led to study discontinuation. Both cases were thrombocytopenia of mild grade and comparable magnitude and value. One occurred while a subject was on Orkambi® only and one in a subject receiving PTI-428 with both subjects resolving spontaneously.

In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi® as background therapy.  The designation was based on the FDA’s review of available clinical evidence, including the observed increase in FEV1 and CFTR protein levels in the 28-day study.  Breakthrough Therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). Also in March 2018, the FDA granted Orphan Drug designation for PTI-428. The FDA grants orphan designation to promote the development of product candidates for rare conditions affecting fewer than 200,000 U.S. patients annually. This designation providesOur Intellectual Property” for a seven-year marketing exclusivity period against competition, as well as certain incentives, including federal grants, tax credits and a waivermore comprehensive description of certain administrative filing fees.

In the second half of 2018, we plan to initiate a clinical study with PTI-428 in CF subjects on background Symdeko therapy with initial data expected early next year.  

Our IND for the Phase 1 study of PTI-801, a corrector molecule, was submitted to the FDA in the first quarter of 2017 and is now active. In March 2017, we received Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. We completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801, and reported initial data on this portion of the study in 2017.

We have initiated a 14-day once-a-day dosing study with PTI-801 in CF subjects on background Orkambi therapy. In December of 2017, we reported initial data from a preliminary ad hoc analysis of the first five subjects (four PTI-801 treated and one placebo) of the first dose level tested.  All four subjects who received once-a-day 100 mg of PTI-801 completed two weeks of dosing. The pharmacokinetic (PK) profile observed from these four subjects was consistent with the PK profile observed for healthy volunteers. These initial data also showed no clinically meaningful drug-drug interactions with either lumacaftor or ivacaftor.  There were no serious adverse safety events reported that were considered as possibly drug related.  Mean absolute improvements in ppFEV1 of approximately 4 percentage points from baseline, with mean relative improvements of approximately 7 percent, were observed in the four PTI-801 subjects who completed two weeks of dosing. This study, designed to investigate the effect of PTI-801 in escalating doses in multiple cohorts, is continuing.


Our IND for the Phase 1 study of PTI-808, a potentiator molecule, was submitted to the FDA in the second quarter of 2017 and is now active. PTI-808 has completed investigation in 48 healthy volunteers with up to 300 mg in single and multiple dose cohorts. PTI-808 was found to be generally well tolerated.  One subject experienced a serious adverse event from a pre-existing condition of transverse myelitis. This serious adverse event was considered unlikely to berisks related to the study drug. No adverse events leading to discontinuation of treatment were reported.  All other adverse events that have been reported to date were of mild or moderate severity. Preliminary PK assessment of PTI-808 suggests that it could potentially be suitable for once daily dosing.

Co-administration of PTI-428, PTI-801 and PTI-808 has been completed in 20 healthy volunteer subjects.  Safety and PK profiles achieved with seven days of once-a-day oral dosing of PTI-428, PTI-801 and PTI-808 indicated these compounds were generally well-tolerated and could potentially be amenable for once a day dosing. No SAEs or AEs leading to discontinuation of treatment were reported.  The PK data demonstrated a lack of clinically meaningful drug-drug interactions.  

Combination study protocols for trials in CF patients have been reviewed by key patient advocacy and regulatory authorities in US and Europe. In January of 2018, we announced that our triple combination clinical study protocol received endorsement and a high strategic fit score from the Therapeutics Development Network (TDN) and the Clinical Trial Network (CTN). Our double combination protocol has also received the endorsement of the TDN. The TDN and CTN are the drug development arms of the Cystic Fibrosis Foundation (CFF) and the European CF Society (ECFS), respectively.intellectual property.

 

Our ongoing clinical trials are summarized as follows:25

Add-on therapy:

PTI-801: We are conducting a 14-day once-a-day, placebo controlled, double blind, dosing study with PTI-801 in CF subjects on background Orkambi therapy. This Phase 1 study is designed to investigate the effect of PTI-801 in escalating doses in multiple cohorts, with primary objectives of safety and tolerability and secondary objectives of PK and FEV1.

PTI-428: We are planning a clinical study with PTI-428 in CF subjects on background Symdeko therapy.

PTI-428: We are studying PTI-428 in a 14-day once-a-day, placebo controlled, double blind, dose-range study in patients on background Kalydeco.

Combination studies:

We are conducting Phase 1 combination studies with our proprietary drug candidates PTI-428, PTI-801 and PTI-808, in double and triple combination formats with an expected enrollment of up to 46 CF patients.  


Double combination:  we have commenced dosing CF subjects homozygous for the F508del mutation in a 14-day double combination study of PTI-801 and PTI-808, expected to consist of two cohorts with escalating doses of both agents in the second cohort. This study is placebo-controlled.

Triple combination:  we aim to initiate dosing of CF subjects homozygous for the F508del mutation in a 21-day study of PTI-428, PTI-801 and PTI-808, expected to consist of two cohorts with escalating doses of PTI-808 in the second cohort and fixed doses of PTI-801 and PTI-808.  This study is placebo-controlled and will consist of a 7-day run-in where patients will be dosed solely with PTI-808, followed by a period of 14 days where patients will be taking all three investigational drugs.

We have completed 28-day GLP preclinical combination safety studies to support our combination trials.


In 2018, we aim to (1) produce additional data from our 14-day study of PTI-801 in CF patients on background Orkambi in the first half, (2) continue dosing CF patients in a double combination trial consisting of PTI-801 and PTI-808, and produce initial data by mid-year, (3) initiate a triple combination of our proprietary agents PTI-428, PTI-801 and PTI-808 in CF patients in the first half, and produce preliminary data in the second half and (4) initiate a clinical study with PTI-428 in patients on background Symdeko in the second half with initial data in early 2019.

Commercialization

We have exclusive worldwide commercial rights to PTI-428, PTI-801 and PTI-808, as well as our proprietary combinations. We plan to pursue regulatory approval for add-on therapies based on PTI-428 and/or PTI-801 in regions where ivacaftor and lumacaftor (and ivacaftor and tezacaftor, as applicable) are commercially available. Given the well-characterized and clearly identified patient populations with CF in the United States, Canada, Europe and Australia, we plan to independently commercialize PTI-428 and/or PTI-801 in those regions. Our commercialization strategy will target key prescribing physicians and advocacy groups, as well as provide patients with support programs, ensure product access and secure reimbursement.  

Our pricing and reimbursement strategy for therapies will be based on the efficacy and safety profile that will be collected during registrational studies. Pharmacoeconomic models that could support our potential pricing considerations for a CFTR modulator have been widely used in territories where the drug is approved and provide us with validated strategies to be used in future pricing and reimbursement negotiations.

Manufacturing and Supply

We do not own or operate, and presently have no plans to establish, any manufacturing facilities.facilities or personnel. We presentlycurrently rely, and expect to continue to rely, on third parties for the manufacturemanufacturing of our product candidates for preclinical and clinical testing, as well as for commercial manufacture of any products that we may commercialize. We have outsourced the manufacturing of current Good Manufacturing Practice, or cGMP-grade,if our product for preclinical studies and clinical trials. Our contract manufacturers have had and we believe that they will have the capacity to produce adequate quantities of PTI-428, PTI-801, and PTI-808 for both our preclinical studies and our clinical trials. We do not presently have arrangements in place for redundant supply for bulk drug substance. Forcandidates receive marketing approval.

Currently, all of our product candidates we intend to identifyare small molecules and qualify additional manufacturers to provide the active pharmaceutical ingredient and fill-and-finish services prior to submission of an NDA to the FDA.

We have entered into manufacturing and supply agreements with three vendors and these activities are ongoing. As of the date of this report, we believe we have access to sufficient amounts of cGMP-certified material for use in our clinical trials.

All of our compounds are organic compounds of low molecular weight, generally called small molecules. They can be manufactured in reliable and reproducible synthetic processes from inexpensive and readily available starting materials that can be supplied by a number of commercial vendors.materials. The chemistry is amenable to scale-up and does not require unusual equipment in the manufacturing process. We expect to continue to develop drugproduct candidates that can be produced cost-effectively at contract manufacturing facilities.

Regulatory StrategyCommercialization

We planintend to conduct clinical studies for our CF programs in territories with the largest populations of CF patients such as North America, Europedevelop and, Australia. We therefore rely on local regulatory and ethics authorities for the approval of our IND or equivalent submissions. All three compounds have active INDs underif approved by the FDA, to commercialize our product candidates alone or in the United States and approvals by regulatory bodiescollaboration with others. We may work in ex-U.S. territoriescombination with one or more large pharmaceutical partners for certain indications, where the respective study or studiesspecialist capabilities are ongoing and active.


needed. For CF, in addition to regulatory agencies, patient advocacy groups can play a key role in helping access study subjects. In the United States, the TDN has developed a network consisting of 89 CF centers to ensure consistency and high quality of clinical study execution. We believe TDN endorsement is an important factor for CF centers in deciding whether to participate in a CF trial, and which trials to prioritize.  In Europe, the CTN, the development arm of the European Cystic Fibrosis Society, acts in a somewhat analogous manner, as a patient advocacy group that reviews and ranks protocols for CF trials. PTI-428 has received the priority score “high medium” by the CTN.  Our triple combination clinical study protocol has received endorsement and a high strategic fit score from the Therapeutics Development Network (TDN) and the Clinical Trial Network (CTN). Our double combination protocol has also received the endorsement of the TDN. The TDN and CTN are the drug development arms of the Cystic Fibrosis Foundation (CFF) and the European CF Society (ECFS), respectively.  The protocol for PTI-801 has also been endorsed by both organizations.

The CFF and ECFS are the most impactful CF patient advocacy organizations and shepherd the execution of clinical trials in the United States and Europe, respectively.  Both organizations have well established processes to evaluate submitted study protocols based on scientific merit, study design, feasibility and the overall clinical research priorities of the CF community.  Protocols are reviewed by a selected group of experienced CF physician investigators, research coordinators, biostatisticians, people with CF and other specialists.

In the United States, upon the protocol endorsement, the TDN provides access to 89 accredited care centers with demonstrated expertise in clinical research, and supports study participant recruitment and execution of studies.  Since its founding in 1998, the TDN has conducted more than 130 clinical studies for CF, including studies of CFTR modulators. Similarly, in Europe, the CTN provides access for endorsed studies to 43 large and experienced CF centers located in 15 different countries, including the U.K. The TDN and the CTN have established a strong partnership for endorsed studies conducted in both the U.S. and Europe.  

For all of our CF programs,specialized indications, we intend to maintain a proactive relationship with the Cystic Fibrosis Foundation Therapeutics and the TDN. We will continue to access patient-derived HBE cells from the Foundation’s database to conduct ongoing preclinical studies.

There is a large number of CF programs in clinical development at this time, including numerous corrector and combination trials from Vertex and other companies with greater resources and experience than us which may increase competition for patients to enroll in our clinical trials.

Our Partnered Program

The UPR Program

The unfolded protein response, or UPR, program is focused on developing therapies that modulate the cellular processes activated when proteins do not fold properly and is directed toward developing treatments for diseases caused by defects in protein folding, trafficking and clearance, which include neural and retinal degenerative disorders. The ER is an organelle in the cell that is important in biosynthesis and folding of proteins. Only properly folded and functional proteins are trafficked out from the ER. Misfolded, poorly functional proteins remain in the ER and are targeted for clearance. When misfolded proteins accumulate in the ER, the folding, trafficking and clearance capacity of the cell is increased through the activation of the UPR, and protein synthesis is arrested through activation of the protein kinase RNA-like ER kinase, or PERK, receptor. Nonclinical studies have shown that a selective pharmacologic activation of the UPR without activating the PERK pathway has improved the stress response and restored cellular function, suggesting that this process can be beneficial as a potential novel disease-modifying therapy for multiple diseases with high unmet medical needs.

In November 2014, we announced our collaboration with Astellas to research, develop and commercialize therapies targeting UPR. See “—Licenses—Astellas Agreement.” By specific activation of the UPR, we aim to better fold and export mutant proteins out of the ER and reduce the accumulation of misfolded aggregation-prone proteins. We are presently using our expertise to identify selective UPR activators. Preclinical evidence suggests that selectively activating the UPR could have therapeutic benefit in patients in a variety of diseases. As of today, the vast majority of drug discovery and development efforts are focused on the therapy of cancer with molecules inhibiting specific elements of the UPR. See “—Competition.”


Expertise Regarding the Proteostasis Network

We were founded around our unique and comprehensive expertise regarding the proteostasis network, or PN, which comprises pathways and cellular processes that control protein biosynthesis, folding, trafficking and clearance within a cell. Many diseases appear to be caused by an imbalance in the proteostasis network, including loss-of-function diseases, such as CF, and gain-of-toxic-function diseases, such as Alzheimer’s and Parkinson’s diseases. The decreased ability of the proteostasis network to cope with misfolded proteins from inherited gene mutations, aging, and metabolic or environmental stress appears to trigger or exacerbate proteostasis diseases.

The proteostasis network is comprised of a number of integrated pathways totaling more than 1,000 proteins. A natural way to address this complex, interrelated network of pathways and proteins is through phenotypic screening where a desirable change in the cellular phenotype is monitored. A phenotypic screen is often viewed as more physiologically relevant and less artificial than a target-based screen, since it relies on cells with a native cellular environment close to the disease state, unlike other widely used approaches such as target-based assays that are based on genetically modified cells or artificial systems. For example, in CF screens, the change in phenotype is a functional readout for an increased ability of mutant CFTR protein to transport ions across the membranes of HBE cells from CF patients.

We have developed and validated a phenotypic drug screening approach that is based on the use of highly predictive and functionally pertinent cellular assays. Our expertise regarding the PN is an integral part of our drug discovery and development approach used to discover compounds for other loss-of-function and gain-of-toxic-function diseases. We believe our PN expertise allows us to identify drug candidates with optimal pharmacological profiles to restore the proteostasis balance in the cell and thus address the cause of the disease. Our approach makes it also possible to identify active compounds that modulate a disease phenotype by acting on previously undescribed targets.

We have assembled a proprietary library of 150,000 highly curated compounds. These compounds have physicochemical properties optimized to have oral bioavailability, wide structural diversity and novelty. We have performed extensive filtering in order to remove potentially toxic and other unwanted structural characteristics.

We perform a transcriptional analysis of our hit compounds in order to group them into similar modes of action and filter away compounds that activate undesired pathways. The most promising hits are then further optimized using medicinal chemistry, which includes pharmacophore and quantum chemical modeling.

Competition

The biopharmaceutical industry is highly competitive and subject to rapid and significant technological change. Key competitive factors affecting the commercial success of our product candidates independently. For example, we believe the patient and prescriber populations for Parkinson’s disease are likely torelatively concentrated and can be efficacy, safety and tolerability profile, reliability, convenience of dosing, price, and reimbursement. Our potential competitors include largeaddressed with a focused sales team. We also do not believe any existing pharmaceutical and biotechnology companies specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. Many of these potential competitors have significantly greater experiencesignificant expertise in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products and have substantially greater financial, technical and human resources than we do. Mergers and acquisitionsdisease-modifying therapies for neurodegenerative diseases. We will, however, continuously review our partnering strategy in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small numberlight of competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval for therapies and achieving widespread market acceptance more quickly than we will. Our competitors’ products may be more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may render our therapies obsolete or non-competitive before we can recover development and commercialization expenses. See “Risk Factors—Risks Relating to Commercialization of Our Product Candidates.”

A number of companies are seeking to identify and develop drug candidates for the treatment of CF, including Vertex Pharmaceuticals Incorporated, AbbVie Inc., Galapagos NV, ProQR Therapeutics N.V., Flatley Discovery Lab, LLC, F. Hoffmann-LaRoche Ltd., Novartis AG, Gilead Sciences, Inc., Laurent Pharmaceuticals Inc., Pfizer Inc., AstraZeneca, Translate Bio Inc., Sanofi Genzyme, Bayer AG, Corbus Pharmaceuticals Holdings, Inc., Eloxx Pharmaceuticals, Verona  Pharma plc, and several other companies. Of these, Vertex’s Kalydeco, Orkambi and Symdeko are the only drugs approved to treat an underlying cause of CF, rather than the symptoms.  


A number of companies are active in drug discovery and development for the treatment of diseases caused by protein misfolding by pursuing various pathways that regulate the fate of a misfolded protein within a cell. Such companies could be competitive with the UPR program and include, but are not limited to, Forma Therapeutics, Inc., Mission Therapeutics Ltd, Treventis Corporation, Arvinas, Inc., Progenra, Inc. and Proteologics Ltd.

Intellectual Property

Our owned patent applications relate to our amplifiers, correctors, and CFTR modulators and include patent applications directed to new compositions of matter and to methods of treating CF, including combination therapies with existing CFTR modulators and our own proprietary combinations.

As of December 31, 2017, we own three Patent Cooperation Treaty patent applications, and one pending U.S. provisional patent application family and we intend to seek patent protection in the United States and in selected jurisdictions worldwide for composition of matter, methods of use, and combination therapies relating to PTI-428. If we continue to pursue protection, and if any patents issue based on these applications, we expect such patents, if issued, to expire between 2035 and 2038.

As of December 31, 2017, we own one Patent Cooperation Treaty patent application and one pending U.S. provisional patent application and we intend to seek patent protection in the United States and in selected jurisdictions worldwide for composition of matter, methods of use, and combination therapies relating to new correctors, including PTI-801. If we continue to pursue protection, and if any patents issue based on this application family, we expect such patents to expire between 2036 and 2038.

As of December 31, 2017, we own one Patent Cooperation Treaty patent application relating to new potentiators, including PTI-808. If we continue to pursue protection, and if any patents issue based on this application, we expect such patents to expire in 2037.

We also own two issued U.S. patents, eight pending U.S. patent applications, six Patent Cooperation Treaty patent applications, all of which generally relate to other compounds and methods for our CF program; if we continue to pursue protection, and if any patents issue based on these applications, in the United States and in selected jurisdictions worldwide, we expect such patents, if issued, to expire between 2034 and 2037.

We primarily rely on trade secrets and know-how to protect the proprietary nature of our research and discovery platform. However, trade secrets and know-how can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data, know-how and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Licenses

CFFT Agreement

In March 2012, we entered into a research, development and commercialization agreement with Cystic Fibrosis Foundation Therapeutics, Inc., or CFFT, pursuant to which we have collaborated to research, develop and commercialize products for the treatment of CF, non-classical CF, and other pulmonary diseases in the United States or in the European Union. Under this agreement, CFFT provided financial support and continues to provide consultation and advice and certain research materials and know-how for our research program.


We expect to make milestone payments based on PTI-428, if approved, and may need to make additional payments for our other product candidates in CF, if approved. We have agreed to make future sales-based milestone payments (which the agreement refers to as royalties) to CFFT of up to $34.2 million upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the collaboration agreement. We have also agreed to pay to CFFT royalties of a mid single-digit percentage, up to an aggregate of $22.8 million, on any amounts received by us from the sale, license or transfer to a third party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the first three sales-based milestone payments owed by us through the second anniversary of the first commercial sale of a product developed as a result of this collaboration. In the event of a change of control of our company, CFFT will receive certain payments, depending on the timing of the change of control and the size of the transaction.

We have the exclusive right to develop, commercialize, market, sell and distribute products worldwide. All joint technology from of the research program is jointly owned by the parties, but we have a license from CFFT for all CFFT-owned inventions and patents and in the joint inventions and joint patents arising from the collaboration for all purposes. We control and cover the costs of the preparation, prosecution and maintenance and enforcement of all of our patents, CFFT-owned patents and joint patents, but CFFT is able to use compounds for non-commercial research purposes in the field of treatment of CF, non-classical CF, and other pulmonary diseases.

The agreement will expire when there are no longer any payment obligations, unless terminated earlier. Each party may terminate for an uncured material breach of any material covenants or obligations or if any representation or warranty is materially untrue as of the date made and uncured after 30 days from notice. CFFT may also terminate if a case or proceeding under the bankruptcy laws is filed against our company and not dismissed within 60 days, or if we file for insolvency, reorganization, receivership, dissolution or liquidation of our company.

If at any time prior to the first commercial sale, we cease to use commercially reasonable efforts to develop or commercialize any product in the field of treatment of CF, non-classical CF, and other pulmonary diseases, for a continuous period of 180 consecutive days, and fail to present a reasonable plan to resume commercially reasonable efforts, we will grant to CFFT an irrevocable, exclusive worldwide interruption license under all of our interest in the research plan technology to exploit such product, and CFFT will assume all costs and expenses relating to the prosecution, maintenance and enforcement of all joint patents and patents covering such product. Any third-party license granted by us shall be subject to such interruption license.

Terminated Harvard Agreement

In December 2013, we amended and restated an existing license agreement signed on March 29, 2011 with the President and Fellows of Harvard College, or Harvard, in order to enter into a sublicense agreement with Biogen, or the Usp 14 agreement, which agreement was subsequently terminated by Biogen, to further develop and commercialize certain products under the Usp14 agreement and to retain the services of consultants Drs. Daniel Finley and Randall King for such purpose.

In October of 2017, we terminated the license agreement with Harvard University.  Following the termination, all licenses granted by either party to the other under the agreement terminated. The footnotes to our financial statements describe our surviving milestone and royalty obligations.

Terminated Biogen Agreement

In December 2013, we entered into a collaboration and license agreement, or the Usp14 agreement, with Biogen, where we agreed to collaborate to research, develop and commercialize licensed products to attack toxic proteins implicated in the development of Alzheimer’s and Parkinson’s diseases. On December 5, 2016, we received notice from Biogen of termination of the Usp14 agreement effective as of December 6, 2016.  Following the termination, all licenses granted by either party to the other under the Usp14 agreement terminated. Additionally, the exclusivity provisions in the Usp14 agreement terminated and now each party is free to research, develop and commercialize products that modulate the target (Usp14) either by themselves or with third parties, subject to the intellectual property rights of the other party.


In connection with the collaboration, we received from Biogen an initial upfront payment and an equity investment, as well as research and development expense reimbursements. Additionally, we also received a milestone payment of $2.0 million for achieving an initial preclinical milestone on July 2014. Following the termination, no future research and development expense reimbursements, milestones or royalties are payable under the Usp14 agreement.

Astellas Agreement

In November 2014, we entered into a collaboration and license agreement with Astellas Pharma Inc., or Astellas, to develop cell assays for high throughput screening, and to identify, develop and commercialize drug candidates relating to the unfolded protein response pathway.

Astellas will develop and have full control over, at its sole cost and expense, the commercialization of each licensed product. If we elect to co-develop a product candidate, we will be responsible for a percentage of the co-development costs for such development compound. We will also have the opportunity to co-promote licensed products with Astellas in the United States on a fee-for-service basis.

In connection with the collaboration, we received an initial upfront investment from Astellas. We are entitled to certain research, development and sales milestone payments that could result in total payments of up to approximately $400 million, as well as royalties ranging in the mid single-digit to low double-digit percentages, subject to any third-party license fees we pay or need to pay. In addition, Astellas had the right to specify two additional projects to be conducted under the same terms, which, if it fully exercised this right, would bring the total potential payments under the collaboration to $1.2 billion. This right to specify two additional projects was not fully exercised by Astellas and lapsed as of November 4, 2016.

We will jointly own any collaboration technology and all intellectual property rights therein and will be jointly responsible for the prosecution and maintenance (including costs) of all collaboration patent rights, provided that our company will have final decision making authority until the time a development candidate is designated.

The collaboration and license agreement will remain in effect until the end of the royalty term, which will vary on a country-by-country basis, ending on the later of (a) 11 years following the first commercial sale of a licensed product in such country, (b) the expiration of the last valid claim covering such licensed product in such country, or (c) the expiration of the data protection period for such licensed product, unless terminated earlier. Upon expiration, but not termination, the development and commercialization license will become fully-paid up and perpetual. Astellas may terminate the agreement at any time following completion of the research term on a licensed product-by-licensed product and a country-by-country basis, or terminate the agreement in its entirety, by providing written notice to us. Astellas may also terminate on a project-by-project basis upon 20 days’ to six months’ notice, depending on the phase of research in progress. Either party may terminate for a material breach by the other party which is uncured within 60 days or for bankruptcy of the other party. If Astellas challenges a patent right or collaboration patent right of ours, we may terminate the agreement upon written notice to Astellas.

Upon a termination of the agreement other than by Astellas for cause, Astellas will grant to us a reverted product license, assign regulatory and clinical data and agreements with third parties that relate exclusively to reverted products and provide commercially reasonable assistance to permit us to developmarket understanding. We may enter into distribution or commercialize such reverted products in their reverted territory.licensing arrangements for commercialization rights for other regions outside the United States.

Government Regulation

Government authorities in the United States at the federal, state and local levels,level and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing.


A number of differentdrug products. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific to each regulatory agencies may be involved, depending onauthority, submitted for review and approved by the product at issue, and the type and stage of activity. These include the FDA, the regulatory authority.

U.S. Department of Health & Human Services, or HHS, the Centers for Medicare and Medicaid Services, or CMS, other federal agencies, state boards of pharmacy, state departments of health and more.

U.S. Government Regulation

Drug Development Process

In the United States, the FDA is a primary regulator ofregulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, the Public Health Service Act, or PHSA, and its implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations. The process of obtaining and maintaining regulatory approvals and otherthe subsequent compliance with applicableappropriate federal, state, local and foreign statutes and regulations requiresrequire the expenditure of substantial time and financial resources in addition to the commitment of dedicated manufacturing, regulatory and compliance personnel, among others.resources. Failure to comply with the applicable U.S. requirements at any time during the drugproduct development process, approval process or after approval may subject usan applicant to adverse consequences and administrative or judicial sanctions. These sanctions anycould include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of whichan approval, a clinical hold, untitled or warning letters, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties. Additionally, a manufacturer may need to recall a product from the market. Any agency or judicial enforcement action could have a material adverse effect on us. These sanctions could include refusal to approve pending applications; withdrawal

Our product candidates must be approved by the FDA through the new drug application, or restriction of an approval; imposition of a clinical hold or other limitation on both ongoing or future research; enforcement letters; product seizures; total or partial suspension of development, production, or distribution; or injunctions, fines, disgorgement, or civil or criminal payments or penalties.

NDA, process before they may be legally marketed in the United States. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

completion of preclinicalextensive nonclinical laboratory tests, animal trialsstudies and formulation trials conducted according tostudies in accordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, requirements, animal welfare laws and other applicable regulations;

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submission to the FDA of an investigational new drug, application, or IND, application, which must become effective before human clinical trials meaning trials in human subjects, may begin in the United States, obtaining similar authorizations in other jurisdictions whereand must be updated annually or when significant changes are made;

approval by an independent institutional review board, or IRB, or ethics committee at each clinical research willtrial site before each trial may be conducted and maintaining these authorizations on a continuing basis throughout the time that trials are performed and new data are collected;initiated;

performance of adequate and well-controlled human clinical trials accordingin accordance with applicable IND and other clinical trial-related regulations, referred to as Good Clinical Practices, or GCP, requirementsGCPs, to demonstrate whether aestablish the safety and efficacy of the proposed drug is safe and effective for its intended use;each proposed indication;

preparation and submission to the FDA of a marketing authorization application, such asan NDA for a new drug application, ordrug;

payment of user fees for FDA review of the NDA and submitting similar marketing authorization applications in other jurisdictions where commercialization will be pursued;

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

satisfactory completion of an FDApre-approval inspection of the manufacturing facility or facilities at whichwhere the product will bedrug is produced to assess compliance with current good manufacturing practices,Good Manufacturing Practices, or cGMP, requirements to assure that the facilities, methods and controls are adequate to preserve the product’sdrug’s identity, strength, quality and purity;

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

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

Preclinical Studies and Clinical Trials

The development,nonclinical and clinical testing and approval process requires substantial time, effort and financial resources, and bears significant inherent risk that the individual products will not exhibit the relevant safety, effectiveness, or quality characteristics or that FDA, or any other regulatory authority, may interpret the data in a manner that does not support marketing approval or authorization. Wewe cannot be certain that any approvals for our product candidates will be granted on a timely basis, or with the specific terms that we desire, if at all.

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

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

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

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

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

Phase 1. The drug initially is introduced into1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug.

Phase 2 clinical trials typically involve studies in disease-affected patients or human volunteersto determine the dose required to produce the desired benefits and provide a preliminary evaluation of efficacy. At the same time, safety and further pharmacokinetic and pharmacodynamic information is collected, pertaining to the drug’s safety, dosage tolerance, absorption, metabolism, distribution and elimination. These trials are designed to determine the metabolism and pharmacologic actions, side effects with increasing doses and if possible, early evidenceas well as identification of effectiveness.

Phase 2. Clinical trials include controlled clinical studies initiated in a limited target patient population to identify possible adverse effects and safety risks,risks. Multiple Phase 2 clinical trials may be conducted to preliminarily evaluateobtain information prior to beginning larger and more expensive Phase 3 clinical trials.

Phase 3 clinical trials generally involve large numbers of patients at multiple sites (from several hundred to several thousand subjects) and are designed to provide the data necessary to demonstrate the effectiveness of the drug candidateproduct for a particular indicationits intended use, its safety in patients with the disease or condition under study,use and to determine common short-term side effects and risks associated with the drug.

Phase 3. Clinical trials are expanded and controlled trials undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to gather additional information about effectiveness and safety that is needed to evaluateestablish the overall benefit-risk profilebenefit/risk relationship of the drug candidateproduct and provide an adequate basis for physician labelinglabeling. Phase 3 clinical trials may include comparisons with placebo and/or comparator treatments. Generally, two adequate and regulatory approval.well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA.

A drug being studied inPost-approval studies, sometimes referred to as Phase 4 clinical trials, may be made availableconducted after initial marketing approval. These studies are used to individualgain additional experience from the treatment of patients in the intended

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therapeutic indication. In certain circumstances.  instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. Written IND safety reports must be submitted to the FDA and the investigators within 15 calendar days for serious and unexpected suspected adverse events, finding from other studies or animal or in vitro testing that suggests a significant risk for human subjects, and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Additionally, a sponsor must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may recommend that the clinical trial be stopped if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy.

Pursuant to the 21st Century Cures Act, or Cures Act, which was signed into law in December 2016, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the laterearlier of 60 calendar days after the date of enactment of the Cures Act or the first initiation of a Phase 2 or Phase 3 trial of the investigational drug.

Progress reports related to clinical trials must be submitted at least annually to the FDA and participating institutional review boards, and more frequent safety reports must be submitted to the FDA and to investigators for serious and unexpected suspected adverse events, and certain other purposes. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within a specified period, if at all and study protocols may be amendeddrug, or terminated by either the FDA or the sponsor. For example, the FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the healthy volunteers or patients are being exposed to an unacceptable health risk or that the investigational product apparently lacks efficacy. Similarly, an institutional review board can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance withas applicable, requirements, including requirements to protect study subjects, or if15 days after the drug candidate has been associated with unexpected serious harm to healthy volunteersreceives a designation as a breakthrough therapy, fast track product, or patients.regenerative advanced therapy.

We estimate that it generally takes 10 to 15 years, or possibly longer, to discover, develop and bring to market a new pharmaceutical product in the United States. Several years may be needed to complete each phase of development, including discovery, preclinical, Phase 1, 2 or 3, or marketing authorization.

At times during the development of a new drug product, sponsors are given opportunities to meet with the FDA. This commonly occurs prior to submission of an IND, at the end of Phase 2 testing, and before an NDA is submitted. Meetings at other times may also be requested. These meetings provide an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and the FDA to reach agreement on the next phase of development. For example, prior to initiating a Phase 3 study, sponsors have the option to submit a request for Special Protocol Assessment, or SPA, to FDA which, if granted provides FDA’s concurrence that the study, if conducted as designed and if successful, could support a regulatory approval for the drug candidate. A plan for pediatric assessment also must be discussed at the end of the Phase 2 meeting. ConcurrentConcurrently with clinical trials, companies usually complete additional animal trialsstudies and must also develop additional information about the chemistry and physical characteristics of the drug candidate andas well as finalize a process for manufacturing both the drug substance and finished drug product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the finished drug candidate and, among other things, the manufacturersponsor must develop methods for confirmingtesting the identity, strength, quality purity, and potencypurity of the final products.drug product. Additionally, appropriate packaging must be selected and tested and stability trialsstudies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf-lifeshelf life.

NDA and distribution pathway.


Disclosure of Clinical Trial Information

Sponsors (or designated principal investigators) of clinical trials that are applicable clinical trials under the PHSA and the National Institute of Health’s recently published final rule regarding Clinical Trial Registration and Results information Submission are required to register their trials and disclose certain clinical trial information.  Phase 1 studies are not subject to these requirements.  Information related to the product, comparator, patient population, phase of investigation, trial sites and investigators and other aspects of the clinical trial is made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of certain trials of unapproved new drugs that are still under development or new uses of approved drugs may be delayed, subject to limitations, until 30 calendar days after the new product or new indication being studied has been approved, or the marketing application has been withdrawn for a specified amount of time.  Where a new indication of a previously approved drug is sought, the submission of results information may also be delayed until 30 calendar days after FDA issues a letter that ends the review cycle for the application but does not approve the drug for the use studied in the clinical trial.  In addition, publication policies of major medical journals mandate certain registration and disclosures as a pre-condition for potential publication, even when this is not presently mandated as a matter of law. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

New Drug Application Review and Approval ProcessesProcess

The results of drug candidate development, preclinical trialsthe nonclinical studies and clinical trials, alongtogether with descriptionsother detailed information, including extensive manufacturing information and information on the composition of the manufacturing process, analytical tests conducted on the drug candidate,and proposed labeling, and other relevant information are submitted to the FDA as partin the form of a new drug application, oran NDA requesting approval to market the drug candidate.for one or more specified indications. Data may come from company-sponsored clinical trials intended to evaluate the safety and efficacy of a product candidate or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the investigational drug to the satisfaction of the FDA. The submissionFDA reviews an NDA to determine, among other things, whether a drug is safe and effective for its intended use and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality, and purity. FDA approval of an NDA is subject to the payment ofmust be obtained before a substantial user fee, and the sponsor of an approved NDA is also subject to annual product and establishment user fees; a waiver of feesdrug may be obtained under limited circumstances.offered for sale in the United States.

The cost of preparing and submitting an NDA is substantial. Under federal law, NDAs are subject to substantial application user fees and the sponsor of an approved NDA is also subject to annual product and establishment user fees. UnderPrescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA’s fee schedule, effective from October 1, 2020 through September 30, 2018,2021, the user fee for each NDAan application requiring clinical data, such as an NDA, is $2,421,495.$2,875,842. PDUFA also imposes an annual prescription drug product program fee of $304,162.for human drugs

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($336,432). Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on NDAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.

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

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

After the facilityFDA evaluates an NDA, it may issue an approval letter or facilities wherea Complete Response Letter. An approval letter authorizes commercial marketing of the active ingredientdrug with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the formulated drug candidate are manufactured and tested.

application is not ready for approval. A Complete Response Letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable criteria are not satisfied, including if the manufacturing facilities fail to demonstrate cGMP compliance, or itComplete Response Letter may require additional preclinical, clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other data, such as manufacturing data.significant and time-consuming requirements related to clinical trials, nonclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may resubmit the NDA addressing all of the deficiencies identified in the letter, withdraw the application, or request an opportunity for a hearing. Even if such data areand information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The

There is no assurance that the FDA will issueultimately approve a Complete Response Letter ifdrug product for marketing in the agency decides not to approveUnited States and we may encounter significant difficulties or costs during the NDA in its present form. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the Complete Response Letter may include recommended actions that the applicant might take to place the application in a condition for approval.review process. If a product receives regulatorymarketing approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial


value of the product. Further, the FDA may require that certain limitations of use, contraindications, warnings, or precautions be included in the product labeling. In addition,labeling or may condition the approval of the NDA on other changes to the proposed labeling, development of adequate controls

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and specifications, or a commitment to conduct post-marketing testing or clinical trials and surveillance to monitor the effects of the approved product. For example, the FDA may require post-approval trials, including Phase 4 testing which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA approvalefficacy and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized. The FDA also may place other conditions on approvals including the requirement for a risk evaluation and mitigation strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory requirements or if problems occur following initial marketing.

Orphan Drug Designation and Exclusivity

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of disease or condition will be recovered from sales of the product.

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

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

Expedited Development and Review Programs

The FDA has various programs, including fast track, priority review, accelerated approval, and breakthrough therapy designation, that are intended to increase agency interactions, expedite or facilitate the process for reviewing drug candidates, and/or provide for initial approval on the basis of surrogate or intermediate endpoints. We believe that PTI-428 and PTI-801 may qualify for some of these expedited development and review programs. Even if a drug candidate qualifies for one or more of these programs, the FDA may later rescind such designation if it determines that the drug candidate no longer meets the conditions for qualification as clinical data and the approved treatment landscape continue to evolve.

In January 2016, we received Fast Track designation from the FDA for the investigation of PTI-428 for the treatment of CF. Additionally, in February 2017, we applied for, and in March 2017 we were granted, Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. The Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and non-clinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the product (either alone or in combination with other drugs)of the product and the specific indication for which it is being studied. The sponsor of a new drug may request the FDA to designate the drug as a Fast Track product at any time during the clinical development of the product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete applicationNDA is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the

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application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.

Any product submitted to the FDA for marketing, including under athe Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Anyreview. A product is eligible for priority review if it treats a serious conditionhas the potential to provide safe and if approved, would provideeffective therapy where no satisfactory alternative therapy exists or offers a significant improvement in safetythe treatment, diagnosis or effectivenessprevention of a disease compared to available alternatives.marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review with a goal review time frame of 6 months versus the standard 10 month standard review cycle for NDAs. review.

Additionally, a productdrug may be eligible for accelerated approval. Drug candidates studied for their safety and effectivenessdesignation as a breakthrough therapy if the drug is intended, alone or in treatingcombination with one or more other drugs, to treat a serious or life-threatening illnessesdisease or condition and preliminary clinical evidence indicates that provide meaningful therapeutic benefitthe drug may demonstrate substantial improvement over existing treatments may qualify for accelerated approval if they demonstrate an effecttherapies on a surrogate endpoint that is reasonably likely to predict aone or more clinically significant endpoints, such as substantial treatment effects observed early in clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality (IMM) (i.e., an intermediate endpoint), that is reasonably likely to predict an effect on IMM or other clinical benefit.  As a conditiondevelopment. The benefits of approval,breakthrough therapy designation include the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies. Failure to conduct required post-approval trials, or the inability to confirm a clinical benefit during post-marketing trials, may allow thesame benefits as fast track designation, plus intensive guidance from FDA to withdraw theensure an efficient drug from the market on an expedited basis. In addition, the FDA presently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.development program. Fast Track designation, priority review, and accelerated approvalbreakthrough designation do not change the standards for approval but may expedite the development or approval process.

The Food and Drug Administration Safety and Innovation Act of 2012 also amended the FDCA to require FDA to expedite the development and review of a breakthrough therapy. A drug can be designated as a breakthrough therapy if it is intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. A sponsor may request that a drug be designated as a breakthrough therapy at any time during the clinical development of the product. If so designated, FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the sponsor throughout the product’s


development, providing timely advice to the sponsor to ensure that the development program to gather nonclinical and clinical data is as efficient as practicable, involving senior managers and experienced review staff in a cross-disciplinary review, assigning a cross-disciplinary project lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor, and taking steps to ensure that the design of the clinical trials is as efficient as practicable. In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi® as background therapy.The FDA may rescind such designation if our development program does not continue to meet the criteria for breakthrough therapy designation.Pediatric Trials

Post-Approval Requirements

Any products for which we may receive future FDA approval are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting and analysis of adverse experiences with the product, providing the FDA with updated safety, efficacy and quality information, product sampling and distribution requirements, maintaining up-to-date labels, warnings, and contraindications, and complying with promotion and advertising requirements. Products may be promoted only for their approved indications and in accordance with their approved labels; products cannot be promoted for unapproved, or off-label, uses, although physicians may prescribe drugs for off-label uses in accordance with the practice of medicine. Manufacturers must continue to comply with cGMP requirements, which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to manufacturing processes often require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to, in some cases, extensive clinical development activities as well as further FDA review and approval. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Manufacturers and other entities involved in the manufacturing and distribution of approved products are required to register their establishments with the FDA and certain state agencies, and are subject to periodic inspections for compliance with cGMPs and other laws. FDA and state inspections may identify compliance issues at manufacturing sites that may disrupt production or distribution or may require substantial resources to correct.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market, such as adverse events, the existence or severity of which was unknown when the product was approved. Later discovery of previously unknown problems with a product may result in restrictions on the product’s approved uses or distribution or complete withdrawal from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, enforcement letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal payments or penalties.

From time to time, new legislation is enacted that changes the statutory provisions governing the approval, manufacturing, and marketing of products regulated by the FDA. In addition, FDA regulations and guidance may be revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or regulatory or policy changes will occur or be implemented and what the impact of such changes, if any, may be.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration, and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents, if issued, may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term to be extended up to five years as compensation for patent term effectively lost due to the FDA’s pre-market approval requirements. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is


eligible for the extension. Extensions are not granted as a matter of right and the extension must be applied for prior to expiration of the patent and within a 60-day period from the date the product is first approved for commercial marketing. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Where a product contains multiple active ingredients, if any one active ingredient has not been previously approved, it can form the basis of an extension of patent term provided the patent claims that ingredient or the combination.

In the future, we may apply for patent term restoration for some of our presently owned patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA; however, there can be no assurance that any such extension will be granted to us.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The specific scope varies, but fundamentally the FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity never previously approved by the FDA either alone or in combination. For a new chemical entity that was issued orphan drug designation, the FDCA provides marketing exclusivity for the “same drug” and “same indication” for a period of seven years. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the compound responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability trials, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical trials and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric Information and Exclusivity

Under the FDCA, NDAs and certain supplements to NDAs must contain data adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. Recently, the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law on July 9, 2012, amended the FDCA. FDASIA requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within 60sixty days of an end-of-phaseend-of-Phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials and/or other clinical development programs.

Orphan Drug DesignationPost-Marketing Requirements

Under the OrphanPediatric Research Equity Act, or PREA, as amended, an NDA or supplement to an NDA must contain data to assess the safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of pediatric data or full or partial waivers. Following approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the FDA of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements and complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which

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may require the applicant to develop additional data or conduct additional nonclinical studies and clinical trials. As with new NDAs, the review process is often significantly extended by FDA’s requests for additional information or clarification. Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or the PDMA, a part of the FDCA.

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

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

Orange Book Listing

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

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time as the innovator drug and can often be substituted by pharmacists under prescriptions written for the reference listed drug.

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

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

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

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

U.S. Marketing Exclusivity

Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for an NCE. A drug is an NCE if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may grant orphannot accept for review an ANDA or a 505(b)(2) NDA submitted by another company for another drug designationbased on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, if new

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clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug candidates intended to treat a rare diseasereceived approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the original indication or condition whichof use. Three-year and five-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the nonclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy. Pediatric exclusivity is generally a disease or condition that affects fewer than 200,000 individualsanother type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.

U.S. Patent-Term Extension

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

Healthcare Reform

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or more than 200,000 individualsdelay marketing approval of product candidates, restrict or regulate post-approval activities, and affect the ability to profitably sell product candidates for which marketing approval is obtained. Among policy makers and payors in the United States and for whichelsewhere, there is no reasonable expectation that costsignificant interest in promoting changes in healthcare systems with the stated goals of research and development of the drug for the indication can be recovered by sales of the


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

If a drug candidate that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication for seven years, except in very limited circumstances, such as if the second applicant demonstrates the clinical superiority of its product. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee. Orphan drug exclusivity could block the approval of our drug candidates for seven years if a competitor obtains approval of the same product as defined by the FDA or if our drug candidates are determined to be contained within the competitor’s product for the same indication or disease.

The Orphan Products Grants Program in the FDA’s Office of Orphan Products Development, with an annual budget of approximately $15.5 million, supports clinical development of products including drugs, biologics, medical devices and medical foods for use in rare diseases and conditions where no therapy exists or where the proposed product will be superior to the existing therapy. This program provides grants for clinical studies on safetycontaining healthcare costs, improving quality and/or effectiveness that will either result in, or substantially contribute to, market approval of these products.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. For example, as FDA works to implement its authorities under the 21st Century Cures Act and FDA Reauthorization Act relating to modernization of clinical trial design, endpoints, and incorporation of patient experience data and real-world evidence in new drug development, FDA’s expectations of sponsor drug development activities may change.expanding access. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency or reviewing courts in ways that may significantly affect our business and development of our product candidates and any products that we may commercialize. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of any such changes may be. Federal budget uncertainties or spending reductions may reduce the capabilities of the FDA, extend the duration of required regulatory reviews, and reduce the availability of clinical research grants.

As in the United States, we may apply for designation of a drug candidate as an orphan drug for the treatment of a specific indication in the European Union before the application for marketing authorization is made. Orphan drugs in the European Union enjoy economic and marketing benefits, including up to 10 years of market exclusivity for the approved indication unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product.

The FDA and foreign regulators expect holders of exclusivity for orphan drugs to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the orphan drug.

In March 2018, the FDA granted Orphan Drug designation for PTI-428.

Pharmaceutical Coverage, Pricing, and Reimbursement

United States

Even if the FDA approves NDAs for our drug candidates, sales of our products will depend, in part, on the availability of coverage and reimbursement by third-party payors, such as government health programs, commercial or private insurance, and managed care organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugs forpharmaceutical industry has been a particular indication. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be


approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

The marketabilityfocus of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on cost containment measures in the United States has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

European Union

In Europe and many other foreign countries, the success of our drug candidates we may develop depends largely on obtaining and maintaining government reimbursement, because in many foreign countries patients are unlikely to use prescription pharmaceutical products that are not reimbursed by their governments. Negotiating reimbursement rates in foreign countries can delay the commercialization of a pharmaceutical product and generally results in a reimbursement rate that is lower than the net price that companies can obtain for the same product in the United States.

In some countries, such as Germany, commercial sales of a product can begin while the reimbursement rate that a company will receive in future periods is under discussion. In other countries, a company must complete the reimbursement discussions prior to the commencement of commercial sales of the pharmaceutical product. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of drugs for which their national health insurance systems provide reimbursement and to control the prices of drugs for human use. A member state may approve a specific price for the drug or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug on the market. Recently, many countries in the European Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experiencedhas been significantly affected by many countries in the European Union. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in those countries.major legislative initiatives.

Other U.S. Healthcare Laws and Compliance Requirements

Pharmaceutical companies also are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false claims laws, and the reporting of payments to physicians and teaching hospitals. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. In March 2010,For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, of 2010,or collectively, ACA, was enacted in the United States in March 2010, has already had, and is expected to continue to have, a significant impact on the healthcare industry. The ACA expanded coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, the ACA, among other things, addressed a new methodology by which includes measures that have or will significantly change the way health care is financedrebates owed by both governmental and private insurers. Among the provisions of ACA of greatest importance to the biopharmaceutical industry are the following:

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services, a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic products from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by expanding the population potentially eligible for Medicaid drug benefits. The Centers for Medicare and Medicaid Services, or CMS, expanded Medicaid rebate liability to the territories of the United States as well. In addition, ACA provides for the public availability of retail survey prices and certain weighted average AMPs under the


Medicaid program. The implementation of this requirement by the CMS may also provide for the public availability of pharmacy acquisition of cost data, which could negatively impact our sales.

In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programsDrug Rebate Program are calculated for drugs that are inhaled, infused,

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instilled, implanted or to be sold directly to U.S. government agencies,injected, increased the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP andminimum Medicaid rebate amounts reportedrebates owed by the manufacturer. ACA expanded the types of entities eligible to receive discounted 340B pricing, although,manufacturers under the present state ofMedicaid Drug Rebate Program and extended the law, with the exception of children’s hospitals, these newly eligible entities will not be eligiblerebate program to receive discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is determined based on AMPindividuals enrolled in Medicaid managed care organizations, established annual fees and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.

ACA imposed a requirementtaxes on manufacturers of branded drugs and biologic products to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., “donut hole”).

ACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs, and biologic products, apportioned among these entities accordinga new Medicare Part D coverage gap discount program, in which manufacturers must agree to their market shareoffer 50% (increased to 70% in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.

As part of efforts to further transparency of payments made by pharmaceutical companies to physicians, ACA required manufacturers to track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” made or distributed to such entities, as well as any ownership interests held by physicians and their immediate family members. Manufacturers are required to report this information annually to CMS. Records of payments and ownership interests are publicly available for review on the CMS website.

A new Patient-Centered Outcomes Research Institute was established2019 pursuant to subsequent legislation) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

Since its enactment, there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to oversee, identify prioritiesthe ACA in the future. Various portions of the ACA are currently undergoing legal and conduct comparative clinical effectiveness research, along with funding for such research.constitutional challenges in the United States Supreme Court and members of Congress have introduced several pieces of legislation aimed at significantly revising or repealing the ACA. The research conducted byUnited States Supreme Court is expected to rule on a legal challenge to the Patient-Centered Outcomes Research Institute may affectconstitutionality of the market for certainACA in early 2021. The implementation of the ACA is ongoing and the law appears likely to continue the downward pressure on pharmaceutical products.

ACA created the Independent Payment Advisory Board, or IPAB, which has authority to recommend certain changes topricing, especially under the Medicare program, which may also increase our regulatory burdens and operating costs. Litigation and legislation related to reduce expendituresthe ACA are likely to continue, with unpredictable and uncertain results.

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

Recently, there has been not been clearly defined. ACA provided thatheightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products. Such scrutiny has resulted in several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs under certain circumstances, IPAB recommendations will become law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings.

ACA established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescriptionreform government program reimbursement methodologies for drug spending. Funding has been allocated to supportproducts. At the mission offederal level, the Center for Medicare and Medicaid Innovation from 2011 to 2019.

Some provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. In January 2017, Congress voted to adopt aprevious administration’s budget resolutionproposal for fiscal year 2017, that while not2021 includes a law, is widely viewed as$135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the first step toward the passage ofprevious administration sent “principles” for drug pricing to Congress, calling for legislation that would, repealamong other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical price increases. Additionally, the current administration previously released a ‘‘Blueprint’’ to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain aspects of ACA. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of ACA that are repealed. Thus, the full impact of ACA, any law replacing elements of it, or the political uncertainty related to any repeal or replacement legislation on our business remains unclear.


Anti-kickback Laws

U.S. federal laws, including the federal Anti-Kickback Statute, prohibit fraud and abuse involving state and federal healthcare programs, such as Medicareincentivize manufacturers to lower the list price of their products and Medicaid. These laws are interpreted broadly and enforced aggressivelyreduce the out of pocket costs of drug products paid by various federal agencies, including CMS, the Department of Justice, and the Office of Inspector General for theconsumers. The U.S. Department of Health and Human Services, or HHS, has already implemented certain measures. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step therapy for Part B drugs beginning

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January 1, 2020. However, it is unclear whether the Biden administration will challenge, reverse, revoke or otherwise modify these executive and various state agencies. These anti-kickback laws prohibit,administrative actions.

In 2020, former President Trump signed four Executive Orders aimed at lowering drug prices. In response, the FDA released a final rule on September 24, 2020, which went into effect on November 30, 2020, providing guidance for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020 CMS issued an Interim Final Rule implementing the Most Favored Nation, or MFN, Model under which Medicare Part B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate participation by identified Part B providers and would have applied to all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. However, in response to a lawsuit filed by several industry groups, on December 28, the U.S. District Court for the Northern District of California issued a nationwide preliminary injunction enjoining government defendants from implementing the MFN Rule pending completion of notice-and-comment procedures under the Administrative Procedure Act. On January 13, 2021, in a separate lawsuit brought by industry groups in the U.S. District of Maryland, the government defendants entered a joint motion to stay litigation on the condition that the government would not appeal the preliminary injunction granted in the U.S. District Court for the Northern District of California and that performance for any final regulation stemming from the MFN Interim Final Rule shall not commence earlier than 60 days after publication of that regulation in the Federal Register. Further, authorities in Canada have passed rules designed to safeguard the Canadian drug supply from shortages. If implemented, importation of drugs from Canada and the MFN Model may materially and adversely affect the price we receive for any of our product candidates. Additionally, on December 2, 2020, HHS published a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. Pursuant to an order entered by the U.S. District Court for the District of Columbia, the portion of the rule eliminating safe harbor protection for certain rebates related to the sale or purchase of a pharmaceutical product from a manufacturer to a plan sponsor under Medicare Part D has been delayed to January 1, 2023. Further, implementation of this change and new safe harbors for point-of-sale reductions in price for prescription pharmaceutical products and pharmacy benefit manager service fees are currently under review by the Biden administration and may be amended or repealed.

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

Other U.S. Healthcare Laws and Compliance Requirements

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

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The federal Anti-Kickback Statute, makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully offering, paying, soliciting, receiving,solicit, receive, offer, or providingpay any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in exchange forcash or in kind, to induce, eitheror in return for, the referral of an individual, or the furnishing, arranging for,purchase, lease, order, or recommendingrecommendation of anany good, facility, item, or service that is reimbursable,(including the purchase, order, or prescription of a particular drug), for which payment may be made, in whole or in part, byunder a federal healthcare program. Remuneration isprogram, such as Medicare or Medicaid. “Remuneration” has been interpreted broadly defined to include anything of value, such as cash payments, gifts or gift certificates, discounts, orvalue. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs. In addition, the furnishing of services, supplies, or equipment. The anti-kickback laws are broad and prohibit many arrangements and practices that are lawful in businesses outsideACA, among other things, amended the intent requirement of the healthcare and biopharmaceutical industry.federal Anti-Kickback Statute. A person or entity need notno longer needs to have actual knowledge of the federal Anti-Kickback Statutestatute or specific intent to violate it in orderit. Further, courts have found that if “one purpose” of renumeration is to have committed a violation.

The penalties for violating the anti-kickback laws can be severe. The sanctions include criminal and civil penalties, and possible exclusion frominduce referrals, the federal healthcare programs. Many states have adopted laws similar toAnti-Kickback statute is violated. Moreover, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback laws, and some apply to items and services reimbursable by any payor, including third-party payors.

Federal and State Prohibitions on False Claims

The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented,Anti-Kickback Statute constitutes a false or fraudulent claim for payment underpurposes of the federal programs (including Medicare and Medicaid). Under thecivil False Claims Act,Act. There are a person acts knowingly if he has actual knowledgenumber of the information or acts in deliberate ignorance or in reckless disregard of the truth or falsity of the information. statutory exceptions and regulatory safe harbors protecting some common activities.

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

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

HIPAA created federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the federal governmentmoney or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), willfully obstructing a criminal investigation of a healthcare offense, and to share inknowingly and willfully falsifying, concealing or covering up by any amounts paid by the defendant to the governmenttrick or device a material fact or making any materially false, fictitious or fraudulent statement in connection with the action. The numberdelivery of filings under these provisions has increased significantly in recent years. Conduct that violates the False Claims Act may also lead to exclusion fromor payment for healthcare benefits, items or services. Like the federal healthcare programs. In addition, variousAnti-Kickback Statute a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Many states have enacted similar laws modeled after the False Claims Actfraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that any of our product candidates, if approved, are sold in a foreign country, we may be subject to similar foreign laws.

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, impose requirements relating to the privacy, security and transmission of individually identifiable health information on certain healthcare programs,providers, healthcare clearinghouses, and health plans, known as covered entities, as well as independent contractors, or agents of covered entities that create, receive or obtain individually identifiable health information in several states, suchconnection with providing a service on behalf of a covered entity, known as a business associates. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws apply to claims submitted to all payers.

Federal Prohibitions on Healthcare Fraud and False Statements Related to Healthcare Matters

There are numerousseek attorney’s fees and costs associated with pursuing federal andcivil actions. In addition, certain state laws protectinggovern the privacy and security of protected health information. Additionally, a numberinformation in certain circumstances, some of related crimes can be prosecuted relatedwhich are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to healthcare fraud, false statements relating to healthcare matters, theft or embezzlement in connectioncomply with a health benefit program, and obstruction of criminal investigation of healthcare offenses. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including a private insurer. Violation of any of these laws, is a felony and maywhere applicable, can result in fines or exclusion from the federal healthcare programs.

Physician Payment Sunshine Actimposition of significant civil and criminal penalties.

The U.S. federal transparency requirements under the ACA, including the provision commonly referred to as the Physician PaymentPayments Sunshine Act, requires most pharmaceuticaland its implementing regulations, require applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the Secretary of HHS any and all financial arrangements,CMS, information related to payments or other transfers of value made by that entity to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and teaching hospitals. The paymenthospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members.

Additionally, we are subject to state and foreign equivalents of each of the healthcare laws and regulations described above, among others, some of which may be broader in scope and may apply regardless of the payor. Many U.S. states have adopted laws similar to the federal Anti-Kickback Statute and False Claims Act, and may apply to our business practices, including, but not limited to, research, distribution, sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state and require the registration of pharmaceutical sales representatives. State and foreign laws, including for example the European Union General Data Protection Regulation, which became effective May 2018 also governs the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. There are ambiguities as to what is made publicly available in a searchable format on a CMS website. Over the next several years, we will need to dedicate significant resources to establish and maintain systems and processes in orderrequired to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties. Finally, there are state and foreign laws governing the privacy and security of health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Other regulations may affect other aspects of our business. For example, pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition laws. There has also been a recent trend of increased federal and state regulation of payments made

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to physicians. Certain states mandate implementation of compliance programs, impose restrictions on drug manufacturers’ marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and individual imprisonment, any of which could adversely affect our ability to operate its business and its financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of its business.

Coverage and Reimbursement

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

a covered benefit under its health plan;

safe, effective and medically necessary;

appropriate for the specific patient;

cost-effective; and

neither experimental nor investigational.

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

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

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could reduce physician usage of such drugs and have a material adverse effect on our sales, results of operations and financial condition.

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

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

European Drug Development

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

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

In April 2014, the European Union adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current EU Clinical Trials Directive 2001/20/EC. It is expected that the new Clinical Trials Regulation (EU) No 536/2014 will apply following confirmation of full functionality of the Clinical Trials Information System, or CTIS, the centralized European Union portal and database for clinical trials foreseen by

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the regulation, through an independent audit, currently expected to occur in December 2021. The new Regulation will overhaul the current system of approvals for clinical trials in the European Union. Specifically, the new Regulation, which will be directly applicable in all Member States (and so does not require national implementing legislation in each Member State), aims at simplifying and streamlining the approval of clinical trials in the European Union. For instance, the new Regulation provides for a streamlined application procedure via a single point and strictly defined deadlines for the assessment of clinical trial applications.

European Drug Review and Approval

In the European Economic Area, or EEA, comprising the Member States of the European Union plus Norway, Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a marketing authorization, or MA. There are two main types of marketing authorizations:

The centralized MA is issued by the European Commission through the centralized procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the entire territory of the EEA. The centralized procedure is mandatory for certain types of products, such as human medicines derived from biotechnology processes or advanced therapy medicinal products (gene therapy, somatic cell therapy and tissue engineered products), products that contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune diseases and other immune dysfunctions, viral diseases, and officially designated orphan medicines. The centralized procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the European Union. Under the centralized procedure the maximum timeframe for the evaluation of a MA application by the EMA is 210 days, excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP. Clock stops may extend the timeframe of evaluation of a MA application considerably beyond 210 days. Where the CHMP gives a positive opinion, the EMA provides the opinion together with supporting documentation to the European Commission, who make the final decision to grant a marketing authorization, which is issued within 67 days of receipt of the EMA’s recommendation. Accelerated assessment might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health interest, particularly from the point of view of therapeutic innovation. The timeframe for the evaluation of a MA application under the accelerated assessment procedure is of 150 days, excluding stop-clocks, but it is possible that the CHMP may revert to the standard time limit for the centralized procedure if it determines that the application is no longer appropriate to conduct an accelerated assessment.

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

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

Now that the UK (which comprises Great Britain and Northern Ireland) has left the EU, Great Britain will no longer be covered by centralized MAs (under the Northern Irish Protocol, centralized MAs will continue to be recognized in Northern Ireland). All medicinal products with a current centralized MA were automatically converted to Great Britain MAs on January 1, 2021. For a period of two years from January 1, 2021, the Medicines and Healthcare products Regulatory Agency, or MHRA, the UK medicines regulator, may rely on a decision taken by the European Commission on the approval of a new marketing authorization in the centralized procedure, in order to more quickly grant a new Great Britain MA. A separate application will, however, still be required.

European Data and Market Exclusivity

In the EEA, innovative medicinal products, qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. The data exclusivity, if granted, prevents generic or biosimilar applicants from referencing the innovator’s pre-clinical and clinical trial data contained in the dossier of the reference product when applying for a generic or biosimilar marketing authorization, for a period of eight years from the date on which the reference product was first authorized in the EEA. During the additional two-year period of market exclusivity a generic or biosimilar marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic or biosimilar product can be marketed until the expiration of the market exclusivity period. The overall ten year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are determined to bring a significant clinical benefit in comparison with currently approved therapies.

European Orphan Designation and Exclusivity

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

In the EEA, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity is granted following marketing approval for the orphan product. This period is extended by two years for compliance with an agreed upon pediatric investigation plan granted at the time of review of the orphan drug designation. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. During the period of market exclusivity, marketing authorization may only be granted to a “similar medicinal product” for the same therapeutic indication if (i) the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application, (ii) the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of the orphan medicinal product, or (iii) the second applicant can establish that the second medicinal product, although similar, is safer, more effective or otherwise clinically superior to the authorized orphan medicinal product. A “similar medicinal product” is defined as a medicinal product containing a similar active substance or substances as contained in an authorized orphan medicinal product, and which is intended for

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the same therapeutic indication. Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

Brexit and the Regulatory Framework in the United Kingdom

In June 2016, the electorate in the United Kingdom voted in favor of leaving the European Union (commonly referred to as “Brexit”). Thereafter, in March 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The United Kingdom formally left the European Union on January 31, 2020. A transition period began on February 1, 2020, during which European Union pharmaceutical law remains applicable to the United Kingdom, which ended on December 31, 2020. Since the regulatory framework for pharmaceutical products in the United Kingdom covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from European Union Directives and Regulations, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the United Kingdom, as United Kingdom legislation now as the potential to diverge from EU legislation. It remains to be seen how Brexit will impact regulatory requirements for product candidates and products in the United Kingdom in the long term. The MHRA, the UK medicines and medical devices regulator, has recently published detailed guidance for industry and organizations to follow from January 1, 2021 now the transition period is over, which will be updated as the UK’s regulatory position on medicinal products evolves over time.

European Union Data Collection

The collection and use of personal health data in the European Economic Area (EEA) is governed by the EU General Data Protection Regulation 2016/679, or GDPR, which went into effect on May 25, 2018 and superseded the Data Protection Directive. The GDPR applies to any company established in the EEA and to companies established outside the EEA that provides goods or services to residents in the EEA. This would include companies that process personal data in connection with the offering of goods or services to data subjects in the EU or the monitoring of the behavior of data subjects in the EU. The GDPR enhances data protection obligations for data controllers of personal data (including stringent requirements relating to the consent of data subjects, expanded disclosures about how personal data is used, requirements to conduct privacy impact assessments for “high risk” processing, limitations on retention of personal data, mandatory data breach notification and “privacy by design” requirements), creates direct obligations on service providers acting as data processors, and imposes special protections for “sensitive information,” which includes health and genetic information of data subjects residing in the EU. The GDPR grants individuals the opportunity to object to the processing of their personal information, and allows them to request deletion of personal information in certain circumstances. Additionally, the GDPR also imposes strict rules on the transfer of personal data outside of the EEA to countries that do not ensure an adequate level of protection, like the U.S. Failure to comply with the reporting requirements canof the GDPR and the related national data protection laws of the EEA Member States may result in fines of up to 20 million Euros or 4% of a company’s global annual revenues for the preceding financial year, whichever is higher. Moreover, the GDPR grants data subjects the right to claim material and non-material damages resulting from infringement of the GDPR. Given the breadth and depth of changes in data protection obligations, maintaining compliance with the GDPR will require significant civiltime, resources and expense, and we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules. This may be onerous and adversely affect our business, financial condition, results of operations and prospects. In addition, further to the UK’s exit from the EU on January 31, 2020, the GDPR ceased to apply in the UK at the end of the transition period on December 31, 2020. However, as of January 1, 2021, the UK’s European Union (Withdrawal) Act 2018 incorporated the GDPR (as it existed on December 31, 2020 but subject to certain UK specific amendments) into UK law (referred to as the ‘UK GDPR’). The UK GDPR and the UK Data Protection Act 2018 set out the UK’s data protection regime, which is independent from but aligned to the EU’s data protection regime. Non-compliance with the UK GDPR may result in monetary penalties. Similar laws havepenalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher. The UK, however, is now regarded as a third country under the EU’s

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GDPR which means that transfers of personal data from the EEA to the UK will be restricted unless an appropriate safeguard, as recognised by the EU’s GDPR, has been enacted or areput in place. Although, under consideration in foreign jurisdictions, including France which has adopted the Loi BertrandEU-UK, or French Sunshine Act, which became effective in 2013.


The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act prohibits U.S. companies Trade Cooperation Agreement it is lawful to transfer personal data between the UK and their representatives from offering, promising, authorizing, or making payments to foreign officialsthe EEA for a 6 month period following the purpose of obtaining or retaining business abroad. In many countries, the healthcare professionals we regularly interact with may meet the definition of a foreign government official for purposesend of the Foreign Corrupt Practices Act.

Other Regulations

In additiontransition period, with a view to achieving an adequacy decision from the European Commission during that period. Like the EU GDPR, the UK GDPR restricts personal data transfers outside the UK to countries not regarded by the UK as providing adequate protection (this means that personal data transfers from the UK to the statutesEEA remain free flowing).

Rest of the World Regulation

For other countries outside of the European Union and regulations described above, we also are subject to regulation in the United States, under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other federal, state, local and foreign statutes and regulations, now or hereafter in effect.

Foreign Regulation

In addition to regulations in the United States, we are subject to a variety of foreign regulations governing clinical trials, distribution, and future commercial sales of our products. Whether or not we obtain FDA approval for a drug candidate, we must obtain approval by the comparable regulatory authorities of foreign countries or economic areas, such as the European Union, before we can commence clinical trialscountries in Eastern Europe, Latin America or market products in those countries or areas. The approval process andAsia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from placecountry to place,country. In all cases the clinical trials must be conducted in accordance with GCP requirements and the timeapplicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki. If we fail to comply with applicable foreign regulatory requirements, we may be longersubject to, among other things, fines, suspension or shorterwithdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and potentially more rigorous than that required for FDA approval. Clinical studies conducted to support a submission for FDA approval may be inadequate to support a submission for marketing approval or authorization outside the United Statescriminal prosecution.

Employees and additional clinical studies may be required, such as studies that enroll subjects located in the jurisdiction where the sponsor seeks regulatory approval.  

Under European Union regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegeneration, or diabetes and optional for those medicines that are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for approval by one or more “concerned” member states based on an assessment of an application performed by one member state, known as the “reference” member state. Under the decentralized approval procedure, an applicant submits an application, or dossier, and related materials to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether or not to approve the assessment report and related materials. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.

EmployeesHuman Capital Resources

As of February 28, 2018,December 31, 2020, we employed 5044 full-time employees, including 3932 in research, and2 in clinical development and 1110 in general and administrative, and two2 part-time employees.Twenty-one of our full-time employees hold M.D. or Ph.D. degrees. We are highly dependent on our management and scientific and medical personnel, and it is crucial that we continue to attract and retain valuable employees. To facilitate attraction and retention, we strive to make us a diverse, inclusive and safe workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation and benefits programs. We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective-bargaining arrangements. We consider our employee relationsrelationship with our employees to be good.

Our Corporate and Available Information

We wereProteostasis was incorporated in Delaware on December 13, 2006 under the name Proteoguard, Inc., and subsequently changed ourits name to Proteostasis Therapeutics, Inc., on September 17, 2007. On December 22, 2020, Proteostasis effected a reverse merger, pursuant to which its wholly owned subsidiary merged with and into Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.), with Yumanity, Inc. surviving as a wholly owned subsidiary of Proteostasis. On December 22, 2020, Proteostasis changed its name from Proteostasis Therapeutics, Inc. to Yumanity Therapeutics, Inc.

See Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the consolidated financial statements included in Part II—Item 8 for more information about the above-mentioned transactions.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of: (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of the IPO, or 2021 (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

We are also a “smaller reporting company” as defined in the Securities and Exchange Act of 1934, as amended, or the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an

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emerging growth company. We may continue to take advantage of certain of the scaled disclosures available to smaller reporting companies if either our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or our annual revenues are less than $100 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.

Our principal executive offices are located at 200 Technology Square, 4th Floor, Cambridge,40 Guest Street, Suite 4410, Boston, Massachusetts 02139, and our telephone number is (617) 225-0096.409-5300. Our website address is www.proteostasis.com.www.yumanity.com. The information contained on, or accessible through, our website does not constitute part of this Annual Report on Form 10-K. We makehave included our website address in this Annual Report on Form 10-K solely as an inactive textual reference.

Available Information

Our Internet address is www.yumanity.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available through the “Investors” portion of our website free of charge at our website as soon as reasonably practicable after they have been filedwe electronically file such material with, or furnish it to, the SEC. Information on our website is not part of this Annual Report on Form 10-K or any of our other securities filings unless specifically incorporated herein by reference. In addition, our filings with the SEC. We do not incorporate the information on or accessible through our website into this report, and you should not consider any information contained in, or that canSEC may be accessed through our website as part of this report.


This report contains references to our trademarksthe SEC’s Electronic Data Gathering, Analysis and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report, including logos, artwork, and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate,Retrieval system at http://www.sec.gov. All statements made in any way, that we will not assert, to the fullest extent under applicable law,of our rightssecurities filings, including all forward-looking statements or the rightsinformation, are made as of the applicable licensor to these trademarksdate of the document in which the statement is included, and trade names. Wewe do not intend our useassume or displayundertake any obligation to update any of other companies’ trade namesthose statements or trademarksdocuments unless we are required to imply a relationship with, or endorsement or sponsorship of usdo so by any other companies. Except where the context requires otherwise, the terms “Company,” “Proteostasis,” “PTI,” “we,” “us” and “our” used in this report refer to Proteostasis Therapeutics, Inc.law.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains the materials we file with the SEC at www.sec.gov.

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ITEM 1A.

RISK FACTORS

Item 1A. Risk Factors

Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Annual Report on Form 10-K and in other documents that we file with the Securities and Exchange Commission, or SEC, in evaluating the Company and our business. Investing in our common stock involves a high degree of risk. You should carefully considerIf any of the following risks and uncertainties together with all of the other information in this Annual Report on Form 10-K, or this report, including our financial statements and related notes, before investing in our common stock. Any of the risks we describe below could adversely affectactually occurs, our business, prospects, financial condition orand results of operations.operations could be materially and adversely affected. The market price of our common stock could decline if one or more of these risks or uncertainties actually occur, causing youdescribed below are not intended to lose all or part of your investment.be exhaustive and are not the only risks facing the Company. Additional risks that we currently doand uncertainties not know about,presently known to us or that we currently believe to bedeem immaterial also may also impairimpact our business. Certain statements below are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this report.business, prospects, financial condition and results of operations.

Risks RelatingRelated to Our Business, Financial Position, and Need for Additional Capital

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

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

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

We have incurred significant operating losses since our inception. Weinception and anticipate that we will continue to incur significantcontinued losses for the foreseeable future, and we may never achieve or maintain profitability.future.

We are a drug researchhave funded our operations to date through proceeds from collaborations and development company focused primarily on developingsales of preferred units. From our lead product candidates, PTI-428, PTI-801inception through December 31, 2020, we have received gross proceeds of $125.5 million from such transactions. As of December 31, 2020, our cash, cash equivalents and PTI-808 for the treatment of CF, as well as our other product candidates for CF as part of our potential combination therapies.marketable securities were $85.3 million. We have incurred significant net losses in each year since our inception, including net losses of $25.0 million, $37.2 million and $59.4 million for the years ended December 31, 2015, 2016 and 2017, respectively. As of December 31, 2017, we hadhave an accumulated deficit of $216.9 million.$147.8 million as of December 31, 2020.

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

We expect our research and development expenses to significantly increase in connection with our clinical trials of our product candidates. In addition, if we obtain marketing approval for our product candidates, we will incur significant sales and marketing, legal, and outsourced-manufacturing expenses. As a public company, we expect

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to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are also unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

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

Our ability to become profitable depends upon the ability of our product candidates to generate revenue. To date, we have financednot generated any revenue from our operations primarily throughproduct candidates and we do not know when, or if, we will do so. We do not anticipate generating any revenue from product sales until after we have successfully completed clinical development and received regulatory approval for the commercial sale of equity securities and debt financings. We have devoted mosta product candidate, if ever. Our ability to generate revenue depends on a number of our financial resources to research and development,factors, including, ourbut not limited to:

successfully completing preclinical and clinical development activities. We have not completedof our product candidates;

successfully submitting investigational new drug, or IND, applications or comparable applications, for our product candidates;

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

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

the prevalence, duration and severity of potential side effects or other safety issues experienced with our product candidates or future product candidates, if any;

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

obtaining regulatory approvals for product candidates for which we successfully complete clinical development;

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

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

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

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

addressing any competing technological and market developments;

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

attracting, hiring, and retaining qualified personnel.

Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of our expenses, or when we will be able to generate any meaningful revenue or achieve or maintain profitability, if ever. In addition, our expenses could increase beyond our current expectations if we are required by the U.S. Food and Drug Administration (the “FDA”), or foreign regulatory agencies, to perform studies in addition to those that we currently anticipate, or if there are any delays in any of our current or future collaborators’ clinical trials or the development of any of our product candidates. We expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future. The size of our losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. In particular, we expect to incur substantial and increased expenses as we:

continue the clinical development of our lead product candidates, PTI-428, PTI-801 and PTI-808, for the treatment of CF;

seek to obtain regulatory approvals for PTI-428, PTI-801, and potential combination therapies, and our other product candidates;

seek cooperation and support from third parties, including clinical investigators, industry experts, therapeutic development networks of patient advocacy groups and clinical research organizations, as we enroll patients in our clinical trials;

conduct our ongoing clinical trials and prepare for additional clinical trials and potential commercialization of PTI-428, PTI-801, and potential combination therapies, and our other product candidates;


scale up contracted manufacturing processes and quantities to conduct our ongoing clinical trials and prepare for additional clinical trials and the commercialization of PTI-428, PTI-801, and potential combination therapies, and our other product candidates for any indications for which we receive regulatory approval;

establish outsourcing of the commercial manufacturing of PTI-428, PTI-801, PTI-808 and our other product candidates for any indications for which we may receive regulatory approval;

establish an infrastructure for the sales, marketing and distribution of PTI-428, PTI-801, potential combination therapies, and our other product candidates for any indications for which we may receive regulatory approval;

advance our combination therapies, including a potential double and triple combination candidate, as a treatment for CF into clinical trials;

expand our research and development activities and advance the discovery and development programs for other product candidates, including, without limitation, preclinical laboratory, animal and other testing and reports and the preparation of investigational new drug filings in the United States, and the equivalent in non-U.S. jurisdictions where we may seek to conduct clinical trials;

maintain, expand and protect our intellectual property portfolio;

continue our research and development efforts and seek to discover additional product candidates, including back-up candidates to existing product candidates; and

add clinical, regulatory, operational, financial and management information systems and personnel, including personnel to support our clinical development and commercialization efforts and operations as a public company.

To become and remain profitable, we must succeed in developing and eventually commercializing products with significant market potential. This will require us to be successful in a range of challenging activities, including discovering product candidates, completing preclinical testing and clinical trialsEven if one or more of our product candidates obtainingis approved for commercial sale, absent our entering into a collaboration or partnership

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agreement, we anticipate incurring significant costs associated with commercializing any approved product candidate and maintainingongoing compliance efforts.

Even if we are able to generate revenue from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations. Revenue from the sale of any product candidate for which regulatory approval is obtained will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product, the ability to get reimbursement at any price, and whether we own the commercial rights for that territory. The precise number of people with Parkinson’s disease, Alzheimer’s disease, and amyotrophic lateral sclerosis (“ALS”) is unknown. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, and manufacturing, marketing and selling those products. We are inbased on estimates. If the early stagesnumber of these activities.

Noneaddressable patients is not as significant as we anticipate, the indication approved by regulatory authorities is narrower than we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice, or treatment guidelines, we may not generate significant revenue from sales of our product candidates, has been approved or commercialized. We may never succeed in obtaining regulatory approval for or commercializing any of our product candidates. If our product candidates are not approved or commercialized,even if any products that do receive regulatory approvals later show unanticipated properties (for example, unexpected safety issues), or if revenues from any products that do receive regulatory approvals are insufficient, we will not achieve profitability and our business may fail.

approved. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our failure to become and remain profitable would depress thedecrease our value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product offeringscandidates, or continue our operations. Aoperations and cause a decline in the value of our company could cause you to losecommon stock, all or partany of your investment.which may adversely affect our viability.


Our abilityDue to generate future revenues from product sales is uncertainthe significant resources required for the development of our programs, and depends upondepending on our ability to successfully develop, obtain regulatory approval for and commercialize our product candidates, as well as the receipt and/or maintenance of regulatory approval of products and product candidates under development by third parties that our product candidates will or may in the future depend on.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators, to successfully complete theaccess capital, we must prioritize development of obtain the necessary regulatory approvals for, and commercialize, acertain product candidate or candidates. Our several development programs are currently focused on demonstrating their respective clinical benefit for CF patients. If either PTI-428 or PTI-801 is approved, it may be approved for co-administration with ivacaftor and lumacaftor. We do not anticipate generating revenues from sales of PTI-428, PTI-801 or any product candidate for the foreseeable future, if ever. Our ability to generate future revenues from product sales depends heavily on:

Vertex’s continued compliance with regulatory requirements, the continued commercial availability of ivacaftor and lumacaftor, the reimbursement of their cost to CF patients by insurers and their overall success in the market;

the successful regulatory approval and commercial launch of CFTR modulators other than ivacaftor and lumacaftor (for example, tezacaftor with ivacaftor) that we desire to test for administration with PTI-428, PTI-801 and/or our other product candidates;

obtaining favorable results for and advancing the development of PTI-428, PTI-801, PTI-808, our potential combination therapies, and our other product candidates, including successfully enrolling patients in and completing our ongoing clinical trials and initiating and completing additional clinical trials;

obtaining regulatory approval in the United States of PTI-428, PTI-801, our potential combination therapies, and our other product candidates for CF and equivalent foreign regulatory approvals;

launching and commercializing PTI-428, PTI-801, our potential combination therapies, and our other product candidates, including building a production infrastructure and a sales force, and collaborating with third parties;

achieving broad market acceptance of PTI-428, PTI-801, our potential combination therapies, and our other product candidates in the medical community and with third-party payors; and

generating and advancing through clinical development, a pipeline of product candidates in addition to PTI-428, PTI-801, PTI-808, our potential combination therapies, and next-generation CFTR modulators.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, andMoreover, we may never generate the data necessaryfail to obtain regulatory approval and achieve product sales. Our anticipated development costs would likely increase if we do not obtain favorable results or if development of any product candidate is delayed. In particular, if we are required by the U.S. Food and Drug Administration, or FDA, and comparable regulatory authorities in other countries to perform studies or trials in addition to those that we currently expect to undertake, we would likely incur higher costs than we anticipate. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of any increase inexpend our anticipated development costs.

In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs in connection with commercialization. As a result, we cannot assure you that we will be able to generate revenues from sales of any approvedlimited resources on product candidates or indications that we will achievemay be more profitable or for which there is a greater likelihood of success.

Our current portfolio consists of two programs and two additional potential programs. Our lead product candidate, YTX-7739, is in Phase 1 clinical development. We seek to maintain profitability even if we do generate sales.


We will require additional capitala process of prioritization and resource allocation to fund our operations, including if our operating plan changes. If we fail to obtain additional capital, we would be forced to delay, reduce or eliminate one or moremaintain an optimal balance between aggressively advancing product candidates, such as YTX-7739, and ensuring replenishment of our product research and development programs, seek corporate partnersportfolio.

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

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

Developing pharmaceutical products, including conducting preclinical studiesAs of December 31, 2020, our cash, cash equivalents and marketable securities were $85.3 million. We will require additional funding to advance YTX-7739 beyond Phase 1 clinical trials and other planned early

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development of other programs generated by our discovery engine platform. Our ability to secure this additional funding may be adversely impacted by negative or ambiguous results in our Phase 1 clinical trial for YTX-7739. Developing small-molecule products is a time-consuming, expensive, and uncertain process that takes years to complete. Wewe expect our discovery, research, and development expenses to increase substantially increase in connection with our ongoing activities, particularly as we advance our product candidates in clinical programstrials. We may also need additional funds sooner if we choose to pursue additional indications and/or geographies for PTI-428, PTI-801, PTI-808, our potential combination therapies, andproduct candidates or otherwise expand more rapidly than we presently anticipate.

In addition, our other product candidates.

Based uponindependent registered public accounting firm has included an emphasis of matter paragraph relating to our current operating plan, we believe that our existing cash, cash equivalents and short-term investments of $74.5 million as of December 31, 2017 will enable usneed for additional financing to fund operations in its report on our operating expensesaudited financial statements, and capital expenditure requirements into early 2019. As of December 31, 2017, management has further assessed this risk and, in accordance with the requirements of ASC 205-40, determined that there is substantial doubt about our abilitywe may be unable to continue as a going concern within twelve months ofover the issuance date of the financial statements in this Annual Report on Form 10-K. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining additional financing on terms acceptable to us, if at all, nor is it considered probable under the accounting standards. As such, under the requirements of ASC 205-40, management may not consider the potential for future capital raises or management plans to reduce costs that are not considered probable in their assessment of our ability to meet our obligations for the next twelve months. If we are unable to obtain funding, we would be forced to delay, reduce or eliminate one or more of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue operations.long-term.

In addition, should ourOur operating plan may also change we will be required to reassess our operating capital needs and there can be no assurance that we will have the cash resources to fund any changed operating plan or that additional funding will be available on terms acceptable to us, if at all. Changing circumstances including those beyond our control may cause us to consume capital more rapidly than weas a result of many factors currently anticipate,unknown, and we may need to seek additional funds sooner than planned. For example, our clinical trials may encounter technical, enrollmentplanned, through public or private equity or debt financings, government or other difficulties that could increase our development costs more than we expect, or the FDA may require us or we may choose to perform studies or trials in addition to those that we currently anticipate. We may need to raise additional funds to support our ongoing programs for PTI-428, PTI-801third-party funding, marketing and PTI-808, our potential combination therapies,distribution arrangements and other clinical candidates, through regulatory approvalcollaborations, strategic alliances and commercialization,licensing arrangements, or ifa combination of these approaches. In any event, we need or opt to seekwill require additional capital to obtain regulatory approval for, PTI-428 and/and, if approved, to commercialize our product candidates. Raising funds in the current economic environment may present additional challenges. Even if we believe that we have sufficient funds for our current or PTI-801 for administration with drugs other than ivacaftor and lumacaftor, such as ivacaftor and tezacaftor.future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

SecuringAny additional financingfundraising efforts may divert our management from our their day-to-day activities, which may adversely affect our ability to develop and, if approved, commercialize our product candidates, including PTI-428, PTI-801 and PTI-808, and our potential combination therapies.candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us,it, if at all. If we are unableMoreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to raisedecline. The sale of additional capital when requiredequity or on acceptable terms,convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to:

significantly delay, scale back or discontinue the research, development or commercialization of our product candidates, including PTI-428, PTI-801 and PTI-808, our potential combination therapies, and our other research or pre-clinical activities;

seek corporate partners for PTI-428, PTI-801, PTI-808, our potential combination therapies, or any of our other product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seekagree to develop or commercialize ourselves.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing our development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects andcertain restrictive covenants, such as limitations on our ability to develop our product candidates. In addition, if we are unable to raise capital, we will also need to implement cost reductions, and any failure to effectively do so will harm our business, results of operations and prospects.


Raisingincur additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates on terms unfavorable to us.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs primarily through the sale of equity securities, debt, financings and government and foundation grants. We may also seek to raise capital through third-party collaborations, strategic alliances and similar arrangements. We currently do not have any committed external source of funds.

In order to raise additional funds to support our operations, we may sell additional equity or debt securities, enter into collaborations, strategic alliances, or licensing arrangements or other marketing or distribution arrangements. To the extent that we raise additional capital through the sale of equity or debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. For example, our board of directors has the right to issue previously-authorized shares of preferred stock with such preferences without stockholder approval. Debt financing, if available, may involve the right to convert any such debt into equity on favorable conversion terms, which conversion would dilute existing stockholders’ ownership interest. Any such debt financing would also likely include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, and declaring dividends, and will impose limitations on our ability to acquire, sell or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business.

If we raise additional We could also be required to seek funds through collaborations, strategic alliances, or licensing arrangements or other marketing or distribution arrangements with third parties,collaborative partners or otherwise at an earlier stage than otherwise would be desirable and we may havebe required to relinquish valuable rights to some of our technologies future revenue streams, research programs or product candidates or grant licensesotherwise agree to terms unfavorable to us, any of which may have a material adverse effect on terms that may not be favorable to us. our business, operating results, and prospects.

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

Risks Related to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts, or grant others rights to developOur Product Development and market product candidates that we would otherwise prefer to develop and market ourselves.Commercialization

We have a limited operating history, which may make it difficult to evaluate the success of our business to date and to assess our future viability.

We were formed and began operations in December 2006. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights and conducting researchResearch and development activities for our product candidates. We have not obtained regulatory approval for any of our product candidates. Consequently, any predictions about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history, more experience with clinical development or approvedbiopharmaceutical products on the market.is inherently risky.

We might not be able to utilize all or a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.

As of December 31, 2017, we had federal and state net operating loss carryforwards of $196.9 million and $182.1 million, respectively, which begin to expire in 2026 and 2030, respectively. As of December 31, 2017, we also had federal and state research and development tax credit carryforwards of $6.8 million and $3.1 million, respectively, which begin to expire in 2027 and 2026, respectively. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not determined if we have experienced Section 382 ownership changes in the past and if a portion of our net operating loss and tax credit carryforwards are subject to an annual limitation under Section 382. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If we determine that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations. We have a full valuation allowance against our net deferred tax assets.


In addition, under the Tax Cuts and Jobs Act (the Tax Act), the amount of post 2017 NOLs that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. The Tax Act generally eliminates the ability to carry back any NOL to prior taxable years, while allowing post 2017 unused NOLs to be carried forward indefinitely. There is a risk that due to changes under the Tax Act, regulatory changes or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.

Risks Relating to the Development and Regulatory Approval of Our Product Candidates

We depend substantially on the success of our lead product candidate, PTI-428, which is currently in clinical development and is a new class of CFTR modulator. We cannot be certain that we will be able to successfully complete the clinical development of, obtain regulatory approval for, or successfully commercialize PTI-428.

We currently have no products on the market, and our most advanced product candidate, PTI-428, is currently in clinical development. Our other product candidates – PTI-801 and PTI-808 - are at an even earlierearly stage of clinical development of the product candidates currently in our pipeline and are continuing to discover additional potential product candidates leveraging our discovery engine platform. To date, we are just now initiating combination therapy clinical trials.

have devoted substantially all of our efforts and financial resources to identify, secure intellectual property for, and develop our discovery engine platform and our product candidates, including conducting multiple preclinical studies, and providing general and administrative support for these operations. Our business depends substantiallyheavily on the successful clinical development, regulatory approval, and commercialization of PTI-428,our lead product candidate, YTX-7739 which is in clinical development. None of our product candidates have advanced into late-stage

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development or a new class of CFTR modulator known as amplifier,pivotal clinical study and it may be years before any such study is initiated, if at all. YTX-7739 will require substantial additional clinical development, testing, and regulatory approval efforts before we are permitted to commence its commercialization, if ever. Theour commercialization. Further, we cannot be certain that any of our product candidates will be successful in clinical trials or obtain regulatory approval.

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

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

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

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

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

the product candidates that we develop and our discovery engine platform may not be sufficiently covered by intellectual property for which we hold exclusive rights;

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

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

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

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

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

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

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

The preclinical and clinical product candidates and current clinical trials are, and the future clinical trials and the manufacturing and marketing of PTI-428 and any otherour product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States, the European Union and in other jurisdictionscountries where we intend to

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test and, if approved, market ourany product candidates.candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must, among other requirements, demonstrate through preclinical testingstudies and clinical trials that the product candidate is safe and effective for use in each target indication,indication. Drug development is a long, expensive, and potentially in specific patient populations, including the pediatric population.uncertain process, and delay or failure can occur at any stage of any of our clinical trials. This process can take many years and may include post-marketing studies and surveillance, which wouldwill require the expenditure of substantial resources beyond the proceeds we have currently raised.resources. Of the large number of drugs in development for approval in the United States, and the European Union, only a small percentage will successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable,process and arewill be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and preclinical studies and clinical programs,trials, we cannot assure you that PTI-428 or any of our other product candidates will be successfully developed or commercialized.

In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi® as background therapy.  We may not achieve expedited clinical development or review as a result of the breakthrough therapy designation, the FDA may rescind such designation if our development program does not continue to meet the criteria for breakthrough therapy designation, and breakthrough designation does not change the standards of approval for investigational new drugs.

We also depend on the successIf any of our product candidate PTI-801,candidates successfully complete clinical trials, we generally plan to seek regulatory approval to market our product candidates in the United States, the European Union (“EU”), and in additional foreign countries where we believe there is a viable commercial opportunity and significant patient need. We have never commenced, compiled, or submitted an application seeking regulatory approval to market any product candidate. We may never receive regulatory approval to market any product candidates even if such product candidates successfully complete clinical trials, which is currentlywould adversely affect our viability. To obtain regulatory approval in earlycountries outside the United States, we must comply with numerous and varying regulatory requirements of such other countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical development.trials, commercial sales, pricing, and distribution of our product candidates. We may also rely on collaborators or partners to conduct the required activities to support an application for regulatory approval, and to seek approval, for one or more of our product candidates. We cannot be certainsure that any collaborators or partners will conduct these activities or do so within the timeframe we desire. Even if we (or any collaborators or partners) are successful in obtaining approval in one jurisdiction, we cannot ensure that we (or any collaborators or partners) will obtain approval in any other jurisdictions. If we are unable to obtain approval for our product candidates in multiple jurisdictions, our revenue and results of operations could be negatively affected.

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

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

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

One of our strategies is to identify and pursue clinical development of obtain regulatory approval for, or successfully commercialize PTI-801.

For PTI-801, we have completed dosingadditional product candidates. Our portfolio currently consists of subjectsfour programs, one of which is in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801, and are now conducting the CF portion of this study.

Our business depends on the successful clinical development and the rest of which are in research, discovery and preclinical stages of development. Identifying, developing, obtaining regulatory approval, and commercializationcommercializing additional product candidates for the treatment of PTI-801, a class of CFTR modulator known as a corrector, and itneurodegenerative diseases will require substantial additional funding and is prone to the risks of failure inherent in drug development. We cannot provide you any assurance that we will be able to successfully identify or acquire additional product candidates, advance any of these additional product candidates through the development process, successfully commercialize any such additional product candidates, if approved, or assemble sufficient resources to identify, acquire, develop or, if approved, commercialize additional product candidates. If we are unable to successfully identify, acquire, develop, and commercialize additional product candidates, our commercial opportunity may be limited.

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

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

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

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

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

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

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

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

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

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

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

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the proximity of subjects to a study site;

the design of the study;

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

public perception of drug safety issues;

our ability to recruit clinical study investigators with the appropriate competencies and marketingexperience;

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

clinicians’ and patients’ perceptions as to the potential advantages and side effects of PTI-801the product candidate being studied in relation to other available therapies and product candidates;

our ability to obtain and maintain patient consents;

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

the impact of the COVID-19 pandemic on patient enrollment and retention and clinical trial site initiation.

Our clinical trials may fail to demonstrate adequate safety and efficacy of our product candidates, will be subject to extensivewhich would prevent, delay, or limit the scope of regulatory approval and rigorous review and regulation by numerous government authorities in the United States, the European Union and other jurisdictions where we intend to test and, if approved, market our product candidates. commercialization.

Before obtaining regulatory approvals for the commercial sale of any of our product candidate,candidates, we must, among other requirements, demonstrate


through lengthy, complex, and expensive preclinical testingstudies and clinical trials that theour product candidate iscandidates are both safe and effective for use in each target indication,indication. Each product candidate must demonstrate an adequate risk versus benefit profile in our intended patient population and potentially in specific patient populations, including the pediatric population. This processfor our intended use.

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

We have limited experience in designing clinical trials and may include post-marketing studiesbe unable to design and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large number of drugs in development for approval in the United States and the European Union, onlyexecute a small percentage successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are ableclinical study to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that PTI-801 or any of our other product candidates will be successfully developed or commercialized.

We also depend on the success of our proprietary combination therapies, including a double and a triple combination, which are currently in early clinical development.support marketing approval. We cannot be certain that weour current clinical trials or any other future clinical trials will be able to successfully complete the clinical developmentsuccessful. Additionally, any safety concerns observed in any one of obtain regulatory approval for, or successfully commercialize these combinations. Combination therapies involve additional complexity and risk that could delay or cause our programs to stall or fail; development of such programs may be more costly, may take longer to achieve regulatory approval and may be associated with unanticipated adverse events.

Our business depends on the successful clinical development, regulatory approval and commercialization of combination therapies, including potential proprietary double and triple combinations that will require substantial additional clinical development and regulatory approval efforts before we are permitted to commence commercialization, if ever. The clinical trials and manufacturing and marketing of these combinations will be subject to extensive and rigorous review and regulation by numerous government authorities in our targeted indications could limit the United States, the European Union and other jurisdictions where we intend to test and, if approved, market them. Before obtaining regulatory approvalsprospects for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication, and potentially in specific patient populations, including the pediatric population. This process can take many years and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that our proprietary combination therapies or any of our other product candidates will be successfully developed or commercialized.

Clinical development and commercialization of combination therapies, such as our potential proprietary double and triple combinations, and our PTI-428 and PTI-801 candidates being tested in the clinic with patients taking background standard of care therapies, involve additional complexity and risk, including without limitation, those involving pre-clinical studies, drug-drug interactions, dose selection, unanticipated adverse events, clinical design and approvals of regulatory bodies and therapeutic development networks of patient advocacy groups. For example, if we or regulatory bodies identify concerns in pre-clinical combination toxicology studies, we may need to run additional studies before commencing or continuing clinical development. Combination therapy clinical development may also involve more restrictive inclusion criteria based on the profiles of multiple investigational products, which could delay enrollment. We have limited experience developing and commercializing combination therapies and are competing with industry players with greater resources than us. If we are unable to manage the additional complexities and risks of the development and commercialization of combination therapies, our proposed combination program could be delayed, halted or otherwise fail to receive approval.

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for PTI-428, PTI-801, PTI-808, our potential combination therapies, or our other product candidates, our business will be substantially harmed.

We are not permitted to market PTI-428, PTI-801, PTI-808, our potential combination therapies, or any of our other product candidates in the United States or the European Union until we receive approval of a New Drug Application, or NDA, from the FDA or a Marketing Authorization Application, or MAA, from the European Commission, respectively. Prior to submitting an NDA to the FDA or an MAA to the EMA for approval of any of our product candidates for a specific indication, we will need to complete preclinical and toxicology studies, as well as Phase 1, Phase 2 and Phase 3 clinical trials.


Successfully initiating and completing our clinical program and obtaining approval of an NDA or an MAA is a complex, lengthy, expensive and uncertain process, and the FDA, the EMA or other comparable foreign regulatory authorities may delay, limit or deny approval of any of our candidates for many reasons, including, among others:

we may not be able to demonstrate that our product candidates are safe and effective to the satisfaction of the FDA or the EMA;

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or the EMA for marketing approval;

the FDA or the EMA may disagree with the number, design, size, conduct or implementation of our clinical trials;

the FDA or the EMA may require that we conduct additional clinical trials or cohorts or run cohorts sequentially, all of which could delay our trial completion timelines;

the FDA or the EMA may not approve the formulation, labeling or specifications of PTI-428, PTI-801, PTI-808, or our other product candidates;

the clinical research organizations, or CROs, that we retain to conduct our clinical trials may take actions outside of our control that materially adversely impact our clinical trials;

the FDA or the EMA may find the data from preclinical studies and clinical trials insufficient to demonstrate that PTI-428, PTI-801, PTI-808, our potential combination therapies, and/or our other product candidates’ clinicalin those, and other benefits outweigh their safety or other risks, including, without limitation, the potential for drug-drug interaction;

the FDA or the EMA may disagree with our interpretation of data from our preclinical studies and clinical trials, including our characterization of observed toxicities;

the FDA or the EMA may not accept data generated at our clinical trial sites;

if our NDAs or MAAs, if and when submitted, are reviewed by the FDA or the EMA, as applicable, the regulatory agency may have difficulties scheduling the necessary review meetings in a timely manner, may recommend against approval of our application or may recommend that the FDA or the EMA, as applicable, require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

the FDA may require development of a Risk Evaluation and Mitigation Strategy as a condition of approval or post-approval, and the EMA may grant only conditional approval or impose specific obligations as a condition for marketing authorization, or may require us to conduct post-authorization safety studies;

the FDA or the EMA may find deficiencies with or not approve the manufacturing processes or facilities of third-party manufacturers withindications, which we contract; or

the FDA or the EMA may change their approval policies or adopt new regulations.

Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market PTI-428, PTI-801, PTI-808, our potential combination therapies, or any of our other product candidates. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business, financial condition, and results of operations.

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

We may not be able to file IND applications or related amendments or similar applications and amendments outside the United States to commence additional clinical trials on the timelines expected, and even if we are able to, regulatory authorities may not permit us to proceed.

We may not be able to file future IND applications or similar applications outside the Unites States for our product candidates on the timelines we expect. For example, we may experience manufacturing delays or other delays with preclinical studies. Moreover, we cannot be sure that submission of an IND or similar application outside the United States will result in the FDA or respective regulatory authority allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate clinical trials. Additionally, even if such regulatory authorities agree with the design and implementation of the clinical trials set forth in IND or similar application, we cannot guarantee that such regulatory authorities will not change their requirements in the future. These considerations also apply to new clinical trials we may submit as amendments to existing IND or similar applications or to a new application. Any failure to file IND or similar applications on the timelines we expect or to obtain regulatory authorizations for our trials may prevent us from completing our clinical trials or commercializing our products on a timely basis, if at all.

Interim, “topline,” and preliminary data from our clinical trials that are announced or published from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose preliminary or topline data from our clinical trials, which are based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of its analyses of data, and we may not have received or had the opportunity to fully evaluate all data. As a result, the topline or preliminary results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, topline data should be viewed with caution until the final data are available. From time to time, we may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available or as patients from our clinical trials continue other treatments for their disease. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.

In addition, the information we choose to publicly disclose regarding a particular clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is material or otherwise appropriate information to include in our disclosure.

If the United Statesinterim, topline, or preliminary data that we report differs from actual or final results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and the European Union, we intend to marketcommercialize, our product candidates if approved, in other international markets. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary from country-to-country and may require additional testing. Moreover, the time required to obtain approval may differ from that required to obtain FDAbe harmed, which could harm our business, operating results, prospects or EMA approval. In addition, in many countries, a product candidate must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA or the EMA. The regulatory approval process in other international markets may include all of the risks associated with obtaining FDA or EMA approval.financial condition.

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Our lead product candidates PTI-428 and PTI-801, are designed to be administered withmay cause serious adverse events or other CF therapies. Developing product candidates for administration with other therapies may lead to unforeseenundesirable side effects or failures in our clinical trials that could delay or prevent their regulatory approval, or limit the commercial profile of an approved label. Such other therapies could also be removed fromlabel, or supplanted in the market and result in significant negative consequences.consequences following marketing approval, if any.

We are studying our lead product candidates PTI-428 and PTI-801, in clinical trials as a combination therapy with therapies that are approved and commercially available to the patients we plan to enroll in such clinical trials. We are also exploring proprietary combination therapies consisting of combinations of PTI-801 and PTI-808, as a double combination, and PTI-428, PTI-801 and PTI-808, as a triple combination.  We anticipate that if oneSerious adverse events or more ofother undesirable side effects caused by our product candidates is approved for marketing, it will be approvedcould cause us or regulatory authorities to be administered only withinterrupt, delay, or halt clinical trials, and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other therapies. Our development programs and planned studies carry all the risks inherent in drug development activities, including the risk that they will fail to demonstrate meaningful efficacy or acceptable safety. In addition, our development programs are subject to additional regulatory commercial, manufacturing and other risks becauseauthorities.

Further, clinical trials by their nature utilize a sample of the usepotential patient population for a limited duration of other therapies in combinationexposure. Rare and severe side effects of a product candidate may only be uncovered with oura significantly larger number of patients exposed to the product candidates. For example, the other therapies may lead to toxicities that are improperly attributed tocandidate. If our product candidates receive marketing approval and we or the combination of ourothers identify undesirable side effects caused by such product candidates with(or any other therapies may result in toxicities that the product candidate or other therapy does not produce when used alone. The other therapies we are using in combination may be removed from the market, or we may not be able to secure adequate quantities ofsimilar products) after such materials for which we have no guaranteed supply contract, and thus be unavailable for testing or commercial use with any of our approved products. The other therapies we may use in combination with our product candidates may be supplanted in the market by newer, safer and/or more efficacious products or combinations of products. For example, we are testing PTI-428 and PTI-801 in clinical trials where we provide our investigational product to CF patients stable on background therapy of ivacaftor and lumacaftor.  The manufacturer of this background therapy has recently received marketing approval, from the FDA to market ivacaftor and tezacaftor as Symdeko, and is conducting testing of Symdeko’s components together with additional corrector modulators as part of triple combinations, any of which, if approved, could supplant the existing therapy. Symdeko could supplant Orkambi as, or become its own independent, standard of care.  Testing product candidates in combination with other therapies may increase the risk of significant adverse effects or test failures, or impact from drug-drug interactions. The timing, outcome and cost of developing products to be used in combination with other therapies is difficult to predict and dependent on a number of factors thatpotentially significant negative consequences could result, including:

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

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

we may be required to change the way such products are outside our reasonable control. If distributed or administered;

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

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

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

subjects in a clinical study may experience safetysevere or toxicity issues in ourunexpected drug-related side effects;

we may decide, or regulatory authorities may require it, to conduct additional clinical trials or with any approved products, abandon product development programs;

we may not receive approvaldecide to market anyremove such products whichfrom the marketplace;

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

the product may become less competitive; and

our reputation may suffer.

Any of these events could prevent us from ever generating revenuesachieving or achieving profitability.

If the data from our existing, ongoing and planned preclinical studies and clinical trials of PTI-428 and PTI-801 each as a combination therapy administered with ivacaftor and lumacaftor and/or as part of a proprietary combination therapy, in each case regarding the safety or efficacy of these combinations are not favorable, the FDA and comparable foreign regulatory authorities may not approve these combination therapies and we may be forced to delay or terminate the development of any of these combination therapies, which would materially harm our business. Further, even if we gain marketing approvals for any of these combination therapies from the FDA and comparable foreign regulatory authorities in a timely manner, we cannot be certain that they will be commercially successful. If the results of the anticipated or actual timing of marketing approvals for these combination therapies, or themaintaining market acceptance of these combination therapies, if approved, including treatment reimbursement levels agreed to by third-party payors, do not meet the expectations of investors or public market analysts,affected product candidates, could substantially increase the market price of our common stock would likely decline.  Currently, some jurisdictions outside of the United States do not provide reimbursement for all or some of the standard of care therapies included in some of our combination therapies. Government and other third-party payors seek to contain costs of health care through legislativecommercializing our product candidates, and other means. If they failcould significantly impact our ability to provide coveragesuccessfully commercialize our product candidates and adequate reimbursement rates for these products, it could increase the cost of our trials in such jurisdictions and decrease the possible market for any approved combination therapy that includes these co-administered drugs.generate revenues.


Failures or delays in the commencement progress or completion of, or ambiguous or negative results from, our planned clinical trials of our product candidates including PTI-428, PTI-801 and PTI-808, and our potential combination therapies, including due to competition from competing trials for CF patients, amended or additional trials or cohorts, lack of sufficient approvals including from the FDA, local regulatory and ethics bodies and those of therapeutic development networks of patient advocacy groups, or trial holds or stoppage due to interim results or safety concerns, could result in increased costs to us and could delay, prevent, or limit our ability to generate clinical trial data, advance our product candidates in the clinic, submit an NDA (or foreign equivalent) for any of our product candidates for U.S. or foreign marketing approval, derive revenue and continue our business.

Successful completion of the clinical trials for PTI-428, PTI-801, PTI-808, our potential combination therapies, and our other candidates is a prerequisite to submitting an NDA to the FDA or a MAA to the EMA and, consequently, the ultimate approval and commercial marketing of PTI-428, PTI-801, PTI-808, our potential combination therapies, and our other candidates in the United States and the European Union. Similar prerequisites apply in other foreign jurisdictions and for all of our product candidates in any jurisdiction. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A product candidate can unexpectedly fail at any stage of clinical development. The historical failure rate for product candidates is high due to scientific feasibility, safety, tolerability, toxicology, efficacy, changing standards of medical care and other variables. If the FDA requires us to complete, or we choose to implement, amended or additional studies beyond what we currently expect, or to run additional cohorts or conduct cohorts sequentially, we may be delayed in completing our clinical trials and our expenses will increase. Conducting our trials in Europe and other ex-U.S. jurisdictions has and will continue to require IND-equivalent submissions to, and the approval of, local regulatory and ethics bodies, and we cannot assure you we will receive these approvals, or receive them in a timely manner. If therapeutic development networks of CF patient advocacy groups in the United States and/or other jurisdictions such as Europe do not timely sanction or highly rate or score our trials, or prioritize trials of other sponsors over our trials, we may not be able to enroll sufficient patients to conduct our trials at their member sites, or it may take longer to conduct these trials and we may need to look to other jurisdictions where we can more efficiently run our trials.  Many CF clinical trial sites place importance on the review, ranking and sanctioning of therapeutic development networks of CF patient advocacy groups. In the U.S., we believe many sites consider sanctioning from the Protocol Review Committee, or PRC, of the Therapeutic Development Network of the U.S.-based Cystic Fibrosis Foundation’s Therapeutic Branch, or the TDN, when deciding whether and when to participate in a trial or which trials to prioritize. For example, the TDN deferred sanctioning of PTI-428, which we believe contributed to a delay in our now completed PTI-428 Phase 2 trial. There is also a large number of CF programs in clinical development at this time, including numerous corrector and combination trials from Vertex and other companies with greater resources and experience than us.  We face intense competition for eligible CF patients, which has and could continue to hamper our recruitment efforts; this competition is likely to intensify following the recent clinical data announcements from multiple triple combination trials from Vertex. We do not know whether allany of our planned clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

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

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

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

negative results from our ongoing preclinical studies and clinical trials;

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

inadequate quantity or quality of or access to a product candidate or other materials such as combination therapies for co-administration in our trials that are marketed by other firms, necessary to conduct clinical trials;trials, for example delays in the manufacturing of sufficient supply of finished drug product;

difficulties obtaining institutional review board,ethics committee or IRB, or ethics committeeInstitutional Review Board (“IRB”) approval to conduct a clinical trialstudy at a prospective site or sites;

challenges in recruiting and enrolling patientssubjects to participate in clinical trials, including the size and nature of the patient population, the proximity of patientssubjects to clinicalstudy sites, (including, without limitation, if U.S. trial sites include international subjects coming to the U.S. on a visa), eligibility criteria for the clinical trial,study, the nature of the clinical trialstudy protocol, (including, without limitation, patient factors such as the time commitment involved in the required number of trial-related visits and procedures and the inability to take certain existing therapies during the trial), risks included in the signed informed consent and any new or amended consents required by each study participant, the availability of approved effective treatments for the relevant disease, and competition from other clinical trialstudy programs for similar indications;


 

unfavorable review of or a decision to defer sanctioning or not sanction one or more of our clinical trials by the TDN, or the CTN, each of which may not sanction our trials for conduct at prospective trial sites, may change or alter any approval it may grant, or may provide a ranking or revised ranking of an amended protocol that adversely impacts recruitment in our clinical trials compared with other investigational new drugs in CF; while the TDN approved and favorably ranked our triple combination (for PTI-428, PTI-801 and PTI-808), double combination (for PTI-801 and PTI-808) and PTI-801 protocols, we cannot assure you that it will ever sanction PTI-428 or any of our other trials; the CTN has approved and favorably ranked the protocols for our PTI-428, PTI-801 and triple combination trials and we are actively working to expand into Europe with its member sites, subject to regulatory and ethics approvals in local jurisdictions, but we cannot assure you that such expansion will be successful;

severe or unexpected drug-related side effects experienced by patientssubjects in oura clinical study;

we may decide, or regulatory authorities may require it, to conduct additional clinical trials or by individuals using drugs similarabandon product development programs;

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

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

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

difficulties retaining and/or obtaining data from patientssubjects who have enrolled in a clinical trialstudy but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues, or loss of interest, difficulty travelling to the trial site or returning for required check-ins, or other factors, some of which are out of our control.interest.

There are an unprecedented number of CF clinical trials ongoing in the United States and in other countries. As a result of this and other factors described above, the activation of clinical trial sites for our ongoing trials, and securing our target subject enrollment for these clinical trials, has been delayed from what we had originally planned. If we are unable to increase our enrollment, we will not have a substantially complete data set for these trials by our target dates.

We expanded our clinical trial protocols for PTI-428, PTI-801 and PTI-808 to include CF patients. These expansions required protocol amendments to our INDs that are in effect with the FDA, which are subject to FDA comment. We are required to receive IRB approval for these amended protocols but there is no guarantee that IRBs of our existing and prospective clinical trial sites will approve these expansions. Any failure or delay in obtaining necessary permissions from the relevant IRBs to expand our trials may delay their completion and our overall development plan.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trialstudy may be suspended placed on clinical hold or terminated by us, the FDA, other regulatory authoritiesthe IRBs or the IRBsethics committees at the sites where the IRBsin which such clinical studies are overseeingbeing conducted, a clinical trial, or a data and safety monitoring board (“DSMB”) overseeing the clinical study at issue or DSMB, may recommend that the sponsor suspend or terminate a trial,other regulatory authorities due to a number of factors, including, among others:

failure to conduct the clinical trialstudy in accordance with regulatory requirements or our clinical protocols;

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

unforeseen safety issues, including any that could be identified in our ongoing toxicologypreclinical studies or clinical trials, adverse side effects or lack of effectiveness, including as part of ambiguous or negative interim results;effectiveness;

changes in government regulations or administrative actions;

problems with clinical supply materials; and

lack of adequate funding to continue clinical trials.

We may in the clinical trial.


Positive results from preclinicalfuture seek orphan drug designation or in vitro and in vivo testing of PTI-428, PTI-801, PTI-808, our potential combination therapies, or our other candidates are not necessarily predictive of the resultsexclusivity for certain of our ongoing and future clinical trials of theseproduct candidates. If we cannot achieve positive results in our clinical trialscompetitors are able to obtain orphan drug exclusivity for PTI-428, PTI-801, PTI-808,products that constitute the same drug and treat the

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same indications as our potential combination therapies, or our otherproduct candidates, we may be unable to successfully develop, obtain regulatory approval for and commercialize PTI-428, PTI-801, PTI-808, our potential combination therapies, or our other candidates.

Positive results from our preclinical testing of PTI-428, PTI-801, PTI-808, our potential combination therapies, and our other candidates in vitro and in vivo may not necessarily be predictive of the results from our clinical trials in humans. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical trials after achieving positive results in preclinical in vitro and in vivo studies, and we, or the third parties whose drug candidates we expect to be co-administered with PTI-428 and PTI-801, may face similar setbacks. For example, CFTR mRNA levels in target tissues of rats and monkeys exposed to PTI-428 were observed to increase proportionally with exposure to PTI-428. Additionally, preliminary exploratory biomarker nasal CFTR mRNA and protein data from the SAD and MAD cohorts in our Phase 1 clinical trial for PTI-428 in healthy volunteers confirm target engagement. However, later clinical trials may not show that this biomarker is predictive of clinical efficacy or we may not be able to successfully obtain sufficient biomarker data to analyze. Preclinical and clinical data are often susceptible to varying interpretations and analyses, andhave competing products approved by the FDAapplicable regulatory authority for a significant period of time.

We may in the future seek orphan drug designation or other regulatory agencies may require changes to our protocols or other aspects of our clinical trials or require additional studies. Additionally, many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval. If we fail to produce positive results in our clinical trials of one or moreexclusivity for certain of our product candidates, the development timeline and regulatory approval and commercialization prospects for those product candidates, and, correspondingly, our business and financial prospects, would be materially adversely affected.  These risks could also impair our ability to successfully commence, progress or complete studies of our potential combination therapies.

Even if we obtain positive clinical results for PTI-428 or PTI-801 in early-stage clinical trials (including, without limitation, those involving a relatively short duration in a small number of subjects, with the publication of interim, initial, preliminary or final results), those positive results may not be repeated in later-stage clinical trials.  These risks will also apply to any other of our product candidates, including any potential combination therapies.

Before obtaining regulatory approval for the sale of our product candidates, including PTI-428, PTI-801, and any combination therapies, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Successful completion of such clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of PTI-428 and PTI-801 in the United States. Similar requirements apply in the European Union and other foreign jurisdictions. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and preliminary, initial or interim results of a clinical trial do not necessarily predict final results. Our current CF trials involve relatively short duration in a small number of patients, resulting in limited data sets. From time to time, we may publish or report interim, initial or preliminary data from our clinical trials. Interim, initial or preliminary data from clinical trials that we may conduct may not be indicative of the final results of the trial and are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Interim, initial or preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the interim, initial or preliminary data. We may also experience delays in analyzing or an inability to analyze samples, including, without limitation, biomarker data, due to insufficient sample size, errors in collection procedures at one or more sites, or other factors. As a result, interim, initial or preliminary data should be viewed with caution until the final data are available.  

Negative or inconclusive results of our clinical trials of PTI-428 or PTI-801, any potential combination therapies, or any other clinical trials we conduct, could mandate repeated or additional clinical studies. We do not know whether our clinical trials of any product candidate will demonstrate adequate efficacy and safety to result in regulatory approval to market such product candidate. Even if early-stage clinical results are favorable, if later-stage clinical trials (including, without limitation, those for longer duration with greater numbers of patients) do not produce favorable results, our ability to obtain regulatory approval for our product candidates, including PTI-428 and PTI-801, and any potential combination therapies, may be adversely impacted.


Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. It is possible that, during the course of the development of PTI-428, PTI-801, our potential combination therapies, or our other product candidates, results of our studies and clinical trials could reveal an unacceptable severity and prevalence of side effects and/or drug-drug interactions. For example, in preclinical testing of PTI-428 we observed reduced platelet counts in the animals we tested following administration at doses in excess of the doses we expect to administer in our clinical trials. As a result of this or any other side effects, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development, or deny approval, of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims or result in delays in the trials due to requirements to provide new informed consents to patients to disclose new or changed risks or side effects.  Even if approved for marketing, our product candidates could face label restrictions based on the above factors or others.

Additionally, if one or more of our product candidates receive marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

regulatory authorities may withdraw approvals of such product or impose restrictions on its distribution in a form of a modified Risk Evaluation and Mitigation Strategy;

regulatory authorities may require additional labeling, such as warnings or contraindications;

we may be required to change the way the product is administered or to conduct additional clinical studies;

we could be sued and held liable for harm caused to patients; and

our reputation may suffer.

Any of these events could delay or prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects.

If we cannot demonstrate an acceptable safety and toxicity profile for our product candidates in our clinical studies, we will not be able to continue our clinical trials or obtain approval for our product candidates.

In order to obtain approval of a product candidate, we must demonstrate safety in various nonclinical and clinical tests. At the time of initiating human clinical trials, we may not have conducted or may not conduct the types of nonclinical testing ultimately required by regulatory authorities, or future nonclinical tests may indicate that our product candidates are not safe for use. Nonclinical testing and clinical testing are both expensive and time-consuming and have uncertain outcomes. For example, results of an earlier laboratory study of PTI-130, a former amplifier candidate, in non-rodent species suggested potential hematologic and reproductive toxicology issues that we believe are specific to the non-rodent species. We cannot predict whether future safety and toxicology studies may produce these same problems or cause other undesirable effects. We also observed certain undesired hematological (including reduced platelet count) side effects in animals dosed at levels of PTI-428 that are higher than those intended for our clinical studies. We plan to complete additional toxicity studies of reproductive toxicity, carcinogenicity and long-term side effects prior to or concurrent with any Phase 3 clinical trials of our product candidates, and we cannot exclude the possible occurrence of these or other side effects in future nonclinical or clinical studies. In addition, success in initial tests does not ensure that later testing will be successful. We may experience numerous unforeseen events during, or as a result of, the testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:

our preclinical and nonclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional nonclinical testing or to abandon product candidates;


our product candidates may have unfavorable pharmacology or toxicity characteristics or suggest possible drug-drug interaction;

our product candidates may cause undesirable side effects; and

the FDA or other regulatory authorities may determine that additional safety testing is required.

Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

PTI-428 is based on a novel technology, which may raise development issues we may not be able to resolve, regulatory issues that could delay or prevent approval, or personnel issues that may keep us from being able to develop our product candidates.

Our product candidate PTI-428 is based on our novel amplifier technology. We are not aware of other drugs that work in a manner that we believe our amplifier technology does. We cannot assure you that development problems related to our novel technology will not arise in the future that could cause significant delays or that we are not able to resolve.

Clinical development and regulatory approval of novel product candidates such as ours can be more expensive and take longer than other, more well-known or extensively studied pharmaceutical product candidates due to our, investigators’ and regulatory agencies’ lack of experience with them. These factors also apply to patient advocacy groups and sanctioning by their affiliated therapeutic development center arms, such as the TDN. To our knowledge, there are no other amplifiers in clinical development and none have been approved to date. The novelty of our technology may lengthen the clinical development timeline and regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. For example, the FDA could require additional studies or characterization that may be difficult or impossible to perform.

In addition, if we are unable to hire and retain the necessary personnel, the rate and success at which we can develop and commercialize product candidates will be limited. Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

Even if we meet safety and efficacy endpoints in clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates and we cannot, therefore, predict the timing of any future revenue from PTI-428, PTI-801, our potential combination therapies or any of our other product candidates.

We cannot commercialize our product candidates, including PTI-428, PTI-801, and our combination therapies, until the appropriate regulatory authorities, such as the FDA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval for PTI-428, PTI-801, combination therapies, or our other product candidates at all. Additional delays may result if PTI-428, PTI-801, combination therapies, or any other product candidate is brought before an FDA advisory committee or an analogous foreign body, which could recommend restrictions on approval or recommend non-approval of the product candidate. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical studies and the review process. As a result, we cannot predict when, if at all, we will receive any future revenue from commercialization of any of our product candidates, including PTI-428, PTI-801, and combination therapies.


Even if we obtain regulatory approval for PTI-428, PTI-801, our combination therapies and/or our other product candidates, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

Even if we obtain regulatory approval in the United States, the FDA may still impose significant restrictions on the indicated uses or marketing of our product candidates, including PTI-428 and PTI-801 and our combination therapies, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance, including Phase 4 clinical trials. For example, the labeling, if approved for our product candidates, including PTI-428 and PTI-801 and our combination therapies, will likely include restrictions on use due to the specific patient population and manner of use in which the drug was evaluated and the safety and efficacy data obtained in those evaluations.  

PTI-428, PTI-801, our combination therapies and our other product candidates will also be subject to additional ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor and report adverse events and any failure of a product to meet the specifications described in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practice, or cGMP, requirements and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously unknown problems with a product, such as quality issues or adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requesting a recall or requiring withdrawal of the product from the market or suspension of manufacturing.

If we fail to comply with applicable regulatory requirements following approval of our product candidate, a regulatory agency may:

issue an untitled or warning letter asserting that we are in violation of the law;

seek an injunction or impose civil or criminal penalties or monetary fines;

suspend or withdraw regulatory approval;

suspend any ongoing clinical trials;

refuse to approve a pending NDA or supplements to an NDA submitted by us; or

request a recall and/or seize product.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize PTI-428, PTI-801, our combination therapies and our other product candidates and inhibit our ability to generate revenues.

Even if we obtain FDA approval for PTI-428, PTI-801, our combination therapies or any of our other product candidates in the United States, we may never obtain approval for or commercialize PTI-428, PTI-801, our combination therapies or any of our other product candidates outside of the United States, which would limit our ability to realize their full market potential.

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among


countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates in those countries. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our product candidates will be unrealized.

If we are not able to obtain orphan product status for PTI-801, PTI-808 or other current product candidates (or maintain orphan drug designation for PTI-428) or obtain such status for future product candidates for which we seek this status, we will not be able to claim the tax credits for our clinical trials of such products provided by this status or potentially take advantage of other benefits of orphan drug status.

Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs forand biologics intended to treat relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a product candidate as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a disease or condition thathaving a patient population of fewer than 200,000 individuals in the United States, have been diagnosed as having ator a patient population greater than 200,000 in the timeUnited States where there is no reasonable expectation that the cost of developing the submission ofdrug will be recovered from sales in the requestUnited States. In the European Union, the European Commission after recommendation from the EMA’s Committee for orphan drug designation. Under Regulation No. (EC) 141/2000 on Orphan Medicinal Products a medicinal product may be designated as angrants orphan medicinal product if, among other things, it isdrug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five5 in 10,000 peoplepersons in the European Union. Additionally, orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union whenwould be sufficient to justify the application is made. necessary investment in developing the drug or biologic product.

If we request orphan drug designation for our product candidates, there can be no assurances that FDA or the European Commission will grant any of our product candidates such designation. Additionally, orphan drug designation does not guarantee that any regulatory authority will accelerate regulatory review of, or ultimately approve, the product candidate, nor does it limit the ability of any regulatory authority to grant orphan drug designation to product candidates of other companies that treat the same indications.

Generally, if a product candidate with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of market exclusivity. Thismarketing exclusivity, which precludes the EMAFDA or the FDA, as applicable,European Commission from approving another marketing application for a product that constitutes the same or, in the European Union, a similar drug fortreating the same indication for that timemarketing exclusivity period, unless, among other things,except in limited circumstances. If another sponsor receives such approval before we do (regardless of our orphan drug designation), we will be precluded from receiving marketing approval for our product for the later product is clinically superior.applicable exclusivity period. The exclusivityapplicable period is seven years in the United States and ten10 years in the European Union following marketing approval.Union. The EU exclusivity period in the European Union can be reduced to six years if a drugproduct no longer meets the criteria for orphan drug designation for exampleor if the drugproduct is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be revoked if any regulatory authority determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even if we obtain orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same condition. In the United States, orphan drug exclusivity may be lost if the FDA withdraws or revokes the orphan-drug designation as permitted by law, we withdraw the marketing application for the drug, we consent to another’s marketing application for approval of the same use or indication as the designated orphan drug, or we fail to assure a sufficient quantity of the drug as required by law. Similarly, in the European Union, exclusivity may be lost if we request the removal of the orphan-drug designation or the drug no longer meets any of the criteria that made it eligible for orphan-drug status at the outset. Eveneven after an orphan drug is approved, the same or, in the European Union, a similarFDA may subsequently approve another drug can subsequently be approved for the same condition if the competent regulatory agencyFDA concludes that the laterlatter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

We are currently, and may in the original orphan drug by providing a significant therapeutic advantage over and above that drug.

If we do not obtain orphan drug exclusivity or if our competitors obtain orphan drug exclusivityfuture, conduct clinical trials for other rare diseases or conditions we are targeting before we do, we may be delayed in obtaining marketing authorization or we may lose out on the potential benefits of market exclusivity associated with the orphan drug designation. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee. If we do not obtain orphan designation for PTI-801 or our other product candidates (and maintain such designation as to PTI-428), we will lose out on such benefits associated with orphan designation.

Use of social media platforms presents new risks.

Social media increasingly is being used to communicate about our product candidates outside the United States, and the diseases our therapiesFDA and similar foreign regulatory authorities may not accept data from such trials.

We are designedcurrently, and may in the future, conduct additional clinical trials outside the United States, including in Europe or other foreign jurisdictions. The acceptance of trial data from clinical trials conducted outside the United States by the FDA may be subject to treat. We believe that memberscertain conditions. In cases where data from clinical trials conducted outside the United States are intended to serve as the sole basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the United States population and United States medical practice; (ii) the trials were performed by clinical investigators of recognized competence; and (iii) the data may be considered valid without the need for

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an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. Additionally, the FDA’s clinical trial requirements, including sufficient size of patient populations and statistical powering, must be met. Many foreign regulatory bodies have similar approval requirements. In addition, such foreign trials would be subject to the applicable local laws of the CF community mayforeign jurisdictions where the trials are conducted. There can be more active on social media as compared to other patient populations. Social media practicesno assurance that the FDA or any similar foreign regulatory authority will accept data from trials conducted outside of the United States or the applicable jurisdiction. If the FDA or any similar foreign regulatory authority does not accept such data, it would result in the pharmaceuticalneed for additional trials, which would be costly and biotechnology industries are evolving,time-consuming and delay aspects of our business plan, and which creates uncertaintymay result in our product candidates not receiving approval for commercialization in the applicable jurisdiction.

Changes in regulatory requirements, FDA guidance, or unanticipated events during our preclinical studies and riskclinical trials of noncompliance with regulations applicableour product candidates may occur, which may result in changes to our business. For example, patients may use social media platforms to comment on the effectiveness of,preclinical or adverse experiences with, a


drug candidate,clinical study protocols or additional preclinical or clinical study requirements, which could result in reporting obligations. In addition, there is a risk of inappropriate disclosure of sensitive informationincreased costs to us and could delay our development timeline.

Changes in regulatory requirements, FDA guidance, or negativeunanticipated events during our preclinical studies and clinical trials may force us to amend preclinical studies and clinical trial protocols or inaccurate poststhe FDA may impose additional preclinical studies and clinical trial requirements. Amendments or comments about us on any social networking website. If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face restrictive regulatory actions or incur other harmchanges to our business.

Risks Relatingclinical study protocols would require resubmission to Our Dependence on Third Parties

the FDA and IRBs for review and approval, which may adversely impact the cost, timing, or successful completion of clinical trials. Similarly, amendments to our preclinical studies may adversely impact the cost, timing, or successful completion of those preclinical studies. If third parties on which we depend to conductexperiences delays completing, or if we terminate, any of our preclinical studies or any ongoing or future clinical trials, do not perform as contractually required, fail to satisfy regulatory or legal requirements or miss expected deadlines, our development program could be delayed with materially adverse effects on our business and prospects.

We rely on clinical research organizations, clinical data management organizations and consultants, collectively referred to as CROs, to design, conduct, supervise and monitor preclinical and clinical studies of our product candidates and plan to do the same for our ongoing and future clinical trials for PTI-428, PTI-801, PTI-808, combination therapies and any other clinical trials. We and our CROsif we are required to comply with various regulations, including Good Clinical Practice,conduct additional preclinical studies or GCP, requirements, which are enforced by the FDA, and guidelines of the Competent Authorities of the Member States of the European Economic Area, and comparable foreign regulatory authorities to ensure that the health, safety and rights of patients are protected in clinical development and clinical trials, and that trial data integrity is assured. Regulatory authorities ensure compliance with these requirements through periodic inspections of trial sponsors, principal investigators and trial sites, as well as third party contractors. If we or any of our CROs fail to comply with applicable requirements, or the CRO does not perform its contractually required obligations (or makes errors or mistakes), the clinical data, including, without limitation, biomarker data, generated in our clinical trials may not be collected or may be collected but be deemed unreliable, and the FDA, the EMA or other comparable foreign regulatory authorities may require us (or we may choose ourselves) to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with such requirements. In addition, our clinical trials must be conducted with products produced under cGMP requirements, which mandate the methods, facilities and controls used in manufacturing, processing and packaging of a drug product to ensure its safety and identity. Failure to comply with these regulations may require us to delay or repeat preclinical and clinical trials, which would delay the regulatory approval process.

Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs. We generally represent a small percentage of these firms’ overall business, which could limit our ability to receive priority allocation of their resources. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our operations and the commercial prospects for our product candidates wouldmay be harmed our costs could increase and our ability to generate revenues couldproduct revenue will be delayed.

We also rely on clinical investigators and clinical research organizations, as well as therapeutics development arms of patient advocacy groups, such as the TDN and CTN, to assistIf, in the design and review of our clinical trials, including supporting the enrollment of qualified patients.  If these third parties do not approve or sanction our trial design to facilitate enrollment, our ability to conduct clinical trials may be impeded.  Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated or inadvertently be made publicly-available. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely affected. Though we carefully manage our relationships with our CROs, and other third parties, there can be no assurance that


we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

If we cannot contract with acceptable third parties on commercially reasonable terms, or at all, or if these third parties do not carry out their contractual duties, satisfy legal and regulatory requirements for the conduct of preclinical studies or clinical trials or meet expected deadlines, our clinical development programs could be delayed and otherwise adversely affected. In all events, we are responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. The FDA and the EMA require clinical trials to be conducted in accordance with GCP, including for conducting, recording and reporting the results of preclinical studies and clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Any such event could have a material adverse effect on our business, financial condition, results of operations and prospects.

We rely on third-party manufacturers and suppliers and we intend to rely on third parties to produce preclinical, clinical and commercial supplies of PTI-428, PTI-801, PTI-808 and any future product candidates. These third parties may not perform as contractually required or expected and issues may arise that could delay the commencement or completion of clinical trials.

We rely on third parties to supply the materials and components for our research and development, preclinical and clinical trial supplies. We do not own manufacturing facilities or supply sources for such components and materials. There can be no assurance that our supply of research and development, preclinical and clinical development drugs and other materials will not be limited, interrupted, restricted in certain geographic regions or of satisfactory quality or continue to be available at acceptable prices. Any replacement of these third parties could require significant effort and expertise because there may be a limited number of qualified replacements.

The manufacturing process for a product candidate is subject to FDA, EMA and other foreign regulatory authority review. Suppliers and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required by regulatory authorities to comply with regulatory standards such as cGMP. In the event that any of our suppliers or manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, our regulatory filings may be delayed, our preclinical studies or clinical trials may be delayed or suspended, and we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture our product candidates may be unique or proprietary to the original manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills or technology to another third party and a feasible alternative may not exist; even if it exists, it may be cost-prohibitive and time-prohibitive to engage in technology transfer to switch vendors for product candidate manufacturing. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our product candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget.  Drug formulation is an inherently uncertain process with numerous steps, some of which may need to be repeated, to ensure quality, accuracy and yield; unexpected variances may occur, which could delay our manufacturing efforts and delay commencement or completion of pre-clinical studies and/or clinical trials.

We expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product candidate. To the extent that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercialize our product candidates successfully. Our or a third party’s failure to execute on our manufacturing requirements could adversely affect our business in a number of ways, including:


preventing us from initiating or continuing preclinical studies or clinical trials of product candidates under development;

delaying our submissions of regulatory applications or receipt of regulatory approvals for product candidates;

preventing a collaborator from cooperating with us;

subjecting our product candidates to additional inspections by regulatory authorities;

requiring us to cease distribution or to recall batches of our product candidates; and

in the event of approval to market and commercialize a product candidate, preventing us from meeting commercial demands for our products.

If a current or future collaborative partner terminates or fails to perform its obligations under an agreement with us, or if research does not produce viable lead candidates or meet specified criteria during the applicable research term, the development and commercialization of the product candidates could be delayed or terminated.

We are currently party to a collaborative arrangement with Astellas. If our collaborative partner does not devote sufficient time and resources to a collaboration arrangement with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be materially adversely affected.

Much of the potential revenue from our collaboration consists of contingent payments, such as payments for achieving scientific or regulatory milestones or royalties payable on sales of drugs. The milestone and royalty revenue that we may receive under collaborations will depend upon our collaborators’ ability to successfully develop, introduce, market and sell new products. Our collaboration partners may fail to develop or effectively commercialize their products using our products or technologies or otherwise discontinue their research activities because they:

exercise their unilateral right to terminate the collaboration agreement, which, for example, our former collaboration partner, Biogen, did in December 2016, including, without limitation, if research does not produce a viable lead candidate or meet specified criteria during the applicable research term;

decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite expertise, limited cash resources or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining marketing approval or may potentially generate a greater return on investment;

decide to pursue other technologies or develop other product candidates, either on their own or in collaboration with others, including our competitors, to treat the same diseases targeted by our own collaborative programs;

do not have sufficient resources necessary to carry the product candidate through clinical development, marketing approval and commercialization; or

cannot obtain the necessary marketing approvals.

Competition may negatively impact a partner’s focus on and commitment to our relationship and, as a result, could delay or otherwise negatively affect the commercialization of our products, which would have a material adverse effect on our operating results and financial condition. Terminated collaborations include the risk that the former partner maintains rights to exploit certain co-developed technology, and the risk that, to the extent the program is desired to continue, funding formerly provided by the partner will need to come from alternative sources such as us or a new partner and such funding may not be available on terms acceptable to us, if at all.  These factors can cause a delay or abandonment of technology programs and could negatively affect commercialization of our products, which would have a material adverse effect on our operating results and financial condition.

We face a number of challenges in seeking future collaborations. Collaborations are complex and any potential discussions may not result in a definitive agreement for many reasons. For example, whether we reach a


definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors, such as the design or results of our clinical trials, the potential market for our product candidates, the costs and complexities of manufacturing and delivering our product candidates to patients, the potential of competing products, the existence of uncertainty with respect to ownership or the coverage of our intellectual property, and industry and market conditions generally. If we determine that additional collaborations for our product candidates are necessary and are unable to enter into such collaborations on acceptable terms, we might elect to delay or scale back the development or commercialization of our product candidates in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and systems and expertise ourselves.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If a future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

Risks Relating to Commercialization of Our Product Candidates

The commercial success of PTI-428, PTI-801, any combination therapies and our other product candidates will depend upon the acceptance of those products, if approved, by the medical community, including physicians, patients and health care payors.

Even if PTI-428, PTI-801, any combination therapies or our other product candidates are approved for sale, they may not achieve sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. If these product candidates, if approved, do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of any of our product candidates, including PTI-428 and PTI-801 and any combination therapies, will depend on a number of factors, including:

demonstration of safety and efficacy in our clinical trials;

the relative convenience, ease of administration and acceptance by physicians, patients and health care payors;

the prevalence and severity of any adverse effects;

limitations or warnings contained in the FDA-approved label for the relevant product candidate;

availability of alternative treatments;

pricing and cost-effectiveness;

the effectiveness of our or any future collaborators’ sales and marketing strategies; and

our ability to obtain and maintain healthcare payor approval or reimbursement, which may vary from country to country.

If any of our product candidates, including PTI-428 and PTI-801 and any combination therapies, is approved but does not achieve an adequate level of acceptance by physicians, patients and health care payors, we may not generate sufficient revenue and we may not become or remain profitable.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market ourany product candidates we may develop, we may not be successful in commercializing ourthose product candidates if and when they are approved.

We do not currently have a sales or marketingan infrastructure and we have limited experience infor the sales, marketing, orand distribution of pharmaceutical products. Our commercialization strategy will target key prescribing physicians and advocacy groups, as well as provide patients with support programs, ensure product access and secure


reimbursement. Outside of the United States, Canada, Europe and Australia, we may seek a partnerIn order to commercialize our products. In the future, we may choose to build a focused sales and marketing infrastructure to market or co-promote our product candidates, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial, and when theyother non-technical capabilities, or make arrangements with third parties to perform these services. There are approved, which would be expensiverisks involved with both establishing our own commercial capabilities and time-consuming. Alternatively, we may electentering into arrangements with third parties to outsourceperform these functions to third parties. Either approach carries significant risks.services. For example, recruiting and training a sales force or reimbursement specialists is expensive and time-consuming and if done improperly, could delay aany product launch and result in limited sales.launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and other commercialization capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketingcommercialization personnel.

Factors that may inhibit our efforts to commercialize our product candidates on our own include:

inability to recruit, manage and retain adequate numbers of effective sales and marketing personnel;

the inability of marketing personnel to develop effective marketing materials;

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

We may also not be successful in entering into additional arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. Even ifIf we do enter into arrangements with third parties to perform sales, marketing, commercial support, and distribution services, our product revenuesrevenue or the profitability of these product candidates are likely torevenue may be lower than if we were to market and sell ourany products ourselves.we may develop itself. In addition, we likely willmay not be successful in entering into arrangements with third parties to commercialize our product candidates or may be unable to do so on terms that are favorable to us. We may have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we dodoes not establish sales and marketingcommercialization capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.candidates if approved.

If we are unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our competitors develop technologies or product candidates more rapidly than we do or their technologies are more effective, our ability to developbusiness, results of operations, financial condition, and successfully commercialize our products mayprospects will be materially adversely affected. Competitive products for treatment of CF may reduce or eliminate the commercial opportunity

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

The clinical and commercial landscape for CF is highly competitive and subject to rapid and significant technological change. New data from clinical-stage products continue to emerge. It is possible that these data may alter the current standardsuccess of care, completely precluding us from further developing PTI-428, PTI-801, our combination therapies or our other product candidates, for CF. Further, it is possible that we may advanceif approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of our clinical trials only to find that data from competing products make it impossible for us to complete enrollment in these trials, resulting inproduct candidates among the medical community, including physicians, patients, and healthcare payors. If any of our inability to file for marketing approval with regulatory agencies. Even if PTI-428, PTI-801, combination therapies or our other product candidates are approved but do not achieve an adequate level of acceptance by physicians, patients, healthcare payors, and others in the medical community, we may not generate sufficient revenue to become or remain profitable. Market acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:

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

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

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

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

inability of certain types of patients to take our products;

the clinical indications for which our product candidates are approved;

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

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

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

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

publicity concerning our products or competing products and treatments;

pricing and cost effectiveness;

the effectiveness of our sales and marketing strategies;

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

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

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

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

We face significant competition in the CF market.

Competitive therapeutic treatments include thosean environment of rapid technological and scientific change, and there is a possibility that our competitors may achieve regulatory approval before we do or develop therapies that are currently in

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safer, more advanced, or more effective, which may negatively impact our ability to successfully market or commercialize any product candidates we may develop and ultimately harm our financial condition.

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

There are a number of conditions for which we may try to develop product candidates. Our potential competitors include large pharmaceutical and biotechnology companies specialty pharmaceuticalthat are currently pursuing the development of products for the treatment of the neurodegenerative disease indications for which we have research programs, including Parkinson’s disease, ALS and generic drugAlzheimer’s disease. Companies that we are aware of are developing therapeutics in the neurodegenerative disease area include large companies academic institutions, government agencieswith significant financial resources, such as AbbVie, AstraZeneca, Biogen, Bristol-Myers Squibb, Lilly, GlaxoSmithKline, Johnson & Johnson, Novartis, Roche, Sanofi, and research institutions. Examples include Vertex, AbbVie Inc., Galapagos NV, ProQR Therapeutics N.V., Flatley Discovery Lab, LLC, F. Hoffmann-LaRoche Ltd., Novartis AG, Gilead Sciences, Inc., Laurent Pharmaceuticals Inc., Pfizer Inc., AstraZeneca, Translate Bio Inc., Sanofi Genzyme, Bayer AG, Corbus Pharmaceuticals Holdings, Inc., Eloxx Pharmaceuticals, Verona Pharma plc, and severalTakeda. In addition to competition from other companies.


Although PTI-428 and PTI-801 are being developedcompanies targeting neurodegenerative indications, any products we may develop may also face competition from other types of therapies, such as individual therapies to be administered with ivacaftor and lumacaftor, Vertex or other competitors could develop other drugs or combinations that may obviate the applicability of PTI-428 and PTI-801. Changes in standard of care or use patterns could also make our combination therapy obsolete. For example, Vertex has developed tezacaftor and ivacaftor as a combination therapy on its own and was recently granted marketing approval for this combination under the name Symdeko.  Vertex is also in clinical development for this combination as part of a triple combination therapy with additional Vertex correctors. If PTI-428 or PTI-801 is approved for marketing as a combination therapy to be administered with ivacaftor and lumacaftor but use of another therapy becomes more prevalent than ivacaftor and lumacaftor, the availability of ivacaftor and lumacaftor may be limited, sales of PTI-428 or PTI-801 could be negatively impacted and our financial results and stock price would be adversely affected.gene-editing therapies.

Many of our current or potential competitors, either alone or with their strategic partners, have significantly greater financial technical, manufacturing, clinical development, marketing, salesresources and supply resources, technical and human resources or experience than us and significantly greater experienceexpertise in the discoveryresearch and development, of product candidates,manufacturing, preclinical testing, conducting clinical trials, obtaining FDA and other regulatory approvals, of product candidates and the commercialization of those products. Accordingly, our competitors may be more successfulmarketing approved products than we may be in obtaining FDA and other regulatory approvals for therapies and achieving widespread market acceptance. Our competitors’ products may be more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may render our therapies obsolete or non-competitive before we can recover development and commercialization expenses.

If we successfully obtain approval for any product candidate, we will face competition based on many different factors, including the efficacy, safety and tolerability of our products, the ease with which our products can be administered,  the extent to which physicians and patients accept combination therapies and, for PTI-428, new classes of modulators, the timing and scope of regulatory approvals for these products, the availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage and patent position. Competing products could present superior treatment alternatives, including being more effective, safer, or less expensive, or could be marketed and sold more effectively than any products we may develop. Competitive products may make any products we develop, or products with which we are approved for use in combination, obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. Such competitors could also recruit our employees, which could negatively impact our level of expertise and our ability to execute our business plan.do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smallsmaller number of our competitors.

We Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with other clinical-stage companiesus in recruiting and institutionsretaining qualified scientific and management personnel and establishing clinical study sites and patient registration for clinical trial participants,trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products that we may develop. Furthermore, currently approved products could be discovered to have application for treatment of neurodegenerative disease indications, which could reducegive such products significant regulatory and market timing advantages over any of our product candidates. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for our product candidates and may obtain orphan product exclusivity from the FDA for indications our product candidates are targeting, which could result in our competitors establishing a strong market position before we are able to enter the market. Additionally, products or technologies developed by our competitors may render our potential product candidates uneconomical or obsolete, and we may not be successful in marketing any product candidates we may develop against competitors.

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

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

Broad-based business or economic disruptions could adversely affect our ongoing or planned research and development activities. For example, in December 2019, an outbreak of a novel strain of coronavirus originated

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in Wuhan, China, and has since spread to a number of other countries, including the United States. To date, the COVID-19 pandemic has caused significant disruptions to the U.S. and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the U.S., have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. Certain states and cities, including where we or the third parties with whom we engage operate, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue.

The extent to which COVID-19 may impact our preclinical studies or clinical trial operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, the severity of COVID-19, or the effectiveness of actions to contain and treat COVID-19. The continued spread of COVID-19 globally could adversely impact our preclinical studies or clinical trial operations in the United States, including our ability to recruit participants forand retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. COVID-19 may also affect employees of third-party CROs located in affected geographies that we rely upon to carry out our clinical trials. For example, actualAny negative impact COVID-19 has to patient enrollment or perceived riskstreatment or the execution of our current product candidates such as PTI-428, may negatively affect potentialand any future product candidates could cause costly delays to clinical trial participants or patients when deciding whether to participate in our clinical trials, and could result in patients seeking alternative clinical trials or commercial therapies from our competitors. Delay in recruiting clinical trial participantsactivities, which could adversely affect our ability to bringobtain regulatory approval for and to commercialize our current product candidate and any future product candidates, increase our operating expenses, and have a material adverse effect on our financial results.

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

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

Risks Related to Our Regulatory Approval and Other Legal Compliance Matters

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

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable, typically takes many years following the commencement of clinical trials, and depends upon numerous factors, including the type, complexity, and novelty of the product candidates involved. In addition, approval policies,

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regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to market priorapprove an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our competitors. Further, researchdata are insufficient for approval and discoveries by othersrequire additional preclinical, clinical or other studies. We have not submitted for, or obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Applications for our product candidates could be delayed in receiving or fail to receive regulatory approval for many reasons, including but not limited to the following:

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

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

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

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

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

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

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

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

This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in breakthroughs that render our product candidates obsolete even before they beginfailing to generate any revenue.

In addition, our competitors may obtain patent protection or FDAregulatory approval and commercialize products more rapidly than we do, which may impact future sales ofto market any of our product candidates, thatwhich would significantly harm our business, results of operations, and prospects.

Even if we obtain regulatory approval for our product candidates, our products will remain subject to extensive regulatory scrutiny.

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

Manufacturers and manufacturers’ facilities are required to comply with extensive requirements imposed by the FDA and comparable foreign regulatory authorities, including, for example, ensuring that quality control and

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manufacturing procedures conform to current Good Manufacturing Practice (“cGMP”) regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any new drug application (“NDA”) or comparable marketing approval. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

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

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

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

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

impose civil or criminal penalties;

suspend or withdraw regulatory approvals;

suspend or impose a clinical hold on any of our ongoing clinical trials;

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

impose restrictions on our operations;

require the conduct of additional post-market clinical trials to assess the safety of the product;

seize or detain products; or

request that we initiate a product recall.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory

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requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of the company and our operating results will be adversely affected.

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

Although we do not currently have any products on the market, if we obtain FDA approval for any of our product candidates and begins commercializing our products, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we have limited or no experience. We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, product price, reimbursement coverage by government and privateconduct our business. Healthcare providers, physicians, third-party payors, and patent position.others play a primary role in the recommendation and prescription of our product candidates, if approved. Our profitabilityfuture arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial position will sufferarrangements and relationships through which we market, sell, and distribute our product candidates, if we cannot compete effectivelyobtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

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

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

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

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which also impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information on health plans, healthcare clearing houses, and certain healthcare providers and their business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created new tiers of civil monetary penalties, amended

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HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, there may be additional federal, state and non-U.S. laws which govern the privacy and security of health and other personal information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;

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

the federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act (the “ACA”) require manufacturers of drugs, devices, biologics, and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the CMS information related to payments and other transfers of value to physicians ( as defined by the law), physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and teaching hospitals, as well as physician ownership and investment interests, and requires applicable manufacturers and group purchasing organizations to report annually the ownership and investment interests held by such physicians and their immediate family members and payments or other “transfers of value” to such physician owners; and

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

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

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

Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”) a pharmaceutical manufacturer may file an abbreviated new drug application (“ANDA”) seeking approval of a

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

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

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

Payor approval and reimbursementWe may not be availablesuccessful in securing or maintaining proprietary patent protection for PTI-428, PTI-801,products and technologies we develop or license. Moreover, if any combination therapiesof our owned or in-licensed patents that are listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, the affected product could immediately face generic competition and our sales would likely decline rapidly and materially. See “Risks Related to Our Intellectual Property Rights.”

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

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

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Even if approved, reimbursement policies could make it difficult or impossible for uslimit our ability to sell our products profitably.product candidates.

Market acceptance and salesSales of PTI-428 or PTI-801, any combination therapies, or any other product candidates that we develop,our drugs will depend, in part, on the extent to which our drugs will be covered by third-party payors, such as government health programs, commercial insurance, and managed healthcare organizations. Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we may obtain regulatory approval.

Market acceptance and sales of our product candidates will depend on reimbursement policies and may be affected by healthcare reform measures. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States, and commercial payors are critical to new product acceptance. Third-party payors decide which drugs they will pay for and establish reimbursement levels. In the United States, the principal decisions about reimbursement for thesenew medicines are typically made by CMS. CMS decides whether and to what extent our products and related


third party treatments will be available from governmentcovered and reimbursed under Medicare and private payors tend to follow CMS to a substantial degree. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a therapeutic is:

a covered benefit under our health administration authorities, private health insurersplan;

safe, effective and other organizations. medically necessary;

appropriate for the specific patient;

cost-effective; and

neither experimental nor investigational.

Government authorities and other third-party payors, such as private health insurers and health maintenance organizations and pharmacy benefit management organizations, decide which medications they will pay for at what tier level and establish reimbursement levels. Alevels for those medications. Cost containment is a primary trendconcern in the United StatesU.S. healthcare industry and elsewhere is cost containment.elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for anyour product that we commercializecandidates and, if reimbursement is available, what the level of reimbursement will be. Even if we are successful in gaining reimbursement in one country, that does not mean we will achieve reimbursement at the same levels or at all in any other country.such reimbursement. Reimbursement may impact the demand for, or the price of, our product candidates. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our product candidates. Limited coverage and less than adequate reimbursement may reduce the demand for, or the price of, any product for which we obtain marketingregulatory approval. Obtaining

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

Recently enacted and future legislation may be particularly difficult becauseincrease the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the higher prices often associated with products administered under the supervision of a physician. Also, reimbursement amounts may reduce the demand for, or the price of, our products. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize PTI-428, PTI-801, any combination therapies, or any other product candidates that we develop. We will also be required to establish systemsobtain.

In the United States and programs that assist patients in determining the reimbursement level and in some instances establishing patient economic support programs to alleviate the economic burden of co-pays and/or co-insurance. These patient support programs are complex, costly and require knowledge and expertise that we currently do not possess.

Thereforeign jurisdictions, there have been a number of legislative and regulatory proposals to changechanges and proposed changes regarding the healthcare system that could prevent or delay regulatory approval of our product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

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

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

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

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

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

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

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

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

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

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

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

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

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

Since its enactment, there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future. Various portions of the ACA are currently undergoing legal and constitutional challenges in the United States Supreme Court and members of Congress have introduced several pieces of legislation aimed at significantly revising or repealing the ACA. The United States Supreme Court is expected to rule on a legal challenge to the constitutionality of the ACA in early 2021. The implementation of the ACA is ongoing, the law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. Litigation and legislation related to the ACA are likely to continue, with unpredictable and uncertain results.

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In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year through 2030. However, pursuant to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, these Medicare sequester reductions will be suspended from May 1, 2020 through March 31, 2021 due to the COVID-19 pandemic. Proposed legislation, if passed, would extend this suspension until the end of the pandemic. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.

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

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

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

Our future growth may depend, in part, on our ability to commercialize our product candidates in foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.

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

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

our inability to directly control commercial activities because we are relying on third parties;

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

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

import or export licensing requirements;

longer accounts receivable collection times;

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longer lead times for shipping;

language barriers for technical training;

reduced protection of intellectual property rights in some foreign jurisdictions thatcountries;

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

foreign currency exchange rate fluctuations; and

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

Foreign sales of our product candidates could affect our ability to sell any future products profitably. These legislativealso be adversely affected by the imposition of governmental controls, political and regulatoryeconomic instability, trade restrictions, and changes may negatively impact the reimbursement for any future products, following approval. The availability of generic treatments may also substantially reduce the likelihood of reimbursement for any future products, including PTI-428in tariffs.

Obtaining and PTI-801 or any combination therapies. The application of user fees to generic drug products will likely expedite themaintaining regulatory approval of additional generic drug treatments. We expectour product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.

In order to experience pricing pressures in connectionmarket any product outside of the United States, however, we must establish and comply with the salenumerous and varying safety, efficacy, and other regulatory requirements of PTI-428, PTI-801, any combination therapies,other countries. Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other product candidate that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes.

In addition, there may be significant delaysjurisdiction, but a failure or delay in obtaining reimbursement for approved products, and coverageregulatory approval in one jurisdiction may be more limited thanhave a negative effect on the purposes for which the product is approved byregulatory approval process in others. For example, even if the FDA or other comparable foreign regulatory authority grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing, and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other countries. Moreover, eligibility for reimbursement does not imply that any product will be paid forjurisdictions. The marketing approval processes in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new products, if applicable,other countries may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the useimplicate all of the product and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed, and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices thanrisks detailed above regarding FDA approval in the United States. Third-party payors often rely upon Medicare coverage policyStates, as well as other risks. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

Obtaining foreign regulatory approvals and payment limitationscompliance with foreign regulatory requirements could result in setting their own reimbursement policies.

Our inabilitysignificant delays, difficulties, and costs for we and could delay or prevent the introduction of our products in certain countries. Failure to promptly obtain coverage and profitable payment rates from both government-funded and private payors formarketing approval in other countries or any ofdelay or other setback in obtaining such approval would impair our ability to market our product candidates including PTI-428 and PTI-801 and any combination therapies,in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse effectimpact on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

The success of our business depends primarily on our ability to identify, develop and commercialize product candidates. Because we have limited financial and managerial resources, we focus on research programs and product candidates for the indications that take advantage of our deep expertise and knowledge and that we believe are the most scientifically and commercially promising. Our resource allocation decisions may cause us to fail to capitalize


on viable scientific or commercial products or profitable market opportunities. In addition, we may spend valuable time and managerial and financial resources on research programs and product candidates for specific indications that ultimately do not yield any scientifically or commercially viable products. If we do not accurately evaluate the scientific and commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in situations where it would have been more advantageous for us to retain sole rights to development and commercialization.

Risks Relating to Regulation of Our Industry

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and health information privacy and security laws. Some of these laws were recently amended, and their interpretation following such amendments remains unclear. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal anti-kickback statute. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

the federal anti-kickback statute which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid;

the federal false claims laws and civil monetary penalties, including civil whistleblower or qui tam actions, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) which, among other things, imposes criminal liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statement using or making any false or fraudulent document, in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, and as amended by the final HIPAA omnibus rule, Modifications to the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules Under HITECH and the Genetic Information Nondiscrimination Act; Other Modifications to HIPAA, published in January 2013, which imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without appropriate authorization by entities subject to the rule, such as health plans, clearinghouses and healthcare providers;

the Federal Food, Drug, and Cosmetic Act, or FDCA, which prohibits, among other things, the distribution of adulterated or misbranded drugs or medical devices;

the federal Physician Payments Sunshine Act, enacted as part of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, collectively referred to herein as the Affordable Care Act, or the ACA, and its implementing regulations, which requires certain manufacturers of drugs, devices, biologicals and medical supplies to report to the Centers for Medicare


and Medicaid Services information related to payments and other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value, or ownership or investment interests that are not reported; and

analogous state laws and regulations, including: state anti-kickback and false claims laws, which may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by state governmental and non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; and state laws and regulations that require manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities.

Further, the ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity can now be found guilty of fraud or false claims under ACA without actual knowledge of the statute or specific intent to violate it. In addition, ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare, Medicaid and other government programs and forfeiture of amounts collected in violation of such prohibitions. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations, and financial condition.prospects.

In addition, there has been a trend of increased state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation, and other remuneration to physicians.

The scope and enforcement of these laws is uncertain and subject to change in the current environment of health care reform, especially in light of the lack of applicable precedent and regulations. Such changes are impossible to predict. It is possible that some of our business activities could be subject to challenge by federal or state regulatory authorities under one or more of these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations, and financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming, and could have a material adverse effect on our business, financial condition and results of operations.

Our employees, independent contractors, consultants, commercial partners, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.requirements.

We are exposed to the risk of employee fraud, misconduct, or other misconduct.illegal activity by our employees, independent contractors, consultants, commercial partners, and vendors. Misconduct by employeesthese parties could include intentional, failures toreckless, and negligent conduct that fails to: comply with the laws of the FDA regulations,and other comparable foreign regulatory authorities; provide true, complete and accurate information to the FDA and other comparable foreign regulatory authorities; comply with manufacturing standards we have established,established; comply with federal and state health-carehealthcare fraud and abuse laws in the United States and regulations,similar foreign fraudulent misconduct laws; or report financial information or data accurately or to disclose unauthorized activities to us. If we obtain FDA approval of any of our product candidates and begins commercializing those products in the United States, our potential

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exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. In particular, sales, marketing, and other business arrangements in the healthcare industry are subject to extensive laws and regulations intendeddesigned to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales and commission, certain customer incentive programs, and other business arrangements. Employee misconduct couldarrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a Codecode of Business Conductbusiness conduct and Ethicsethics, but it is not always possible to identify and deter employee misconduct by employees and third parties, and the precautions we take to detect and prevent misconductthis activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.laws. If any such actions are instituted against us, and we are not successful in defending ourselvesitself or asserting our rights, those actions could


have a significant impact on our business, and results of operations, including the imposition of significant fines or other sanctions.

Health care reform measuresIf we or any contract manufacturers and suppliers we engage fail to comply with environmental, health, and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

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

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

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

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Risks Related to Our Reliance on Third Parties

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

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

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

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

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

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

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

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

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

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

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

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

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we may lose certain valuable rights under circumstances identified in our collaborations, including if we undergo a change of control;

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

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

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

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

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

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

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

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

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

In

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Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical studies, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and foreign jurisdictions,complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there have beenis a number of legislative and regulatory changeschallenge to such ownership without regard to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs. The ACA, which includes measures to significantly change the way health care is financed by both governmental and private insurers, was enacted in March 2010. Among the provisionsmerits of the ACA of greatest importance to the pharmaceuticalchallenge, and biotechnology industry are the following:

an annual, nondeductible fee on any entity that manufacturesand market conditions generally. The collaborator may also consider alternative product candidates or imports certain branded prescription drugs and biologic products, apportioned among these entities according to their market share in certain government healthcare programs;

new requirements to report certain financial arrangements with physicians and teaching hospitals, including reporting any “transfer of value” made or distributed to physicians and teaching hospitals and reporting any ownership interests held by physicians and their immediate family members;

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

creation of the Independent Payment Advisory Board which, beginning in 2014, has authority to recommend certain changes to the Medicare program that could result in reduced payments for prescription drugs, which recommendations can have the effect of law even without congressional action; and

establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

At this time, the full effect that the ACA would have on our business remains unclear. As a result of the 2016 election in the United States, there is great political uncertainty concerning the fate of the ACA and other healthcare laws. Legislation has been drafted to repeal and replace parts of the ACA, but it is uncertain when a bill would be passed and what any replacement law would encompass. We cannot predict any initiativessimilar indications that may be adoptedavailable to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any collaborations or other arrangements that we may establish may not be favorable to it.

In addition, our collaboration with Merck and any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the future.

Individual states have become increasingly aggressivedevelopment process or commercializing the applicable product candidate and, in passing legislationsome cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and implementing regulations designedother third parties often are terminated or allowed to control pharmaceuticalexpire by the other party. Termination of our collaboration with Merck or any such termination or expiration of future collaborations would adversely affect us financially and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures, and designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business reputation.

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

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

have staffing difficulties;

fail to comply with contractual obligations;

experience regulatory compliance issues;

undergo changes in priorities or become financially distressed; or

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

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific requirements and standards, and our reliance on CROs does not relieve us of our

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regulatory responsibilities. We and our CROs are required to comply with regulations and guidelines, including Good Clinical Practices (“GCPs”) for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the study patients are adequately informed of the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces GCP regulations through periodic inspections of clinical study sponsors, principal investigators and study sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with GCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMP regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject it to enforcement action up to and including civil and criminal penalties.

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

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

The manufacture of our product candidates, particularly those that utilize our discovery engine platform, is complex and we may encounter difficulties in production. If we or any of our third-party manufacturers encounter such difficulties, or fail to meet rigorously enforced regulatory standards, our ability to provide supply of our product candidates for preclinical studies and 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.

The processes involved in manufacturing our drug product candidates, particularly those that utilize our discovery engine platform, are complex, expensive, highly-regulated, and subject to multiple risks. Further, as product candidates are developed through preclinical studies to late-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing

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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.

In addition, the manufacturing process for any products that we may develop is subject to FDA and other comparable foreign regulatory authority approval processes and continuous oversight, and we will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority requirements, including, for example, complying with cGMPs, on an ongoing basis. If we or our third-party manufacturers are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our contract manufacturers will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical study costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations, financial condition and growth prospects. In addition, regional healthcare authorities

We rely completely on third-party suppliers to manufacture our clinical drug supplies for our product candidates, and individual hospitals are increasingly using bidding procedureswe intend to determine whatrely on third parties to produce preclinical, clinical, and commercial supplies of any future product candidates.

We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of our product candidates, or any future product candidates, for use in the conduct of our preclinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. The facilities used by our contract manufacturers to manufacture the active pharmaceutical productsingredient and which suppliers will be included in their prescriptionfinal drug product must complete a pre-approval inspection by the FDA and other healthcare programs. This could reduce ultimate demandcomparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after we submit an NDA or relevant foreign regulatory submission to the applicable regulatory agency.

We do not control the manufacturing process of, and is completely dependent on, our contract manufacturers to comply with cGMPs for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, they will not be able to pass a pre-approval inspection and we would be unable to obtain regulatory approval for our products or put pressure onproduct candidate . We may be required to change contract manufacturers and verify that the new contract manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations. We will also need to verify, such as through a manufacturing comparability study, that any new manufacturing process will produce our product pricing, whichcandidate according to the specifications previously submitted to the FDA or another regulatory authority. The delays associated with the verification of a new CMO could negatively affect our business, results of operations, financial condition and prospects.

ability to develop product candidates or commercialize our products in a timely manner or within budget. In addition, given recent federalwe have no direct control over our contract manufacturers’ ability to maintain adequate quality control, quality assurance, and state government initiatives directed at loweringqualified personnel. Furthermore, all of our contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the total costproduction of healthcare, Congresssuch materials and state legislatures will likely continueproducts. As a result, failure to focus on healthcare reform,satisfy the costregulatory requirements for the production of prescription drugsthose materials and biologics andproducts may affect the reformregulatory clearance of our contract manufacturers’ facilities generally. If the Medicare and Medicaid programs. WhileFDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidates are noncompliant, we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and biologics,need to find alternative manufacturing facilities, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harmwould adversely impact our ability to generate revenues. Increases in importation or re-importation of pharmaceutical products from foreign countries into the United States could put competitive pressure on our ability to profitably price our products, which, in turn, could adversely affect our business, results of operations, financial condition and prospects. We might elect not to seekdevelop, obtain regulatory approval for or market our productsproduct candidates. Our reliance on contract

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manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.

We do not have long-term supply agreements in foreign jurisdictions in order to minimize the riskplace with our contractors, and each batch of re-importation, which


could also reduce the revenue we generate from our product sales. Itcandidates is also possible that other legislative proposals having similar effects will be adopted.

Furthermore, regulatory authorities’ assessment of the dataindividually contracted under a quality and results required to demonstrate safety and efficacy can change over time and can be affectedsupply agreement. If we engage new contractors, such contractors must complete an inspection by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing and leadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects. For example, average review times at the FDA for marketing approval applications can be affected by a variety of factors, including budget and funding levels and statutory,other applicable foreign regulatory and policy changes.

The Referendum of the United Kingdom’s Membership of the European Union creates uncertainty and could negatively impact our business.

On June 23, 2016, the United Kingdom, or the U.K., held a referendum in which voters approved an exit from the European Union, or the E.U., commonly referredagencies. We plan to as “Brexit.” As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U. In addition, Brexit could leadcontinue to legal uncertaintyrely upon contract manufacturers and, potentially, divergent national lawscollaboration partners to manufacture commercial quantities of our product candidates, if approved. Our current scale of manufacturing is adequate to support all of our needs for preclinical studies and regulations as the U.K. determines which E.U. laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the withdrawal of the U.K. from the E.U. would have and how such withdrawal would affect us.

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we could, if we ever commercialize a product, conduct business. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause third-party payors, including governmental organizations, to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could adversely affect our business, financial condition and operating results, particularly if we receive approval to commercialize a product.clinical study supplies.

Risks RelatingRelated to Protecting Our Intellectual Property Rights

It is difficult and expensive to protect our intellectual property rights and we cannot ensure that they will prevent third parties from competing against us. If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly by developing and commercializing products similar or identical to ours, which would have a material adverse impact on our business, results of operations, financial condition, and prospects.

Our success will depend in part,significantly on our ability to obtain and maintain intellectual property rights, bothpatent and other proprietary protection in the United States and other countries successfullyfor commercially important technology, inventions, and know-how related to our business, defend this intellectual property against third-party challenges and successfully enforce this intellectual property to prevent third-party infringement. We rely upon a combination ofour patents, trade secret protection andshould they issue, preserve the confidentiality agreements.

Our ability to protect any of our product candidatestrade secrets, and technologies from unauthorized oroperate without infringing use by third parties depends in substantial part on our ability to obtain and maintainthe valid and enforceable patents in bothand proprietary rights of third parties. We strive to protect and enhance the United Statesproprietary technologies that we believe are important to our business, including seeking patents intended to cover our products and compositions, their methods of use, and any other countries. Patent matters ininventions that are important to the biotechnology and pharmaceutical industries can be highly uncertain and involve complex legal and factual questions. Changes in the patent laws, their implementing regulations or their interpretations may diminish the valuedevelopment of our patent rights.

There can be no assurancebusiness. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we will discover or develop patentable products or processes or that patents will issue from any pendingdo not consider appropriate for, patent applications owned or licensed by us, or if issued, the breadth of such patent coverage. protection.

We do not currently have noany issued patents covering any of our clinical-stage product candidates, including PTI-428, PTI-801, PTI-808 and our combination therapies, or our technologies, and many of our patent applications related to our CF program are in the earliest stages, including several provisional patent applications, although we do have two (2) issued patents covering early CFTR modulator compounds not currently in development.candidate YTX-7739. We cannot provide any


assurances that any of our pending patent applications will lead tomature into issued patents in any particular jurisdiction and, if they do, that such patents will include claims with a scope sufficient to protect our product candidates or otherwise provide any competitive advantage. EvenThe patent application and approval process is expensive, complex, and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. If we are unable to obtain or maintain patent protection with respect to any of our proprietary products and technology we develop, our business, financial condition, results of operations, and prospects could be materially harmed.

If the scope of any patent protection we obtain is not sufficiently broad, or if issued, we cannot guarantee that claimslose any of issued patents ownedour patent protection, our ability to prevent our competitors from commercializing similar or licensed to us are or will be held valid or enforceable by the courts or, even if unchallenged, will provide us with exclusivity or commercial value for ouridentical technology and product candidates or technology or any significant protection against competitive products or prevent others from designing around our claims. Further, if we encounter delays in regulatory approvals, the period of time during which we could market our product candidates under patent protection couldwould be reduced. Our patent rights also depend on our compliance with technology and patent licenses upon which our patent rights are based and upon the validity of assignments of patent rights from consultants and other inventors that were, or are, not employed by us.adversely affected.

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, which in recent years have been the subject of much litigation, and, therefore, the issuance, scope, validity, enforceability, and enforceabilitycommercial value of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated,No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or circumvented. U.S. patents and patent applications may also be subject to derivation or adversarial proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in variousmany foreign both national and regional, patent offices. These proceedings could resultjurisdictions. Changes in either lossthe patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or denial of the patent application or loss or reduction innarrow the scope of one or moreour patent protection. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents, should they issue, thatUnited States, and we may own or exclusively license may not provide any protection against competitors.encounter significant problems in protecting our proprietary rights in these countries.

Patent applications are generally maintained in confidence until publication. In the United States, for example, patent applications are typically maintained in secrecy for up to 18 months after their filing. Similarly,

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publication of discoveries in scientific or patent literature often lags behind actual discoveries. Consequently, we cannot be certain that we were the first to file patent applications on our product candidates. There is also no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which could be used by a third party to challenge the validity of our patents, should they issue, or prevent a patent from issuing from a pending patent application. Any of the foregoing could harm our competitive position, business, financial condition, results of operations, and prospects.

In addition, evenMoreover, our patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented in the United States and abroad. U.S. patents do successfully issue, third partiesand patent applications may challengealso be subject to interference, derivation, exparte reexamination, post-grant review, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may also be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices or courts. An adverse determination in any such patent we own or license through adversarial proceedings in the issuing offices, whichproceeding could result in the invalidation or unenforceability of some or alleither loss of the relevant patent claims. Ifor denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, such proceedings may be costly. Thus, any patents, should they issue, that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party assertsreceiving the patent right sought by us, which in turn could affect our ability to develop, market, or otherwise commercialize our product candidates.

Furthermore, though a substantial new question of patentabilitypatent, if it were to issue, is presumed valid and enforceable, our issuance is not conclusive as to our validity or our enforceability and it may not provide us with adequate proprietary protection or competitive advantages against any claim ofcompetitors with similar products. Even if a U.S. patent we ownissues and is held to be valid and enforceable, competitors may be able to design around or license, the U.S. Patent and Trademark Office,circumvent our patents, such as using pre-existing or USPTO, may grant a request for reexamination, which may resultnewly developed technology or products in a lossnon-infringing manner. Other parties may develop and obtain patent protection for more effective technologies, designs, or methods. If these developments were to occur, they could have a material adverse effect on our business, financial condition, results of scopeoperations, and prospects.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of some claimsinfringement in a competitor’s or a losspotential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the entire patent. The adoption of the Leahy-Smith America Invents Act,damages or the Leahy-Smith Act, on September 16, 2011, established additional opportunities for third partiesother remedies awarded if we were to invalidate U.S. patent claims, including inter partes review and post-grant review, on the basis of a lower legal standards than reexamination and additional grounds.prevail may not be commercially meaningful.

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

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

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Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example, we do not know whether:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In addition, each of our license agreements, and we expect our future agreements, will impose various development, diligence, commercialization, and other obligations on it. Certain of our license agreements also

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

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

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

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

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

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

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

the priority of invention of patented technology.

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

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.

We may also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. Additionally, we rely on unpatented know-how, continuing technological innovation to develop, strengthen, and maintain the proprietary and competitive position of our product candidates, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. However, trade secrets are difficult to protect. For example, we may be required to share our trade secrets with third-party licensees, collaborators, consultants, contractors, or other advisors and we have limited control over the protection of trade secrets used by such third parties. Although we use reasonable efforts to protect our trade secrets, including by entering into confidentiality agreements, our employees, consultants, contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose our trade secrets and proprietary information to competitors and we may not have adequate remedies for any such disclosure. Enforcing a claim that a third party illegally obtained and used, disclosed, or misappropriated any of our trade secrets is difficult, expensive, and time-consuming, and the outcome is

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unpredictable. Furthermore, we may not obtain these agreements in all circumstances, and the employees and consultants who are parties to these agreements may breach or violate the terms of these agreements, thus we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. In addition, trade secret laws in the United States vary, and some U.S. courts as well as courts outside the United States are sometimes less willing or unwilling to protect trade secrets. Moreover, it is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Further, our trade secrets could otherwise become known or be independently discovered by our competitors or other third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees, and current employees. If our trade secrets or confidential or proprietary information is divulged to or acquired by third parties, including our competitors, our competitive position in the marketplace, business, financial condition, results of operations, and prospects may be materially adversely affected.

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

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

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our product candidates or the use of our technologies infringe or otherwise violates patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize our current product candidates and future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization. There may be third-party patents or patent applications with claims to compositions, materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. In particular, we are aware of an issued patent in each of the United States and Japan that expires in 2030 that covers one of our preclinical assets. We do not know if we will have reasonable defenses against a claim of infringement or if we will be able to obtain a license to such patent on commercially reasonable terms, if at all. As a result, we may not be able to commercialize such asset, if approved, prior to such patent’s expiration.

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

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

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

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

cease developing, selling or otherwise commercializing our product candidates;

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

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

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

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

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

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

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual

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property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

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

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

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

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

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

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

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to us from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our involvement in litigation or interference proceedings may fail and, even if successful, may result in substantial costs, and distract

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our management and other employees. We may not be able to prevent infringement, misappropriation of, or other violations of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

Issued patents covering our discovery engine platform and our product candidates could be found invalid or unenforceable if challenged.

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

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

We willmay not be ableseek to seek and obtain protection forprotect 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 and prosecuting patent applications, and defending patents on all of our discovery engine platform and product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive. Competitors may manufactureexpensive, and sell our potential productsintellectual property rights in some countries outside the United States could be less extensive than those foreign countries where we do not file for and obtain patent protection or where patent protection may be unavailable, not obtainable or ultimately not enforceable. Our competitors might conduct research and development activities in countries where we do not have patentthe United States, assuming that rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets and, further, may be able to export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as thatare obtained in the United States. These products may compete with our products in jurisdictions where weIn addition, the laws of some foreign countries do not have any issued patents and our


patent claims or otherprotect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be effective or sufficientable to prevent themthird parties from so competing.practicing our inventions in all countries

The

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outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. In addition, the statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of our patent applications and we may not timely file foreign patent applications. For PTI-428, allthe patent families related to YTX-7739, as well as for many of the statutory deadlines have passed.  For our patent applications related to PTI-801, PTI-808, potentiators and correctors,families that we own, the relevant statutory deadlines have not yet expired. Thus, for each of thesethe patent families particularly those that we believe provideprovides coverage for theseour lead product candidates,candidate, we will need to decide whether and where to pursue protection outside the United States by the relevant deadlines,States.

Competitors may use our technologies in jurisdictions where we do not pursue and we will only have the opportunity to obtain patent protection in those jurisdictionsto develop their own products and further, may export otherwise infringing products to territories where we file forhave patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and prosecuteour patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued claims.patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The scope and available coverage thus may vary significantly. Outside of the United States, patents we own or license, if issued, may become subject to patent opposition in the European Patent Office or similar proceedings, which may result in loss of scope of some claims or loss of the entire patent. Participation in adversarial proceedings is very complex and expensive, and may divert our management’s attention from our core business and may result in unfavorable outcomes that could adversely affect our ability to prevent third parties from competing with us.

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

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. For example, an April 2014 report from the Office of the United States Trade Representative identified a number of countries, including India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including India and China, have been listed in the report every year since 1989. If we encounter difficulties in protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

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

IntellectualIf we do not obtain additional protection under the Hatch-Waxman Act and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from our earliest U.S. non-provisional filing date in our chain of priority. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired for a product candidate, we may be open to competition from competitive medications, including generic medications. Given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing product candidates similar or identical to ours.

Depending upon the timing, duration, and specifics of FDA marketing approval of our product candidates, one or more of the U.S. patents we own may be eligible for a limited patent term extension under the Drug Price

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

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

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

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

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

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

Our employees have been previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.

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

We may not necessarily address all potential threatsbe successful in obtaining, through acquisitions, in-licenses or otherwise, necessary rights to our discovery engine platform, product candidates or other technologies.

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

Numerous factors may limit any potential competitive advantage provided by our intellectual property rights.

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

Othersothers may be able to make compoundsproducts that are similar to our product candidates or utilize similar technology but that are not covered by the claims of anythe patents should they issue, that we ownlicense or have exclusively licensed.may own;

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We

we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that we license or own now or in the future;

we, or our current or future licensors or strategic collaborators might not have been the first to make the inventions covered by any issued patent or pending patent application that we own or have exclusively licensed.

We or our licensors or strategic collaborators, might not have been the first to file patent applications covering certain of our inventions.or their inventions;

Othersothers may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned or licensed intellectual property rights.rights;

Ourit is possible that our current or future pending owned or licensed patent applications maywill not lead to issued patents.patents;

Patents, should they issue,issued patents that we own or that we have exclusively licensed, if any, may not provide us with any competitive advantages, orhold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors.competitors or other third parties;

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

Wewe may not develop additional proprietary technologies that are patentable.patentable;

Thethe patents of others may have an adverse effect onharm our business.business; and

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

Should any of these events occur, they could significantly harm our business and results of operationsoperations.

Risks Related to Our Indebtedness

Our level of indebtedness and prospects.


Recent patent reform legislationdebt service obligations could increaseadversely affect our financial condition and may make it more difficult for us to fund our operations.

In December 2019, we entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”) (the “Term Loan”), which was most recently amended in December 2020. The Term Loan provides up to $30.0 million of debt financing and has interest-only payments through August 1, 2021, with the uncertaintiesoption to extend an additional six months upon the drawdown following occurrence of a development milestone and costs surroundingan equity event as defined in the prosecutionagreement. Thereafter, we are obligated to make payments that will include equal installments of principal and interest through the maturity date of January 1, 2024. As of December 31, 2020, $15.0 million was outstanding under the Term Loan. In April 2020, we incurred additional indebtedness consisting of a $1.1 million loan (the “PPP Loan”) under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.

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

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

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

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

In addition, while all or a portion of our issued patents.

The Leahy-Smiththe PPP Loan may be forgiven if the PPP Loan is used for qualifying expenses as described in the CARES Act, includes a number of significant changes to United States patent law. These include provisionsthere is no assurance that affect the way patent applicationswe will be prosecutedable to obtain forgiveness, notwithstanding that we believe we have used the PPP Loan for qualifying expenses. The U.S. Department of the Treasury, Small Business Administration and members of Congress have indicated an intention to provide strong oversight of loans granted under the Paycheck Protection Program. If we are audited or reviewed or our records are subpoenaed by the government as a result of entering into the PPP Loan, it could divert management’s time and attention and we could incur legal and reputational costs, and an adverse finding could lead to the requirement to return the PPP Loan, which could reduce our liquidity, or could subject us to fines and penalties.

We may also affect patent litigation. Accordingly, it is not clear what, if any, impacthave cash available to us in an amount sufficient to enable us to make interest or principal payments on our indebtedness when due. If we do not make scheduled payments when due, or otherwise materially breaches or experiences an event of default under the Leahy-Smith Act will have on the operation ofTerm Loan, Hercules could accelerate our business,total loan obligation or enforce our security interest against us.

Failure to satisfy our current and pending patent portfolio and future intellectual property strategy. However,debt obligations under the Leahy-Smith Act and its implementationTerm Loan could increaseresult in an event of default. In addition, other events, including certain events that are not entirely in our control, such as the uncertainties and costs surroundingoccurrence of a material adverse event on our business, could cause an event of default to occur. As a result of the prosecutionoccurrence of an event of default, Hercules could accelerate all of the amounts due. In the event of an acceleration of amounts due under the Term Loan, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness. In addition, Hercules could seek to enforce our security interests in the assets securing such indebtedness. If we are unable to pay amounts due to Hercules upon acceleration of the Term Loan or if Hercules enforces our security interest against our assets securing our indebtedness to Hercules, our ability to continue to operate our business may be jeopardized.

We are subject to certain restrictive covenants which, if breached, could result in the acceleration of our patent applicationsdebt under the Term Loan and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.prospects.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee paymentThe Term Loan imposes operating and other requirements imposed by governmental patent agencies,restrictions on us. Such restrictions will affect, and in many respects limit or prohibit, our patent protectionability and the ability of any future subsidiary to, among other things:

dispose of certain assets;

engage in mergers or acquisitions;

encumber our intellectual property;

incur indebtedness or liens;

pay dividends;

make certain investments; and

engage in certain other business transactions.

These restrictive covenants may prevent us from undertaking an action that we feel is in the best interests of our business. In addition, if we were to breach any of these restrictive covenants, Hercules could be reducedaccelerate our indebtedness under the Term Loan or eliminated for non-complianceenforce our security interest against our assets, either of which would materially adversely affect our ability to continue to operate our business.

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Risks Related to Our Business Operations, Employee Matters and Managing Growth

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

As of December 31, 2020, we had 44 full-time employees and two part-time employees, and in connection with these requirements.

Periodic maintenance fees on any issued patent are duebecoming a public company, we expect to be paid to the USPTO, the European Patent Office and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign national or international patent agencies require compliance with aincrease our number of procedural, documentary, fee paymentemployees and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by paymentscope of our operations. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational, and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Also, our management may need to divert a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapsedisproportionate amount of the patent or patent application, resulting in partial or complete lossits attention away from its day-to-day activities and devote a substantial amount of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of patent rights include, but are not limitedtime to failure to file non-provisional applications claiming prioritymanaging these development activities. Due to our provisional applications by the statutory deadlines, failure to timely file national and regional stage patent applications based on an international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. Iflimited resources, we or our licensors fail to maintain the patents and patent applications covering our product candidates, our competitors mightmay not be able to entereffectively manage the market, which would have a material adverse effect onexpansion of our business.

operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. The patent protectionphysical expansion of our operations may lead to significant costs and patent prosecution for somemay divert financial resources from other projects, such as the development of our product candidatescandidates. If our management is dependent orunable to effectively manage our expected development and expansion, our expenses may be dependent in the future on third parties.

While we normally seek and gain the right to fully prosecute the patents relating to our product candidates, there may be times when platform technology patents or product-specific patents that relate to our product candidates are controlled by our licensors or collaboration partners. In addition, our licensors and/or licensees and/or collaboration partners may have back-up rights to prosecute patent applications in the event that we do not do so or choose not to do so, and our licensees and/or collaboration partners may have the right to assume patent prosecution rights after certain milestones are reached. If any of our licensing partners fails to appropriately prosecute and maintain patent protection for patents covering any of our product candidates,increase more than expected, our ability to develop and commercialize those product candidates maygenerate or increase our revenue could be adversely affectedreduced and we may not be able to prevent competitorsimplement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.

Our future success depends on our ability to retain our management team and to attract, retain, and motivate qualified personnel.

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

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

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

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We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

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

withdrawal of subjects from our clinical trials;

substantial monetary awards to patients or other claimants;

decreased demand for our product candidates or any future product candidates following marketing approval, if obtained;

damage to our reputation and exposure to adverse publicity;

increased FDA warnings on product labels;

litigation costs;

distraction of management’s attention from our primary business;

loss of revenue; and

the inability to successfully commercialize our product candidates or any future product candidates, if approved.

We maintain product liability insurance coverage for our clinical trials with a €5 million annual aggregate coverage limit. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to continue developingmaintain insurance coverage at a reasonable cost or commercializing ain sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtain marketing approval for our product candidate, if approved, that relied on such licensed intellectual property.

We are currently a partycandidates, we intend to andexpand our insurance coverage to include the sale of commercial products; however, we may in the future be party to license agreements under which we are or will be granted rights to intellectual property that are important to our business. Certain of our existing license agreements impose, and we expect that future license agreements will impose on us, various diligence obligations, payment of milestones and/or royalties and other obligations, including, without limitation, patent prosecution, research and development and efforts to meet milestones under mutually-agreed development plans. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to continue to use the rights granted under the license, or develop or market products covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms.


We may need to obtain licenses from third parties to advance our research or allow commercialization of ourthis product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business, and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.

Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

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

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

our right to sublicense patent and other rights to third parties under collaborative development relationships;

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

If disputes over intellectual property that we license now or in the future prevent or impair our ability to maintain our licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

We may be subject to litigation alleging that we are infringing the intellectual property rights of third parties or litigation or other adversarial proceedings seeking to invalidate our patents or other proprietary rights, and we may need to resort to litigation to protect or enforce our patents or other proprietary rights, all of which will be costly to defend, uncertain in its outcome and may prevent or delay development and commercialization efforts or otherwise harm our business.

Our success also will depend, in part, on our refraining from infringing patents or otherwise violating intellectual property owned or controlled by others. Numerous patents and pending applications are owned by third parties in the fields in which we are developing product candidates, both in the United States and elsewhere. It is difficult for industry participants, including us, to identify all third-party patent rights that may be relevant to our product candidates and technologies because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning and scope of patent claims. Moreover, because some patent applications are maintained in secrecy until the patents publish, we cannot be certain that third parties have not filed patent applications that cover our products and technologies. We may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our technology. In addition, we may be unaware of one or more issued patents that would be infringed by the manufacture, sale, importation or use of a current or future product candidate, or we may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent applications can, subject to certain limitations, be later amended in a manner that could cover our technologies, our future products or the manufacture or use of our future products. Pharmaceutical companies, biotechnology companies, universities, research institutions and others may have filed patent applications or have received, or may obtain, issued patents in the United States or elsewhere relating to aspects of our technology, including our products, processes for testing, manufacture, formulation or methods of use, including combination therapy. It is uncertain whether the issuance of any third-party patents will require us to alter our product candidates or processes, obtain licenses, or cease certain activities.


If patents issued to third parties contain blocking, dominating or conflicting claims we may choose to or, if such claims are ultimately determined to be valid, be required to obtain licenses to these patents or to develop or obtain alternative non-infringing technology and cease practicing those activities, including, potentially, the manufacture or marketing of any products deemed to infringe those patents. If any licenses are required, there can be no assurance that we will be able to obtain any such licenses on commercially favorable terms, if at all, and if these licenses are not obtained, we might be prevented from pursuing the development and commercialization of certain of our potential products entirely or for certain indications. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. Our failure to obtain a license to any technology that we may require to commercialize our products on favorable terms may have a material adverse impact on our business, financial condition and results of operations.

We may be exposed to, or threatened with, future litigation by third parties, including our competitors, having patent or other intellectual property rights alleging that our technologies, including our products, processes for manufacture or methods of use, including combination therapy, or other proprietary technologies infringe, either literally or under the doctrine of equivalents, their intellectual property rights. Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful infringement or other intellectual property claim against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our affected products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be availableliability insurance on commercially reasonable terms. Parties making successful claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. We cannot provide any assurancesLarge judgments have been awarded in class action lawsuits based on drugs that third-party patents do not exist which might be enforced against our products or product candidates, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties. Any of those occurrences would have a material adverse impact on our business.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or any other patent litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

We may be involved in lawsuits to protect or enforce our intellectual property, which could be time consuming, expensive and unsuccessful, and issued patents covering our product candidates could be found invalid or unenforceable if challenged in court.

Competitors may infringe our patents or the patents of our licensors, assuming patents issue from patent applications we own or license. Litigation, which could result in substantial costs to us (even if determined in our favor), may also be necessary to enforce any patents issued or licensed to us.had unanticipated side effects. The cost to us in initiatingof any product liability litigation or other proceeding relating to patent or other proprietary rights,proceedings, even if resolved in our favor, could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations. In addition,particularly in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question.

If we were to initiate legal proceedings against a third party to enforce a patent covering one of our product candidates or our technology, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States and in most European countries, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of


several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecutionlight of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of our platform technology. Such a loss of patent protection could have a material adverse impact on our business. Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without legally infringing our patents or other intellectual property rights.

An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing. Any of these outcomes would not only have an adverse effect on our patent portfolio but may also have an adverse effect on our business if we are unable to prevent the competitive activities of third parties.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or any other patent litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.

We rely on trade secrets to protect technology especially where patent protection is not believed to be appropriate or obtainable or where patents have not issued. We attempt to protect our proprietary technology and processes, in part, with confidentiality agreements and assignment of invention agreements with our employees and confidentiality agreements with our consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. We may fail in certain circumstances to obtain the necessary confidentiality agreements, or their scope or term may not be sufficiently broad to protect our interests.

If our trade secrets or other intellectual property become known to our competitors, it could result in a material adverse effect on our business, financial condition and results of operations. To the extent that we or our consultants or research collaborators use intellectual property owned by others in work for us, disputes may also arise as to the rights to related or resulting know-how and inventions.

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

We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific advisors, and sponsored researchers. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Moreover, we may not obtain these agreements in all circumstances.

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


We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of our employees’ or consultants’ former employers or their clients. These claims may be costly to defend and if we do not successfully do so, we may be required to pay monetary damages and may lose valuable intellectual property rights or personnel.

Many of our employees and consultants were previously or concurrently employed at universities or biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees, consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could compromise our ability to commercialize, or prevent us from commercializing, our product candidates, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks Relating to Our Business Operations and Industry

Our future success depends on our ability to retain executives and to attract, retain and motivate key personnel in a competitive environment for skilled biotechnology personnel.

Because of the specialized scientific naturesize of our business and the unique properties of our technology, our success is highly dependent upon our ability to attract and retain qualified scientific and technical personnel, consultants and advisors. We are dependent on the principal members of our scientific and management staff, particularly Ms. Meenu Chhabra, Ms. Helen Boudreau, and Drs. Po-Shun Lee, Geoffrey Gilmartin, Benito Munoz and Marija Zecevic, who have extensive knowledge of and experience developing our technology. Additionally, we are dependent on our Senior Vice President, Clinical Operations, Ms. Sheila Wilson, to conduct our clinical operations. The loss of any of their services might significantly delay or prevent the achievement of our research, development and business objectives.

We will need to recruit a significant number of additional personnel in order to achieve our operating goals. In order to pursue our product development and marketing and sales plans, we will need to hire additional qualified scientific personnel to perform research and development, and preclinical studies, as well as personnel with expertise in clinical operations, clinical testing, government regulation, compliance, manufacturing, marketing and sales, which may strain our existing managerial, operational, regulatory compliance, financial and other resources. We also rely on consultants and advisors to assist in formulating our research and development strategy and adhering to complex regulatory requirements. We face strong competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions, many of which have greater financial and other resources than us. There can be no assurance that we will be able to attract and retain such individuals on acceptable terms, if at all. Additionally, our facilities are located in Massachusetts, which may make attracting and retaining qualified scientific and technical personnel from outside of Massachusetts difficult. The failure to attract and retain qualified personnel, consultants and advisors could have a material adverse effect on our business, financial condition and results of operations.

As our product candidates advance through clinical trials we may experience difficulties in managing our growth and expanding our operations, including, without limitation, managing international clinical trials.

We have limited experience in drug development. As our product candidates advance through preclinical studies and clinical trials, we will need to expand our development, regulatory and manufacturing capabilities or contract with other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators or partners, suppliers and other organizations, including, without limitation, international clinical trials. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.


We are exposed to potentialA product liability claim or similarseries of claims and insurance against these claims may not be sufficient to cover our liabilities, or may not be available to us at a reasonable rate in the future or at all.

Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products. Clinical trials involve the testing of product candidates on human subjects or volunteers under a research plan, and carry a risk of liability for personal injury or death to patients due to unforeseen adverse side effects, improper administration of the product candidate, or other factors. Many of these patients are already seriously ill and are therefore particularly vulnerable to further illness or death.  Our trials may include third party drugs taken with ours that could injure trial subjects for whose damages we would be liable and, even if we were not, we nevertheless may not be able to show or prove that our product was not a cause of the injury.

We carry clinical trial liability insurance. However, there can be no assurance that we will be able to obtain the amount of insurance necessary to cover potential claims or liabilities. We could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim outside the scope of indemnity or insurance coverage, if the indemnity is not performed or enforced in accordance with its terms, or if our liability exceeds the amount of applicable insurance. In addition, there can be no assurance that insurance, if obtained, will continue to be available on terms acceptable to us. Similar risks would exist upon the commercialization or marketing of any products by us or our collaborators.

Regardless of their merit or eventual outcome, product liability claims may result in:

decreased demand for our product;

injury to our reputation and significant negative media attention;

withdrawal of clinical trial volunteers or subjects;

costs of litigation;

distraction of management; and

substantial monetary awards to plaintiffs.

Should any of these events occur, it could have a material adverse effect on our business and financial condition.

We may become involved in securities class action litigation that could divert management’s attention and adversely affect our business and could subject us to significant liabilities.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical and biotechnology companies. These broad market fluctuations as well a broad range of other factors, including the realization of any of the risks described in this “Risk Factors” section of this report, may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies generally experience significant stock price volatility. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business. Any adverse determination in any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and


regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We must comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We use hazardous chemicals and biological materials in certain aspects of our business and are subject to a variety of U.S. federal, state and local laws and regulations governing the use, generation, manufacture, distribution, storage, handling, treatment and disposal of these materials. Although we believe our safety procedures for handling and disposing of these materials and waste products comply with these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, manufacture, distribution, storage, handling, treatment or disposal of hazardous materials. In the event of contamination or injury, or failure to comply with environmental, occupational health and safety and export control laws and regulations, we could be held liable for any resulting damages and any such liability could exceed our assets and resources, including any available insurance.

Risks Relating to Our Common Stock

Our stock price will likely continue to be volatile and an active, liquid and orderly trading market may not develop for our common stock. As a result you may not be able to resell your shares at or above your purchase price.

The market price of our common stock may fluctuate substantially as a result of many factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of the value of your investment in our common stock. Factors that could cause fluctuations in the market price of our common stock include the following:

the development status of our product candidates and when our products receive regulatory approval;

the results, and the timing of results, of our preclinical studies and clinical trials, including, without limitation, the publication or delay in publication of preliminary, interim or final results, adverse events, side effects, safety or efficacy data or other information;

the support and approval, if any, that we receive from our collaboration partners, the TDN and other interested parties;

performance of third parties on whom we rely to conduct pre-clinical studies, manage our clinical trials, and manufacture our products, product components and product candidates, including their ability to comply with regulatory requirements;

the success of, and fluctuation in, the sales of our product candidates, if approved;

our execution of our sales and marketing, manufacturing and other aspects of our business plan;

results of operations that vary from those of our competitors and the expectations of securities analysts and investors;

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

our announcement of significant licensing or collaboration arrangements, or the termination of such arrangements;

our announcement of significant contracts, acquisitions, or capital commitments;


announcements by our competitors of competing products or other initiatives, including, without limitation, those that lead to the development of a new standard of care;

announcements by third parties of significant claims or proceedings against us;

regulatory and reimbursement developments in the United States and abroad;

future sales of our common stock or debt securities;

additions or departures of key personnel; and

general domestic and international economic conditions unrelated to our performance.

In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance of individual companies. These broad market factors may adversely affect the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in significant liabilities and, regardless of the outcome, could result in substantial costs and the diversion of our management’s attention and resources.

Prior to our initial public offering in February 2016, there was no public market for shares of our common stock. The listing of our common stock on The NASDAQ Global Market does not assure that a meaningful, consistent and liquid trading market exists. Although our common stock is listed on The NASDAQ Global Market, trading volume in our common stock has been limited and an active trading market for our shares may never develop or be sustained. If an active market for our common stock does not develop, you may be unable to sell your shares when you wish to sell them or at a price that you consider attractive or satisfactory. The lack of an active market may also adversely affect our ability to raise capital by selling securities in the future, or impair our ability to license or acquire other product candidates, businesses or technologies using our shares as consideration.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Our principal stockholders have and will have a controlling influence over our business affairs and may make business decisions with which you disagree and which may adversely affect the value of your investment.

Our executive officers, directors and principal stockholders and their affiliates beneficially own or control, directly or indirectly, a majority of the outstanding shares of our common stock. As a result, if some of these persons or entities act together, they will have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and by-laws and the approval of any business combination. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for shares of our common stock, which could prevent our stockholders from receiving a premium for their shares. Some of these persons or entities who make up our principal stockholders may have interests different from yours.


Future sales, or the expectation of future sales, of a substantial number of our common shares could depress the trading price of our common stock.

If we or our stockholders sell substantial amounts of shares of our common stock in the public market or if the market anticipates that these sales could occur, the market price of shares of our common stock could decline. These sales may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions.

Pursuant to our 2016 Stock Option and Incentive Plan, or the 2016 Plan, our board is authorized to grant stock options and other equity-based awards to our employees, directors and consultants. The number of shares available for future grant under the 2016 Plan automatically increases each year by up to 3% of all shares of our capital stock outstanding as of December 31 of the prior calendar year, subject to the ability of our board of directors or compensation committee to take action to reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares available for issuance under the 2016 Plan each year. If our board of directors or compensation committee elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

A significant portion ofdecline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our total outstanding shares may be sold into the market. This could cause the market price ofinsurance coverage, our common stock to drop significantly, even if ourfinancial condition, business, is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market believes that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.

The holders of a significant portion of shares of our common stock, or their transferees, have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, theyand prospects could be freely sold in the public market. If these additional shares are sold, or if it is believed that theymaterially adversely affected.

We will be sold, in the public market, the trading priceincur increased costs as a result of our common stock could decline.

Actual or potential sales of our common stock by our employees, including our executive officers, pursuant to pre-arranged stock trading plans could cause our stock price to fall or prevent it from increasing for numerous reasons, and actual or potential sales by such persons could be viewed negatively by other investors.

In accordance with the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934,operating as amended, and our policies regarding stock transactions, our employees and executive officers may adopt stock trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Generally, sales under such plans by our executive officers and directors require public filings. Actual or potential sales of our common stock by such persons could cause the price of our common stock to fall or prevent it from increasing for numerous reasons. For example, a substantial number of shares of our common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing. Also, actual or potential sales by such persons could be viewed negatively by other investors.

We have broad discretion in the use of our cash and cash equivalents and may not use them effectively or may use them in a way with respect to which stockholders do not approve.

Our management will have broad discretion in the use of our cash and could spend it in ways that do not improve our results of operations or enhance the value of shares of our common stock. The failure by our management to utilize our cash effectively could result in financial losses that could have a material adverse effect on our business, cause the market price of shares of our common stock to decline and delay the development of our product candidates. We may invest our cash in a manner that does not produce income or that loses value. If we do not invest our cash in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of shares of our common stock to decline.


As an “emerging growth company,” we are allowed to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the Securities and Exchange Commission, or SEC. This reduced disclosure could make our common stock less attractive to investors.

The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company, whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.07 billionour management team will in general, qualify as an “emerging growth company” until the earliest of:

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

the last day of its fiscal year in which it has annual gross revenue of $1.07 billion or more;

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700.0 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annualdevote substantial time to new compliance initiatives.

As a public company, and quarterly reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a period of at least 12 months and (3) has filed at least one annual report pursuant to the Exchange Act.

Under this definition,particularly after we are an “emerging growth company” and could remain an “emerging growth company” for more than five years. For so long as we areno longer an “emerging growth company,” we will among other things:

not be required to comply with the auditor attestation requirements of section 404(b) of Sarbanes-Oxley;

not be required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of the Exchange Act;

not be required to seek stockholder approval of any golden parachute payments not previously approved pursuant to Section 14A(b) of the Exchange Act;

be exempt from any rule adopted by the Public Company Accounting Oversight Board, requiring mandatory audit firm rotation or a supplemental auditor discussion and analysis; and

be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

In this report and our other periodic reports we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive for relying on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.


As a public reporting company, we are and will be subject to rules and regulations established from time to time by the SEC and the Public Company Accounting Oversight Board, or PCAOB, regarding our internal control over financial reporting. We may not complete improvements to our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the market price of our common stock could decline and you could lose all or part of your investment.

We are a public reporting company subject to the rules and regulations established from time to time by the SEC and the PCAOB. These rules and regulations require, among other things, that we establish and periodically evaluate procedures with respect to our internal controls over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

In addition, as a public company we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, so that our management can certify as to the effectiveness of our internal controls over financial reporting, which will require us to continue to document and make changes to our internal controls over financial reporting. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting at such time as we cease to be an “emerging growth company,” as defined in the JOBS Act, although, as described in the preceding risk factor, we could potentially qualify as an “emerging growth company” for more than five years. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting once we cease to be an emerging growth company, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

We are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures as well as internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are and will be met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

Operating as a public company has significantly increased our costs and requires our management to devote substantial time to compliance efforts.

As a public company, we are incurring and will continue to incur significant legal, accounting, insurance and other expenses that we did not incur as a private company. The Dodd-Frank Act andIn addition, the Sarbanes-Oxley Act as well as relatedof 2002 (the “Sarbanes-Oxley Act”) and rules subsequently implemented by the SEC and The NASDAQNasdaq Stock Market have required changes inimposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices of public companies. In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd-Frank Act are expected to require additional changes. We expect that compliance


with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. We expect that we will need to hire additional accounting, finance and other personnel in connection with our efforts to comply with the requirements of being a public company, and ourpractices. Our management and other personnel will need to devote a substantial amount of time towards maintainingto these compliance withinitiatives. Moreover, these requirements. These requirementsrules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Although

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Pursuant to Section 404 of the JOBSSarbanes-Oxley Act (“Section 404”), we will be required to furnish a report by our management on our internal control over financial reporting, which may include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. While we remain an “emerging growth company” or a “smaller reporting company” with less than $100 million in annual revenues, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a limitedrisk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

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

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

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

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

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

As a newly public company, we will need to establish and maintain effective disclosure and financial controls and make changes in our corporate governance practices. We will need to hire additional accounting and

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financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product development efforts.

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

The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”), which significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). We continue to examine the impact this tax reform legislation may have on our business. However, the effect of the TCJA on our business, whether adverse or favorable, is uncertain, and may not become evident for some period of time somewhat lessen the costtime. Furthermore, our implementation of complyingnew practices and processes designed to comply with thesechanging tax laws and regulations could require us to make substantial changes to our business practices, allocate additional regulatoryresources, and other requirements, we nonetheless expect a continued increase in legal, accounting, insurance and certain other expenses in the future,our costs, which willcould negatively impactaffect our business, results of operations and financial condition.

Anti-takeover provisions in our charter documents could discourage, delay or prevent a change in control We urge investors to consult with their legal and tax advisers regarding the implications of our company and may affect the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated by-laws and the Delaware General Corporation Law contain provisions that may enable our board of directors to resist a change in control of our company even if a change in control were to be considered favorable by youTCJA and other stockholders. These provisions:

provide that directors can be removed only for cause, and then only by a supermajority stockholder vote;

establish advance notice requirements for nominating directors and proposing matters to be voted on by stockholders at stockholder meetings;

require majority stockholder voting to effect certain amendments to our certificate of incorporation and by-laws;

create a classified board of directors whose members serve staggered three-year terms;

specify that special meetings of our stockholders can be called only by our board of directors;

prohibit stockholder action by written consent;

provide that vacancies on our board of directors may be filled only by a majority of directors thenchanges in office, even though less than a quorum;

specify that no stockholder is permitted to cumulate votes at any election of directors;

expressly authorize our board of directors to modify, alter or repeal our amended and restated by-laws, subject to any limitations set forth therein;

require supermajority votes of the holders of our common stock to amend specified provisions of our amended and restated certificate of incorporation; and

require supermajority votes of the holders of our common stock to amend our amended and restated by-laws, unless such amendments have been recommended to the stockholders, in which case only a majority vote is necessary.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock.


A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. We have not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of us may be discouraged or prevented.

We do not expect to pay any dividends on our common stock for the foreseeable future.

We currently expect to retain all future earnings, if any, for future operations, expansion and repayment of debt and have no current plans to pay any cash dividends to holders of our common stock for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. As a result, you may not receive any returntax laws on an investment in our common stock unless you sellstock.

Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

As of December 31, 2020, we had federal and state net operating loss (“NOL”) carryforwards of $453.8 million and $429.9 million, respectively. Of the federal NOL carryforwards, $228.1 million begin to expire in 2026, and $225.7 million can be carried forward indefinitely. Under Section 382 of the Code changes in our ownership may limit the amount of our net operating loss carryforwards and research and development tax credit carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and research and development tax credit carryforwards before they expire. The completion of the Merger, together with private placements and other transactions that have occurred since our inception, may trigger such an ownership change pursuant to Section 382. Any such limitation, whether as the result of the Merger, prior private placements, sales of our common stock by our existing stockholders, or additional sales of our common stock by us after the Merger, could have a material adverse effect on our results of operations in future years. We have not yet completed a Section 382 analysis, and therefore, there can be no assurances that the NOL is already not limited.

In addition, the reduction of the corporate tax rate under the TCJA may cause a reduction in the economic benefit of our NOL carryforwards and other deferred tax assets available to it. For example, while the TCJA allows for federal NOLs incurred in tax years beginning after December 31, 2017 to be carried forward indefinitely, the TCJA also imposes an 80% limitation on the use of NOLs that are generated in tax years beginning after December 31, 2017. Net operating losses generated prior to December 31, 2017, however, will still have a price20-year carryforward period, but are not subject to the 80% limitation.

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

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

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

We may acquire additional businesses or products, form strategic alliances, or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing, and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot provide assurance that, following any such acquisition, we will achieve the synergies expected in order to justify the transaction.

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

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

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

Our by-laws provide thatWe have sole authority over whether and how to pursue the Court of Chancerycontinued development of the State of DelawareCF Assets (if at all), and our only obligations will be to reasonably cooperate with the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our by-laws provide that the Court of Chanceryrequests of the StateCVR Holders’ Representative to carry out the intent and purpose of Delaware is the soleCVR Agreement and exclusive forum fornot to terminate or intentionally negatively impact the CF Assets during the nine-month period following the effective time of the Merger.

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Furthermore, the CVRs will be unsecured obligations of the combined organization and all payments under the CVRs, all other obligations under the CVR Agreement and the CVRs and any derivative actionrights or proceeding brought on our behalf, any action asserting a breachclaims relating thereto will be subordinated in right of fiduciary duty, any action asserting a claim against us arising pursuantpayment to the Delaware prior payment in full of all current or future senior obligations of the combined organization.

General Corporation Law, our certificate of incorporation or our by-laws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees or stockholders (including beneficial owners), which may discourage such lawsuits against us and our directors, officers, other employees or stockholders (including beneficial owners). Alternatively, if a court were to find the choice of forum provision contained in our by-laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, whichRisk Factors

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments
ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.

PROPERTIES

Item 2. Properties

We lease our office and laboratory space, which consists of 18,000Our headquarters are located at 40 Guest Street, Suite 4410, Boston, Massachusetts, where we occupy approximately 27,000 square feet located in Cambridge, Massachusetts. Ourof research and development, laboratory and office space. This lease expires in May 2018. On September 19, 2017, we entered into aApril 2023. We also lease agreement for our new headquarters, consisting of approximately 30,000 square feet of laboratory and office space located at 80 Guest Street, Suite 500, Boston, Massachusetts. This lease expires in Brighton, Massachusetts. The rent commencement dateApril 2028. We believe that our office and laboratory space is April 15, 2018. The term ofsufficient to meet our needs for the leaseforeseeable future and that suitable additional space will expire on April 30, 2028, unless terminated earlier. The Company is entitled to one seven-year option to extend.be available as and when needed.

ITEM 3.

LEGAL PROCEEDINGS

Item 3. Legal Proceedings

We are not a partyFrom time to anytime, we may be subject to legal proceedings and we are not aware of any claims or actions pending or threatened against us. Inin the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business,business. Information with respect to legal proceedings and this item is included in Note 16 of the resolutionNotes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K,which we do not anticipate would have a material adverse impact on our financial position, results of operations or cash flows.is incorporated herein by reference.

Item 4. Mine Safety Disclosures
ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Item 5. Market for Registrant’sCertain Information Regarding the Trading of Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market InformationStock

Our common stock has beencommenced trading on the NASDAQNasdaq Global Market under the symbol “PTI” sinceon February 11, 2016. ThePrior to that date, there was no public market for our common stock. On December 22, 2020, we completed our previously announced merger transaction with Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of August 22, 2020, as amended on November 6, 2020, (the “Merger Agreement”), by and among Pangolin Merger Sub, Inc., a wholly-owned subsidiary of Proteostasis (“Merger Sub”), Yumanity Holdings, LLC (“Holdings”) and Yumanity, Inc., pursuant to which Merger Sub merged with and into Yumanity, Inc., with Yumanity, Inc. surviving as a wholly owned subsidiary of Proteostasis (“the Merger”). Immediately prior to the effective time of the Merger, Holdings merged with and into Yumanity, Inc. and Yumanity, Inc. continued to exist as the surviving corporation. On December 22, 2020, in connection with, and prior to the completion of, the Merger, Proteostasis effected a 1-for-20 reverse stock split of its common stock (the “Reverse Stock Split”). On December 23, 2020, following table sets forth, for the periods indicated,completion of the high and low intraday sales prices ofMerger, our common stock as reported bybegan trading on the NASDAQ Global Market:Nasdaq Capital Market under the symbol “YMTX”.

 

 

Common Stock

Price

 

 

 

High

 

 

Low

 

Fiscal year ended December 31, 2017:

 

 

 

 

 

 

 

 

First Quarter (from January 1, 2017 to March 31,

   2017)

 

$

16.67

 

 

$

7.67

 

Second Quarter (from April 1, 2017 to June 30, 2017)

 

$

8.12

 

 

$

3.50

 

Third Quarter (from July 1, 2017 to September 30,

   2017)

 

$

5.40

 

 

$

1.71

 

Fourth Quarter (October 1, 2017 to December 31,

   2017)

 

$

6.95

 

 

$

1.41

 

StockholdersHolders of Our Common Stock

As of March 12, 2018,19, 2021, there were 23 stockholdersapproximately 100 holders of record of shares of our common stock. The actualThis number of holders of our common stock is greater than this number of record holders, and includesdoes not include stockholders who are beneficial owners, but whosefor whom shares are held in street name by brokers“nominee” or held by other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.“street” name.

Dividend PolicyDividends

We have never declared or paid cash dividends on our capital stock. We anticipate that we will retain all of our future earnings to finance the operation of our business and do not anticipate declaring or paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare and pay cash dividends, if any, will be subject tomade at the discretion of our board of directors and will depend on variousa variety of factors, including applicable laws, our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, general business or financial condition, future prospectsmarket conditions, and any other factors deemed relevant by our board of directors. Investors should not purchasedirectors may deem relevant. In addition, our common stock with the expectation of receivingloan and security agreement contains covenants that could restrict our ability to pay cash dividends.dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The information required to be disclosed by Item 201(d)5 of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,”Form 10-K regarding equity compensation plans is incorporated herein by reference. Referreference to Item 12 of Part III of this Annual Report on Form 10-K for additional information.Report.

Recent Sales of Unregistered Securities

Grants and exercises of stock options

Since January 1, 2013, we have pursuant to our 2008 Equity Incentive Plan granted to our employees, directors and consultants stock options to purchase an aggregate of 1,371,125On December 31, 2020, the Company issued 21,739 shares of our common stock at exercise prices ranging from $2.38 to $14.71, and we have issued an aggregate of 168,684 shares of our common stock upon exercise of stock options granted to our employees, directors and consultants pursuant to our 2008 Equity Incentive Plan for aggregate consideration of $308,134. The grant of options and the issuances of common stock were exempt either pursuant to Rule 701MTS Health Partners, L.P. (“MTS”) in satisfaction of $500,000 of the Securities Act, or Rule 701, as afees owed to MTS in connection with the Merger. The foregoing transaction pursuant to a compensatory benefit plan, orwas exempt from registration pursuant to Section 4(a)(2), of the Securities Act as a transaction by an issuer not involving a public offering. The shares

Except as noted above, there have been no sales of common stock issued pursuant tounregistered securities other than as previously disclosed by the Company in our 2008 Equity Incentive Plan are deemed restricted securities for the purposes of the Securities Act.


Since January 1, 2013, we have also made a one-time grant of options to one of our consultants to purchase 9,250 shares of our common stock for an exercise price of $2.38 per share, which options were exercised fully for aggregate consideration of $22,000. The grant of options and the issuance of the shares of common stock were made pursuant to Section 4(a)(2) and are deemed restricted securities for the purpose of the Securities Act.

The option grants and the issuances of common stock upon exercise of the options were exempt either pursuant to Rule 701, as a transaction pursuant to a compensatory benefit plan, or pursuant to Section 4(a)(2), as a transaction by an issuer not involving a public offering. The shares of common stock issued upon exercise of options are deemed restricted securities for the purposes of the Securities Act.

Issuance of capital stock

In September 2015, we issued and sold an aggregate of 17,107,303 shares of our Series B preferred stock for aggregate consideration of $22.0 million in cash to existing investors and one new investor. Also in September 2015, pursuant to the terms of our convertible promissory notes described below, we issued an aggregate of 12,284,466 shares of Series B preferred stock to existing investors upon the automatic conversion of outstanding principal and unpaid accrued interest totaling $15.8 million. These preferred stock issuances were exempt under the Securities Act pursuant to Section 4(a)(2) and/or Regulation D promulgated thereunder as transactions not involving a public offering.

Issuance of convertible notes

In July 2015, we issued and sold $5.0 million in convertible promissory notes to existing investors for aggregate consideration of $5.0 million in cash. On September 2, 2015, in connection with the Company’s issuance of Series B preferred stock, the principal amount of all outstanding convertible promissory notes, aggregating $15.0 million, and accrued interest thereon, aggregating $0.8 million, were automatically converted into 12,284,466 shares of our Series B preferred stock at a price of $1.286 per share. These convertible note issuances were exempt under the Securities Act pursuant to Section 4(a)(2) and/or Regulation D promulgated thereunder as transactions not involving a public offering.

Issuer Purchases of Equity Securities

We did not purchase any of our registered equity securities during the period covered by this Annual Report.

Use of Proceeds from Registered Securities

On February 17, 2016, we closed the sale of 6,250,000 shares of common stock to the public at an initial public offering price of $8.00 per share. The offer and sale of the shares in the initial public offering, or IPO, were registered under the Securities Act pursuant to a registration statementCurrent Reports on Form S-1 (File No. 333-208735), which was8-K as filed with the SEC on December 23, 2015 and amended subsequently and declared effective on February 10, 2016. The underwriters of the offering were Leerink Partners and RBC Capital Markets, acting as joint book-running managers for the offering and as representatives of the underwriters. Baird and H.C. Wainwright & Co. acted as co-managers for the offering. We raised approximately $42.7 million in net proceeds in the IPO after deducting underwriting discounts and commissions of approximately $3.5 million and other offering expenses of $3.8 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act. We have invested the unused proceeds from the IPO in cash equivalents and investments in accordance with our investment policy.


Performance Graph

The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, nor shall such information be incorporated by reference into any future filing under the Exchange Act or Securities Act, except to the extent that we specifically incorporate it by reference into such filing.

The following graph compares the performance of our common stock to the NASDAQ Composite Index and to the NASDAQ Biotechnology Index from February 11, 2016 (the first date that shares of our common stock were publicly traded) through December 31, 2017. The comparison assumes $100 was invested after the market closed on February 11, 2016 in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any. The stock price performance included in this graph is not necessarily indicative of future stock price performance.SEC.

 

98

Item 6. Selected Consolidated Financial Data

We have derived the statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 from our audited financial statements appearing at the end of this Annual Report. The consolidated balance sheet data as of December 31, 2015, 2014 and 2013 and the statements of operations data for the years ended December 31, 2014 and 2013 were derived from our historical audited financial statements not included in this Annual Report.


You should read the following selected financial data together with our financial statements and the related notes and the “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report. Our historical results are not necessarily indicative of results that should be expected for any future period. The selected financial data for all periods presented reflect the 1-for-10.8102 reverse stock split effected by the Company on January 19, 2016, which has been retrospectively applied for all periods presented.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,341

 

 

$

8,384

 

 

$

4,312

 

 

$

5,150

 

 

$

1,141

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (1)

 

 

53,654

 

 

 

33,959

 

 

 

22,524

 

 

 

16,744

 

 

 

12,976

 

General and administrative (1)

 

 

11,660

 

 

 

11,880

 

 

 

6,322

 

 

 

4,089

 

 

 

3,747

 

Total operating expenses

 

 

65,314

 

 

 

45,839

 

 

 

28,846

 

 

 

20,833

 

 

 

16,723

 

Loss from operations

 

 

(59,973

)

 

 

(37,455

)

 

 

(24,534

)

 

 

(15,683

)

 

 

(15,582

)

Interest income

 

 

641

 

 

 

246

 

 

 

0

 

 

 

1

 

 

 

1

 

Interest expense

 

 

 

 

 

 

 

 

(599

)

 

 

(199

)

 

 

 

Other income (expense), net

 

 

(100

)

 

 

(23

)

 

 

93

 

 

 

109

 

 

 

(139

)

Net loss

 

 

(59,432

)

 

 

(37,232

)

 

 

(25,040

)

 

 

(15,772

)

 

 

(15,720

)

Modifications of Series A preferred stock

 

 

 

 

 

 

 

 

11,481

 

 

 

(6,037

)

 

 

 

Modifications of Series B preferred stock

 

 

 

 

 

0

 

 

 

(26

)

 

 

 

 

 

 

Accruing dividends on preferred stock

 

 

 

 

 

(1,378

)

 

 

(9,724

)

 

 

(7,837

)

 

 

(6,887

)

Net loss attributable to common stockholders

 

$

(59,432

)

 

$

(38,610

)

 

$

(23,309

)

 

$

(29,646

)

 

$

(22,607

)

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(2.34

)

 

$

(2.06

)

 

$

(42.14

)

 

$

(63.74

)

 

$

(53.87

)

Weighted average common shares

   outstanding—basic and diluted

 

 

25,407,943

 

 

 

18,759,369

 

 

 

553,162

 

 

 

465,115

 

 

 

419,633

 


(1)

ITEM 6.

Includes stock-based compensation expense, as follows:RESERVED

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Research and development

 

$

1,326

 

 

$

556

 

 

$

72

 

 

$

161

 

 

$

152

 

General and administrative

 

 

2,406

 

 

 

1,608

 

 

 

400

 

 

 

113

 

 

 

163

 

 

 

$

3,732

 

 

$

2,164

 

 

$

472

 

 

$

274

 

 

$

315

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,724

 

 

$

18,613

 

 

$

13,844

 

 

$

8,793

 

 

$

2,594

 

Short-term investments

 

 

44,738

 

 

 

66,897

 

 

 

 

 

 

 

 

 

 

Working capital (1)

 

 

65,818

 

 

 

81,483

 

 

 

5,106

 

 

 

4,554

 

 

 

2,852

 

Total assets

 

 

94,389

 

 

 

91,140

 

 

 

18,690

 

 

 

11,782

 

 

 

7,215

 

Preferred stock warrant liability

 

 

 

 

 

 

 

 

110

 

 

 

120

 

 

 

40

 

Convertible promissory notes, including

   accrued interest

 

 

 

 

 

 

 

 

 

 

 

10,199

 

 

 

 

Convertible preferred stock

 

 

 

 

 

 

 

 

112,292

 

 

 

86,859

 

 

 

75,890

 

Additional paid-in capital

 

 

285,583

 

 

 

238,902

 

 

 

12,115

 

 

 

93

 

 

 

670

 

Accumulated deficit

 

 

(216,882

)

 

 

(157,450

)

 

 

(120,218

)

 

 

(95,178

)

 

 

(74,396

)

Total stockholders’ equity (deficit)

 

 

68,734

 

 

 

81,456

 

 

 

(108,102

)

 

 

(95,084

)

 

 

(73,726

)

(1)

ITEM 7.

We define working capital as current assets less current liabilities.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

You should read theThe following discussion and analysis of our financial condition and results of operations togethershould be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, or this Annual Report. In addition including information with respect to historical information, this discussionour plans and analysis containsstrategy for our business, includes forward-looking statements that involve risks uncertainties and assumptions. Ouruncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results maycould differ materially from those anticipatedthe results described in, theseor implied by, the forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences belowcontained in the following discussion and elsewhere in this report, including those set forth under Item 1A. “Risk Factors” and under “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report.analysis.

Overview

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

Our goal is to advance one new program into the clinic every year. Our lead program, YTX-7739, is now in Phase 1 clinical trials for the potential treatment and disease modification of Parkinson’s disease. YTX-7739 targets an imbalanceenzyme known as stearoyl-CoA desaturase (“SCD”). Inhibition of SCD in the proteostasis network, a set of pathways that control protein biosynthesis, folding, trafficking and clearance. The Company focuses on identifying therapies that restore protein function. CF is a disease caused by defectsmultiple cellular systems, including patient-derived neurons, as well as in the function or abundance of cystic fibrosis transmembrane conductance regulator, or CFTR. Our CF focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. Upon discovery of amplifiers, a novel classmouse model of CFTR modulators, we have exploited its novel mechanism of action as a drug screening tool and have subsequently identified correctors and potentiators to be developed as part of combination therapies. Investigational agents representative of all three classes of CFTR modulators are currently in clinical development and include PTI-428, an amplifier, and PTI-801 a third generation corrector, both of which we believe are amenable for add-on therapy to standard-of-care CFTR modulator treatment and PTI-808, a potentiator intended to be developed as part of a dual combination with PTI-801 and a triple combination that also includes PTI-428 and PTI-801. We are developing and, if approved, intend to commercialize our own therapies, including add-on and combination therapies for CF patients who have at least one F508del mutation, representing the majority of the patient population.

There is presently no cure for CF. CF affects an estimated 70,000 to 100,000 patients worldwide with the vast majority of the diagnosed patients residing in the United States, Canada, Europe and Australia. CF is a progressiveParkinson’s disease, and the most common fatal inherited disease among Caucasians. Without normal CFTR protein activity, thick mucus accumulates in vital organs, particularly the lungs, pancreas and gastrointestinal tract, and causes many complications, including respiratory infections, chronic lung inflammation, poor absorption of nutrients and in most cases, progressive respiratory failure. CF patients require lifelong treatment with multiple daily medications, hours of self-care, and frequent hospitalizations. In 2016, the median age of death in the United States from CF was 30 years.

The approval of CFTR modulator based therapy, consisting of a potentiator and a combination of a potentiator and a corrector, has validated the clinical benefit of a small molecule pharmacological approach to improve CFTR function and has become a standard of care for eligible CF patients. These developments have spurred drug discovery and development initiatives that include a combinational approach of multiple modulators. To our knowledge there are only two pharmaceutical companies currently developing combined uses of three CFTR modulators whose goal is the restoration of CFTR protein activity in CF patients by using one potentiator and two corrector molecules. Correctors, such as lumacaftor or tezacaftor, are believed to improve protein folding and trafficking to enable abnormally folded CFTR protein to achieve a higher level of activity without repairing the actual protein mutation. Potentiators, such as ivacaftor, are believed to increase the opening time of the CFTR protein channel resulting in higher ion flow across the cell membrane.

Unlike other triple combination drug discovery and development approaches for CF that are based on potentiators and correctors, our program includes PTI-428, an amplifier, a novel CFTR modulator with unique and distinguished molecular properties. PTI-428 is an orally bioavailable CFTR modulator belonging to the amplifier class. CFTR modulators are compounds that affect the folding, trafficking, function and clearance of CFTR protein and can be classified according to the ways in which they affect CFTR protein. Amplifiers, which include PTI-428, are CFTR modulators that selectively increase the amount of the newly synthesized unfolded form of CFTR protein, thereby providing additional substrate for other CFTR modulators, such as correctors and potentiators, to act upon. Using industry-standard in vitro studies, we have demonstrated that co-administration of PTI-428 with correctors and potentiators significantly improves the in vitro CFTR protein activity achieved by these CFTR modulators alone.


Due to the unique ability of amplifiers to selectively increase the amount of the unfolded form of CFTR protein and its synergistic mechanism of action with certain other types of CFTR modulators, we believe that PTI-428 could become the anchor therapeutic agent for combination therapies comprising multiple classes of CFTR modulators for the treatment of CF. A triple combination regimen that includes PTI-428 with PTI-801, a corrector, and PTI-808, a potentiator, has been showndemonstrated to restore in vitro CFTRreverse the toxicity of misfolded alpha-synuclein or α-synuclein, a protein activity to approximately 100% of normal, in patient-derived human bronchial epithelial, or HBE, cells homozygous for F508del.

With the recent advent of CFTR modulators, the CF treatment paradigm is shifting from palliative care, which addresses only the symptoms of CF, to disease-modifying agents that target the genetic cause of the disease or the mutated CFTR protein.strongly associated with Parkinson’s disease. We are developing and, if approved, intend to commercialize a proprietary combination therapy for patients with an F508del mutation of the CFTR gene, the most common CFTR gene mutation. In the United States, approximately 86% of all CF patients have an F508del mutation of the CFTR gene, of which approximately 53% are homozygous (having two copies of the F508del mutation), and approximately 47% are heterozygous (having an F508del mutation and one other mutation).

We and others have analyzed published data by Vertex Pharmaceuticals Incorporated, or Vertex, on its CFTR modulators (the potentiator ivacaftor and the correctors lumacaftor and tezacaftor) and combinations thereof, which show a strong correlation between the in vitro CFTR protein activity and lung function improvement. We have shown in vitro that PTI-428 increases the amount of available CFTR protein and, when combined with ivacaftor and either lumacaftor or tezacaftor, nearly doubles the CFTR protein activity in the cell compared to a combination of only ivacaftor and either lumacaftor or tezacaftor. In December 2015, the investigational new drug application, or IND, that we submitted to the U.S. Food and Drug Administration, or FDA, forrecently completed a Phase 1 clinical trial to evaluate our PTI-428 product candidate became effective. We initiated our first Phase 1 clinical trial in CF patients and healthy volunteers in the first half of 2016. The Phase 1 trial in CF patients included single ascending dose or SAD, and(“SAD”) study of YTX-7739 in healthy volunteers, which evaluated a broad range of doses of YTX-7739. We completed enrolment in a Phase 1a multiple ascending dose or MAD, cohorts. The Phase 1 trial(“MAD”) study in healthy volunteers included SAD and MAD cohorts to assess the safety, pharmacokinetic and exploratory biomarker results. We reported preliminary safety, pharmacokinetic and exploratory biomarker data from SAD and MAD cohortswith results anticipated in the PTI-428beginning of the second quarter of 2021. A Phase 11b clinical trialstudy of YTX-7739 in CF subjects receiving PTI-428 or placebo for 7 days in addition to Orkambi® (lumacaftor/ivacaftor)patients with Parkinson’s disease has commenced and initiated dosing as their background, standarda continuation of care therapy,the MAD study. A Phase 1b part of the study will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as a cohortproof of CF subjects receiving PTI-428 or placebobiology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for 7 days who were not taking CFTR modulator based therapies.

We have completed a 28-day Phase 2 clinical trial for PTI-428 in CF patients randomized to receive either PTI-428 or placebo for 28 days in addition to Orkambi® as their background, standardearly effects of care therapy to evaluate the efficacy, safety, and tolerability of 50 mg of once-a-day PTI-428YTX-7739.. In December of 2017, we announced the Early results of the study which showed that the addition of PTI-428 to Orkambi® demonstrated mean absolute improvements in ppFEV1 of 5.2 percentage points from baseline compared to placebo (p≤0.05), with mean relative improvements of 9.2 percent (p≤0.05). This treatment effect was achieved by day 14 and sustained through 28 days of dosing.

In CF subjects on Orkambi® therapy, it has been shown in two registrational Phase 3 studies that the magnitude of response to Orkambi varied according to patient lung function at screening suggesting that the overall efficacy captured in these studies was mainly driven by the subgroup with baseline ppFEV1 below 70% (+3.3 percentage points) while the changes in the group with FEV1 ≥70% were not statistically significant. A similar analysis was performed in our 28-day study with PTI-428 and it showed an average +6.6 percentage points (p<0.05) increase in absolute ppFEV1 compared to placebo for patients who had lower baseline ppFEV1 value (<70%). The results of the subgroup analysis are consistent with Phase 3 data with Orkambi®, suggesting that PTI-428 potentially amplifies the Orkambi® effect in the responder population.

Additional endpoints in the study included measurement of changes in sweat chloride (secondary endpoint) and CFTR expression in nasal epithelia (exploratory endpoint). In this study, a positive increase in CFTR protein from baseline was observed in PTI-428 treated subjects and the magnitude of change was consistent with the changes in CFTR protein levels observed in an in vitro human bronchial cell (HBE) cell model. In contrast, changes in sweat chloride did not correlate with changes in lung function.


In the 28-day study, PTI-428 was generally well tolerated and lacked clinically meaningful drug-drug interactions with ivacaftor and lumacaftor. Fourteen of 20 subjects receiving PTI-428 and two of four subjects receiving placebo experienced at least one treatment emergent adverse event. There were no serious adverse events, or SAEs, and there were two adverse events, or AEs, that led to study discontinuation. Both cases were thrombocytopenia of mild grade and comparable magnitude and value. One occurred while a subject was on Orkambi® only and one in a subject receiving PTI-428 with both subjects resolving spontaneously.

In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi® as background therapy.  The designation was based on the FDA’s review of available clinical evidence, including the observed increase in FEV1 and CFTR protein levels in the 28-day study.  Breakthrough Therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). Also in March 2018, the FDA granted Orphan Drug designation for PTI-428. The FDA grants orphan designation to promote the development of product candidates for rare conditions affecting fewer than 200,000 U.S. patients annually. This designation provides for a seven-year marketing exclusivity period against competition, as well as certain incentives, including federal grants, tax credits and a waiver of certain administrative filing fees.  

Our IND for the Phase 1 study of PTI-801, a corrector molecule, was submitted to the FDA1b part are anticipated in the first quarter of 2017mid-2021. Our second program, YTX-9184, also inhibits SCD but is chemically distinct from YTX-7739. Good Laboratory Practice (“GLP”) safety pharmacology and is now active. In March 2017, we received Fast Track designation from the FDAtoxicological studies for the investigation of PTI-801 for the treatment of CF. We completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801, and reported initial data on this portion of the study in 2017.

We haveYTX-9184 were initiated a 14-day once-a-day dosing study with PTI-801 in CF subjects on background Orkambi® therapy. In December of 2017, we reported initial data from a preliminary ad hoc analysis of the first five subjects (four PTI-801 treated and one placebo) of the first dose level tested.  All four subjects who received once-a-day 100 mg of PTI-801 completed two weeks of dosing. The pharmacokinetic (PK) profile observed from these four subjects was consistent with the PK profile observed for healthy volunteers. These initial data also showed no clinically meaningful drug-drug interactions with either lumacaftor or ivacaftor.  There were no serious adverse safety events reported that were considered as possibly drug related.  Mean absolute improvements in ppFEV1 of approximately 4 percentage points from baseline, with mean relative improvements of approximately 7 percent, were observed in the four PTI-801 subjects who completed two weeks of dosing. This study, designed to investigate the effect of PTI-801 in escalating doses in multiple cohorts, is ongoing.

Our IND for the Phase 1 study of PTI-808, a potentiator molecule, was submitted to the FDA in the second quarter of 20172020. We anticipate commencing the first in human studies of YTX-9184 in 2021 and intend to develop YTX-9184 for the potential treatment of dementia with Lewy bodies, which is now active. PTI-808 has completed investigation in 48 healthy volunteers with up to 300 mg in single and multiple dose cohorts. PTI-808 was found to be generally well tolerated.  One subject experienced a serious adverse event from a pre-existing conditionanother devasting neurodegenerative disease characterized by the abnormal accumulation of transverse myelitis. This serious adverse event was considered unlikely to be related toaggregates of α-synuclein.

At the study drug. No adverse events leading to discontinuationcenter of treatment were reported.  All other adverse events that have been reported to date were of mild or moderate severity. Preliminary PK assessment of PTI-808 suggests that it could potentially be suitable for once daily dosing.

Co-administration of PTI-428, PTI-801 and PTI-808 has been completed in 20 healthy volunteer subjects.  Safety and PK profiles achieved with seven days of once-a-day oral dosing of PTI-428, PTI-801 and PTI-808 indicated these compounds were generally well-tolerated and could potentially be amenable for once a day dosing. No SAEs or AEs leading to discontinuation of treatment were reported.  The PK data demonstrated a lack of clinically meaningful drug-drug interactions.  

Combination study protocols for trials in CF patients have been reviewed by key patient advocacy and regulatory authorities in the United States and Europe. In January of 2018, we announced that our triple combination clinical study protocol received endorsement and a high strategic fit scorescientific foundation is our drug discovery engine, which is based on technology licensed from the Therapeutics Development Network (TDN) and the Clinical Trial Network (CTN). Our double combination protocol has also received the endorsementWhitehead Institute, an affiliate of the TDN. The TDNMassachusetts Institute of Technology. This core technology, combined with investments and CTN areadvancements by us, is designed to enable rapid screening to identify drugs with the drug development arms of the Cystic Fibrosis Foundation (CFF) and the European CF Society (ECFS), respectively.

In 2018, we aimpotential to (1) produce additional datamodify disease by overcoming toxicity in disease-causing gene networks. Toxicity in many neurodegenerative diseases results from our 14-day study of PTI-801 in CF patients on background Orkambi in the first half, (2) continue dosing CF patients in a double combination trial consisting of


PTI-801 and PTI-808, and produce initial data by mid-year, (3) initiate a triple combination of our proprietary agents PTI-428, PTI-801 and PTI-808 in CF patients in the first half, and produce preliminary data in the second half and (4) initiate a clinical study with PTI-428 in patients on background Symdeko in the second half with initial data in early 2019.

We have exclusive worldwide commercial rights to PTI-428, PTI-801 and PTI-808, as well as our proprietary combinations. We plan to pursue regulatory approval for add-on therapies based on PTI-428 and/or PTI-801 in regions where ivacaftor and lumacaftor (and ivacaftor and tezacaftor, as applicable) are commercially available. Given the well-characterized and clearly identified patient populations with CF in the United States, Canada, Europe and Australia, we plan to independently commercialize PTI-428 and/or PTI-801 in those regions. Our commercialization strategy will target key prescribing physicians and advocacy groups, as well as provide patients with support programs, ensure product access and secure reimbursement.

In addition to our wholly owned CF programs, we have partnered with a major pharmaceutical company, Astellas Pharma Inc., or Astellas, on our unfolded protein response, or UPR, program. The UPR program is intended to reduce thean aberrant accumulation of unfoldedmisfolded proteins in the endoplasmic reticulum, or ER, which is observed in many diseases caused by an imbalance in the proteostasis networkbrain. We leverage our proprietary discovery engine to identify and characterized by defects in protein folding, traffickingscreen novel drug targets and clearance, including genetic, neurodegenerative and retinal degenerative diseases. In August 2016, we announced the achievement of a preclinical milestone by demonstrating that selective modulation of the UPR pathway is an effective disease-modifying approach in the treatment of multiple diseases with few or no therapies currently available.drug molecules

Since our inception in 2006,

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for their ability to protect nerve cells from toxicity arising from misfolded proteins. To date, we have devoted substantially allidentified over one dozen targets, most of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities for our product candidates. We do not have any products approved for sale andwhich have not generated any revenue from product sales.previously been linked to neurodegenerative diseases. We have fundedbelieve this discovery platform will allow us to replenish our operations to date with proceeds frompipeline as programs graduate towards the sale of preferred stock, the issuance of convertible promissory notes, proceeds from our initial public offering in February 2016, proceeds from our follow-on public offerings in September 2016 and December 2017, and, to a lesser extent, payments received in connection with collaboration agreements and a research grant.clinic.

On February 10, 2016, we completed an initial public offering, or IPO, of our common stock, and issued and sold 6,250,000 shares of common stock at a public offering price of $8.00 per share, resulting in net proceeds of approximately $42.5 million after deducting underwriting discounts and commissions and other offering expenses. Upon the listing of our common stock on The NASDAQ Global Select Market, or NASDAQ, on February 11, 2016, all outstanding shares of the Company’s convertible preferred stock automatically converted into 9,699,600 shares of the Company’s common stock and 2,590,742 common shares were issued for payment of $36.0 million of accruing dividends due to the holders of Series A preferred stock.

In September 2016, we completed a follow-on offering of our common stock and issued and sold 5,750,000 shares of our common stock in a public offering at a public offering price of $13.00 per share, resulting in net proceeds of $69.5 million after deducting underwriting discounts and commissions of $4.5 million and other offering expenses of $0.8 million. The foregoing includes the exercise by the underwriters of their option to purchase an additional 750,000 shares of our common stock within 30 days following the date of the final prospectus for the offering.

On October 31, 2017, we determined to focus our resources on research and clinical development of our cystic fibrosis programs, as well as supporting our collaboration with Astellas. Accordingly, we reduced headcount dedicated to research from 46% of the total workforce to 34% through the elimination of 13 positions. As a result of this action, which was completed in the fourth quarter of 2017, we estimated annualized savings of approximately $3.0 million, with one-time severance and related costs of $0.2 million in the fourth quarter of 2017.

In December 2017, we completed a follow-on offering of our common stock and issued and sold 9,200,000 shares of our common stock in a public offering at a public offering price of $5.00 per share, resulting in net proceeds of $42.9 million after deducting underwriting discounts and commissions of $2.8 million and other offering expenses of $0.3 million. The foregoing includes the exercise by the underwriters of their option to


purchase an additional 1,200,000 shares of our common stock within 30 days following the date of the final prospectus for the offering.

Since our inception, weWe have incurred significant operating losses.losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $59.4$57.5 million and $37.2$31.2 million, respectively, for the years ended December 31, 20172020 and 2016.2019. As of December 31, 2017,2020, we had an accumulated deficit of $216.9$147.8 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities particularly if and as we:

expand and/successfully complete preclinical and clinical development of our product candidates;

successfully submit investigational new drug, or advance our add-on and proprietary combination therapy candidates, PTI-428, PTI-801 and PTI-808, into Phase 1 and Phase 2 clinical trials;

seek regulatory approvalIND, applications or comparable applications, for our product candidates;

seek support and approvalidentify, assess or develop new product candidates from our discovery engine platform;

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

negotiate favorable terms in any collaboration, partners,licensing, or other arrangements into which we may enter;

obtain regulatory approvals for product candidates for which we successfully complete clinical development;

launch and successfully commercialize product candidates for which we obtain regulatory approval, either by establishing a sales, marketing, and distribution infrastructure or collaborating with a partner;

negotiate and maintain an adequate price for our product candidates, both in the TDNUnited States and other interested parties;in foreign countries where our products are commercialized;

hire personnelobtain market acceptance of our product candidates as viable treatment options;

build out new facilities or expand existing facilities to support our productongoing development manufacturing, commercializationactivity;

address any competing technological and administrative efforts;market developments;

maintain, protect, expand, and enforce our portfolio of intellectual property rights, including patents, trade secrets, and know-how; and

advance the researchattract, hire and development efforts of our CF and other product candidates, including, without limitation, back-up compounds.retain qualified personnel.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing, manufacturing and distribution. Further, wedistribution activities. We also expect to incur additional costs going forward associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales if ever,or additional licensing agreements, we expect to finance our operations through the sale of public or private equity offerings, debt financings or other capital sources, including potentialwhich may include collaborations with other companies or other strategic transactions. We may

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be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we could have to significantly delay, reduce or eliminate development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

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

We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $57.5 million and $31.2 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $147.8 million. We expect to continue to incur significant operating losses for at least the next several years as we advance our product candidates through preclinical and clinical development, manufacture our product candidates for clinical or commercial use, and, ultimately, seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates.

As a result, until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through public or private securities offerings, debt financings or other sources, which may include licensing, collaborations or other strategic transactions or arrangements. We may be unable to raise additional funds or enter into such other transactions or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such transactions or arrangements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.candidates or delay our pursuit of potential in-licenses or acquisitions.

We expect thatBiopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Typically, it takes many years to develop one new product from the time it is discovered to when it is available for treating patients, and development may cease for a number of reasons. Because of the numerous risks and uncertainties associated with product development, including any impact from the COVID-19 pandemic, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of December 31, 2020, we had cash, cash equivalents and short-term investments as of December 31, 2017$85.3 million. We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2022 from the date of issuance of the consolidated financial statements included in this Annual Report. We have based uponthis estimate on assumptions that may prove to be wrong, and we could exhaust our current operating plan, into early 2019.available capital resources sooner than we expect. See “— Liquidity and Capital Resources”.Resources.” Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations.

ComponentsCOVID-19

In March 2020, COVID-19 was declared a global pandemic by the World Health Organization and to date, the COVID-19 pandemic continues to present a substantial public health and economic challenge around the

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world. The length of time and full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain, subject to change and difficult to predict. While we continue to conduct our research and development activities, the COVID-19 pandemic may cause disruptions that affect our ability to initiate and complete preclinical studies and clinical trials or to procure items that are essential for our research and development activities. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds to support our operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on our business and operations. To date, we have not experienced material business disruptions or incurred impairment losses in the carrying values of our Resultsassets as a result of Operationsthe pandemic.

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

Merger with Proteostasis

On August 22, 2020, Proteostasis Therapeutics, Inc, a Delaware corporation (“Proteostasis”), Pangolin Merger Sub, Inc. (“Merger Sub”), Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.), and Yumanity Holdings, LLC (“Holdings”), entered into the Merger Agreement, as amended on November 6, 2020, pursuant to which Merger Sub merged with and into Yumanity, Inc. Immediately prior to the closing of the transaction, Holdings merged with and into Yumanity, Inc. with Yumanity, Inc. surviving the Merger (the “Yumanity Reorganization”) and, upon the closing of the Merger, Yumanity, Inc. became a wholly owned subsidiary of Proteostasis. The Merger was completed on December 22, 2020 pursuant to the terms of the Merger Agreement. In connection with the completion of the Merger, Proteostasis changed its name to Yumanity Therapeutics, Inc., and the trading symbol changed from “PTI” to “YMTX.” We refer to the historical operations of Holdings and Yumanity, Inc. as Yumanity and following the Merger, the business conducted by Yumanity became our primary business.

Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all of Yumanity, Inc.’s outstanding common stock was exchanged for common stock of Proteostasis and all outstanding options and warrants to purchase common stock of Yumanity, Inc. were exchanged for options and warrants to purchase common stock of Proteostasis.

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

Private Placement

On December 14, 2020, we entered into a subscription agreement with certain accredited investors for the sale by us in a private placement of 1,460,861 shares of our common stock for a price of $23.00 per share. We

102


refer to this sale herein as the Private Placement. The Private Placement closed on December 22, 2020. The aggregate gross proceeds for the issuance and sale of the common stock were $33.6 million and, after deducting certain of our expenses, the net proceeds we received in the Private Placement were $31.6 million.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and dodoes not expect to generate any revenue from the sale of products infor the foreseeable future. Primarily all ofIf our development efforts for product candidates are successful and result in regulatory approval or licenses with third parties, we may generate revenue to date has been derivedin the future from product sales, milestone payments under our collaboration agreements with Astellas and Biogen (and the Biogen agreement is now terminated).

Under the Astellasexisting collaboration agreement enteredor payments from other license agreements that we may enter into in November 2014, we recognized revenue of $5.3 million, $3.2 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. We recognize revenue from all upfront payments, research funding payments, non-substantive milestone payments and reimbursements of third-party costs under this arrangement, together as a single unit, over the three and a half-year research term, which commenced in January 2015, with a cumulative catch-up for the elapsed portion of the research services being recognized at the time any non-substantive milestone payment or other consideration is earned. Amounts recorded as deferred revenue under the Astellas collaboration agreement totaled $1.1 million and $3.0 million as of December 31, 2017 and 2016, respectively.third parties.


In May 2016,June 2020, we entered into a fourth amendment, effective asresearch collaboration and license agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”), focused on accelerating the development of January 31, 2016, tonew treatments for neurodegenerative diseases. Under the terms of the Collaboration Agreement, Merck will gain exclusive rights to two novel pipeline programs for the treatment of ALS and LicenseFTLD. We and Merck will collaborate to advance the two preclinical programs during the research term, after which Merck has the right to continue clinical development and commercialization. Under the Collaboration Agreement, with Astellas Pharma, Inc. In connection with such amendment, in June 2016 we received aan upfront payment totaling $15.0 million and are eligible to receive future milestone payments of $1.0up to $530.0 million to conductassociated with the successful research, development and sales of marketed products for pipeline programs, as well as royalties on net sales. We will perform certain experiments during the period from February 1, 2016 through July 31, 2016. During this period, we did not receive any other payment or reimbursement under the agreement. The payment is being recognizedresearch and development activities over the research term of the agreement with a cumulative catch-up for the elapsed portion of the research term being recognized at the time any such payments are earned. In July 2016, we entered into a fifth amendment effective as of July 31, 2016,pursuant to the Collaboration Agreement and License Agreement with Astellas Pharma, Inc.will participate on a Joint Steering Committee to oversee research and development activities. We cannot provide assurance as a result of achieving a pre-clinical milestone and are progressing to the optimization phase. The amendment provides for the Joint Research Committee to evaluate progress at various intervals throughout the optimization phase. In connection with the amendment, the Company received a $0.8 million non-substantive milestone payment which is being recognized, over the three and a half-year research term of the agreement, with a cumulative catch-up for the elapsed portion of the research term.

Under the Biogen collaboration agreement, we recognized revenue of $5.2 million and $3.0 million for the years ended December 31, 2016 and 2015, respectively. We did not recognize revenue under the Biogen collaboration agreement during the year ended December 31, 2017 due to the termination of the agreement effective December 6, 2016. Through this date, we recognized revenue from all upfront license payments, research funding payments, non-substantive milestone payments and reimbursements of third-party costs under this arrangement, together as a single unit, over the four-year research term, which commenced in December 2013, with a cumulative catch-up for the elapsed portion of the research services being recognized at the time any non-substantive milestone payment or other consideration is earned. Amounts recorded as deferred revenue under the Biogen collaboration agreement totaled $5.1 million as of December 31, 2015. Upon termination of the agreement, we recognized the remaining $3.1 million of deferred revenue. We do not have any deferred revenue under the Biogen collaboration agreement as of December 31, 2017 and 2016 and we will not recognize any additional revenue under this terminated agreement in the future.

We expect that any future revenue recognized under the Astellas collaboration agreement will fluctuate from quarter to quarter as a result of the uncertain timing of future milestone or royalty payments andor that we will receive any of these payments at all.

We will record revenue over the uncertain quantityresearch term as we satisfy our performance obligation under the Collaboration Agreement. Accordingly, the upfront payment of our research services provided from quarter to quarter. Further, subject$15.0 million will be recognized as revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the terms and conditionscustomer. Under the cost-to-cost method, the extent of ourprogress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Through December 31, 2020, we have recorded $6.9 million of collaboration agreements, our collaborators have certain unilateral rightsrevenue related to discontinue their participation in the research activities and, as a result, future payments to us underCollaboration Agreement following the agreements. Additionally, we expect our revenue recognition in the statementcommencement of operations and our deferred revenue balance on our balance sheet to change upon the adoption of new revenue accounting guidance, ASC 606, Revenue From Contracts with Customers, in the first quarter of 2018, as described in Note 2, Summary of Significant Accounting Policies—Recent Accounting Pronouncements, in the accompanying Notes to Consolidated Financial Statements included in Item 15 of Part IV of this Annual Report on Form 10-K.development services.

Operating Expenses

Research and Development Expenses

Research and development expenses which include costs of research services incurred in connection with our collaboration agreements and research grant, consist primarily of costs incurred in connection with the discovery, preclinical and clinical development and manufacture of our product candidates, whichand include:

employee-related expenses, including salaries, benefits, stock/equity-based compensation, consultants and other related benefits, travel and stock-based compensation expensecosts for employees engagedindividuals involved in research and development functions;activities;

external research and development expenses incurred in connection with the preclinical development of our product candidates and under agreements with contract research organizations or CROs;(“CROs”), investigative sites and other scientific development services;

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

licensing agreements and associated milestones;

costs related to compliance with regulatory requirements;

lab supplies and other lab related expenses; and

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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, and maintenance of facilities, insurance and supplies; andother operating costs.

payments made under third-party licensing agreements.


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

Our external direct research and development expenses are tracked on a program-by-program basisby product candidate and consist primarily of external costs such asthat include fees and other expenses paid to outside consultants, centralCROs, CDMOs and research laboratories contractors and CROs in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by product candidate also include fees incurred under third-party license agreements. We do not allocate employee costs and costs associated with our platform technology, early stage discovery efforts, laboratory supplies and facility expenses,facilities, including depreciation or other indirect costs, to specific product development programscandidates because these costs are deployed across multiple product development programs and our platform and, as such, are not separately classified. We use internal resources to manage our preclinical

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and perform data analysis for such activities. These employees work across multiple development programs and, therefore,duration of later-stage clinical trials. As a result, we do not track their costs by program.

The table below summarizes ourexpect research and development costs to increase significantly for the foreseeable future as we continue the development of YTX-7739 and YTX-9184 and any product candidates we may develop in the future. We cannot accurately project total program-specific expenses incurred bythrough commercialization. There are numerous factors associated with the successful commercialization of product candidates including future trial design and various regulatory requirements, many of which cannot yet be determined with accuracy based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development program:program and plans.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

CF

 

$

32,681

 

 

$

20,608

 

 

$

8,566

 

UPR

 

 

1,602

 

 

 

1,062

 

 

 

995

 

Unallocated expenses

 

 

19,371

 

 

 

12,289

 

 

 

12,963

 

Total research and development expenses

 

$

53,654

 

 

$

33,959

 

 

$

22,524

 

We expect that our expenses will increase substantiallyThe successful development and commercialization of YTX-7739 and YTX-9184 and any product candidates we may develop in connection with our ongoing clinical trials and other preclinical development activities.the future is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs for completingof the clinical development of PTI-428, PTI-801efforts that will be necessary to complete the preclinical and PTI-808, or any of our combination therapies, for the treatment of CF or the cost associated with theclinical development of any of our other product candidates.

The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:following:

the timing and progress of preclinical and clinical development activities;

the number and scope progress, outcomeof preclinical and costs of our preclinical development activities, clinical trials and otherprograms we decide to pursue;

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

establishing an appropriate safety profile with IND-enabling or foreign equivalent studies;

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

the cooperationsuccessful completion of clinical trials with safety, tolerability and approval we receiveefficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

the receipt of regulatory approvals from third parties including clinical investigators, clinical research organizations, the TDN and CTN;applicable regulatory authorities;

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

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our ability to establish new licensing or collaboration arrangements;

the performance of our future collaborators, if any;

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

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

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

significant and changing government regulation;

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

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

Any changes in the outcome of any of these variables or others identified within this filing, with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or


other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion ofto complete clinical development of that product candidate. We may never obtain regulatory approval for any of our product candidates. Drug commercialization will take several years and millions of dollars in development costs.

General and Administrative Expenses

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

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

In-Process Research and Development Assets Acquired

We acquired in-process research and development assets in connection with the Merger. As the acquired in-process research and development assets were deemed to have no current or alternative future use, the entire amount was recognized as expense in the consolidated statements of operations for the year ended December 31, 2020.

Other Income (Expense), Net

Interest Income. Interest income consists primarilyChange in Fair Value of interest income earned on cash, cash equivalentsWarrant Liabilities

In connection with our loan and short-term investments. Prior to 2016, our interest income was not significant due to nominal cash balances and low interest earned on the cash balances.

Interest Expense. Interest expense consists of interest accrued on $15.0 million in convertible promissory notessecurity arrangements, we issued during 2015, all of which noteswarrants to purchase preferred units. These warrants were liability classified and accrued interest were converted into Series B preferred stock in September 2015.

Other Income (Expense), Net. Other income (expense), net consists primarily of the gains or losses associated with the changes in the fair values of our preferred stock warrant liability, our derivative liability and amortization/accretion on our short-term investments. We previously issued a warrant for the purchase of our Series A preferred stock that we believe is a financial instrument that may require a transfer of assets because of the redemption features of the underlying stock. Therefore, we had classified this warrant as a liability that we had remeasured to fair value at each reporting period, and we had recorded thedate, with changes in the fair value recognized as a component of other income (expense), net. Upon in our statement of operations.

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Immediately prior to the closingMerger, all of our initial public offering in February 2016, the underlying convertibleoutstanding warrants to purchase preferred stock was converted intounits were exchanged and became warrants to purchase shares of common stock, the preferred stock warrant became exercisable for common stock instead of preferred stock, andstock. As a result, the fair value of the warrant liabilitywarrants was reclassified to additional paid-in capital. The derivativecapital and there is no longer a warrant liability relates to a cash settlement optionremeasure.

Interest Expense

Interest expense consists of interest charged on outstanding borrowings associated with the changeour loan and security agreements, as well as amortization of control provision in our CFFT collaboration agreement, which meets the definitiondebt issuance costs and accretion of a derivative. Therefore,final payment payable upon the maturity or the repayment in full of all obligations under such loans. Interest expense also consists of interest related to capital leases, which upon our adoption of the new lease standard as of January 1, 2019, we have classified this derivativenow refer to as finance leases.

Interest Income and Other Income (Expense), Net

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

Income Taxes

Prior to the Yumanity Reorganization, Holdings was treated as a liability that we remeasurepartnership for federal income tax purposes and, therefore, its owners, and not Holdings, were subject to fair value atU.S. federal or state income taxation. Holdings’ directly held subsidiary was treated as a corporation for U.S. federal income tax purposes and subject to taxation in the United States. After the Yumanity Reorganization, the Company and its subsidiary are both taxpaying entities. In each reporting period, and we recordour tax provision included the changes in the derivative liability as a componenteffects of other income (expense), net.

Income Taxes

consolidating our subsidiary’s results of operations. Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. Utilization of U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to our uncertaintyownership changes that be occurred previously or that could occur in the future. These ownership changes may limit the amount of realizingcarryforwards that can be utilized annually to offset future taxable income. The Company has not conducted a benefit from those items.

On December 22, 2017, the Presidentstudy to assess whether a change of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”) tax reform legislation. The legislation resulted in significantcontrol has occurred or whether there have been multiple changes of control since inception due to the U.S. corporate income tax system, including reducing the U.S. corporate tax rate fromsignificant complexity and cost associated with such a top marginal rate of 35% down to a flat rate of 21% effective for tax years beginning after December 31, 2017, elimination, reduction or limitation of certain domestic deductions and credits, limitation of the deduction for NOLs to 80% of current year taxable income, elimination of NOL carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits, including the orphan drug tax credit.


As a result of the enacted tax law, the Company has revalued the deferred tax assets and liabilities at the new rate. The revaluation resulted in a reduction in deferred tax assets of $24.0 million with a corresponding reduction in the valuation allowance and therefore no net effect on the 2017 tax provision affecting the Company’s statement of operations.

study. As of December 31, 2017,2020, we had U.S. federal and state net operating loss carryforwards of $196.9$453.8 million and $182.1$429.9 million, respectively, which may be available to offset future income tax liabilities. As of December 31, 2020, $228.1 million of federal net operating loss carryforwards will begin to expire in 2026, and 2030, respectively.$225.7 million can be carried forward indefinitely. State net operating loss carryforwards will begin to expire in 2030. As of December 31, 2017,2020, we also had U.S. federal and state research and development tax credit carryforwards of $6.8$14.3 million and $3.1$5.5 million, respectively, which may be available to offset future tax liabilities and each begin to expire in 20272027. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

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Results of Operations

Comparison of the Years Ended December 31, 2020 and 2026,2019

The following table summarizes our results of operations for the years ended December 31, 2020 and 2019:

   Year Ended December 31,    
   2020  2019  Change 
   (in thousands) 

Collaboration revenue

  $6,896  $—    $6,896 

Operating expenses:

    

Research and development

   22,310   22,969   (659

General and administrative

   11,881   7,062   4,819 

In-process research and development assets acquired

   28,336   —     28,336 

Total operating expenses

  $62,527   30,031   32,496 
  

 

 

  

 

 

  

 

 

 

Loss from operations

  $(55,631  (30,031  (25,600
  

 

 

  

 

 

  

 

 

 

Other income (expense):

    

Change in fair value of preferred unit warrant liability

   72   12   60 

Interest expense

   (1,900  (1,209  (691

Interest income and other income (expense), net

   (28  530   (558

Loss on debt extinguishment

   —     (511  511 
  

 

 

  

 

 

  

 

 

 

Total other expense, net

  $(1,856  (1,178  (678
  

 

 

  

 

 

  

 

 

 

Net loss

  $(57,487 $(31,209 $(26,278
  

 

 

  

 

 

  

 

 

 

Collaboration Revenue

Collaboration revenue recognized during the year ended December 31, 2020 of $6.9 million was related to our Collaboration Agreement with Merck. The upfront payment of $15.0 million was initially recorded as deferred revenue and is being recognized as revenue under the cost-to-cost method as research and development is being performed.

Research and Development Expenses

   Year Ended December 31,     
   2020   2019   Change 
   (in thousands) 

Direct research and development expenses by program:

      

YTX-7739

  $5,449   $4,556   $893 

YTX-9184

   1,826    537       1,289 

Platform, research and discovery, and unallocated expenses:

      

Platform and other early stage research external costs

   2,478    4,927    (2,449

Personnel related (including equity-based compensation)

   7,293    7,700    (407

Facility related and other

      5,264       5,249    15 
  

 

 

   

 

 

   

 

 

 

Total research and development expenses

  $22,310   $22,969   $(659
  

 

 

   

 

 

   

 

 

 

Research and development expenses were $22.3 million for the year ended December 31, 2020, a decrease of $0.7 million from $23.0 million for the year ended December 31, 2019. Direct expenses of our YTX-7739 program increased by $0.9 million in the year ended December 31, 2020, compared to the year ended December 31, 2019. The change was due primarily to an increase in clinical and consultant costs as YTX-7739 progressed from GLP toxicology studies in 2019 to our SAD and MAD clinical studies during 2020, partially

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offset by a decrease in preclinical and manufacturing costs. Direct expenses of our YTX-9184 program in 2020 increased by $1.3 million primarily due to preclinical and manufacturing costs for GLP toxicology studies. YTX-9184 was designated as a product candidate in mid-2019. We do not track external costs to programs prior to designation of a product candidate. Platform and other early stage research external costs decreased by $2.4 million due to decreased laboratory activities as a result of COVID-19 and the move to new office and laboratory space in the second quarter of 2020. Personnel related costs decreased by $0.4 million primarily due to employee turnover in the research and development function.

General and Administrative Expenses

   Year Ended December 31,     
       2020           2019       Change 
   (in thousands) 

Personnel related (including equity-based compensation)

  $5,837   $3,966   $1,871 

Professional and consultant fees

   5,090    2,575     2,515 

Facility related and other

   954    521    433 
  

 

 

   

 

 

   

 

 

 

Total general and administrative expenses

  $11,881   $7,062   $4,819 
  

 

 

   

 

 

   

 

 

 

General and administrative expenses were $11.9 million for the year ended December 31, 2020, an increase of $4.8 million from $7.1 million for the year ended December 31, 2019. The increase of $1.9 million in personnel related costs was primarily due to an increase in executive bonus expense and additional hiring in the general and administrative function. Personnel-related costs for each of the years ended December 31, 2020 and 2019 included stock/equity-based compensation of $1.6 million and $0.9 million, respectively. Professional and consultant fees increased by $2.5 million primarily due to higher audit expenses and legal fees related to patent costs and other business development activities. Facility and other related costs increased by $0.4 million primarily due to the move to new office and laboratory space in the second quarter of 2020.

In-Process Research and Development Assets Acquired

In connection with the Merger, we recognized a charge of $28.3 million of acquired in-process research and development expenses for assets with no alternative use for the year ended December 31, 2020.

Other Income (Expense)

Interest expense increased by $0.7 million in the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to an increase in interest expense as a result of an increase in our outstanding borrowings. In December 2019, we entered into a loan and security agreement with a new lender for $15.0 million of gross proceeds and paid off its $10.0 million debt facility, resulting in a net increase to notes payable of $5.0 million.

Interest income and other income (expense), net decreased by $0.6 million from the year ended December 31, 2020 to the year ended December 31, 2019 resulting from lower invested balances and lower interest rates.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have not generated revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations to date primarily with proceeds from sales of preferred units and an upfront payment from our collaboration agreement with Merck received in July 2020. In December 2020, we completed the Merger with Proteostasis and acquired its

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$35.9 million of cash, cash equivalents and restricted cash. Immediately following the Merger, we also completed a private placement of an aggregate of 1,460,861 shares of our common stock and received net proceeds of approximately $31.6 million. We have also funded operations using borrowings under loan and security agreements.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

   Year Ended December 31, 
   2020  2019 
   (in thousands) 

Cash used in operating activities

  $(17,938 $(27,208

Cash provided by investing activities

   31,041   33,250 

Cash provided by financing activities

   55,536   3,025 
  

 

 

  

 

 

 

Net increase in cash, cash equivalents, and restricted cash

  $68,639  $9,067 
  

 

 

  

 

 

 

Net Cash Used in Operating Activities

During the year ended December 31, 2020, operating activities used $17.9 million of cash, resulting from our net loss of $57.5 million, partially offset by net cash provided by changes in our operating assets and liabilities of $5.2 million and non-cash charges of $34.3 million, including the non-cash charge of $28.3 million for in-process research and development acquired as well as $2.5 million of non-cash lease expense and $2.3 million of stock/equity-based compensation expense. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2020 consisted of an $8.1 million increase in deferred revenue and a $0.6 million increase in accounts payable and accrued expenses and other current liabilities, partially offset by a $1.7 million decrease in operating lease liabilities and a $1.5 million increase in prepaid expenses and other current assets    .

During the year ended December 31, 2019, operating activities used $27.2 million of cash, resulting from our net loss of $31.2 million and net cash used by changes in our operating assets and liabilities of $0.2 million, partially offset by non-cash charges of $4.2 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2019 consisted of a $1.0 million decrease in operating lease liabilities and a $0.4 million increase in prepaid expenses and other current assets, partially offset by a $1.2 million increase in accounts payable and accrued expenses and other current liabilities.

Changes in accounts payable, accrued expenses and prepaid expenses in all periods were generally due to growth in our business and the timing of vendor invoicing and payments.

Net Cash Provided by Investing Activities

During the year ended December 31, 2020, net cash provided by investing activities was $31.0 million, primarily related to $35.9 million of cash and restricted cash acquired from our merger with Proteostasis, partially offset by the net cash used of $3.1 million for net purchases of marketable securities and $1.5 million of transaction costs paid associated with the Merger.

During the year ended December 31, 2019, net cash provided by investing activities was $33.3 million, primarily related to cash provided by the net sales and maturities of marketable securities, partially offset by the purchase of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was $55.5 million, consisting primarily of net proceeds from the sale of common stock of $33.6 million, net proceeds from the

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issuance of Class C preferred units of $21.2 million and proceeds from a government loan (Paycheck Protection Program (“PPP”) loan) of $1.1 million, partially offset by payments of finance lease obligations of $0.3 million.

Net cash provided by financing activities for the year ended December 31, 2019 was $3.0 million, consisting of proceeds from issuance of long-term debt, partially offset by repayments of long-term debt and payments of finance lease obligations.

Description of Indebtedness

Loan and Security Agreement

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

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

On December 22, 2020, we entered into an Unconditional Secured Guaranty and Pledge Agreement (the “Guaranty”) with the Lender as a condition to the Lender’s consent to the Merger under the New Loan between us as borrower and the Lender. Immediately prior to the Merger, we entered into a Fourth Amendment and Consent to Loan and Security Agreement dated as of December 22, 2020 with the Lender (the “Loan Amendment”). The Guaranty provides for our guaranty of our obligations under the Loan Agreement and provides the Lender a security interest in all of our assets other than intellectual property as collateral. The Loan Amendment provides for the Lender’s consent to the Merger and to the creation and funding of a Silicon Valley Bank Paycheck Protection Program escrow account to hold funds in connection with our outstanding Paycheck Protection Program loan amounts for which we have submitted a forgiveness application. The Loan Amendment also amends the definition of “Change in Control” to include the situations in which we no longer control Yumanity, Inc., our wholly-owned subsidiary. The remaining terms and conditions of the Loan Agreement generally continue in the form existing prior to the Loan Amendment.

Borrowings under the New Loan are collateralized by substantially all of our personal property, other than our intellectual property. There were no financial covenants associated with the New Loan; however, we are subject to certain affirmative and negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions; encumbering our intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions. The obligations under the New Loan are subject to acceleration upon the occurrence of specified events of default,

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including a material adverse change to our business, operations or financial or other condition. Upon the occurrence of an event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable rate.

Paycheck Protection Program Loan

In April 2020, prior to entering into the Merger Agreement with Proteostasis in August 2020, we issued a Promissory Note to Silicon Valley Bank, pursuant to which we received loan proceeds of $1.1 million (the “PPP Loan”), provided under the PPP established under the CARES Act and guaranteed by the U.S. Small Business Administration. The PPP Loan is unsecured, is scheduled to mature on April 24, 2022, and has a fixed interest rate of 1.0% per annum. Equal monthly payments of principal and interest will be due commencing in August 2021 until the maturity date. Interest accrues on the unpaid principal balance from the inception date of the loan. Forgiveness of the PPP Loan is only available for principal that is used for the limited purposes that expressly qualify for forgiveness under U.S. Small Business Administration requirements. We have determined to account for the PPP Loan as debt and have allocated and recorded the loan proceeds between current and non-current liabilities. We further determined that loan forgiveness would become probable of occurring upon acceptance by the Small Business Association of our forgiveness application. If and when the loan forgiveness becomes probable, we will recognize income for debt extinguishment.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:

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

the clinical development plans we establish for these product candidates;

the number and characteristics of product candidates and programs that we develop or may in-license;

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

our ability to obtain marketing approval for our product candidates;

the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights covering our product candidates;

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

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

our ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent we retain development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;

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

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the success of any other business, product or technology that we acquire or in which we invest;

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

our need and ability to hire additional management and scientific and medical personnel;

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

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

the effect of competing technological and market developments.

The Merger and a concurrent private placement were completed in December 2020, which provided us with incremental net cash from the Merger and net proceeds of $31.6 million from the concurrent private placement. As of March 31, 2021, the issuance date of the consolidated financial statements for the year ended December 31, 2020, we expect that our existing cash, cash equivalents and marketable securities will fund our operating expenses, capital expenditure requirements and debt service payments into the third quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of the our stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimatesjudgments and judgmentsestimates that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe areto be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notesNote 2 to our consolidated financial statements, appearing at the end of this Annual Report, we believe that the following accounting policies are thoserequire the most critical to thesignificant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenueaccount for our one collaboration arrangement, entered into in accordance withJune 2020, under Accounting Standards Codification Topic 606, Revenue From Contracts With Customers (“ASC 606”). Under ASC 606, an entity

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recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC Topic 605, Revenue Recognition. Accordingly, we recognize revenue for each unit of accounting when all of606, the entity performs the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered;five steps: (i) identify the seller’scontract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the buyerperformance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is fixedprobable that we will collect the consideration to which it is entitled in exchange for the goods or determinable; and collectability is reasonably assured.services it transfers to the customer.

We record as deferred revenue any amounts received priorassess the goods or services promised within each contract and determines those that are performance obligations. Arrangements that include rights to satisfyingadditional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the revenue recognition criteria.

Deferred revenue not expectedcustomer and if so, they are considered performance obligations. The identification of material rights requires judgments related to be recognized within the next twelve months is reported as non-current deferred revenue.

We will adopt new revenue accounting guidance indetermination of the first quartervalue of 2018, which we expectthe underlying license relative to impact this policy, the amount and timing of our future revenue recognition,option exercise price, including assumptions about technical feasibility and the amountprobability of revenue previously recognized in our published financial statements. For further discussion, see Note 2, Summary of Significant Accounting Policies—Recent Accounting Pronouncements, in the accompanying Notes to Consolidated Financial Statements included in Item 15. of Part IV of this Annual Report on Form 10-K.

Collaborative Research and License Agreements

The terms of these agreements contain multiple deliverables, which may include licenses and research and development activities. The arrangement consideration from these agreements may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.

We evaluate multiple-element arrangements based on the guidance in ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements, or ASC 605-25. Pursuantdeveloping a candidate that would be subject to the guidance in ASC 605-25, we evaluate multiple-element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate unitsoption rights. The exercise of accounting or whether they must bea material right is accounted for as a combined unitcontract modification for accounting purposes.

We assess whether each promised good or service is distinct for the purpose of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over whichidentifying the performance obligations will be performedin the contract. This assessment involves subjective determinations and revenue


will be recognized. This evaluation requires usmanagement to make judgments about the individual deliverablespromised goods or services and whether such deliverables are separable from the other aspects of the contractual relationship. DeliverablesPromised goods and services are considered separate units of accountingdistinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that the delivered item has valueare readily available to the customer on a standalone basis(that is, the good or service is capable of being distinct) and if(ii) the arrangement includes a general right of return with respectentity’s promise to transfer the good or service to the delivered item, deliverycustomer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or performanceservice is distinct within the context of the undelivered item is considered probable and substantially in our control.contract). In assessing whether an item has standalone value,a promised good or service is distinct, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, weWe also consider whether the collaboration partner can use any other deliverable for its intended purpose without the receiptbenefit of the remaining deliverable,contract in assessing whether a promised good or service is separately identifiable from other promises in the valuecontract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of the deliverablegoods or services that is dependent on the undelivered item, and whether there are other vendors that can provide the undelivered items.distinct.

The consideration received under the arrangement that is fixed or determinabletransaction price is then determined and allocated amongto the separate units of accounting based on the relativeidentified performance obligations in proportion to their standalone selling prices of the separate units of accounting. We determine the selling price of(“SSP”) on a unit of accounting within each arrangement following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence, or VSOE, of selling price, if available; third-party evidence, or TPE, of selling price if VSOErelative SSP basis. SSP is determined at contract inception and is not available; or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. We typically use BESPupdated to estimatereflect changes between contract inception and when the selling price as we generally do not have VSOE or TPE of selling price for our units of accounting.performance obligations are satisfied. Determining the BESPSSP for a unit of accountingperformance obligations requires significant judgment. In developing the BESPSSP for a unit of accounting,performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the BESPSSP for units of accountingperformance obligations by evaluating whether changes in the key assumptions used to determine the BESPSSP will have a significant effect on the allocation of arrangement consideration between multiple unitsperformance obligations.

If the consideration promised in a contract includes a variable amount, we estimate the amount of accounting.

consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We recognize arrangementdetermine the amount of variable consideration allocatedby using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each unit of accounting when allsubsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts our estimate of the revenue recognition criteria in ASC 605overall transaction price. Any such adjustments are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, we recognize revenue from the combined unit of accounting over the contractual or estimated performance period for the undelivered items, which is typically the term of the our research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then we recognize revenue under the arrangementrecorded on a straight- linecumulative catch-up basis overin the period we are expected to complete its performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable, as of the period ending date. At the inception ofadjustment.

113


If an arrangement that includes development and regulatory milestone payments, we evaluate whether eachthe milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is substantive and at risk to both parties onincluded in the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (1) the consideration is commensurate with eithertransaction price. Milestone payments that are not within our performance to achieve the milestonecontrol or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, (2) the consideration relates solely to past performance, and (3) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factorslicensee’s control, such as the scientific, clinical, regulatory commercial and other risksapprovals, are generally not considered probable of being achieved until those approvals are received.

For arrangements with licenses of intellectual property that must be overcome to achieve the particularinclude sales-based royalties, including milestone andpayments based on the level of effortsales, and investment requiredthe license is deemed to achievebe the particular milestone in making this assessment. Therepredominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

We record amounts as accounts receivable when the right to consideration is considerable judgment involved indeemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded for deferred revenue.

In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a milestone satisfies allcontract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the criteria required to conclude that a milestone is substantive. Accordingly, pursuantpromised goods or services to the guidance of ASC Topic 605-28, Revenue Recognition—Milestone Method, or ASC 605-28, revenue from milestone paymentslicensees will be recognizedone year or less. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in its entirety upon successful accomplishment of any substantive milestones, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligationstime or over time, and if over time, recognition is based on the remaining perioduse of an output or input method.

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

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

Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders,

114


communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of


service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. However,met; however, some require advancedadvance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of thethese estimates with the service providers and makemakes adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:

vendors in connection with theclinical and preclinical development activities;

contract manufacturersCROs and investigative sites in connection with clinical trials; and

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

CROs in connection with preclinical studies and clinical trials; and

investigative sites in connection with clinical trials.

We base our expensesthe expense recorded related to preclinical studiesexternal research and clinical trialsdevelopment on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutionsCDMOs, CROs and CROsother vendors that supply, conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Stock-BasedStock/Equity-Based Compensation

We measure stock options and other stock-basedstock/equity-based awards granted to employees and directors based on the fair value on the date of the grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period for employees and directors and as services are delivered for non-employees, both of which isare generally the vesting period of the respective award. Generally, we issue stock optionWe have issued stock/equity-based awards with only service-based and performance-based vesting conditions. We record the expense for awards with only service-based vesting conditions andusing the straight-line method. record the expense for these awards with both service-based and performance-based vesting conditions using the straight-line method.

We measure stock-based awardsgraded vesting method, commencing once achievement of the performance condition becomes probable. Prior to the Yumanity Reorganization, Holdings had granted to consultants and non-employees based onrestricted incentive units, which were accounted for as equity-classified awards. Holdings determined the fair value of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, we remeasurerestricted unit awards using the fair value of these awardsits common units less any applicable purchase price.

The fair value of each option grant was estimated on the date of grant using the then-currentBlack-Scholes option-pricing model, which used as assumption inputs: the fair value of our common stock and updated assumption inputs in the Black-Scholes option- pricing model.

We do not recognize compensation expense for awards with performance-based vesting conditions granted to consultants and non-employees for which satisfactionstock/units, calculation of the performance conditions is not solely within the control of the holder until the performance conditions have been met.

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Use of this model requires that we make assumptions as to the volatility of our common stock,stock/units using historical benchmarking to peer companies, the expected term of our stockthe options, the risk-free interest rate for a period that approximates the expected term of our stockthe options and our expected dividend yield. Prior to our February 11, 2016 initial public offering, we were a private company and lacked company-specific historical and implied volatility information. Accordingly, we estimate our expected volatility based on the historical volatility of a publicly traded group of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our publicly traded stock price. The expected term of our options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options, while the expected term of our options granted to consultants and non-employees has been determined based on the contractual term of the options. The risk-free interest rate is determined by reference to the


U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

Valuation of Preferred Stock Warrant Liability

We have issued a freestanding warrant exercisable for shares of our Series A convertible preferred stock. These warrants were classified as a liability in the accompanying balance sheets prior to the completion of our IPO in February 2016, as the terms for liquidation of the underlying security were outside our control. The warrant was recorded at fair value using the Black-Scholes option pricing model with any changes in fair value being recognized in other income (expense), net in the accompanying statements of operations and comprehensive loss. We ceased the remeasurement of the fair value of the convertible warrant liability upon the conversion of the warrant to a common stock warrant, which occurred upon the completion of our IPO on February 11, 2016. Subsequent to such conversion, the warrant is classified as a component of stockholders’ equity and is no longer subject to remeasurement. These warrants were exercised in 2017 and none are outstanding as of December 31, 2017.

Valuation of Derivative Liability

We identified an embedded derivative resulting from the cash settlement option associated with the change of control provision in our CFFT collaboration agreement. Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as separate financial instruments. Therefore, we have classified this derivative as a liability that we remeasure to fair value at each reporting period, and we record the changes in the derivative liability as a component of other income (expense), net.

We use the Monte-Carlo simulation analysis, which incorporates assumptions and estimates to value the derivative instrument. We assess these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is obtained. Estimates and assumptions impacting the fair value measurement include the fair value of our common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments. We determine the per share fair value of the underlying stock price by taking into consideration recent factors we deem relevant. We estimate the expected stock volatility based on the historical volatility of publicly traded peer companies for a one-year term. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for a one-year term. We estimate the expected sales-based milestone payments based on four times the maximum research funding allowable under the CFFT collaboration agreement plus the expected achievement of certain milestones. We estimate the discount rate in the calculation of the present value of the expected future milestone payments based on expected returns of alternative investments of a similar type. We estimate the probability of a change of control event by taking into consideration recent developments.

JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company”, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and


comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until the last day of our fiscal year following the fifth anniversary of the completion of our initial public offering in February 2016 or until we no longer meet the other requirements for being an “emerging growth company,” whichever occurs first.

Results of Operations

Comparison of the Years Ended December 31, 2017 and 2016

The following table summarizes our results of operations for the years ended December 31, 2017 and 2016 (in thousands):

 

 

Year Ended

December 31,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

Revenue

 

$

5,341

 

 

$

8,384

 

 

$

(3,043

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

53,654

 

 

 

33,959

 

 

 

19,695

 

General and administrative

 

 

11,660

 

 

 

11,880

 

 

 

(220

)

Total operating expenses

 

 

65,314

 

 

 

45,839

 

 

 

19,475

 

Loss from operations

 

 

(59,973

)

 

 

(37,455

)

 

 

(22,518

)

Interest income

 

 

641

 

 

 

246

 

 

 

395

 

Interest expense

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(100

)

 

 

(23

)

 

 

(77

)

Net loss

 

$

(59,432

)

 

$

(37,232

)

 

$

(22,200

)

Revenue

Revenue was $5.3 million for the year ended December 31, 2017, compared to $8.4 million for the year ended December 31, 2016. The decrease of $3.1 million was the result of a decrease of $5.2 million in revenue recognized from our now-terminated collaboration with Biogen and an increase of $2.1 million in revenue recognized from our collaboration with Astellas.

Under our Biogen collaboration agreement, we did not recognize any revenue during the year ended December 31, 2017 as compared to $5.2 million revenue recognized for the year ended December 31, 2016. The decrease in revenue from Biogen was the result of the termination of the collaboration agreement which resulted in the recognition of all previously deferred revenue in December 2016.

Under our Astellas collaboration agreement, we recognized revenue of $5.3 million and $3.2 million for the years ended December 31, 2017 and 2016, respectively. The increase in revenue from the Astellas collaboration was the result of additional reimbursement revenue earned in 2017. Payments received under the agreement are recognized as revenue over the research term, with a cumulative catch-up for the elapsed research term being recognized at the time any such payments are earned.


Research and Development ExpensesOff-Balance

The following table summarizes our research and development expenses for the years ended December 31, 2017 and 2016 (in thousands):

 

 

Year Ended

December 31,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

Direct research and development by program:

 

 

 

 

 

 

 

 

 

 

 

 

CF

 

$

32,681

 

 

$

20,608

 

 

$

12,073

 

UPR

 

 

1,602

 

 

 

1,062

 

 

 

540

 

Unallocated expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Personnel related (including stock-based

   compensation)

 

 

12,708

 

 

 

8,300

 

 

 

4,408

 

Facility related

 

 

2,954

 

 

 

1,507

 

 

 

1,447

 

Other

 

 

3,709

 

 

 

2,482

 

 

 

1,227

 

Total research and development expenses

 

$

53,654

 

 

$

33,959

 

 

$

19,695

 

Research and development expenses were $53.7 million for the year ended December 31, 2017, compared to $34.0 million for the year ended December 31, 2016. The increase of $19.7 million was primarily due to an increase of $12.1 million in costs incurred in advancing the clinical trials of our CF program, as PTI-428 advanced into Phase 2 clinical trials, PTI-801 and PTI-808 initiated Phase 1 clinical trials, and we initiated combination trials. The overall increase in research and development expenses was also due to an increase in personnel-related costs of $4.4 million resulting from an average increase in the headcount of research and development employees from year to year, including an increase of $0.7 million in employee stock-based compensation expense.

General and Administrative Expenses

General and administrative expenses of $11.7 million for the year ended December 31, 2017, were essentially flat compared to $11.9 million for the year ended December 31, 2016.

Interest Income

We recorded $0.6 million of interest income for the year ended December 31, 2017, compared to $0.2 million of interest income for the year ended December 31, 2016. The increase of $0.4 million was due to interest earned on cash equivalents and short-term investments held during the year ended December 31, 2017 and 2016. Our short-term investments were initially purchased in September 2016.

Interest Expense

We recorded no interest expense for the years ended December 31, 2017 and 2016, respectively.

Other Income (Expense), Net

We recorded $0.1 million of other expense for the year ended December 31, 2017, as compared to other expense of less than $0.1 million for the year ended December 31, 2016.


Comparison of the Years Ended December 31, 2016 and 2015

The following table summarizes our results of operations for the years ended December 31, 2016 and 2015 (in thousands):

 

 

Year Ended

December 31,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

(Decrease)

 

Revenue

 

$

8,384

 

 

$

4,312

 

 

$

4,072

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

33,959

 

 

 

22,524

 

 

 

11,435

 

General and administrative

 

 

11,880

 

 

 

6,322

 

 

 

5,558

 

Total operating expenses

 

 

45,839

 

 

 

28,846

 

 

 

16,993

 

Loss from operations

 

 

(37,455

)

 

 

(24,534

)

 

 

(12,921

)

Interest income

 

 

246

 

 

 

 

 

 

246

 

Interest expense

 

 

 

 

 

(599

)

 

 

599

 

Other income (expense), net

 

 

(23

)

 

 

93

 

 

 

(116

)

Net loss

 

$

(37,232

)

 

$

(25,040

)

 

$

(12,192

)

Revenue

Revenue was $8.4 million for the year ended December 31, 2016, compared to $4.3 million for the year ended December 31, 2015. The increase of $4.1 million was the result of an increase of $2.2 million in revenue recognized from our now-terminated collaboration with Biogen and an increase of $1.9 million in revenue recognized from our collaboration with Astellas.

Under our Biogen collaboration agreement, we recognized revenue of $5.2 million and $3.0 million for the years ended December 31, 2016 and 2015, respectively. The increase in revenue from Biogen was the result of the termination of the collaboration agreement which resulted in the recognition of $3.1 million in previously deferred revenue. The increase was partially offset by the decrease in payments received from Biogen in 2016.

Under our Astellas collaboration agreement, we recognized revenue of $3.2 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively. The increase in revenue from the Astellas collaboration was the result of $1.8 million in payments received pursuant to the fourth and fifth amendments of the agreement. Payments received under the agreement are recognized as revenue over the research term, with a cumulative catch-up for the elapsed research term being recognized at the time any such payments are earned.

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2016 and 2015 (in thousands):

 

 

Year Ended

December 31,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

(Decrease)

 

Direct research and development by program:

 

 

 

 

 

 

 

 

 

 

 

 

CF

 

$

20,608

 

 

$

8,566

 

 

$

12,042

 

UPR

 

 

1,062

 

 

 

995

 

 

 

67

 

Unallocated expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Personnel related (including stock-based

   compensation)

 

 

8,300

 

 

 

6,165

 

 

 

2,135

 

Facility related

 

 

1,507

 

 

 

1,924

 

 

 

(417

)

Other

 

 

2,482

 

 

 

4,874

 

 

 

(2,392

)

Total research and development expenses

 

$

33,959

 

 

$

22,524

 

 

$

11,435

 


Research and development expenses were $34.0 million for the year ended December 31, 2016, compared to $22.5 million for the year ended December 31, 2015. The increase of $11.5 million was primarily due to an increase of $12.0 million in costs incurred in advancing the preclinical development and clinical trials of our CF program, of which $5.6 million related to activities supporting our Phase 1 clinical trials of PTI-428 which commenced during the first quarter of 2016. The overall increase in research and development expenses was also due to an increase in personnel-related costs of $2.1 million resulting from an average increase in the headcount of research and development employees from year to year, including an increase of $0.5 million in employee stock-based compensation expense. These increases were partially offset by a decrease of $2.3 million in costs incurred on our Usp14 program due to the termination of the Biogen agreement and focusing our resources on the clinical development of PTI-428.

General and Administrative Expenses

General and administrative expenses were $11.9 million for the year ended December 31, 2016, compared to $6.3 million for the year ended December 31, 2015. The increase of $5.6 million in general and administrative expenses was primarily due to an increase of $2.4 million in professional fees and an increase of $2.0 million in personnel-related costs. The $2.4 million increase in professional fees is primarily associated with costs incurred as the result of becoming a public company in 2016, including costs related to investor relations and legal and audit costs associated with our SEC filings. Personnel-related costs increased by $2.0 million largely as the result of a net increase in average headcount from year to year, including an increase of $0.8 million in employee stock-based compensation expense and an increase of $0.4 million in non-employee stock-based compensation expense.

Interest Income

We recorded $0.2 million of interest income for the year ended December 31, 2016, compared to no interest income for the year ended December 31, 2015. The increase was due to interest earned on cash equivalents and short-term investments held during the year ended December 31, 2016. There were no cash equivalents or short-term investments outstanding during the year ended December 31, 2015.

Interest Expense

We recorded no interest expense for the year ended December 31, 2016, compared to $0.6 million of interest expense for the year ended December 31, 2015. The decrease was due to interest accrued on principal amount of our convertible promissory notes issued during 2015 and 2014, prior to the conversion of all of our outstanding convertible promissory notes and accrued interest thereon into shares of Series B preferred stock in September 2015.

Other Income (Expense), Net

We recorded an immaterial amount of other expense for the year ended December 31, 2016, as compared to other income of less than $0.1 million for the year ended December 31, 2015. The increase of $0.1 in other expense was due to the decrease in the fair value of our derivative liability.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from our collaboration agreements and research grant. We have not yet commercialized any of our product candidates, which are in various phases of preclinical development and clinical trials, and we do not expect to generate revenue from sales of any product for several years, if at all. We have funded our operations to date with proceeds received from our initial public offering and subsequent follow-on offering, the sale of preferred stock, the issuance of convertible promissory notes and, to a lesser extent, payments received in connection with collaboration agreements and a research grant.

As of December 31, 2017, we had cash, cash equivalents and short-term investments of $74.5 million. As of December 31, 2017, we had an accumulated deficit of $216.9 million. During the year ended December 31, 2017, we incurred a loss of $59.4 million and used $52.4 million of cash in operations. We expect that our cash, cash


equivalents and short-term investments as of December 31, 2017 will enable us to fund our operating expenses and capital requirements, based upon our current operating plan, into early 2019. In accordance with the requirements of ASC 205-40, we have determined that there is substantial doubt about our ability to continue as a going concern within twelve months of the issuance date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all. As such, under the requirements of ASC 205-40, management may not consider the potential for future capital raises or management plans to reduce costs that are not considered probable in its assessment of our ability to meet our obligations for the next twelve months. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue operations.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash used in operating activities

 

$

(52,395

)

 

$

(41,925

)

 

$

(19,415

)

Cash provided by (used in) investing activities

 

 

20,227

 

 

 

(67,028

)

 

 

(263

)

Cash provided by financing activities

 

 

43,279

 

 

 

113,722

 

 

 

24,729

 

Net increase in cash and cash

   equivalents

 

$

11,111

 

 

$

4,769

 

 

$

5,051

 

Operating Activities. During the year ended December 31, 2017, operating activities used $52.4 million of cash, primarily resulting from our net loss of $59.4 million, partially offset by non-cash charges of $4.0 million and $3.0 million from changes in our operating assets and liabilities. Our net loss was primarily attributed to an increase of $19.7 million in research and development activities associated with the advancement of our preclinical studies and clinical trials. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2017 consisted primarily of $2.7 million in prepaids and other current assets due to increased upfront payments made to clinical and other research organizations, along with other vendors, and an increase of $0.7 million in accounts receivable. Additionally, there was an increase of $1.5 million in accounts payable and accrued expenses in 2017 which is largely the result of increased spending on research and development programs. These increases were an offset by a decrease of $1.8 million in deferred revenue.  

During the year ended December 31, 2016, operating activities used $41.9 million of cash, primarily resulting from our net loss of $37.2 million and $6.9 million from changes in our operating assets and liabilities, partially offset by non-cash charges of $2.2 million. Our net loss was primarily attributed to an increase of $11.5 million in research and development activities associated with the advancement of our preclinical studies and clinical trials and an increase of $5.6 million in general and administrative expenses. These increases were offset by an increase of $4.1 million of revenue recognized during the period. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2016 consisted primarily of a decrease of $5.4 million in deferred revenue, which is largely attributable to the termination of the Biogen agreement in 2016. Due to increased upfront payments made to clinical and other research organizations, along with other vendors, there was an increase of $3.9 million in prepaids and other current assets. Additionally, there was an increase of $2.4 million in accrued expenses in 2016 which is largely the result of increased spending on research and development programs.

During the year ended December 31, 2015, operating activities used $19.4 million of cash, primarily resulting from our net loss of $25.0 million, partially offset by cash provided by changes in our operating assets and liabilities of $4.3 million and non-cash charges of $1.2 million. Our net loss was primarily attributed to research and development activities and our general and administrative expenses, as we had limited collaboration and research grant revenue for the year. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2015 consisted primarily of a $2.7 million increase in deferred revenue related to our collaboration


agreements, a $0.5 million decrease in accounts receivable, a $0.4 million increase in accounts payable, a $0.4 million increase in accrued expenses, a $0.2 million decrease in other assets and a $0.1 million decrease in other current assets. The increases in accounts payable and accrued expenses were due to increased spending on our research and development programs as well as the timing of vendor invoicing and payments and the decrease in accounts receivable was due to the timing of payments received under our collaboration agreements.

Investing Activities. During the year ended December 31, 2017, cash provided by investing activities totaled $20.2 million, consisting of proceeds received from maturities of our short-term investments, partially offset by additional purchases of short-term investments in the year ended of 2017.

During the year ended December 31, 2016, we used $67.0 million of cash in investing activities, consisting of our purchases of short-term investments in the year ended 2016

During the year ended December 31, 2015, we used $0.3 million of cash in investing activities, consisting of purchases of property and equipment.

Financing Activities.During the year ended December 31, 2017, net cash provided by financing activities was $43.3 million, primarily resulting from proceeds net of commissions and underwriting discounts of $43.2 million from the sale of common stock in connection with the follow-on public offering and $0.1 million proceeds received from the exercise of stock options and issuance of stock pursuant to the employee stock purchase plan, partially offset by payments of less than $0.1 million of public offering costs.

During the year ended December 31, 2016, net cash provided by financing activities was $113.7 million, primarily resulting from proceeds net of commissions and underwriting discounts of $116.8 million from the sale of common stock in connection with the initial and follow-on public offerings, partially offset by payments of $3.3 million of public offering costs.

During the year ended December 31, 2015, net cash provided by financing activities was $24.7 million, primarily resulting from net proceeds of $21.1 million from the sale of Series B preferred stock and proceeds of $5.0 million from the issuance of convertible promissory notes, partially offset by payments of $1.5 million of initial public offering costs.

Operating Capital Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company.


Our expenses will also increase as we:

pursue the clinical development of our most advanced product candidates, including PTI-428 and PTI-801, as well as our combination therapies;

seek support and approval from our collaboration partners, the TDN and other interested parties;

continue the research and development of our other product candidates;

seek to identify and develop additional product candidates;

seek marketing approvals for any of our product candidates that successfully complete clinical development;

develop and expand our sales, marketing and distribution capabilities for our product candidates for which we obtain marketing approval;

scale up our manufacturing processes and capabilities to support our ongoing preclinical activities and clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;

maintain, expand and protect our intellectual property portfolio;

expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; and

increase our product liability and clinical trial insurance coverage as we initiate additional clinical trials, expand our existing clinical trials and launch commercialization efforts.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

the number and characteristics of the product candidates we pursue;

the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;

the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;

the timing of, and costs involved in, manufacturing our drug candidates and any drugs we successfully commercialize;

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

delays that may be caused by changing regulatory requirements;

cost and timing of hiring new employees to support our continued growth;

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.


Until such time, if ever, as we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaborations agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2017 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

 

Total

 

 

Less Than

1 Year

 

 

1 to 3

Years

 

 

3 to 5

Years

 

 

More than

5 Years

 

Operating lease commitments (1)

 

$

563

 

 

$

563

 

 

$

 

 

$

 

 

$

 

Build-to-suit leases (2)

 

 

19,524

 

 

 

1,859

 

 

 

3,419

 

 

 

3,610

 

 

 

10,636

 

Consulting agreement (3)

 

 

1,260

 

 

 

840

 

 

 

420

 

 

 

 

 

 

 

Total

 

$

21,347

 

 

$

3,262

 

 

$

3,839

 

 

$

3,610

 

 

$

10,636

 

(1)

Amounts in the table reflect payments due for our lease of office and laboratory space in Cambridge, Massachusetts under an operating lease agreement that, as amended, expires in May 2018.

(2)

On September 19, 2017, we entered into a lease agreement for its new headquarters, consisting of approximately 30,000 square feet of laboratory and office space located in Brighton, Massachusetts. We are not the legal owner of the leased space. However, in accordance with ASC 840, Leases, we are deemed to be the owner of the leased space during the construction period because of our involvement with the build-out of the space. As a result, we have capitalized approximately $16.1 million as construction in process within property, plant and equipment equal to the estimated fair value of its leased portion of the premises. Also, we have recognized a corresponding build-to-suit facility lease financing obligation of with a current portion of $0.9 million classified as other liabilities and $15.3 million classified as other non-current liabilities on our balance sheet as of December 31, 2017. The commitments in the table above include future rent payable under the lease and our expected cost to complete construction.

(3)

We have entered into an agreement with Dr. Stelios Papadopoulos to provide consulting and advisory services as and when requested. We will pay a quarterly retainer of $0.2 million to Dr. Papadopoulos over three-year term for a total of $2.5 million. The quarterly retainer may be settled in cash, common stock of the Company or a combination thereof, at our discretion.

Under various agreements, we will be required to make milestone payments and pay royalties and other amounts to third parties. We have not included any contingent payment obligations, such as milestones or royalties, in the table above as the amount, timing and likelihood of such payments are not known.


Under a license agreement with Presidents and Fellows of Harvard College, or Harvard, which was terminated by the Company in October 2017, we have agreed to make future milestone payments under the surviving provisions of the Harvard license agreement of up to $2.375 million upon achieving specified development and clinical and commercialization milestones. We have also agreed under surviving contractual provisions to pay Harvard tiered royalties, at rates in the low single-digit percentages, on annual net sales of each developed product utilizing any technologies developed under this agreement for 10 years following the first sale of a commercial product. As of December 31, 2017, we had not developed a commercial product using the licensed technologies and no pre-commercialization milestones had been achieved.

Under the CFFT agreement, we have agreed to make future sales-based milestone payments (which the agreement refers to as royalties) to CFFT of up to $34.2 million upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the collaboration agreement. We have also agreed to pay to CFFT royalties of a mid single-digit percentage, up to an aggregate of $22.8 million, on any amounts received by us from the sale, license or transfer to a third party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the first three sales-based milestone payments owed by us through the second anniversary of the first commercial sale of a product developed as a result of this collaboration. All services required by us under the CFFT agreement had been completed by December 31, 2014. As of December 31, 2017, we had not developed a commercial product in connection with this collaboration, and we had not sold, licensed or transferred rights in the technology resulting from this collaboration to a third party.

We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies and testing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.SEC.

115


Recently Issued and Adopted Accounting Pronouncements

We have reviewed allA description of recently issued standardsaccounting pronouncements that may potentially impact our financial position and have determined that, other than asresults of operations is disclosed in Note 2 to our consolidated financial statements appearing at the end ofincluded in this Annual Report such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.Form 10-K.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

Interest Rate Fluctuation

Our cash, cash equivalents and short-term investments as of December 31, 2017 consisted of money market funds, government-sponsored enterprise securities and U.S. treasury securities. The primary objectives of our investment activitiesWe are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operation.

Item 8. Financial Statements and Supplementary Data

The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report. An index of those financial statements is found in Item 15.


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our President and Chief Executive Officer, who is our principal executive officer and Chief Financial Officer, who is also our principal financial and accounting officer,smaller reporting company, as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, 2017, our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)Rule 12b-2 under the Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial and accounting officer have concluded based upon the evaluation described above that, as of December 31, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.

Our management conducted an assessment ofamended, for this reporting period and are not required to provide the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2017, our internal control over financial reporting was effective.

This annual report does not include an attestation report of our registered public accounting firm on internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Not applicable.


PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required byunder this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 11. Executive Compensation

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.item.

 


116

PART IV

Item 15. Exhibits,


ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

YUMANITY THERAPEUTICS, INC.

Index to Consolidated Financial Statement Schedules

(a) The following documents are filed as part of this report:

(1) Financial Statements:Statements

 

Page(s)

Report of Independent Registered Public Accounting Firm

F-1

118

Consolidated Balance Sheets as of December 31, 2017 and 2016

F-2

119

Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015

F-3

120

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015

F-4

121

Consolidated Statements of Convertible Preferred StockUnits and Stockholders’ Equity (Deficit) for the years ended December 31, 2017, 2016 and 2015Equity/Members’ Deficit

F-5

122

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

F-6

123

Notes to Consolidated Financial Statements

F-7

124

 

(2) Financial Statement Schedules:117

All other financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.


(3) Exhibits. The exhibits filed as partReport of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately following our financial statements. The Exhibit Index is incorporated herein by reference.


Exhibit List

 

 

 

 

Incorporated by Reference

 

Exhibit

No.

 

Exhibit Title

 

Form

 

File No.

 

Exhibit

No.

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

    3.1

 

Fifth Amended and Restated Certificate of Incorporation of the Registrant

 

S-1/A

 

333-208735

 

3.2

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    3.2

 

Second Amended and Restated By-laws of the Registrant

 

S-1/A

 

333-208735

 

3.4

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.1

 

Specimen Common Stock Certificate

 

S-1/A

 

333-208735

 

4.1

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.2

 

Third Amended and Restated Stockholders’ Agreement of the Registrant

 

S-1/A

 

333-208735

 

   4.2

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.3

 

Form of Preferred Stock Warrant

 

S-1

 

333-208735

 

4.3

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.4

 

Form of Senior Indenture

 

S-3/A

 

333-218545

 

4.6

 

June 22, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.5

 

Form of Subordinated Indenture

 

S-3/A

 

333-218545

 

4.7

 

June 22, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.1†

 

Research, Development and Commercialization Agreement by and between the Registrant and Cystic Fibrosis Foundation Therapeutics, Inc., dated March 20, 2012, as amended on May 6, 2013, and January 1, 2014

 

S-1

 

333-208735

 

10.1

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.2†

 

Collaboration and License Agreement by and between the Registrant and Astellas Pharma Inc., dated as of November 4, 2014, as amended May 1, 2015.

 

S-1

 

333-208735

 

10.4

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.3#

 

2008 Equity Incentive Plan, as amended, and forms of award agreements thereunder

 

S-1

 

333-208735

 

10.5

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.4#

 

2016 Stock Option and Incentive Plan and forms of award agreements thereunder

 

S-1/A

 

333-208735

 

10.6

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.5

 

Lease by and between the Registrant and Are-Tech Square, LLC, dated March 31, 2009, as amended on April 16, 2009, March 9, 2011, and June 25, 2014

 

S-1

 

333-208735

 

10.7

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.6

 

Form of Indemnification Agreement, between the Registrant and its officers and directors

 

S-1

 

333-208735

 

10.8

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.7#

 

Senior Executive Cash Incentive Bonus Plan

 

S-1/A

 

333-208735

 

10.10

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.8#

 

Form of Offer Letter by and between the Registrant and the executive officers of the Registrant

 

S-1/A

 

333-208735

 

10.11

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.9#

 

Consulting Agreement, by and between the Registrant and Dr. Jeffery W. Kelly, dated as of August 1, 2013

 

S-1

 

333-208735

 

10.12

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.10

 

Amendment No. 2 to Collaboration and License Agreement, by and between Registrant and Astellas Pharma Inc., dated as of August 5, 2015

 

S-1

 

333-208735

 

10.13

 

December 23, 2015

 


 

 

 

 

Incorporated by Reference

 

Exhibit

No.

 

Exhibit Title

 

Form

 

File No.

 

Exhibit

No.

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.11

 

Amendment No. 3 to Collaboration and License Agreement, by and between Registrant and Astellas Pharma Inc., dated as of December 1, 2015

 

S-1

 

333-208735

 

10.14

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.12#

 

2016 Employee Stock Purchase Plan

 

S-1/A

 

333-208735

 

10.15

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.13#

 

Non-Employee Director Compensation Policy

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.14

 

Amendment No. 4 to Collaboration and License Agreement by and between Registrant and Astellas Pharma, Inc., dated as of May 23, 2016 (effective as of January 31, 2016)

 

8-K

 

001-37695

 

10.1

 

May 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.15#

 

Consulting Agreement, by and between the Registrant and Stelios Papadopoulos, dated as of May 25, 2016

 

8-K

 

001-37695

 

10.2

 

May 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.16

 

Amendment No. 5 to Collaboration and License Agreement by and between the Registrant and Astellas Pharma, Inc., dated as of July 31, 2016

 

10-Q

 

001-37695

 

10.9

 

August 15, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.17 #

 

Amended and Restated Employment Agreement, by and between the Registrant and Meenu Chhabra, dated October 21, 2016

 

10-Q

 

001-37695

 

10.2

 

November 10, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.18 #

 

Amended and Restated Employment Agreement, by and between the Registrant and Po-Shun Lee, dated October 21, 2016

 

10-Q

 

001-37695

 

10.3

 

November 10, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.19#

 

Employment Agreement between the Company and Helen Boudreau, dated as of July 25, 2017

 

8-K

 

001-37695

 

10.1

 

July 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.20

 

Lease Between the Company, as Tenant, and Ice Box, LLC, as Landlord, dated as of September 19, 2017.

 

10-Q

 

001-37695

 

10.2

 

November 14, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.21

 

Employment Agreement between the Company and Benito Munoz, dated as of October 17, 2016

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

  23.1

 

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

  24.1

 

Power of Attorney (included on signature page)

 

 

 

 

 

 

 

Furnished herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

     31.1

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

Filed herewith

 


Incorporated by Reference

Exhibit

No.

Exhibit Title

Form

File No.

Exhibit

No.

Filing Date

    32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

101.INS

XBRL Instance Document

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

XBRL Taxonomy Extension Calculation Document

Filed herewith

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation Link Document

Filed herewith

Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

#

Represents management contract or compensation plan, contract, or agreement.

Item 16. Form 10-K Summary

Not applicable.


SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

PROTEOSTASIS THERAPEUTICS, INC.

Date: March 14, 2018

By:

/s/ Meenu Chhabra

Meenu Chhabra

President and Chief Executive Officer

(Principal Executive Officer)

SIGNATURES AND POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints Meenu Chhabra and Helen M. Boudreau, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney in fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys in fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys in fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue of this Power of Attorney.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated below and on the dates indicated:

Signature

Title

Date

/s/ Meenu Chhabra

President and Chief Executive Officer

March 14, 2018

Meenu Chhabra

(Principal Executive Officer)

/s/ Helen M. Boudreau

Chief Financial Officer

March 14, 2018

Helen M. Boudreau

(Principal Financial and Accounting Officer)

/s/ M. James Barrett

Chairman of the Board of Directors

March 14, 2018

M. James Barrett, Ph.D.

/s/ Franklin M. Berger

Director

March 14, 2018

Franklin M. Berger, CFA

/s/ Jeffery W. Kelly

Director

March 14, 2018

Jeffery W. Kelly, Ph.D.

/s/ Eric Rabinowitz

Director

March 14, 2018

Eric Rabinowitz


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMIndependent Registered Public Accounting Firm

To the Board of Directors and Stockholders of ProteostasisYumanity Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ProteostasisYumanity Therapeutics, Inc. and its subsidiary (the “Company”) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of operations, of comprehensive loss, convertibleof preferred stockunits and stockholders’ equity (deficit)equity/members’ deficit and of cash flows for each of the three years in the periodthen ended, December 31, 2017, including the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the periodthen ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses and negative cash flows from operations since its inception, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

As discussed in Note 1 to the consolidated financial statements, the Company will require additional financing to fund future operations. Management’s evaluation of the events and conditions and management’s plans to mitigate this matter is also described in Note 1.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 31, 2021

Boston, Massachusetts

March 14, 2018

We have served as the Company'sCompany’s auditor since 2010.2018.

118



PROTEOSTASISYUMANITY THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per shareshare/unit amounts)

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,724

 

 

$

18,613

 

Short-term investments

 

 

44,738

 

 

 

66,897

 

Restricted cash

 

 

294

 

 

 

 

Accounts receivable

 

 

 

 

 

668

 

Prepaids and other current assets

 

 

1,377

 

 

 

4,059

 

Total current assets

 

 

76,133

 

 

 

90,237

 

Property and equipment, net

 

 

16,567

 

 

 

541

 

Other assets

 

 

33

 

 

 

68

 

Restricted cash

 

 

1,656

 

 

 

294

 

Total assets

 

$

94,389

 

 

$

91,140

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,098

 

 

$

2,021

 

Accrued expenses

 

 

6,120

 

 

 

4,328

 

Deferred revenue

 

 

1,108

 

 

 

2,204

 

Deferred rent

 

 

87

 

 

 

201

 

Other liabilities

 

 

902

 

 

 

 

Total current liabilities

 

 

10,315

 

 

 

8,754

 

Deferred revenue, net of current portion

 

 

 

 

 

752

 

Deferred rent, net of current portion

 

 

 

 

 

87

 

Derivative liability

 

 

25

 

 

 

91

 

Other liabilities, net of current portion

 

 

15,315

 

 

 

 

Total liabilities

 

 

25,655

 

 

 

9,684

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized as of

   December 31, 2017 and 2016, respectively; no shares issued and

   outstanding as of December 31, 2017 and 2016, respectively

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 shares authorized

   as of December 31, 2017 and 2016, respectively; 34,416,088

   and 25,000,734 shares issued and outstanding as of December 31, 2017

   and 2016, respectively

 

 

35

 

 

 

26

 

Additional paid-in capital

 

 

285,583

 

 

 

238,902

 

Accumulated other comprehensive loss

 

 

(2

)

 

 

(22

)

Accumulated deficit

 

 

(216,882

)

 

 

(157,450

)

Total stockholders’ equity

 

 

68,734

 

 

 

81,456

 

Total liabilities and stockholders’

   equity

 

$

94,389

 

 

$

91,140

 

   December 31, 
           2020                  2019         

Assets

   

Current assets:

   

Cash and cash equivalents

  $80,819  $14,021 

Marketable securities

   4,498   1,347 

Prepaid expenses and other current assets

   2,264   681 

Restricted cash

   —     125 
  

 

 

  

 

 

 

Total current assets

   87,581   16,174 

Property and equipment, net

   874   1,017 

Operating lease right-of-use assets

   23,678   275 

Deposits

   386   40 

Restricted cash

   2,066   100 

Assets held-for-sale

   250   —   
  

 

 

  

 

 

 

Total assets

  $114,835  $17,606 
  

 

 

  

 

 

 

Liabilities, Preferred Units and Stockholders’ Equity/Members’ Deficit

   

Current liabilities:

   

Accounts payable

  $7,384  $1,905 

Accrued expenses and other current liabilities

   7,851   2,421 

Current portion of long-term debt

   2,891   —   

Operating lease liabilities

   4,468   291 

Current portion of finance lease obligation

   166   343 

Deferred revenue

   8,104   —   
  

 

 

  

 

 

 

Total current liabilities

   30,864   4,960 

Long-term debt, net of discount and current portion

   13,237   14,470 

Operating lease liabilities, net of current portion

   14,479   —   

Finance lease obligation, net of current portion

   48   116 

Preferred unit warrant liability

   —     261 
  

 

 

  

 

 

 

Total liabilities

   58,628   19,807 
  

 

 

  

 

 

 

Commitments and contingencies (Note 16)

   

Preferred units (Class A, B and C), no units and 17,515,738 units authorized at December 31, 2020 and 2019, respectively; no units and 12,391,101 units issued and outstanding at December 31, 2020 and 2019, respectively

   —     89,699 
  

 

 

  

 

 

 

Stockholders’ equity/Members’ deficit:

   

Preferred stock, $0.001 par value; 5,000,000 shares and no shares authorized at December 31, 2020 and 2019, respectively; no shares issued and outstanding as of December 31, 2020 and 2019

   —     —   

Common units, no units and 15,492,000 units authorized at December 31, 2020 and 2019, respectively; no units and 2,163,099 units issued and outstanding at December 31, 2020 and 2019, respectively

   —     5,120 

Common stock, $0.001 par value; 125,000,000 shares and no shares authorized at December 31, 2020 and 2019, respectively; 10,193,831 shares and no shares issued and outstanding as of December 31, 2020 and 2019, respectively

   10  

Additional paid-in capital

   204,007   —   

Accumulated deficit

   (147,810  (97,020
  

 

 

  

 

 

 

Total stockholders’ equity/members’ deficit

   56,207   (91,900
  

 

 

  

 

 

 

Total liabilities, preferred units and stockholders’ equity/

members’ deficit

  $114,835  $17,606 
  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

119



PROTEOSTASISYUMANITY THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shareshare/unit and per shareshare/unit amounts)

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Revenue

 

$

5,341

 

 

$

8,384

 

 

$

4,312

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

53,654

 

 

 

33,959

 

 

 

22,524

 

General and administrative

 

 

11,660

 

 

 

11,880

 

 

 

6,322

 

Total operating expenses

 

 

65,314

 

 

 

45,839

 

 

 

28,846

 

Loss from operations

 

 

(59,973

)

 

 

(37,455

)

 

 

(24,534

)

Interest income

 

 

641

 

 

 

246

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

(599

)

Other income (expense), net

 

 

(100

)

 

 

(23

)

 

 

93

 

Net loss

 

 

(59,432

)

 

 

(37,232

)

 

 

(25,040

)

Modifications of Series A preferred stock

 

 

 

 

 

 

 

 

11,481

 

Modifications of Series B preferred stock

 

 

 

 

 

 

 

 

(26

)

Accruing dividends on preferred stock

 

 

 

 

 

(1,378

)

 

 

(9,724

)

Net loss attributable to common stockholders

 

$

(59,432

)

 

$

(38,610

)

 

$

(23,309

)

Net loss per share attributable to common stockholders—basic and

   diluted

 

$

(2.34

)

 

$

(2.06

)

 

$

(42.14

)

Weighted average common shares outstanding—basic and diluted

 

 

25,407,943

 

 

 

18,759,369

 

 

 

553,162

 

   Year Ended December 31, 
           2020                  2019         

Collaboration revenue

  $6,896  $—   
  

 

 

  

 

 

 

Operating expenses:

   

Research and development

   22,310   22,969 

General and administrative

   11,881   7,062 

In-process research and development assets acquired

   28,336   —   
  

 

 

  

 

 

 

Total operating expenses

   62,527   30,031 
  

 

 

  

 

 

 

Loss from operations

   (55,631  (30,031
  

 

 

  

 

 

 

Other income (expense):

   

Change in fair value of preferred unit warrant liability

   72   12 

Interest expense

   (1,900  (1,209

Interest income and other income (expense), net

   (28  530 

Loss on debt extinguishment

      (511
  

 

 

  

 

 

 

Total other expense, net

   (1,856  (1,178
  

 

 

  

 

 

 

Net loss

  $(57,487 $(31,209
  

 

 

  

 

 

 

Gain on extinguishment of Class B preferred units

   6,697   —   

Net loss applicable to common shareholders

   (50,790  (31,209
  

 

 

  

 

 

 

Net loss per share/unit, basic and diluted

  $(21.57 $(14.71
  

 

 

  

 

 

 

Weighted average common shares/units outstanding, basic and diluted

   2,354,143   2,121,843 
  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

120



PROTEOSTASISYUMANITY THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net loss

 

$

(59,432

)

 

$

(37,232

)

 

$

(25,040

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

20

 

 

 

(22

)

 

 

 

Comprehensive loss

 

$

(59,412

)

 

$

(37,254

)

 

$

(25,040

)

   Year Ended December 31, 
           2020                  2019         

Net loss

  $(57,487 $(31,209

Other comprehensive income:

   

Unrealized gains on marketable securities, net of tax of $0

   —     8 
  

 

 

  

 

 

 

Comprehensive loss

  $(57,487 $(31,201
  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

121



PROTEOSTASISYUMANITY THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCKUNITS AND STOCKHOLDERS’ EQUITY (DEFICIT)EQUITY/MEMBERS’ DEFICIT

(In thousands, except shareshare/unit amounts)

 

 

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated Other

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity (Deficit)

 

Balances at December 31, 2014

 

 

75,463,000

 

 

$

86,859

 

 

 

520,305

 

 

$

1

 

 

$

93

 

 

$

 

 

$

(95,178

)

 

$

(95,084

)

Exercise of stock options

 

 

 

 

 

 

 

 

50,832

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

472

 

 

 

 

 

 

 

 

 

472

 

Issuance of Series B convertible preferred stock, net of issuance

   costs of $910

 

 

17,107,303

 

 

 

21,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible promissory notes and accrued interest

   into Series B convertible preferred stock

 

 

12,284,466

 

 

 

15,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Modifications of Series A preferred stock

 

 

 

 

 

(11,481

)

 

 

 

 

 

 

 

 

11,481

 

 

 

 

 

 

 

 

 

11,481

 

Modifications of Series B preferred stock

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

(26

)

 

 

 

 

 

 

 

 

(26

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,040

)

 

 

(25,040

)

Balances at December 31, 2015

 

 

104,854,769

 

 

 

112,292

 

 

 

571,137

 

 

 

1

 

 

 

12,115

 

 

 

 

 

 

(120,218

)

 

 

(108,102

)

Exercise of stock options

 

 

 

 

 

 

 

 

101,816

 

 

 

 

 

 

268

 

 

 

 

 

 

 

 

 

268

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,805

 

 

 

 

 

 

 

 

 

1,805

 

Issuance of common stock upon completion of initial public

   offering, net of offering costs

 

 

 

 

 

 

 

 

6,250,000

 

 

 

6

 

 

 

42,523

 

 

 

 

 

 

 

 

 

42,529

 

Conversion of convertible preferred stock to common stock

 

 

(104,854,769

)

 

 

(112,292

)

 

 

9,699,600

 

 

 

10

 

 

 

112,282

 

 

 

 

 

 

 

 

 

112,292

 

Issuance of common stock to settle accruing Series A dividends

 

 

 

 

 

 

 

 

2,590,742

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Issuance of common stock for partial payment of accrued bonus

 

 

 

 

 

 

 

 

10,218

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

62

 

Conversion of preferred stock warrant to common stock warrant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

 

 

 

28

 

Issuance of common stock upon completion of follow-on offering

   including overallotment, net of offering costs

 

 

 

 

 

 

 

 

5,750,000

 

 

 

6

 

 

 

69,463

 

 

 

 

 

 

 

 

 

69,469

 

Issuance of common stock for payment of consulting services

 

 

 

 

 

 

 

 

27,221

 

 

 

 

 

 

359

 

 

 

 

 

 

 

 

 

359

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

(22

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,232

)

 

 

(37,232

)

Balances at December 31, 2016

 

 

 

 

 

 

 

 

25,000,734

 

 

 

26

 

 

 

238,902

 

 

 

(22

)

 

 

(157,450

)

 

 

81,456

 

Exercise of stock options

 

 

 

 

 

 

 

 

11,714

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,965

 

 

 

 

 

 

 

 

 

2,965

 

Issuance of common stock pursuant to employee stock purchase

   plan

 

 

 

 

 

 

 

 

10,829

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

43

 

Issuance of common stock upon exercise of common stock

   warrant

 

 

 

 

 

 

 

 

4,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for payment of consulting services

 

 

 

 

 

 

 

 

188,462

 

 

 

 

 

 

767

 

 

 

 

 

 

 

 

 

767

 

Issuance of common stock upon completion of follow-on offering

   including overallotment, net of offering costs

 

 

 

 

 

 

 

 

9,200,000

 

 

 

9

 

 

 

42,875

 

 

 

 

 

 

 

 

 

42,884

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,432

)

 

 

(59,432

)

Balances at December 31, 2017

 

 

 

 

$

 

 

 

34,416,088

 

 

$

35

 

 

$

285,583

 

 

$

(2

)

 

$

(216,882

)

 

$

68,734

 

  Preferred Units     Common Units  Defaulting
Class B

Preferred Units
  Common Stock  

Additional

Paid-in

  

Accumulated

Other

Comprehensive

  Accumulated  

Total

Stockholders’

Equity/

Members’

 
  Units  Amount     Units  Amount  Units  Amount  Shares  Amount  Capital  Gain (Loss)  Deficit  Deficit 

Balances at December 31, 2018

  12,391,101  $89,699     2,167,179  $3,575   —    $—     —    $—    $—    $(8 $(65,811 $(62,244

Forfeiture of unvested incentive units

  —     —       (4,080  —     —     —     —     —     —     —     —     —   

Stock/equity-based compensation expense

  —     —       —     1,545   —     —     —     —     —     —     —     1,545 

Unrealized gains on marketable securities

  —     —       —     —     —     —     —     —     —     8   —     8 

Net loss

  —     —       —     —     —     —     —     —     —     —     (31,209  (31,209
 

 

 

  

 

 

    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at December 31, 2019

  12,391,101   89,699     2,163,099   5,120   —     —     —     —     —     —     (97,020  (91,900

Issuance of Class C preferred units, net of issuance costs of $388

  5,404,588   21,235     —     —     —     —     —     —     —     —     —     —   

Exchange of Ordinary Class B preferred units for Defaulting Class B Preferred units

  (836,319  (288    —     —     836,319   288   —     —     —     —     —     288 

Gain on extinguishment of Ordinary Class B preferred units

  —     (6,697    —     —     —     —     —     —     —     —     6,697   6,697 

Forfeiture of unvested incentive units

  —     —       (790  —     —     —     —     —     —     —     —     —   

Stock/equity-based compensation expense

  —     —       —     2,266   —     —     —     —     —     —     —     2,266 

Exchange of preferred units of Yumanity Holdings, LLC for shares of common stock of Yumanity Therapeutics, Inc., adjusted to reflect the Exchange Ratio

  (16,959,370  (103,949    —     —     (836,319  (288  3,745,983   4   104,233   —     —     103,949 

Exchange of common units of Yumanity Holdings, LLC for shares of common stock of Yumanity Therapeutics, Inc., adjusted to reflect the Exchange Ratio

  —     —       (2,162,309  (7,386  —     —     2,278,450   2   7,384   —     —     —   

Exchange of common stock in connection with the Merger

  —     —       —     —     —     —     2,708,537   3   60,127   —     —     60,130 

Fair value of replacement

equity

  —     —       —     —     —     —     —     —     471   —     —     471 

Reclassification of warrant liability to permanent equity

  —     —       —     —     —     —     —     —     189   —     —     189 

Private placement of common stock, net of issuance costs of $1,996

  —     —       —     —     —     —     1,460,861   1   31,603   —     —     31,604 

Net loss

  —     —       —     —     —     —     —      —     —     (57,487  (57,487
 

 

 

  

 

 

    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at December 31, 2020

  —    $—       —    $—     —    $—     10,193,831  $10  $204,007  $—    $(147,810 $56,207 
 

 

 

  

 

 

    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

122



PROTEOSTASISYUMANITY THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(59,432

)

 

$

(37,232

)

 

$

(25,040

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

235

 

 

 

306

 

 

 

272

 

Premium on short-term investments

 

 

(27

)

 

 

(184

)

 

 

 

Amortization of premium on short-term investments

 

 

205

 

 

 

77

 

 

 

 

Non-cash rent expense

 

 

(127

)

 

 

(181

)

 

 

(63

)

Non-cash interest expense

 

 

 

 

 

 

 

 

599

 

Stock-based compensation expense

 

 

2,965

 

 

 

1,805

 

 

 

472

 

Stock issued for consulting services

 

 

767

 

 

 

359

 

 

 

 

Change in fair value of derivative liability

 

 

(66

)

 

 

89

 

 

 

(63

)

Change in fair value of preferred stock warrant liability

 

 

 

 

 

(82

)

 

 

(10

)

Gain on disposal of property and equipment

 

 

 

 

 

(13

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

��

 

 

 

 

Accounts receivable

 

 

668

 

 

 

250

 

 

 

506

 

Prepaids and other current assets

 

 

2,682

 

 

 

(3,871

)

 

 

190

 

Other assets

 

 

35

 

 

 

76

 

 

 

182

 

Accounts payable

 

 

67

 

 

 

(289

)

 

 

361

 

Accrued expenses

 

 

1,481

 

 

 

2,350

 

 

 

498

 

Deferred revenue

 

 

(1,848

)

 

 

(5,385

)

 

 

2,681

 

Net cash used in operating activities

 

 

(52,395

)

 

 

(41,925

)

 

 

(19,415

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

(1,656

)

 

 

 

 

 

 

Purchases of short-term investments

 

 

(61,220

)

 

 

(69,812

)

 

 

 

Proceeds received from maturities of short-term investments

 

 

83,221

 

 

 

3,000

 

 

 

 

Purchases of property and equipment

 

 

(118

)

 

 

(229

)

 

 

(263

)

Proceeds received from sale of property and equipment

 

 

 

 

 

13

 

 

 

 

Net cash provided by (used in) investing activities

 

 

20,227

 

 

 

(67,028

)

 

 

(263

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon completion of initial public

   offering, net of commissions and underwriting discounts

 

 

 

 

 

46,500

 

 

 

 

Proceeds from issuance of common stock upon completion of follow-on public

   offering, net of commissions and underwriting discounts

 

 

43,240

 

 

 

70,265

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

 

 

 

 

 

21,090

 

Proceeds from exercise of stock options

 

 

31

 

 

 

268

 

 

 

95

 

Proceeds from issuance of stock pursuant to employee stock purchase plan

 

 

43

 

 

 

 

 

 

 

Proceeds from issuance of convertible promissory notes

 

 

 

 

 

 

 

 

5,000

 

Payments of public offering costs

 

 

(35

)

 

 

(3,311

)

 

 

(1,456

)

Net cash provided by financing activities

 

 

43,279

 

 

 

113,722

 

 

 

24,729

 

Net increase in cash and cash equivalents

 

 

11,111

 

 

 

4,769

 

 

 

5,051

 

Cash and cash equivalents at beginning of year

 

 

18,613

 

 

 

13,844

 

 

 

8,793

 

Cash and cash equivalents at end of year

 

$

29,724

 

 

$

18,613

 

 

$

13,844

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Modifications of Series A preferred stock

 

$

 

 

$

 

 

$

(11,481

)

Modifications of Series B preferred stock

 

$

 

 

$

 

 

$

26

 

Conversion of convertible promissory notes and accrued interest into Series B

   convertible preferred stock

 

$

 

 

$

 

 

$

15,798

 

Conversion of convertible preferred stock into common stock

 

$

 

 

$

112,292

 

 

$

 

Issuance of common stock to settle accrued Series A preferred stock dividends

 

$

 

 

$

3

 

 

$

 

Issuance of common stock for partial payment of accrued bonus

 

$

 

 

$

62

 

 

$

 

Conversion of preferred stock warrants to common stock warrants

 

$

 

 

$

28

 

 

$

 

Additions to property and equipment included in accounts payable or accrued

   expenses

 

$

 

 

$

60

 

 

$

 

Amounts capitalized under build-to-suit lease transaction

 

$

16,143

 

 

$

 

 

$

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

321

 

 

$

 

 

$

1,288

 

   December 31, 
           2020                  2019         

Cash flows from operating activities:

   

Net loss

  $(57,487 $(31,209

Adjustments to reconcile net loss to net cash used in operating activities:

   

Non-cash expense for in-process research and development acquired

   28,336   —   

Depreciation and amortization expense

   770   1,057 

Non-cash lease expense

   2,501   1,049 

Stock/equity-based compensation expense

   2,266   1,545 

Accretion of discounts on marketable securities

   (6  (316

Non-cash interest expense

   535   318 

Loss on debt extinguishment

   —     511 

Change in fair value of preferred unit warrant liability

   (72  (12

Gain on sale of property and equipment

   (2  —   

Loss on disposal of property and equipment

   —     3 

Changes in operating assets and liabilities, excluding the effect of acquisition:

   

Prepaid expenses and other current assets

   (1,497  (418

Deposits

   (346  75 

Operating lease liabilities

   (1,688  (986

Accounts payable

   2,802   533 

Accrued expenses and other current liabilities

   (2,154  642 

Deferred revenue

   8,104   —   
  

 

 

  

 

 

 

Net cash used in operating activities

   (17,938  (27,208
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Purchases of marketable securities

   (4,495  (19,347

Proceeds from sales and maturities of marketable securities

   1,350   53,235 

Purchases of property and equipment

   (246  (638

Proceeds from sale of property and equipment

   13   —   

Cash, cash equivalents, and restricted cash acquired in connection with the Merger

   35,939   —   

Merger transaction costs

   (1,520  —   
  

 

 

  

 

 

 

Net cash provided by investing activities

   31,041   33,250 
  

 

 

  

 

 

 

Cash flows from financing activities:

   

Proceeds from issuance of Class C preferred units, net of offering costs paid

   21,235   —   

Proceeds from private placement of common stock, net of issuance costs

   33,597   —   

Proceeds from Paycheck Protection Program loan

   1,123   —   

Proceeds from issuance of long-term debt, net of issuance costs

   —     14,750 

Repayments of long-term debt

   —     (10,767

Payments of prior-year issuance costs related to long-term debt

   (72  —   

Payments of finance lease obligations

   (347  (958
  

 

 

  

 

 

 

Net cash provided by financing activities

   55,536   3,025 
  

 

 

  

 

 

 

Net increase in cash, cash equivalents and restricted cash

   68,639   9,067 

Cash, cash equivalents and restricted cash at beginning of period

   14,246   5,179 
  

 

 

  

 

 

 

Cash, cash equivalents and restricted cash at end of period

  $82,885  $14,246 
  

 

 

  

 

 

 

Supplemental cash flow information:

   

Cash paid for interest

  $1,287  $910 

Supplemental disclosure of noncash investing and financing activities:

   

Additions to property and equipment under finance lease

  $102  $—   

Issuance of preferred unit warrant in connection with loan

  $—    $223 

Deferred financing costs included in accounts payable

  $—    $72 

Merger transaction costs included in accounts payable and accrued expenses

  $1,169  $—   

Offering costs included in accounts payable

  $1,993  $—   

Operating lease liabilities arising from obtaining right-of-use assets

  $10,219  $469 

Fair value of net assets acquired in the Merger, excluding cash, cash equivalents

and restricted cash acquired

  $24,662  $—   

Conversion of preferred units to common stock

  $104,237  $—   

Conversion of preferred unit warrants into common stock warrants

  $189  $—   

The accompanying notes are an integral part of these consolidated financial statements.

123



PROTEOSTASISYUMANITY THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share1. Nature of Business and per share amounts)Basis of Presentation

1.

Nature of the Business

Yumanity Therapeutics, Inc. (formerly Proteostasis Therapeutics, Inc. (the, and together with its wholly owned subsidiary, the “Company” or “Yumanity”) was incorporated in Delaware on December 13, 2006. The Company is an innovativea clinical stage biopharmaceutical company committed toengaged in the discoveryresearch and development of novel therapeutics that treattreatments for neurodegenerative diseases caused by an imbalance in the proteostasis network, a set of pathways that control protein biosynthesis, folding, trafficking and clearance. The Company’s initial therapeutic focus is on cystic fibrosis, which is caused by defects in the cystic fibrosis transmembrane conductance regulator (“CFTR”) protein and insufficient CFTR protein function. The Company’s lead product candidates, PTI-428, an amplifier, PTI-801, a third generation corrector, and PTI-808, a potentiator, as well a dual combination consisting of PTI-801 and PTI-808, and a triple combination consisting of PTI-428, PTI-801, and PTI-808 are in clinical development. The Company’s other drug candidates are in the preclinical development and discovery phase.misfolding.

The Company is subject to risks and uncertainties commonsimilar to early-stagethose of other early clinical stage companies in the biotechnologybiopharmaceutical industry, including but not limited to, development by competitors of new technological innovations, dependence on key personnel, protectionindividuals, the need to develop commercially viable products, competition from other companies, many of proprietary technology, compliance with government regulationswhom are larger and abilitybetter capitalized, the impact of the COVID-19 pandemic and the need to secureobtain adequate additional capitalfinancing to fund operations. Product candidates currently underthe development will require significant additionalof its product candidates. There can be no assurance that the Company’s research and development efforts, including extensive preclinical and clinical testing andwill be successfully completed, that adequate protection for the Company’s intellectual property will be maintained, that any product candidates developed will obtain required regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities.or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realizegenerate significant revenue from product sales.the sale of its products.

InMerger with Proteostasis Therapeutics, Inc.

On December 22, 2020, Proteostasis Therapeutics, Inc. (“Proteostasis” or “PTI”) completed its previously announced merger transaction with Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.) in accordance with ASC 205-40, the terms of the Agreement and Plan of Merger and Reorganization, dated as of August 22, 2020, as amended on November 6, 2020 (the “Merger Agreement”), by and among Pangolin Merger Sub, Inc., a wholly-owned subsidiary of Proteostasis (“Merger Sub”), Yumanity Holdings, LLC (“Holdings”) and Yumanity, Inc., pursuant to which Merger Sub merged with and into Yumanity, Inc., with Yumanity, Inc. surviving as a wholly owned subsidiary of Proteostasis (the “Merger”). Immediately prior to the effective time of the Merger, Holdings merged with and into Yumanity, Inc. and Yumanity, Inc. continued to exist as the surviving corporation. On December 22, 2020, in connection with, and prior to the completion of, the Merger, Proteostasis effected a 1-for-20 reverse stock split of its common stock (the “Reverse Stock Split”). Immediately following the Merger, Proteostasis changed its name to “Yumanity Therapeutics, Inc.”

At the effective time of the Merger (the “Effective Time”), each share of Yumanity Inc.’s common stock, par value $0.01 (the “Yumanity Common Stock”), outstanding immediately prior to the Effective Time was converted into the right to receive shares of PTI based on an exchange ratio set forth in the Merger Agreement. At the Effective Time following the Reverse Stock Split, the exchange ratio was determined to be 0.2108 shares of PTI Common Stock for each share of Yumanity Common Stock (the “Exchange Ratio”). At the closing of the Merger on December 22, 2020, PTI issued an aggregate of 6,024,433 shares of its common stock to Yumanity, based on the Exchange Ratio. In addition, all options and warrants exercisable for shares of common stock of Yumanity, Inc. became options and warrants exercisable for shares of common stock of PTI equal to the Exchange Ratio multiplied by the number of shares of Yumanity Inc.’s common stock previously represented by such stock options and warrants, as applicable, with a proportionate adjustment in exercise price. No fractional shares were issued in connection with the Exchange Ratio.

The transaction was accounted for as a reverse merger and as an asset acquisition in accordance with GAAP. Under this method of accounting, Yumanity was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the fact that, immediately following the Merger: (i) Yumanity’s equityholders own a majority of the voting rights in the combined organization, (ii) Yumanity designated a majority of the members (7 of 9) of the initial board of directors of the combined organization and (iii) Yumanity’s senior management hold all key positions in the senior management of the combined

124


organization. Accordingly, for accounting purposes, (i) the Merger was treated as the equivalent of the Yumanity issuing stock to acquire the net assets of PTI, (ii) the net assets of PTI were allocated a portion of the transaction price and recorded based upon their relative fair values in the financial statements at the time of closing, (iii) the reported historical operating results of the combined organization prior to the Merger will be those of Yumanity and (iv) for periods prior to the transaction, shareholders’ equity of the combined organization is presented based on the historical equity structure of Yumanity. As a result, as of the closing date of the Merger, the net assets of PTI were recorded at their acquisition-date fair values in the financial statements of Yumanity and the reported operating results prior to the Merger will be those of Yumanity. As used herein, the words “the Company” refer to, for periods following the Merger, Yumanity Therapeutics, Inc., together with its wholly owned subsidiary, and for periods prior to the Merger, Holdings, and its wholly owned subsidiary, as applicable.

The Yumanity Reorganization

On December 22, 2020, immediately prior to the closing of the Merger, pursuant to the terms of the Merger Agreement, the Company completed the Yumanity Reorganization whereby Holdings, the sole stockholder and holding company parent of Yumanity, Inc., merged with and into Yumanity, Inc., with Yumanity, Inc. as the surviving corporation. In connection with the Yumanity Reorganization, each outstanding common unit of Holdings was exchanged for shares of common stock of Yumanity, Inc. based upon a ratio associated with the terms of each common unit, each outstanding preferred unit of Holdings was converted into shares of common stock of Yumanity, Inc. based upon the ratio associated with each individual series of preferred units, each outstanding option to purchase shares of common units of Holdings was converted into an outstanding option to purchase shares of common stock of Yumanity, Inc. on a 1-for-1 basis, with a corresponding adjustment to the exercise price, and each outstanding warrant to purchase preferred units or common units of Holdings was converted into a warrant to purchase shares of common stock of Yumanity, Inc. based upon the ratio associated with each individual series of preferred units or on a 1-for-1 basis, respectively, with a corresponding adjustment to the exercise price, as applicable.

Basis of presentation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, all references to common stock/unit share and per share amounts have also been adjusted to reflect the Exchange Ratio.

Reverse Stock Split/Exchange Ratio

All common shares/units and per common share/unit amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the Exchange Ratio (0.2108). All PTI common stock amounts have been adjusted retroactively, where applicable, to reflect the 1-for-20 reverse stock split (“Reverse Stock Split”).

Going Concern, theconcern

The Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the original issuance date of the consolidated financial statements are issued. Asstatements.

125


Since its inception, the Company has funded its operations primarily with proceeds from sales of preferred units and debt financings. In December 2020, the Company completed the Merger and a concurrent private placement of an aggregate of 1,460,861 shares of its common stock. The Company has incurred recurring losses and negative cash flows from operations since inception, including net losses of $57.5 million and $31.2 million for the years ended December 31, 2020 and 2019, respectively. In addition, as of December 31, 2017,2020, the Company had an accumulated deficit of $216.9$147.8 million. During the year ended December 31, 2017, the Company incurred a loss of $59.4 million and used $52.4 million of cash in operations. The Company expects to continue to generate operating losses infor the foreseeable future. TheAs of March 31, 2021, the original issuance date of the consolidated financial statements for the year ended December 31, 2020, the Company currently expects that its cash, cash equivalents and short-term investments of $74.5 millionmarketable securities will be sufficient to fund its operating expenses, capital expenditure requirements and debt service payments into the third quarter of 2022.

The Company will require additional financing to fund operations and plans to obtain additional funding through private or public equity financings, debt financings, or other capital requirements, based upon its current operating plan, into early 2019. In accordancesources, including collaborations with the requirements of ASC 205-40, the Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within twelve months of the issuance date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Although the Company has been successful in raising capital in the past, thereother companies or other strategic transactions. There is no assurance that itthe Company will be successful in obtaining such additional financingsufficient funding on terms acceptable to the Company to fund continuing operations, if at all, nor is it considered probable under the accounting standards. As such, under the requirements of ASC 205-40, management may not consider the potential for future capital raises or management plans to reduce costs that are not considered probable in its assessment of the Company’s ability to meet its obligations for the next twelve months.all. If the Company is unable to obtain additional funding, the Company wouldwill be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

In October 2017,Impact of the COVID-19

The COVID-19 pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak. The outbreak and government measures taken in response have had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, and facilities and production have been suspended. The future progression of the pandemic and its effects on the Company’s business and operations are uncertain. The COVID-19 pandemic may affect the Company’s ability to initiate and complete preclinical studies, delay its clinical trial or future clinical trials, disrupt regulatory activities, or have other adverse effects on its business and operations. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact the Company’s ability to raise additional funds to support its operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on the Company’s business and operations.

The Company is monitoring the potential impact of the COVID-19 pandemic on its business and financial statements. To date, the Company reduced headcount throughhas not experienced material business disruptions or incurred impairment losses in the eliminationcarrying values of 13 positions. Asits assets as a result of this action,the pandemic and it is not aware of any specific related event or circumstance that would require it to revise its estimates reflected in these consolidated financial statements. The extent to which was completed in the fourth quarterCOVID-19 pandemic will directly or indirectly impact the Company’s business, results of 2017,operations and financial condition, including current and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the Company incurred one-time severanceactions taken to contain or treat it, and related costs of $0.2 million in the fourth quarter of 2017.

Reverse Stock Split

On January 19, 2016, the Company effected a 1-for-10.8102 reverse stock split of its issuedduration and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each seriesintensity of the Company’s Preferred Stock (see Note 10). Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustmentrelated effects.

2. Summary of the preferred stock conversion ratios.


Public OfferingsSignificant Accounting Policies

In February 2016, the Company issued and sold 6,250,000 shares of its common stock in its initial public offering (“IPO”) at a public offering price of $8.00 per share, for net proceeds of $42.5 million after deducting underwriting discounts and commissions of $3.5 million and other offering expenses of $4.0 million. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into an aggregate of 9,699,600 shares of common stock, and the Company issued 2,590,742 shares of common stock as payment of $36.0 million of accruing dividends due to holders of Series A preferred stock. In addition, the Company’s convertible preferred stock warrant outstanding at the close of the IPO converted to a warrant to purchase common stock.

In connection with the completion of the IPO, the Company amended its certificate of incorporation to authorize the future issuance of up to 5,000,000 shares of undesignated preferred stock, par value $0.001 per share. As of December 31, 2017 and 2016, there were no shares of preferred stock issued or outstanding.

In September 2016, the Company issued and sold 5,750,000 shares of its common stock in a public offering at a public offering price of $13.00 per share, for net proceeds of $69.5 million after deducting underwriter discounts and commissions of $4.5 million and other offering expenses of $0.8 million. The foregoing includes the exercise by the underwriters of their options to purchase an additional 750,000 shares of the Company’s common stock within 30 days following the date of the final prospectus for the offering.

In December 2017, the Company issued and sold 9,200,000 shares of its common stock in a public offering at a public offering price of $5.00 per share, for net proceeds of $42.9 million after deducting underwriting discounts and commissions of $2.8 million and other offering expenses of $0.3 million. The foregoing includes the exercise by the underwriters of their option to purchase an additional 1,200,000 shares of the Company’s common stock within 30 days following the date of the final prospectus for the offering.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimatesestimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual forof research and development

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expenses, including clinical trials,the valuation of common units prior to the Merger and the valuation of common stock, preferred stock warrant liability, derivative liabilitystock/unit-based awards. The Company bases its estimates on historical experience, known trends and build-to-suit lease obligation. Estimatesother market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results couldmay differ from those estimates.estimates or assumptions.

Segment information

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. All of the Company’s tangible assets are held in the United States.

Concentrations of Credit Riskcredit risk and Significant Customersof significant suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash cash equivalents, short-term investments and accounts receivable. The Company mitigates its risk with respect to cash, cash equivalents and short-term investments by maintaining itsmarketable securities. At times the Company may maintain cash and investment balances at two accredited financial institutions, in amounts that exceedexcess of federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company’s accounts receivable balances are due from the counterpartyCompany relies, and expects to continue to rely, on a small number of vendors to provide services, supplies and materials related to its collaboration agreements (see Note 13) thatdiscovery programs. These programs could be adversely affected by a significant interruption in these services or the Company believes to be creditworthy. Asavailability of December 31, 2016, accounts receivable consisted of amounts due from one such counterparty.materials.


Deferred Offering Costsfinancing costs

The Company capitalizes certain legal professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offeringobtaining access to capital under credit facilities. Deferred financing costs until such financings are consummated. After consummation of the equity financing, these costsincurred in connection with obtaining access to capital are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a resultprepaid expenses and other current assets and are amortized over the term of the offering. As of December 31, 2015, the Company had recorded $2.7 million of deferred offering costs in contemplation of the Company’s IPO, which was completed on February 11, 2016. In conjunction with the completion of the IPO, the Company reclassified $4.0 million of deferredcredit facility. Deferred financing costs related to additional paid-in capitala recognized debt liability are recorded as a reduction of the proceeds from the IPO. In September 2016, the Company reclassified $0.8 million of deferred financing costs to additional paid-in capital as a reductioncarrying amount of the proceeds fromdebt liability and amortized to interest expense using the follow-on public offering. In December 2017,effective interest method over the Company reclassified less than $0.4 million of deferred financing costs to additional paid-in capital as a reduction of the proceeds from its public offering, of which $0.3 million is included within accrued expenses and accounts payable as of December 31, 2017.repayment term.

Cash Equivalentsequivalents

The Company considers all highly liquid investments with an original maturitymaturities of three months or less at the date of purchase to be cash equivalents. As

Restricted cash

Amounts included in restricted cash represent amounts pledged as collateral for letters of December 31, 2017,credit required for a security deposit on the Company’s cash equivalents consistedleased facilities, which was returned to the Company in August 2020, as well as amounts pledged as collateral for Company credit cards as part of money market funds, U.S. government-sponsored securities and U.S. treasury securities. The Company’s cash equivalentsthe terms of the “New Loan” (see Note 8). These amounts are classified as of December 31, 2016 consisted of money market funds.

Restricted Cash

As of December 31, 2017and 2016, short term restricted cash consisted of a certificate of deposit collateralizing a letter of credit issued as a security deposit(current) and restricted cash (non-current), respectively, in the Company’s consolidated balance sheets. In December 2020, in connection with the Company’s lease of its corporate facilities at 200 Technology Square, Cambridge, MA.

On September 19, 2017,Merger, the Company entered into a lease agreement for a new corporate headquarters at 80 Guest Street, Brighton, MA (see Note 16). As of December 31, 2017, long termacquired Proteostasis’ restricted cash consisted of a money marketpledged as collateral for its office and laboratory space lease and amended its loan and security agreement to establish an escrow account in the amount of $1.7 million collateralizing a letter of credit issuedits Paycheck Protection Program loan (see Note 8). These amounts are classified as a security deposit for this lease agreement.

Short-Term Investments

Short-term investments represent holdings of available-for-sale marketable securitiesrestricted cash (non-current) in accordance with the Company’s investment policyconsolidated balance sheet as of December 31, 2020. As of December 31, 2020 and 2019, the cash and restricted cash of $82.9 million and $14.2 million, respectively, presented in the consolidated statements of cash flows included cash and cash management strategy. Short-term investments mature within one-year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gainsequivalents of $80.8 million and losses, net$14.0 million, respectively, and restricted cash of taxes, reported as a component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The cost of marketable securities sold is determined based on the specific identification method$2.1 million and any realized gains or losses on the sale of investments are reflected as a component of other expense, net.$0.2 million, respectively.

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Property and Equipmentequipment

Property and equipment are stated at cost less accumulated depreciation.depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset.asset as follows:

Estimated Useful Life

Laboratory equipment

2 - 3 years

Office equipment, computers and software

2 - 5 years

Furniture and fixtures

2 - 7 years

Leasehold improvements

Shorter of remaining term of lease or useful life

Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged to expense as incurred.

Assets held-for-sale

The Company classifies assets as held-for-sale when the following conditions are met: (1) management has committed to a plan to sell, (2) the assets are available for immediate sale in their present condition, (3) the Company has initiated an active program to identify a buyer, (4) it is probable that a sale will occur within one year, (5) the assets are actively marketed for sale at a reasonable price in relation to their current fair value, and (6) there is a low likelihood of significant changes to the plan or that the plan will be withdrawn. If all of the criteria are met as of the balance sheet date, the assets are presented separately in the consolidated balance sheet as held-for-sale at the lower of the carrying amount or fair value less costs to sell. The assets are then no longer depreciated or amortized while classified as held-for-sale.

Impairment of Long-Lived Assetslong-lived assets

Long-livedThe Company evaluates its long-lived assets, which consist primarily of property and equipment. Long-livedequipment and right-of-use assets, to be held and used are tested for recoverabilityimpairment whenever events or changes in business circumstances indicate that the carrying amount of thesuch assets may not be fully recoverable. Factors that the Company considers in deciding whenRecoverability of assets to perform an impairment review include significant underperformancebe held and used is measured by a comparison of the business in relationcarrying amount of an asset to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is


performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts offuture undiscounted net cash flows expected to result frombe generated by the use and eventual dispositionasset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the long-lived asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result fromexceeds the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carryingfair value of the impaired asset group over its fair value, determined based on discounted cash flows. To date, theasset. The Company hasdid not recordedrecord any impairment losses on long-lived assets.assets during the years ended December 31, 2020 or 2019.

Acquisitions

Acquisitions of assets or a group of assets that do not meet the definition of a business are accounted for as asset acquisitions using the cost accumulation method, whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. No goodwill is recognized in an asset acquisition. Intangible assets that are acquired in an asset acquisition for use in research and development activities which have an alternative future use are capitalized as in-process research and development (“IPR&D”). Acquired IPR&D which has no alternative future use is recognized as research and development expense at acquisition. Contingent milestone payments associated with asset acquisitions are recognized when probable and estimable. These amounts are expensed to research and development if there is no alternative future use associated with the asset, or capitalized as an intangible asset if alternative future use of the asset exists.

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Fair Value Measurementsvalue measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1—1 — Quoted prices in active markets for identical assets or liabilities.

Level 2—2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

Level 3—3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s investmentscash equivalents and its derivative liabilitymarketable securities are carried at fair value, determined according to the fair value hierarchy described above (see Note 4). The carrying valuevalues of accounts receivable,the Company’s accounts payable and accrued expenses approximate their fair valuevalues due to the short-term nature of these assetsliabilities. The carrying value of the Company’s long-term debt under its loan and liabilities.security agreement approximates its fair value due to its variable interest rate.

Segment InformationMarketable securities

The Company’s marketable securities, which consist of debt securities, are classified as available-for-sale and are carried at fair value. Realized gains and losses are reported in other income (expense), net, within the consolidated statements of operations and comprehensive loss on a specific identification basis.

The Company managesconducts periodic reviews to identify and evaluate each investment in the Company’s portfolio that has an unrealized loss to determine whether a credit loss exists. An unrealized loss exists when the current fair value of an individual security is less than its operationsamortized cost basis. A credit loss is estimated by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. Any credit loss is recorded as a single segment forcharge to other income (expense), net, not to exceed the purposes of assessing performance and making operating decisions. The Company’s singular focus is developing therapeutics to treat protein conformational diseases. Allamount of the Company’s tangible assetsunrealized loss. Unrealized losses other than the credit loss are heldrecognized in accumulated other comprehensive income (loss). When determining whether a credit loss exists, the United States. To date, allCompany considers several factors, including whether the Company has the intent to sell the security or whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If the Company’s revenueCompany has been generatedan intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the United States.Company will write down the security to its fair value and record the corresponding charge as a component of other income (expense), net. No declines in value were deemed to be credit losses or other than temporary during the year ended December 31, 2020.

Revenue Recognitionrecognition

The Company accounts for its one collaboration arrangement, entered into in June 2020, under ASC Topic 606, Revenue From Contracts With Customers (ASC 606). For additional information on the Company’s collaboration agreement, see Note 6, Collaboration Agreement, to these consolidated financial statements. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. Accordingly,an

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amount that reflects the Company recognizesconsideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for each unitarrangements within the scope of accounting when all ofASC 606, the entity performs the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered;five steps: (i) identify the seller’scontract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the buyerperformance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is fixedprobable that the entity will collect the consideration to which it is entitled in exchange for the goods or determinable; and collectability is reasonably assured.services it transfers to the customer.

The Company records as deferred revenue any amounts received priorassesses the goods or services promised within each contract and determines those that are performance obligations. Arrangements that include rights to satisfying the revenue recognition criteria. Deferred revenue not expected to be recognized within the next twelve months is reported as non-current deferred revenue.

Collaborative Research and License Agreements

The terms of these agreements contain multiple deliverables, which may include licenses and research and development activities. The terms of these agreements may also include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.


additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company evaluates multiple-element arrangements based on the guidance in ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements (“ASC 605-25”). Pursuantassesses if these options provide a material right to the guidance in ASC 605-25,customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the Company evaluates multiple-element arrangementsdetermination of the value of the underlying license relative to determine (1) the deliverables included inoption exercise price, including assumptions about technical feasibility and the arrangement and (2) whetherprobability of developing a candidate that would be subject to the individual deliverables represent separate unitsoption rights. The exercise of accounting or whether they must bea material right is accounted for as a combined unitcontract modification for accounting purposes.

The Company assesses whether each promised good or service is distinct for the purpose of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When the Company determines that an arrangement should be accounted for as a single unit of accounting, the Company must determine the period over whichidentifying the performance obligations will be performedin the contract. This assessment involves subjective determinations and revenue will be recognized. This evaluation requires the Companymanagement to make judgments about the individual deliverablespromised goods or services and whether such deliverables are separable from the other aspects of the contractual relationship. DeliverablesPromised goods and services are considered separate units of accountingdistinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that the delivered item has valueare readily available to the customer on a standalone basis(that is, the good or service is capable of being distinct) and if(ii) the arrangement includes a general right of return with respectentity’s promise to transfer the good or service to the delivered item, deliverycustomer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or performanceservice is distinct within the context of the undelivered item is considered probable and substantially in the Company’s control.contract). In assessing whether an item has standalone value,a promised good or service is distinct, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition,The Company also considers the Company considers whether the collaboration partner can use any other deliverable for its intended purpose without the receiptbenefit of the remaining deliverable,contract in assessing whether a promised good or service is separately identifiable from other promises in the valuecontract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of the deliverablegoods or services that is dependent on the undelivered item, and whether there are other vendors that can provide the undelivered items.distinct.

The consideration received under the arrangement that is fixed or determinabletransaction price is then determined and allocated amongto the separate units of accounting based on the relativeidentified performance obligations in proportion to their standalone selling prices of the separate units of accounting. The Company determines the selling price of(“SSP”) on a unit of accounting within each arrangement following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence (“VSOE”), if available; third-party evidence (“TPE”) of selling price if VSOErelative SSP basis. SSP is determined at contract inception and is not available; or best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. The Company typically uses BESPupdated to estimatereflect changes between contract inception and when the selling price as it generally does not have VSOE or TPE of selling price for its units of accounting.performance obligations are satisfied. Determining the BESPSSP for a unit of accountingperformance obligations requires significant judgment. In developing the BESPSSP for a unit of accounting,performance obligation, the Company considers applicable market conditions and relevant entity-specificentity- specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the BESPSSP for units of accountingperformance obligations by evaluating whether changes in the key assumptions used to determine the BESPSSP will have a significant effect on the allocation of arrangement consideration between multiple unitsperformance obligations.

If the consideration promised in a contract includes a variable amount, the Company estimates the amount of accounting.

consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company recognizes arrangementdetermines the amount of variable consideration allocatedby using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each unit of accounting when allsubsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the revenue recognition criteria in ASC 605overall transaction price. Any such adjustments are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, the Company recognizes revenue from the combined unit of accounting over the contractual or estimated performance period for the undelivered items, which is typically the term of the Company’s research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then the Company recognizes revenue under the arrangementrecorded on a straight-linecumulative catch-up basis over in the period the Company is expected to complete its performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable, as of the period ending date. At the inception ofadjustment.

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If an arrangement that includes development and regulatory milestone payments, the Company evaluates whether eachthe milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is substantive and at risk to both parties onincluded in the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (1) the consideration is commensurate with eithertransaction price. Milestone payments that are not within the Company’s performance to achieve the milestonecontrol or the enhancement of the value of the delivered item as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (2) the consideration relates solely to past performance, and (3) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factorslicensee’s control, such as the scientific, clinical, regulatory commercial and other risksapprovals, are generally not considered probable of being achieved until those approvals are received.

For arrangements with licenses of intellectual property that must be overcome to achieve the particularinclude sales-based royalties, including milestone andpayments based on the level of effortsales, and investment requiredthe license is deemed to achievebe the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all ofpredominant item to which the criteria required to conclude that a milestone is substantive. The Company will recognize revenue


in its entirety upon successful accomplishment of any substantive milestones, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, with a cumulative catch-up for the elapsed portion of the research term, assuming all other revenue recognition criteria are met.

Research Grant Contracts

Under these contracts,royalties relate, the Company is typically compensated for specific researchrecognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or development activities. The Company recognizes revenue as(ii) when the activities specified underperformance obligation to which the research grant contracts are performed and all of the revenue recognition criteria in ASC 605 areroyalty has been allocated has been satisfied.

Adoption of ASC 606

The Company will adopt new revenue accounting guidance inrecords amounts as accounts receivable when the first quarterright to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of 2018, which it expects to impact this policy,a contract, a contract liability is recorded for deferred revenue.

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

Classification and accretion of preferred units

The Company’s preferred units were classified outside of members’ deficit on the consolidated balance sheets because the holders of such units had redemption rights in this note below.

Embedded Derivatives

Embedded derivativesthe event of a deemed liquidation that, are requiredin certain situations, were not solely within the control of the Company. The occurrence of a deemed liquidation event was not determined to be bifurcated fromprobable in any period prior to the underlying host instrument are accounted for and valued as a separate financial instrument. An embedded derivative exists associated with an alternate payment option upon change of control withinMerger, therefore the research, development and commercialization agreement with Cystic Fibrosis Foundation Therapeutics, Inc. (see Note 13). The embedded derivative has been bifurcated and is classified as a liability on the balance sheet and separately accounted for at its fair value. The derivative liability is marked-to-market every reporting period. Changes in fair valuecarrying values of the derivative liability are recognized as a component of other income (expense), net in the accompanying statement of operations and comprehensive loss.preferred units were not being accreted to their redemption values.

Research and Development Costs

Research and development costs

Costs for research and development activities are expensed asin the period in which they are incurred. Research and development expenses are comprisedconsist of costs incurred in performing research and development activities, including salaries stock-basedand bonuses, stock/equity-based compensation, andemployee benefits, facilities costs, laboratory supplies, depreciation third-party license fees,and amortization, manufacturing expenses, and external costs of outside vendors engaged to conduct research and preclinical development activities and clinical trials. Researchtrials as well as the cost of licensing technology.

Upfront payments under license agreements are expensed upon receipt of the license, and development expenses includeannual maintenance fees under license agreements are expensed in the Company’s costsperiod in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of performing services in connection with its collaboration agreementsachievement and research grant.the related amount is reasonably estimable.

Nonrefundable prepaymentsNon-refundable advance payments for goods or services that willto be used or renderedreceived in the future for futureuse in research and development activities are deferred and capitalized. Suchrecorded as prepaid expenses. The prepaid amounts are recognizedexpensed as an expense as the related goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.performed.

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Research, Contract Costsdevelopment, and Accrualsmanufacturing contract costs and accruals

The Company has entered into various research, development, and developmentmanufacturing contracts with research institutions and other companies both inside and outside of the United States.companies. These agreements are generally cancelable, and related paymentscosts are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs. When evaluatingbilling terms under these contracts do not coincide with the adequacytiming of when the work is performed, the Company is required to make estimates of outstanding obligations to those third parties as of period end. Any accrual estimates are based on a number of factors, including the Company’s knowledge of the accrued liabilities, the Company analyzes progress towards completion of the studies, includingresearch, development, and manufacturing activities, invoicing to date under the phase or completioncontracts, communication from the research institutions and other companies of events, invoices receivedany actual costs incurred during the period that have not yet been invoiced, and contracted costs.the costs included in the contracts. Significant judgments and estimates aremay be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.estimates made by the Company. The Company’s historical accrual estimates made by the Company have not been materially different from the actual costs.


Patent Costscosts

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.

Preferred Stock Warrant Liability

Through February 2016, the Company classified a warrant to purchase shares of its Series A preferred stock as a liability on its balance sheets as this warrant was a free-standing financial instrument could have required the Company to transfer assets upon exercise. The warrant was initially recorded at fair value on date of grant and subsequently remeasured to fair value at each balance sheet date. Changes in fair value of the warrant were recognized as a component of other income (expense), net in the statement of operations. Following the reverse stock split of the common stock of the Company and the completion of the Company’s IPO in February 2016, the warrant became a warrant to purchase 14,800 shares of common stock. At that time, the warrant was reclassified to a component of stockholder’s equity and is no longer subject to remeasurement.

The Company used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the preferred stock warrant. The Company has assessed these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is obtained. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying Series A preferred stock, the remaining contractual term of the warrant, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying preferred stock. The Company determined the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of its convertible preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant. Up until February 2016, the Company was a private company and therefore lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrant. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant. Expected dividend yield is determined considering that the underlying Series A preferred stock is entitled to dividends of 8.0% per year, whether or not declared.

Stock-Based CompensationStock/equity-based compensation

The Company measures all stock options and other stock-based awards with service-based vesting or performance-based vesting granted to employees, non-employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues stock options and restricted stock awards to employees with only service- based vesting conditions and records the expense for these awards using the straight-line method.

The Company measures stock-based awards granted to consultants and non-employees based on the fair value of the award on the date on whichof grant. Compensation expense for the related service is complete. Compensation expenseawards is recognized over the requisite service period during whichfor employees and directors and as services are rendered by such consultants anddelivered for non-employees, until completed. Atboth of which are generally the end of each financial reportingvesting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.respective award. The Company does not recognize compensationuses the straight-line method to record the expense forof awards with only service-based vesting conditions. The Company uses the graded-vesting method to record the expense of awards with both service-based and performance-based vesting conditions, granted to consultants and non-employees for which satisfactioncommencing once achievement of the performance conditions is not solely within the controlcondition becomes probable. The Company accounts for forfeitures of the holder until the performance conditions have been met.stock/equity-based awards as they occur.

The Company classifies stock-basedstock/equity-based compensation expense in its statementconsolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’recipient’s service payments are classified.

Income taxes

Prior to January 1, 2017,the Yumanity Reorganization, Holdings was organized as a Limited Liability Company and subject to the provisions of Subchapter K of the Internal Revenue Code. As such, Holdings was not viewed as a taxpaying entity in any jurisdiction and did not require a provision for income taxes. Each member was responsible for the tax liability, if any, related to its proportionate share of the member’s taxable income. The Company’s wholly owned corporate subsidiary was a taxpaying entity. After the Yumanity Reorganization, the Company recognized compensation expense for only the portion of awards thatand its subsidiary are expected to vest. In developing a forfeiture rate estimate, the Company has considered its historical experience to estimate pre- vesting forfeitures for service-based awards. Effective January 1, 2017, the company adopted ASU No. 2016-09 on a modified retrospective basis. As a result, the Company has made an accounting policy election to account for forfeitures as they occur.


The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option- pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. For the years ended December 31, 2017 and 2016, comprehensive loss included less than $0.1 million of unrealized gains and less than $0.1 million of unrealized losses on short-term investments, respectively. There was no difference between net loss and comprehensive loss for the year ended December 31, 2015.

Income Taxesboth taxpaying entities.

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the

132


weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

Comprehensive loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity/members’ deficit that result from transactions and economic events other than those with its members. The Company’s only elements of other comprehensive loss are unrealized gains (losses) on marketable securities.

Net Lossloss per Shareshare

Basic net lossincome (loss) per common share is computed usingby dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and unvested restricted stock. Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of the Company’s common shares and participating securities. The Company’s convertible preferred stock contains participation rights in any dividend paid by the Company and are deemed to be participating securities. Net loss attributable to common stockholders and participating preferred shares are allocated to each share on an as-converted basis as if all of the earnings for the period, had been distributed. The participating securities do not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods that have a net loss.


Diluted net loss per share is computed using the moreincluding potential dilutive of (a) the two-class method or (b) the if- converted method. The Company allocates earnings first to preferred stockholders based on dividend rights and then to common and preferred stockholders based on ownership interests. The weighted average number of common shares included inassuming the computationdilutive effect of diluted net loss gives effect to all potentially dilutiveoutstanding common equivalent shares, including outstanding stock options, warrants, preferred stock and the potential issuance of stock upon the conversion of the Company’s convertible notes. Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive.

Inequivalents. For periods in which the Company reportsreported a net loss, attributable to common stockholders, diluted net loss per share attributable to common stockholdersshare is the same as basic net loss per share attributable to common stockholdersshare, since dilutive common shares are not assumed to have been issued if their effectaffect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the years ended December 31, 2017, 2016 and 2015.

Recently Issued Accounting PronouncementsLeases

In May 2014,accordance with ASC 842, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principleCompany determines at the inception of a contract if such arrangement is thator contains a company will recognize revenue when it transfers promised goodslease. A contract is or servicescontains a lease if the contract conveys the right to customers incontrol the use of an amount that reflects the consideration to which the company expects to be entitledidentified asset for a period of time in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance.consideration. The Company expectsclassifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet, but payments are recognized as expense on a straight-line basis over the lease term.

The Company often enters into contracts that these judgments contain both lease and estimates willnon-lease components. Non-lease components may include identifying performance obligationsmaintenance, utilities, and other operating costs. Subsequent to the Company’s adoption of ASC 842 as of January 1, 2019, the Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the customer contract, estimatingmeasurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to includebe paid occurs.

Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The present value of future lease payments is determined by using the interest rate implicit in the transaction pricelease if that rate is readily determinable; otherwise, the Company uses its

133


estimated secured incremental borrowing rate for that lease term. The Company estimates its secured incremental borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

Certain of the Company’s leases include options to extend or terminate the lease. The amounts determined for the Company’s right-of-use assets and allocatinglease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised, unless it is reasonably certain that the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Company will exercise such options.

Recently adopted accounting pronouncements

In August 2015,June 2016, the FASB issued ASU 2015-14, No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Revenue from Contracts(“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with Customers (Topic 606): Deferralan expected loss model. It also eliminates the concept of other- than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the Effective Datesecurities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification, Improvements to Topic 326, Financial Instruments — Credit Losses, which delaysnarrowed the scope and changed the effective date of for non-public entities for ASU 2014-09 such that2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the standard is effectivefair value option for certain financial assets previously measured at amortized cost basis. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 20172019, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020 and the adoption had no impact on its consolidated financial statements.

Recently issued accounting pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2020 and for interim periods within those fiscal years. In April 2016,For nonpublic entities, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing,which clarifies two aspects of ASU 2014-09, Revenue from Contracts with Customers (Topic 606): identifying performance obligations and the licensing implementation guidance. These new standards will becomeguidance is effective for annual reporting periods beginning after December 15, 2021 and to interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for all entities. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company on January 1, 2018. Companies have the option of applying this new guidance retrospectively to each prior reporting period presented (the full retrospective method) or retrospectively with the cumulative effect of initially applying this update recognized atis currently assessing the date of initial application (the modified retrospective method). The Company only has one contract (see Note 13) within the scope of Topic 606adoption and intends to use the modified retrospective method for adoption. Since the inception of the contract, the Company has recognized $9.7 million in revenue.

The Company is assessing, but has not yet completed its assessment of the impact of the adoption of this standardguidance on its consolidated financial statements and related disclosures. Currently,statements.

3. Merger Accounting

On December 22, 2020, the Company anticipates a potential impactcompleted its merger with PTI. Based on the revenue recognition method used to recognize revenue under its agreement with AstellasExchange Ratio, immediately following the Merger, former PTI stockholders, PTI option holders and other persons holding securities or other rights directly or indirectly convertible, exercisable or exchangeable for PTI Common Stock owned approximately 29.7% of the outstanding capital stock of the combined organization, and the accountingformer Yumanity stockholders, Yumanity option holders and other persons holding securities or other rights directly or indirectly convertible, exercisable or exchangeable for research funding paymentsYumanity Common Stock owned approximately 70.3% of the outstanding capital stock of the combined organization. At the closing of the Merger, all shares of Yumanity Common Stock were exchanged for an aggregate of 6,024,433 shares of PTI Common Stock.

134


The total purchase price paid in the Merger, including certain transaction costs, has been allocated to the tangible and intangible assets acquired and liabilities assumed of PTI based on a specified rate for time incurredtheir relative fair values as well as the recognition of milestone revenue prior to achievement. The expected impact is further described below. Estimated impacts from the adoption of this standard could differ upon the final adoption and implementation of the standard.

Under ASC 606, an entity recognizes revenue when its customer obtains controlcompletion of promised goods or services, in an amount that reflects the consideration whichMerger. Transaction costs primarily included bank fees and professional fees associated with legal counsel, auditors and printers. The following summarizes the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligationspurchase price paid in the contract; (iii) determineMerger (in thousands, except share and per share amounts):

Number of shares owned by Proteostasis stockholders (1)

   2,708,537 

Multiplied by fair value per share of Proteostasis common stock (2)

  $22.20 
  

 

 

 

Fair value of shares of combined organization owned by Proteostasis Stockholders

  $60,130 

Fair value of Proteostasis stock options assumed in Merger (3)

   471 

Transaction costs

   2,689 
  

 

 

 

Total purchase price

  $63,290 
  

 

 

 

(1)

The number of shares represents 2,609,489 shares of PTI common stock outstanding as of December 22, 2020, plus 25,719 shares issued for the settlement of severance obligations and 21,739 shares issued as compensation for investment banking fees related to the Merger. Additionally, 51,590 shares of restricted stock units were issued as compensation for two consultants hired by PTI. The number of shares reflects the impact of the Reverse Stock Split.

(2)

Based on the last reported sale price of PTI common stock on the Nasdaq Global Market on December 22, 2020, the closing date of the Merger, and after giving effect to the Reverse Stock Split.

(3)

Represents the fair value of the PTI options to purchase 194,550 shares of common stock outstanding at the time of the Merger.

The purchase price for the transaction price; (iv) allocateMerger was allocated to the transactionnet assets acquired on the basis of relative fair values. The following summarizes the allocation of the purchase price to the performance obligations innet tangible and intangible assets acquired (in thousands):

Cash and cash equivalents

  $35,111 

Prepaid expenses and other current assets

   703 

Assets held-for-sale

   250 

Property and equipment, net

   290 

In-process research and development

   28,336 

Operating lease right-of-use assets

   15,166 

Restricted cash

   828 

Current liabilities

   (7,171

Operating lease liabilities

   (10,223
  

 

 

 

Total purchase price

  $63,290 
  

 

 

 

The acquired in-process research and development asset relates to two lead product candidates for the contract;treatment of cystic fibrosis. Due to the stage of development of these assets at the date of acquisition, significant risk remained and (v) recognize revenue when (or as)it was not yet probable that there was future economic benefit from these assets. Absent successful clinical results and regulatory approval for the entity satisfies a performance obligation. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract.

With respect to its collaboration with Astellas, the Company currently expects the one performance obligation identified under the provisions of ASC 606 will be consistentassets, there was no alternative future use associated with the one unit of accounting identified underassets. Accordingly, the provisions of ASC 605. However, as previously described, it currently expects that the pattern of revenue recognition under step (v) above will differ from the pattern of revenue recognition under ASC 605. Any change in the timing or pattern of revenue recognition will have a corresponding change to the Company’s deferred revenue balance.


The Company expects the accounting for research funding payments and milestone payments under its agreement to change under ASC 606. Revenue from research funding and milestone payments may be recognized earlier under ASC 606 than under ASC 605. Under ASC 605, upon being earned or achieved, these payments were being recognized as revenue over the three and a half year research term of the agreement, which commenced in January 2015, with a cumulative catch-up for the elapsed portion of the research term being recognized at the time any such payments are earned. The adoption of ASC 606 may result in the recognition of revenue related to these payments over the three and a half year research term before being earned or achieved. For the milestone payments, this recognition is based on assessment of the probability of achievement of the milestone event and the likelihood of a significant reversal of such milestone revenue at each reporting date.

ASC 606 requires more robust disclosures than required by previous guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.

In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease paymentsassets were expensed in the statementconsolidated statements of financial position. This guidance is effectiveoperations for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard was adopted by the Company on January 1, 2017 on a modified retrospective basis. As a result, the Company has made an accounting policy election to account for forfeitures as they occur. The adoption of ASU 2016‑09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid‑in capital when the awards vest or are settled. This had no material impact on the condensed financial statements as of and for year ended December 31, 2017.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. The new standard also clarifies that an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The new standard will be effective for the Company on January 1, 2018. The Company is currently evaluating the impact that the adoption of this standard will have on its statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of- period total amounts shown on the statement of cash flows. The effective date will be the first quarter of fiscal year 2018. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. 


In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 719): Scope of Modification Accounting. The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for the Company on January 1, 2018. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

3.

Short-Term Investments

The following is a summary of the Company’s short-term investments as of December 31, 2017 and 2016 (in thousands):2020.

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

9,817

 

 

$

 

 

$

(1

)

 

$

9,816

 

U.S. treasury securities

 

 

34,923

 

 

 

1

 

 

 

(2

)

 

$

34,922

 

 

 

$

44,740

 

 

$

1

 

 

$

(3

)

 

$

44,738

 

135

 

 

December 31, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

53,384

 

 

$

 

 

$

(20

)

 

$

53,364

 

U.S. treasury securities

 

 

13,535

 

 

 

 

 

 

(2

)

 

 

13,533

 

 

 

$

66,919

 

 

$

 

 

$

(22

)

 

$

66,897

 

The Company did not have any realized gains or losses on its short-term investments for the years ended December 31, 2017


4. Fair Value Measurements and 2016. There were no other-than-temporary impairments recognized for the years ended December 31, 2017 and 2016.Marketable Securities

4.

Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financialfair value hierarchy for its assets and liabilities, which are measured at fair value on a recurring basis and indicate(in thousands):

   Fair Value Measurements at December 31, 2020 Using: 
         Level 1               Level 2               Level 3               Total       

Assets:

        

Cash equivalents:

        

Money market funds

  $77,129   $—     $—     $77,129 

Commercial paper

   —      1,800    —      1,800 

Marketable securities:

        

Commercial paper

   —      4,498    —      4,498 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $77,129   $6,298   $—     $83,427 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Preferred unit warrant liability

  $—     $—     $—     $—   
  

 

 

   

 

 

   

 

 

   

 

 

 
   Fair Value Measurements at December 31, 2019 Using: 
   Level 1   Level 2   Level 3   Total 

Assets:

        

Cash equivalents:

        

Money market funds

  $13,146   $—     $—     $13,146 

Marketable securities:

        

Commercial paper

   —      1,347    —      1,347 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $13,146   $1,347   $—     $14,493 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Preferred unit warrant liability

  $—     $—     $261   $261 
  

 

 

   

 

 

   

 

 

   

 

 

 

Marketable securities were valued by the levelCompany using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.

The following table provides a roll-forward of the aggregate fair values of the Company’s preferred units warrant liability, for which fair value was determined by Level 3 inputs (in thousands):

   Preferred Unit
Warrant Liability
 

Fair value at December 31, 2018

  $50 

Issuance of warrants to purchase Class B preferred units

   223 

Change in fair value

   (12
  

 

 

 

Fair value at December 31, 2019

   261 

Change in fair value

   (72

Reclassification of warrant liability to permanent equity

   (189
  

 

 

 

Fair value at December 31, 2020

  $—   
  

 

 

 

The preferred unit warrant liability in the table above consisted of the fair value hierarchy utilizedof warrants to determine such fair values (in thousands):

 

 

Fair Value Measurements as of December 30, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

13,871

 

 

$

 

 

$

 

 

$

13,871

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

8,960

 

 

 

 

 

 

8,960

 

U.S. treasury securities

 

 

 

 

 

3,497

 

 

 

 

 

 

3,497

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

9,816

 

 

 

 

 

 

9,816

 

U.S. treasury securities

 

 

 

 

 

34,922

 

 

 

 

 

 

34,922

 

 

 

$

13,871

 

 

$

57,195

 

 

$

 

 

$

71,066

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

25

 

 

$

25

 

 

 

$

 

 

$

 

 

$

25

 

 

$

25

 


 

 

Fair Value Measurements as of December 30, 2016 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

15,440

 

 

$

 

 

$

 

 

$

15,440

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

53,365

 

 

 

 

 

 

53,365

 

U.S. treasury securities

 

 

 

 

 

13,532

 

 

 

 

 

 

13,532

 

 

 

$

15,440

 

 

$

66,897

 

 

$

 

 

$

82,337

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

91

 

 

$

91

 

 

 

$

 

 

$

 

 

$

91

 

 

$

91

 

During the years ended December 31, 2017, 2016purchase preferred units issued in 2018 and 2015, there were no transfers between Level 1, Level 2 and Level 3.

The fair value of the derivative liability2019 (see Note 13) is11) and was based on significant inputs not observable in the market, which representsrepresented a Level 3 measurement within the fair value hierarchy. The fair valueCompany’s valuation of the derivative instrument was determined usingpreferred unit warrants utilized the Monte-Carlo simulation analysis. In determiningBlack-Scholes option-pricing model, which incorporated assumptions and estimates to value the preferred unit warrants. The Company assessed these assumptions and estimates at the end of each reporting period. Changes in the fair value of the derivative liability,preferred unit warrants were recognized within other

136


income (expense) in the inputsconsolidated statements of operations. The most significant assumption in the Black-Scholes option-pricing model impacting fair value include the fair value of the Company’s common stock, expected termpreferred unit warrant liability was the fair value of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments.

As of December 31, 2017 and 2016, the Company determined the per share common stock price available based on the closing price of its common stock on The NASDAQ Global Marketunderlying preferred units as of December 29, 2017 and December 30, 2016, respectively.each remeasurement date. The Company determined the expected termfair value per unit of these preferred units by taking into consideration its most recent sales of its preferred units as well as additional factors that the instrument to be 2.00 years and 2.50 years as of December 31, 2017 and 2016, respectively. The Company estimated its expected stock volatility to be 80.0% and 81.1% as of December 31, 2017 and 2016, respectively, based on the historical volatility of publicly traded peer companies for terms matching the expected term of the instrument for each respective period. The risk-free interest rate was determined to be 1.87% and 1.33% for the years ended December 31, 2017 and 2016, respectively, by referencedeemed relevant. Immediately prior to the U.S. Treasury yield curve for terms matchingMerger, all of Holdings’ outstanding warrants were exchanged and became warrants to purchase shares of Yumanity Common Stock. As a result, the expected term of the instrument for each respective period. The Company estimated the expected sales-based milestone payments based on four times the maximum research funding allowable under the CFFT collaboration agreement (see Note 13) plus the expected achievement of certain milestones, which totaled $28.5 million for each of the years ended December 31, 2017 and 2016. The Company estimated the discount rate in the calculation of the presentfair value of the expected future milestone paymentswarrants was reclassified to be 25% for the years ended December 31, 2017additional paid-in capital and 2016, respectively, based on expected returns of alternative investments ofthere is no longer a similar type.

Changes in the values of the preferred stock warrant liability and the derivative liability are summarized below (in thousands):subject to remeasurement.

 

 

Preferred Stock

Warrant Liability

 

 

Derivative

Liability

 

Fair value at December 31, 2014

 

$

120

 

 

$

65

 

Change in fair value

 

 

(10

)

 

 

(63

)

Fair value at December 31, 2015

 

 

110

 

 

 

2

 

Change in fair value

 

 

(82

)

 

 

89

 

Conversion to common stock warrant

 

 

(28

)

 

 

 

Fair value at December 31, 2016

 

 

 

 

 

91

 

Change in fair value

 

 

 

 

 

(66

)

Fair value at December 31, 2017

 

$

 

 

$

25

 


5.

Prepaids and Other Current Assets

Prepaids and other current assetsMarketable securities by security type consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Prepaid clinical, manufacturing and scientific

   expenses

 

$

568

 

 

$

1,390

 

Prepaid insurance expenses

 

 

55

 

 

 

104

 

Other prepaid expenses and other current assets

 

 

754

 

 

 

2,565

 

 

 

$

1,377

 

 

$

4,059

 

   December 31, 2020 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

Commercial paper

  $4,498   $—     $—     $4,498 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $4,498   $—     $—     $4,498 
  

 

 

   

 

 

   

 

 

   

 

 

 
   December 31, 2019 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

Commercial paper

  $1,347   $—     $—     $1,347 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $1,347   $—     $—     $1,347 
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s marketable securities are due within one year.

6.

5. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

 

Useful Life

 

December 31,

 

  December 31, 

 

(Years)

 

2017

 

 

2016

 

          2020                 2019         

Laboratory equipment

 

5 years

 

$

3,299

 

 

$

3,192

 

  $1,674  $2,351 

Office equipment, computers and software

   209   168 

Furniture and fixtures

 

5 years

 

 

158

 

 

 

147

 

   170   5 

Leasehold improvements

 

Shorter of the lease term or

5 years

 

 

382

 

 

 

382

 

   —     85 

Computer and office equipment

 

3 – 5 years

 

 

143

 

 

 

143

 

Construction-in-progress

 

 

 

 

16,143

 

 

 

 

  

 

  

 

 

 

 

 

 

20,125

 

 

 

3,864

 

   2,053   2,609 

Less: Accumulated depreciation and

amortization

 

 

 

 

(3,558

)

 

 

(3,323

)

   (1,179  (1,592

 

 

 

$

16,567

 

 

$

541

 

  

 

  

 

 
  $874  $1,017 
  

 

  

 

 

Assets held-for-sale

  $250  $—   

Amounts included within construction-in-progress represent the Company’s build-to-suit lease, see Note 16. Depreciation and amortization expense was $0.2$0.8 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 the Company had $0.8 million of gross assets under finance leases, which primarily consisted of laboratory equipment, and related accumulated amortization of $0.6 million. At December 31, 2019, the Company had $1.8 million of gross assets under finance leases and related accumulated amortization of $1.3 million.

6. Collaboration Agreement

In June 2020, the Company entered into an exclusive license and research collaboration agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to support the research, development

137


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

Under the terms of the Collaboration Agreement, the Company and Merck are each responsible to perform certain research activities in accordance with a mutually agreed upon research plan. Upon the completion of certain stages of the research plan, Merck will elect to either advance and make certain contractual option payments or terminate the applicable research program. If Merck elects not to advance a research program, such program terminates and the rights granted to Merck in the program revert to the Company. Following completion of the research program, Merck is responsible for the development and commercialization of the compounds developed pursuant to the research program and any product containing such compounds.

Under the terms of the Collaboration Agreement, the Company received an upfront payment totaling $15.0 million in July 2020 and is eligible to receive up to $280.0 million upon achievement of specified research and development milestones, and up to $250.0 million upon achievement of specified sales- based milestones as well as a tiered, mid-single digit royalty on net sales of licensed products, subject to customary reductions.

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

Merck also participated in the Company’s Class C preferred units financing in June 2020 with terms consistent with those of other investors that purchased Class C preferred units in June 2020 (see Note 9). The Class C preferred units were issued at a price of $4.0008 per unit, which was determined to be fair value based on the same price paid by other investors that purchased Class C preferred units in the financing. The equity investment was considered to be distinct from the Collaboration Agreement.

The Company assessed the promised goods and services to determine if they are distinct. Based on this assessment, the Company determined that Merck cannot benefit from the promised goods and services separately from the others as they are highly interrelated and therefore not distinct. Accordingly, the promised goods and services represent one combined performance obligation and the entire transaction price was allocated to that single combined performance obligation. The performance obligation is being satisfied over the research term as the Company performs the research and development activities through the first substantive option period, and participates in a Joint Steering Committee to oversee research and development activities. Accordingly, the upfront payment of $15.0 million was recorded as deferred revenue and will be recognized as revenue as the performance obligation is satisfied. The Company recognizes revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. As of December 31, 2020, the aggregate amount of the transaction price related to the unsatisfied portion of the performance obligation is $8.1 million, which is expected to be recognized as revenue within the next year. During the year ended December 31, 20172020, the Company recorded $6.9 million of collaboration revenue related to the Collaboration

138


Agreement following the commencement of development services. At contract inception, the potential milestone payments that the Company is eligible to receive were excluded from the transaction price as they were fully constrained. At the end of each reporting period, the Company reevaluates the transaction price and $0.3 million for eachas uncertain events are resolved or other changes in circumstances occur, and if necessary, the Company will adjust its estimate of the years ended December 31, 2016transaction price. Any additions to the transaction price would be reflected in the period as a cumulative revenue catch-up. At the inception of the arrangement, the Company evaluated the options held by Merck to either advance or terminate the applicable research program to determine if they provided Merck with any material rights. The Company concluded that the options were not issued at a significant and 2015, respectively.incremental discount, and therefore do not provide Merck with a material right. As such, these options were excluded as performance obligations and will be accounted for if and when they occur.

7.

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

7. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued payroll and related expenses

 

$

1,542

 

 

$

1,813

 

Accrued research and development expenses

 

 

3,930

 

 

 

1,612

 

Accrued professional fees

 

 

556

 

 

 

383

 

Accrued other

 

 

92

 

 

 

520

 

 

 

$

6,120

 

 

$

4,328

 

   December 31, 
           2020                   2019         

Accrued employee compensation and benefits

  $4,295   $1,318 

Accrued external research and development expenses

   1,780    689 

Accrued professional fees

   987    215 

Other

   789    199 
  

 

 

   

 

 

 
  $7,851   $2,421 
  

 

 

   

 

 

 

8. Debt

Long-term debt consisted of the following (in thousands):    

 

   December 31, 
           2020                  2019         

Principal amount of long-term debt

  $16,123  $15,000 

Less: Current portion of long-term debt

   (2,891  —   
  

 

 

  

 

 

 

Long-term debt, net of current portion

   13,232   15,000 

Debt discount, net of accretion

   (348  (539

Accrued end-of-term payment

   353   9 
  

 

 

  

 

 

 

Long-term debt, net of discount and current portion

  $13,237  $14,470 
  

 

 

  

 

 

 

The Company has outstanding borrowings of $15.0 million (“Tranche 1”) under a loan and security agreement entered into in December 2019 (the “New Loan”) with Hercules Capital, Inc. (the “Lender”). The Company may borrow an additional $5.0 million upon the occurrence of a development milestone and an equity event as defined in the agreement (“Tranche 2”), and an additional $10.0 million may become available to be drawn upon lender approval. Borrowings under the New Loan are repayable in monthly interest-only payments until August 1, 2021, with the option to extend an additional six months upon the drawdown of Tranche 2. The interest-only period will be followed by monthly payments of equal principal plus interest until the loan maturity date of January 1, 2024. Outstanding borrowings bear interest at the greater of i) 8.75% and ii) the prime rate as reported in the Wall Street Journal plus 4.00%. A final payment fee of 5.25% of the amounts drawn under the New Loan is due upon the earlier of the maturity date or the repayment date if paid early, whether voluntary or

139


8.

upon acceleration due to default. The Company may repay the New Loan at any time by paying the outstanding principal balance in full, along with any unpaid accrued interest, the final payment fees of 5.25% of the amounts drawn and a prepayment fee calculated on amounts being prepaid. The prepayment fee is 3.0% if the New Loan is repaid within the one-year anniversary of the draw date, 2.0% if paid between the first and second-year anniversary of the draw date and 1.0% if paid after the second anniversary of the draw date but before the maturity date.

Convertible Promissory Notes

In July 2014,April 2020, the New Loan was amended to permit indebtedness consisting of a loan under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provided that such loan shall be unsecured, shall not contain any terms or conditions that are adverse to the Lender’s rights under the loan and that the Company will not prepay such loan. In June 2020, the New Loan was amended and an additional final payment fee of $0.3 million became due upon repayment of the loan.

On December 22, 2020, the Company entered into an agreementUnconditional Secured Guaranty and Pledge Agreement (the “Guaranty”) with the Lender as a condition to issue $10.0 millionthe Lender’s consent to the Merger under the New Loan between Yumanity, Inc. as borrower and the Lender. Immediately prior to the Merger, Yumanity, Inc. entered into a Fourth Amendment and Consent to Loan and Security Agreement dated as of convertible promissory notes.December 22, 2020 with the Lender (the “Loan Amendment”). The Guaranty provides for the Company’s guaranty of Yumanity Inc.’s obligations under the Loan Agreement and provides the Lender a security interest in all of Company’s assets other than intellectual property as collateral. The Loan Amendment provides for the Lender’s consent to the Merger and to the creation and funding of a Silicon Valley Bank Paycheck Protection Program escrow account to hold funds in connection with Yumanity’s outstanding Paycheck Protection Program loan amounts for which Yumanity has submitted a forgiveness application. The Loan Amendment also amends the definition of “Change in Control” to include the situations in which the Company received proceeds fromno longer controls Yumanity, Inc. The remaining terms and conditions of the issuanceLoan Agreement generally continue in the form existing prior to the Loan Amendment.

As of convertible promissory notes aggregating $10.0 million forDecember 31, 2020 and 2019, the interest rate applicable to borrowings under the New Loan was 8.75%. During the year ended December 31, 2014.2020, the weighted average effective interest rate on outstanding borrowings under the New Loan was approximately 12.48%.

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

In July 2015,April 2020, prior to entering into the Company issued an additional $5.0 million of convertible promissory notes, increasing the aggregate principal amount of convertible promissory notes to $15.0 million.


On September 2, 2015,Merger Agreement with PTI in connection with the Company’s issuance of Series B preferred stock, the principal amount of all outstanding convertible promissory notes, aggregating $15.0 million, and accrued interest thereon, aggregating $0.8 million, were automatically converted into 12,284,466 shares of Series B preferred stock at a price of $1.286 per share.

9.

Preferred Stock Warrant Liability

In July 2008,August 2020, the Company issued a preferred stock warrantPromissory Note to an investorSilicon Valley Bank, pursuant to which it received loan proceeds of $1.1 million (the “Loan”) provided under the PPP established under the CARES Act and guaranteed by the U.S. Small Business Administration. The Loan is unsecured, is scheduled to mature on April 24, 2022, and has a fixed interest rate of 1.0% per annum. Equal monthly payments of principal and interest will be due commencing in connection withAugust 2021 until the issuancematurity date. Interest accrues on the unpaid principal balance from the inception date of Series A preferred stockthe loan. Forgiveness of the Loan is only available for principal that was immediately exercisableis used for the purchase of 160,000 shares of Series A preferred stock at an exercise price of $1.00 per share, over a term of ten years from issuance.

The fair value of the warrant on the date of grant of $0.1 million was recorded as a reduction to the initial carrying amount of the Series A preferred stock.limited purposes that expressly qualify for forgiveness under U.S. Small Business Administration requirements. The Company remeasuredhas determined to account for the fair value ofLoan as debt under ASC 470, “Debt”, and has allocated and recorded the liability for this preferred stock warrant at each reporting date from its grant date through February 2016, with any adjustments being recorded as a component of other income (expense), net in the Company’s statement of operationsloan proceeds between

140


current and comprehensive loss.non-current liabilities. The Company recorded gainsfurther determined that loan forgiveness would become probable of less than $0.1 million each year foroccurring upon acceptance by the years ended December 31, 2016 and 2015, respectively, to reflect the change in fair value of this preferred stock warrant.

Upon the closingSmall Business Association of the Company’s IPO on February 11, 2016, all outstanding shares offorgiveness application. If and when the Series A preferred stock were automatically converted to common stock and the preferred stock warrant liability was remeasured at fair value and was reclassified to additional paid-in capital. The following assumptions and inputs were used in determining the fair value of the preferred stock warrant liability valued using the Black-Scholes option-pricing model:

As of February 10,

2016

Expected term (in years)

2.25

Expected volatility

73.24

%

Risk-free interest rate

0.74

%

Expected dividend yield

8.0

%

The warrant for the purchase of common stock was exercised in February 2017 andloan forgiveness becomes probable, the Company issued 4,349 shares of common stock in a net settlement of the warrant exercise.will recognize income for debt extinguishment pursuant to ASC 470-50-15-4.

10.

Convertible Preferred Stock

As of December 31, 2015,2020, future principal payments due are as follows (in thousands):

Year Ending December 31,

    

2021

  $2,891 

2022

   6,305 

2023

   6,341 

2024

   586 

2025

   —   
  

 

 

 
  $16,123 
  

 

 

 

9. Preferred Units

Prior to the Company’s certificate of incorporation, as amended and restated, authorizedMerger, the Company to issue 110,057,398 shares of $0.001 par valuehad issued Class A preferred stock.

The Company has issued Series A and Seriesunits, Class B preferred stock (collectivelyunits, and Class C preferred units, collectively referred to as the “Preferred Stock”)Units”. The Preferred Stock is classified outside of stockholders’ equity (deficit) because the shares contain certain redemption features that are not solely within the control of the Company.

In January 2014,June 2020, the Company issued 5,000,000 shares of Series Aand sold 5,404,588 Class C preferred stockunits at an issuancea purchase price of $1.00$4.0008 per share forunit, resulting in cash proceeds of $4.9$21.2 million net of issuance costs of $0.1$0.4 million.

In September 2014, the Company modified the Conversion Price of the Series A preferred stock from $10.8102 per share to $3.6030397 per share. This amendment to the Series A Conversion Price was accounted for as a modification of preferred stock based on a quantitative assessment of the change in the fair value that resulted from the modification of the conversion price on the modification date. The increase in the fair value of Series A preferred stock measured immediately before the modification and immediately after the modification, equal to $6.0 million, was recorded as a deemed dividend from holders of common stock to the holders of preferred stock, resulting in a decrease to additional paid-in capital of $1.0 million and an increase to accumulated deficit of $5.0 million as well as a corresponding increase of $6.0 million to the carrying value of the Series A preferred stock.


In May 2015, the Company modified the Conversion Price of the Series A preferred stock from $3.6030397 per share to $10.8102 per share. This amendment to the Series A Conversion Price was accounted for as a modification of preferred stock based on a quantitative assessment of the change in the fair value that resulted from the modification of the conversion price on the modification date. The decrease in the fair value of Series A preferred stock measured immediately before the modification and immediately after the modification, equal to $10.6 million, was recorded as a deemed dividend from holders of preferred stock to the holders of common stock, resulting in an increase to additional paid-in capital of $10.6 million and a corresponding decrease of $10.6 million to the carrying value of the Series A preferred stock.

In September 2015, the Company issued 17,107,303 shares of Series B preferred stock at an issuance price of $1.286 per share for proceeds of $21.1 million, net of issuance costs of $0.9 million. Concurrent with the sale of Series B preferred stock, all outstanding convertible promissory notes, aggregating $15.0 million, and accrued interest thereon, aggregating $0.8 million, were automatically converted into 12,284,466 shares of Series B preferred stock at a price of $1.286 per share.

In September 2015, in connection with the Series B preferred stock financing, (1) the right of the holders of Series A preferred stock to receive accruing dividends, whether or not declared, at a rate of 8.0% per year of the Original Issue Price per share (as described below) ceased as of August 31, 2015, at which time such cumulative accruing dividends totaled $36.0 million, and (2) the right of holders of Series A preferred stock to receive a cash payment of accruing dividends upon the automatic conversion of the Series A preferred stock into common stock was modified such that all previously accrued but unpaid dividends on Series A preferred stock will be paid in shares of common stock, at a price of $13.9019172 per share, upon such conversion of the Series A preferred stock. If as of January 1, 2016, the Series A preferred stock has not automatically converted into shares of common stock according to its terms, the holders of the Series A preferred stock will be entitled to receive dividends at the rate of 8.0% per year of the respective Original Issue Price per share, commencing as of the respective original issuance date of the Series A preferred stock. These amendments to the Series A preferred stock dividend rights were accounted for as a modification of preferred stock based on a quantitative assessment of the change in the fair value that resulted from the modification of the dividend rights on the modification date. The decrease in the fair value of Series A preferred stock measured immediately before the modification and immediately after the modification, equal to $0.2 million, was recorded as a deemed dividend from holders of preferred stock to the holders of common stock, resulting in an increase to additional paid-in capital of $0.2 million and a corresponding decrease of $0.2 to the carrying value of the Series A preferred stock.

On December 17, 2015, the right of holders of Series A and Series B preferred stock to become entitled to accruing dividends was further modified such that if, as of April 1, 2016, the Series A and Series B preferred stock has not automatically converted into shares of common stock according to its terms, the holders of the Series A and Series B preferred stock will be entitled to receive dividends at the rate of 8.0% per year of the respective Original Issue Price per share, commencing as of the respective original issuance date of the Series A and Series B preferred stock. The decrease in the fair value of Series A preferred stock measured immediately before the modification and immediately after the modification, equal to $0.8 million, was recorded as a deemed dividend from holders of preferred stock to the holders of common stock resulting in an increase to additional paid-in capital of $0.8 million and a corresponding decrease of $0.8 million to the carrying value of the Series A preferred stock. The increase in the fair value of Series B preferred stock measured immediately before the modification and immediately after the modification, equal to less than $0.1 million, was recorded as a deemed dividend from holders of common stock to holders of preferred stock the resulting in an decrease to additional paid-in capital of less than $0.1 million and a corresponding increase of  less than $0.1 million to the carrying value of the Series B preferred stock. In connection with the completion of the Company’s IPO in February 2016, all outstanding shares of convertible preferred stock were converted to common stock.


As of December 31, 2015, Preferred Stock consisted of the following:

 

 

Preferred

Shares

Authorized

 

 

Preferred

Shares

Issued and

Outstanding

 

 

Carrying

Value

 

 

Liquidation

Preference

 

 

Common Stock

Issuable Upon

Conversion

 

Series A preferred stock

 

 

76,000,000

 

 

 

75,463,000

 

 

$

75,378

 

 

$

111,594

 

 

 

6,980,712

 

Series B preferred stock

 

 

34,057,398

 

 

 

29,391,769

 

 

 

36,914

 

 

 

37,798

 

 

 

2,718,888

 

 

 

 

110,057,398

 

 

 

104,854,769

 

 

$

112,292

 

 

$

149,392

 

 

 

9,699,600

 

The holders of the Preferred Stock had the following rights and preferences:

Dividends

At the time of their issuance, the holders of Series A preferred stock were entitled to receive dividends in preference to any dividend on common stock at the rate of 8.0% per year of the Original Issue Price. Such dividends accrued daily, compounded annually, were cumulative and were payable, whether or not declared, upon any liquidation event or upon the conversion of the Series A preferred stock into common stock.

In connection with the Series Bissuance and sale of Class C preferred stock financing in September 2015, the dividends on the Series A preferred stock ceased accruing as of August 31, 2015. In addition, the right of holders of Series A preferred stock to receiveunits, a cash payment of accruing dividends upon the automatic conversion of the Series A preferred stock into common stock was modified such that all previously accrued but unpaid dividends on Series A preferred stock will be paid in shares of common stock, at a price of $13.9019172 per share, upon such conversion. If, as of April 1, 2016, the Series A preferred stock has not automatically converted into shares of common stock according to its terms, the holders of the Series A and Series B preferred stock will be entitled to receive dividends at the rate of 8.0% per year of the respective Original Issue Price per share, commencing as of the respective original issuance date of the Series A and Series B preferred stock. Such dividends will accrue daily, compounding annually, and will be cumulative and payable when and if declared by the Company’s board of directors. In addition, such dividends will be payable, whether or not declared, upon any liquidation event or conversion of Series A or Series B preferred stock into common stock. The Original Issue Price is $1.00 per share for Series A preferred stock and $1.286 per share for Series B preferred stock. In February 2016, upon completion of the IPO, the Company issued 2,590,742 shares of common stock in full payment of $36.0 million of accrued dividends.

Conversion

Each share of Preferred Stock is convertible into common stock at the option of the stockholder at any time after the date of issuance. In addition, each share of Preferred Stock will be automatically converted into shares of common stock, at the applicable conversion ratio then in effect, upon a qualified public offering with net proceeds of at least $50.0 million that results in the Company’s common stock being listed on the NASDAQ or NYSE exchange. In addition, each share of Series A preferred stock will be automatically converted into shares of common stock upon the date specified by vote or written consent of the holders of at least two-thirds of the then outstanding shares of Series A preferred stock, and each share of Series B preferred stock will be automatically converted into shares of common stock upon the date specified by vote or written consent of the holders of at least the majority of the then outstanding shares of SeriesCompany’s voting preferred and common unit holders voted to amend the Company’s operating agreement such that Class B preferred stock.

unitholders who did not participate in a minimum purchase of Class C preferred units, referred to as non-participating holders, became holders of Class B preferred units referred to as “Defaulting Class B Preferred Units.” Class B preferred units other than the Defaulting Class B Preferred Units are referred to as Ordinary Class B preferred units. The conversion ratioterms of each seriesthe Defaulting Class B Preferred Units are similar to the terms of common units with respect to distributions, except that Defaulting Class B Preferred Stock is determined by dividingUnits are treated as one-fifth (1/5) of a common unit. The Defaulting Class B Preferred Units lose their rights associated with Preferred Units and have no voting rights. For accounting purposes, this transaction was treated as an extinguishment of the Original Issue Price per share of each series ofexisting Class B preferred stockunits held by the Conversion Price of each series. The initial Conversion Price for Series A preferred stock was $10.8102 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or recapitalization affecting the Series A preferred stock. On September 30, 2014, the Conversion Price for Series A preferred stock was amended to be $3.6030397 per share. In May 2015, the Conversion Price for Series A preferred stock was amended to be $10.8102 per share.

In February 2016, upon completion of the Company’s IPO, all outstanding shares of convertible preferred stock were converted into 9,699,600 shares of common stocknon-participating holders and the issuance of 2,590,742a new security. The carrying value of $7.0 million for the Class B preferred units exchanged for Defaulting Class B Preferred Units was removed from Preferred units on the balance sheet and the Defaulting Class B Preferred Units were reflected in permanent equity at their issuance date fair value of $0.3 million with the difference $6.7 million reflected as a reduction of accumulated deficit.

Preferred Units consisted of the following as of December 31, 2019 (in thousands, except unit amounts):

   December 31, 2019 
   Preferred
Units
Authorized
   Preferred Units
Issued and
Outstanding
   Carrying
Value
   Liquidation
Preference
 

Class A preferred units

   8,555,165    8,075,629   $53,657   $54,591 

Class B preferred units

   8,960,573    4,315,472    36,042    36,121 
  

 

 

   

 

 

   

 

 

   

 

 

 
   17,515,738    12,391,101   $89,699   $90,712 
  

 

 

   

 

 

   

 

 

   

 

 

 

Yumanity Reorganization and Merger

Immediately prior to the Merger on December 22, 2020, pursuant to the Yumanity Reorganization, all of the Class A, Class B, and Class C preferred units converted to shares of Yumanity, Inc. common stock. Pursuant to the Merger, these shares of Yumanity Inc. common stock as paymentwere then exchanged for shares of $36.0 million in accruing dividends onPTI

141


common stock based upon the Series AExchange Ratio and the related carrying value was reclassified to common stock and additional paid-in capital. There were no preferred stock.units outstanding after the Yumanity Reorganization.


11.

10. Common Stock/Units

Common and Preferred Stock

As of December 31, 2017 and 2016,2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 125,000,000 shares of $0.001common stock, par value common stock.

On February 11, 2016, the Company completed its IPO, which resulted in the sale of 6,250,000 shares of its common stock at a public offering price of $8.00$0.001 per share. Upon closing of the IPO, all outstanding shares of convertible preferred stock were converted into 9,699,600 shares of common stockshare, and the Company issued 2,590,742 shares of common stock as a payment of $36.0 million on accruing dividends due to holders of Series A preferred stock. Additionally, the Company’s convertible sock warrant outstanding at the close of the IPO converted to a warrant to purchase common stock.

In conjunction with the IPO and the amended and restated certificate of incorporation, the Company is authorized to issue 5,000,000 shares of preferred stock, $0.001 par value $0.001 per share, all of which is undesignated.

In September 2016, the Company issued and sold 5,750,000 shares of its common stock in a public offering at a public offering price of $13.00 per share, for net proceeds of $69.5 million after deducting underwriter discounts and commissions of $4.5 million and other offering expenses of $0.8 million. The foregoing includes the exercise by the underwriters of their options to purchase an additional 750,000 shares of our common stock within 30 days following the date of the final prospectus for the offering.

In December 2017, the Company issued and sold 9,200,000 shares of its common stock in a public offering at a public offering price of $5.00 per share, for net proceeds of $42.9 million after deducting underwriter discounts and commissions of $2.8 million and other offering expenses of $0.3 million. The foregoing includes the exercise by the underwriters of their options to purchase an additional 1,200,000 shares of our common stock within 30 days following the date of the final prospectus for the offering.

Each share of common stock entitles the holder to one vote for the election of directors and on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of the preferred stockholders. Through December 31, 2017, noNo cash dividends have been declared.declared or paid to date.

Prior to the Yumanity Reorganization, the Company had issued common units. Each common unit entitled the holder to one vote on all matters submitted to a vote of the Company’s members. In the event of any deemed liquidation, dissolution, or winding-up of the Company, the assets of the Company would have been distributed in accordance with the order of distributions described under the rights and preferences of the Preferred Units.

Prior to the Yumanity Reorganization, the Company also had outstanding restricted incentive units, a form of common units, that generally vested over four years (see Note 12).

Yumanity Reorganization

Immediately prior to the Merger, pursuant to the Yumanity Reorganization, all of Holdings’ outstanding common units, including the outstanding incentive units, were exchanged and became shares of common stock of Yumanity, Inc.

Private Placement

Following the Merger, on December 22, 2020, pursuant to the Subscription Agreement, dated as of December 14, 2020, by and among the Company and the purchasers named therein, the Company completed the sale of $33.6 million of the Company’s common stock, par value $0.001 per share to the purchasers in a private placement.

11. Warrants for Common Stock and Preferred and Common Units

Prior to the Merger, in December 2019, in connection with the New Loan (see Note 8), the Company issued 34,946 Class B preferred warrants with an exercise price of $8.37 per unit. Upon issuance of Class C preferred units in June 2020, the warrants for Class B preferred units issued in December 2019 became warrants to purchase of 73,109 Class C preferred units with an exercise price of $4.0008 per unit (see Note 9).

Yumanity Reorganization and Merger

As of December 31, 2017,2019, the Company had reserved 3,741,251outstanding warrants for the purchase of common units, Class A preferred units, and Class B preferred units (which became warrants to purchase Class C preferred units as described above). Immediately prior to the Merger, pursuant to the Yumanity Reorganization, all of Holdings’ outstanding warrants were exchanged and became warrants to purchase shares of Yumanity common stock. Upon consummation of the Merger, the warrants to purchase shares of Yumanity common stock became warrants to purchase the Company’s common stock. The contractual term of each warrant remained unchanged. No additional warrants were issued in 2020 and no warrants were exercised in 2020.

As of December 31, 2020, the Company’s outstanding warrants to purchase shares of common stock of the Company consisted of the following:

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December 31, 2020

 

Issuance Date

  Contractual
Term
(in Years)
   Class of
Stock
   Number of
Shares of
Common
Stock Issuable
   Exercise
Price
 

August 14, 2015

   10    Common    74,622   $24.05 

October 9, 2015

   10    Common    7,798   $24.05 

June 14, 2018

   10    Common    2,152   $30.13 

December 20, 2019

   10    Common    15,414   $18.98 
      

 

 

   
       99,986   
      

 

 

   

12. Stock/Equity-Based Compensation

Incentive units

Prior to the Yumanity Reorganization, the Company’s operating agreement, as amended and restated, provided for the exercisegranting of outstanding stock options underincentive units, a type of common units, to officers, directors, employees, consultants and advisors. Holders of incentive units were entitled to receive distributions in proportion to their ownership percent interest, upon liquidation, that were in excess of the strike price of the award, (the “Participation Threshold”) set by the board of directors on the date of grant. The Participation Threshold was based on the amount that would be distributed in respect of a common unit pursuant to its liquidation preferences, if, upon a hypothetical liquidation of the Company on the date of issuance of such Incentive Unit, the Company sold its assets for their fair market value, satisfied its liabilities and distributed its remaining net assets to holders of units in liquidation. The Company determined that the underlying terms of the incentive units and the intended purpose of the awards were more akin to an equity-based compensation award than a performance bonus or profit-sharing arrangement and, therefore, the incentive units were equity-classified awards.

Incentive unit valuation

The fair value of each common unit was determined based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, including the contemporaneous valuations of the Company’s 2008 Plancommon units, the Company’s financial condition and 2016 Planoperating results, the material risks related to the Company’s business, the Company’s stage of development and business strategy and the numberlikelihood of shares remainingachieving a liquidity event for grant underthe holders of the Company’s common units.

Incentive unit activity

A summary of unvested incentive unit (a type of common units) activity is as follows:

   Units  Weighted
Average Grant
Date Fair Value
 

Unvested incentive units at December 31, 2019

   15,401  $8.68 

Issued

   —    $—   

Vested

   (14,008 $8.68 

Forfeited

   (790 $8.68 

Exchange of incentive units for restricted common stock

   (603 $            8.68 
  

 

 

  

Unvested incentive units at December 31, 2020

   —    $—   
  

 

 

  

There were no restricted incentive units granted during the years ended December 31, 2020 and 2019. The aggregate grant-date fair value of restricted incentive units that vested during the years ended December 31, 2020 and 2019 was $0.1 million and $0.4 million, respectively. Unvested incentive units were a type of common unit and were exchanged for restricted common stock of Yumanity as described in Note 10. There were no incentive units outstanding following the Reorganization. As of December 31, 2020, the Company had 292 shares of unvested restricted common stock outstanding, which reflects the effect of the Yumanity Reorganization.

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Summary of plans

Upon completion of the Merger, the Company assumed PTI’s 2016 Stock Option and Incentive Plan (see Note 12)(the “2016 Plan”) and the number of shares available under the Company’sPTI’s 2016 Employee Stock Purchase Plan (the “2016 ESPP”).

12.

Stock-Based Compensation

2008 Equity Incentive Plan

The Company’s 2008 Equity Incentive Plan, as amended, (the “2008 Plan”) provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors and consultants of the Company. The 2008 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of stock option may not be greater than ten years.

Stock options granted to employees and directors under the 2008 plan typically vest over four years. Stock options granted to non-employees under the 2008 plan typically vest over periods ranging from six months to four years, depending on the period during which the services are being provided.


On February 9, 2016, the Company’s 2016 Stock Option and Incentive Plan (the “2016 Plan”) became effective and no further stock options or other awards will be made under the 2008 Plan. Shares of common stock underlying any awards that are forfeited, canceled, repurchased or are otherwise terminated by the Company under the 2016 Plan and the 2008 Plan will be added back to the shares of common stock available for issuance under the 2016 Plan.

2016 Stock Option and Incentive Plan

On February 3, 2016, the Company’sPTI’s stockholders approved the 2016 Stock Option and Incentive Plan, (the “2016 Plan”), which became effective on February 9, 2016. The 2016 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards and other stock-based awards. The number of shares initially reserved for issuance under the 2016 Plan is 1,581,839was 79,092 shares. The number of shares of common stock that may be issued under the 2016 Plan will automatically increase on each January 1, beginning on January 1, 2017, by the lesser of 3% of the shares of the Company’s common stock outstanding on the immediately preceding December 31, or an amount determined by the Company’s board of directors or the compensation committee of the board of directors.

Stock options The shares of common stock underlying any awards that are forfeited, canceled, repurchased, or are otherwise terminated by the Company under the 2016 Plan and the 2008 Equity Incentive Plan, as amended (the “2008 Plan”) will be added back to the shares of common stock available for issuance under the 2016 Plan. On January 1, 2020, an additional 78,175 shares were reserved for issuance under the 2016 Plan. Options granted under the 2016 Plan vest based on the grantee’s continued service with the Company during a specified period following the grant. Awards granted to employeesservice-based vesting conditions generally vest ratably over four years and expire after ten years. As of December 31, 2020, the total number of shares of the Company’s common stock reserved for issuance under the 2016 Plan was 322,605, of which 76,225 shares are available for future issuance under the 2016 Plan. The number of shares reserved for issuance under the 2016 Plan was increased by 303,495 shares effective as of January 1, 2021 in accordance with a 25% cliff vesting at the one-year anniversary for new employee awards. Stock options granted to directors generally vest ratably over three years. All awards are exercisable for a periodprovisions of ten years from the grant date.2016 Plan described above.

2016 Employee Stock Purchase Plan

On February 3, 2016, the Company’sPTI’s stockholders approved the 2016 Employee Stock Purchase Plan (the “2016 ESPP”),ESPP, which became effective in connection with the completion of the Company’s IPO.PTI’s initial public offering. A total of 138,7576,938 shares of common stock were initially reserved for issuance under this plan.the 2016 ESPP. In addition, the number of shares of common stock that may be issued under the 2016 ESPP will automatically increase on each January 1, beginning on January 1, 2017, and ending on January 1, 2026, by the leastlesser of (i) 138,7576,938 shares of common stock, (ii) 1% of the Company’s shares of common stock outstanding on the immediately preceding December 31, andor (iii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors. No shares were issued under this plan during the year ended December 31, 2016. During the year ended December 31, 2017, 10,829 shares were issued under this plan.

Stock option grants and shares to non-employees

Prior to 2013, the Company issued options to purchase 203,964 shares of common stock to non-employees, primarily members of the Company’s scientific advisory board, that vest upon the achievement of specified development and clinical milestones. As of December 31, 20172020, the total number of shares reserved under the 2016 ESPP was 34,689 shares. The number of shares reserved for issuance under the 2016 ESPP was increased by 6,937 shares effective as of January 1, 2021 in accordance with the provisions of the 2016 ESPP described above.

Yumanity Therapeutics, Inc. Amended and 2016, optionsRestated 2018 Stock Option and Grant Plan

On December 4, 2018, the Company’s board of directors adopted the 2018 Unit Option and Grant Plan (the “2018 Plan”), which was approved by the Company’s members on December 5, 2018. The 2018 Plan provided for the purchase of 83,250 shares held by non-employees remained unvested, pending achievementCompany to grant unit options, restricted unit awards and unrestricted unit awards to employees, directors and consultants of the specified milestones,Company. As part of the Yumanity Reorganization and hadthe Merger, the 2018 Plan was amended and restated as the “Yumanity Therapeutics, Inc. Amended and Restated 2018 Stock Option and Grant Plan”. Each stock option outstanding under the 2018 Plan at the Effective Time of the Merger was automatically converted into a stock option exercisable for the same number of shares of Yumanity common stock, and then assumed by the Company, based on the Exchange Ratio and the exercise price per share of such outstanding stock option, as adjusted for the Exchange Ratio. The 2018 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated.

Options granted under the 2018 Plan with service-based vesting conditions generally vest over four years and expire after ten years. The total number of common shares that may be issued under the 2018 Plan is 1,527,210 as of December 31, 2020. Shares that are forfeited, canceled, reacquired by the Company prior to vesting, satisfied without the issuance of shares or otherwise terminated (other than by exercise) and units that

144


are withheld upon the exercise of an aggregateoption or settlement of an award to cover exercise price or tax withholding shall be added back to units available under the 2018 Plan. As of December 31, 2020, 776,799 shares remain available for issuance under the 2018 Plan.

Under each plan, the exercise price per option granted is not less than the fair market value of common stock as of the date of grant.

Yumanity Reorganization and Merger

Immediately prior to the Merger, pursuant to the Yumanity Reorganization, all of Holdings’ outstanding options were exchanged on a 1-for-1 basis and became options to purchase shares of Yumanity common stock. The Company assumed all of the outstanding and unexercised options to purchase shares of Yumanity common stock upon consummation of the Merger.

Option valuation

The fair value of $0.3 million per year. Duringoption grants is estimated using the years ended December 31, 2017, 2016 and 2015,Black-Scholes option-pricing model. Prior to the Merger, the Company did not grant anywas a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock/unit volatility based on the historical volatility of a publicly traded set of peer companies. The expected term of the Company’s options has been determined utilizing a midpoint convention estimate. The risk-free interest rate is determined by reference to non-employees under this plan. 

On October 28, 2015, the Company made a one-timeU.S. Treasury yield curve in effect at the time of grant of optionsthe award for time periods approximately equal to a non-employee to purchase 9,250 shares of our common stock with an exercise price of $2.38 per share which were granted outsidethe expected term of the 2008 Stock Option Plan. The options were fully vested upon the grant date as such the Company calculated the fair value of the options on the date of the grant. The Company calculated fair value at $12.23 per option utilizing the Black-Scholes option pricing model with the following inputs used to determine the fair value (i) Risk-free interest rate of 0.0 %; (ii) Expected term (in years) of 0.08 years; (iii) Expected volatility of 60.28 % and (iv)award. Expected dividend yield of 0.0 %. The Company recognized $0.1 million of stock compensation expense within general and administrative expenses foris based on the year ended December 31, 2015. The Company received cash proceeds of less than $0.1 million for the option exercise during the year ended December 31, 2015. The aggregate intrinsic value of the stock option exercised during the year ended December 31, 2015 was $0.1 million.


Stock-based compensation expense for the three months ended June 30, 2015 was reduced by $0.5 million for the cumulative correction of immaterial errors associated with the recognition of stock-based compensation for certain stock options with performance-based vesting conditions. Of this amount, $0.2 million related to years prior to 2015 and $0.3 million related to the three months ended March 31, 2015. Based upon its evaluation of relevant factors, the Company concluded that the uncorrected errors in its previously issued financial statements for any of the periods affected are immaterial and that the impact of recording the cumulative correction during the six months ended June 30, 2015 is not material to the Company’s results for the year ending December 31, 2015.

Stock Option Valuation

The assumptionsfact that the Company usedhas never paid cash dividends and does not expect to determinepay any cash dividends in the fair value of the stock options granted to employees and directors were as follows, presentedforeseeable future.

The following table presents, on a weighted average basis:basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of options granted:

 

 

Year Ended December 31,

 

 

2017

 

 

2016

 

 

2015

 

  Year Ended December 31, 

Risk-free interest rates

 

 

2.00

%

 

 

1.35

%

 

 

1.68

%

Expected term (in years)

 

 

5.96

 

 

 

6.09

 

 

 

5.99

 

          2020                 2019         

Risk-free interest rate

   1.1  1.7

Expected volatility

 

 

75.18

%

 

 

73.19

%

 

 

56.86

%

   70.9  72.1

Expected dividend yield

 

 

 

 

 

 

 

 

 

   —     —   

Expected term (in years)

   7.8   7.8 

Stock OptionsOption activity

The following table summarizes the Company’s stock option activity sinceduring the year ended December 31, 2016 (in thousands except share and per share amounts):2020:

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average Remaining

Contractual Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(Years)

 

 

 

 

 

Outstanding at December 31, 2016

 

 

2,030,517

 

 

$

7.29

 

 

 

8.42

 

 

$

10,510

 

Granted

 

 

1,201,789

 

 

 

6.88

 

 

 

 

 

 

 

 

 

Exercised

 

 

(11,714

)

 

 

2.68

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(382,034

)

 

 

10.59

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

2,838,558

 

 

$

6.69

 

 

 

8.10

 

 

$

3,213

 

Vested and expected to vest at December 31, 2017

 

 

2,755,308

 

 

$

6.82

 

 

 

8.25

 

 

$

2,926

 

Options exercisable at December 31, 2017

 

 

1,054,350

 

 

$

6.29

 

 

 

7.18

 

 

$

1,404

 

   Number
of Shares/
Units
  Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
 
          (in years)   (in thousands) 

Outstanding as of December 31, 2019

   815,885  $14.71    9.41   $1,998 

Granted

   84,758  $16.51     

Exercised

   —     —       

Forfeited

   (150,232 $14.99     

Assumed as part of the Merger with Proteostasis

   194,550  $68.48     
  

 

 

      

Outstanding as of December 31, 2020

   944,961  $20.70    8.29   $6,522 
  

 

 

      

Vested and expected to vest as of December 31, 2020

   944,961  $20.70    8.29   $6,522 

Options exercisable as of December 31, 2020(1)

   944,961  $20.70    8.29   $6,522 

 

(1)

Certain options were immediately exercisable for restricted common stock which vest according to the original vesting terms of the option grant. No options have been exercised prior to vesting.

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The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stockstock/units for those stockstock/unit options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2017 and 2016 was less than $0.1 million and $0.4 million, respectively.

The Company received cash proceeds from the exercise of stock options of less than $0.1 million, $0.3 million and $0.1 million during the years ended December 31, 2017, 2016 and 2015.stock/units.

The weighted average grant-date fair value of stockstock/unit options granted during the years ended December 31, 2017, 20162020 and 20152019 was $4.57, $5.47$11.39 per unit and $7.13,$12.10 per share/unit, respectively.

Stock/equity-based compensation

The total fair value of options vested during the years ended December 31, 2017, 2016 and 2015 was $2.5 million, $1.1 million and $0.5 million, respectively.


Stock-based Compensation

Stock-basedCompany recorded stock/equity-based compensation expense was classifiedrelated to common stock/unit options and restricted incentive units in the following expense categories in its consolidated statements of operations and comprehensive loss as follows:(in thousands):

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Research and development

 

$

1,326

 

 

$

556

 

 

$

72

 

General and administrative

 

 

2,406

 

 

 

1,608

 

 

 

400

 

 

 

$

3,732

 

 

$

2,164

 

 

$

472

 

   Year Ended December 31, 
   2020   2019 

Research and development expenses

  $663   $674 

General and administrative expenses

       1,603        871 
  

 

 

   

 

 

 
  $2,266   $1,545 
  

 

 

   

 

 

 

As of December 31, 2017,2020, total unrecognized compensation cost related to the unvested stock-based awardsoptions and restricted common stock was $6.6$5.2 million, which is expected to be recognized over a weighted average period of 2.572.6 years.

13.

Collaboration, Research Grant and License Agreements

Astellas Pharma Inc.

In November 2014,July 2020, the Company entered intomodified 722,009 outstanding unit options with a worldwide Collaborative Research, Development, Commercialization and License Agreement (the “Astellas Agreement”) with Astellas Pharma Inc. (“Astellas”).weighted-average exercise price of $14.90 per common unit to reduce the exercise price to $8.16 per common unit. The focusCompany accounted for the re-pricing as a modification of the Astellas Agreement is to identify, develop and commercialize therapeutic candidates relatingawards for accounting purposes. The resulting compensation charge related to the Unfolded Protein Response (“UPR”) pathway.

Financial Terms

Under termsmodification was equal to the positive difference between the fair value of the Astellas Agreement, Astellas purchased frommodified awards and the Company convertible promissory notes totaling $5.0fair value of the original awards immediately before they were deemed modified for accounting purposes. For the portion of awards that were vested as of the modification date, equity-based compensation expense equal to the amount of the incremental fair value of the modified awards of $0.1 million with terms consistent with those of other investors that purchased convertible promissory notes issued during 2014 (see Note 8). In addition, the Company will be eligible to receive research funding support, basedwas recognized immediately on the establishmentmodification date. For the portion of an annual research budget, and future research, development and sales milestone paymentsthe awards that were unvested as of upthe modification date, equity-based compensation expense related to $398.5the incremental fair value of the modified awards of $0.5 million as well as tiered royalty payments ranging inunrecognized compensation expense related to the mid single-digit to low double-digit percentages of net sales, as defined in the agreement. Under the agreement, the companies will conduct research during the initial research term, which is three and a half years, to identify lead compounds for clinical development. Astellas will reimburse the Company at a specified rate for time incurred as well as certain agreed upon third-party costs incurred by the Company, based on the annual budget. The Company received payments for the years ended December 31, 2017 and 2016 of approximately $3.5 million and $2.5 million, respectively.

The Company determined that the deliverables under the agreement include (i) the research license, (ii) the research services to be provided over the research term, which is three and a half years, and (iii) the Company’s participation in the Joint Research Committee (the “Committee”) to be provided over the initial three and a half year research term of the agreement. The Company concluded that the research license and the involvement in the Committee did not have standalone value to Astellas and, therefore, are not separable from the research services. Therefore, the research license, research services and participation in the Committee have been combined and accounted for as a single unit of accounting. Accordingly, the research funding support payments and any reimbursement of third-party costsoriginal award are being recognized byover the remaining service period.

13. Income Taxes

Prior to the Yumanity Reorganization, Holdings was treated as a partnership for federal income tax purposes and, therefore, its owners, and not Holdings, were subject to U.S. federal or state income taxation on the income of Holdings. Holdings’ directly held subsidiary Yumanity Therapeutics, Inc. was treated as a corporation for U.S. federal income tax purposes and was subject to taxation in the United States. Subsequent to the Yumanity Reorganization, the Company as revenue overis a corporation and is subject to taxation in the three and a half year research termUnited States. In each reporting period, the Company’s tax provision includes the effects of consolidating the results of the agreement, which commenced in January 2015, with a cumulative catch-up for the elapsed portion of the research term being recognized at the time any such payments are earned. The Company concluded at the outset of the arrangement that none of the future milestone payments included in the arrangement qualified as substantive milestones. Non-substantive milestone payments totaling $1.8 million and $0.8 million earned during the years ended December 31, 2016 and 2015, respectively, are being recognized, along with the other arrangement consideration, over the three and half year research term of the agreement, with a cumulative catch-up for the elapsed portion of the research term. Revenue recognized under the Astellas Agreement during the years ended December 31, 2017 and 2016 totaled $5.3 million and $3.2 million, respectively. As of December 31, 2017 and 2016, deferred revenue related to the Astellas Agreement totaled $1.1 million and $3.2 million, respectively.


Term and Termination

The term of the Astellas Agreement commenced in November 2014 and will continue in full force and effect, unless terminated under the conditions described below, until expiration of all applicable royalty terms with respect to all licensed products in all countries in the territory defined as per the agreement.

The agreement will automatically terminate at the end of the three and a half year research term, in the second quarter of 2018, if Astellas has not designated at least one development compound, unless mutually agreed to be extended. Astellas has the unilateral right to terminate the agreement on a project-by-project basis by providing written notice to the Company. Reciprocal termination rights under the agreement include termination for breach and termination for bankruptcy.

Biogen

In December 2013, the Company entered into a Collaborative Research, Development, Commercialization and License Agreement (the “Biogen Agreement”) with Biogen New Ventures, formerly Biogen Idec New Ventures Inc. (“Biogen”). The focus of the Biogen Agreement is to research, develop and commercialize licensed products to attack toxic proteins implicated in the development of Alzheimer’s and Parkinson’s diseases. The Biogen Agreement was terminated in December 2016.

Financial Terms

Under the terms of the agreement, Biogen agreed to pay a nonrefundable upfront fee to the Company of $2.5 million and to purchase $5.0 millionoperations of its Series A preferred stock under existing terms purchased on January 3, 2014. Research funding payments due to the Company guaranteed over the first two years of the agreement and totaled $4.0 million. In addition, third-party costs incurred by both parties are shared at the same ratio with corresponding payments made between the parties on a quarterly basis.subsidiary.

The Company determined that the deliverables under the agreement include (i) the research license, (ii) the research services to be provided over the four-year research term of the agreement, and (iii) the Company’s participation in the Joint Research Committee (the “Committee”) to be provided over the initial four-year research term of the agreement. The Company concluded that the research license and the involvement in the Committee did not have standalone value to Biogen and, therefore, are not separable from the research services. Therefore, the research license, research services and participation in the Committee have been combined and accounted for as a single unit of accounting. Accordingly, the upfront fee, research payments and any reimbursement of third-party costs are being recognized by the Company as revenue over the four-year research term of the agreement, which commenced in December 2013, with a cumulative catch-up for the elapsed research term being recognized at the time any such payments are earned. The Company concluded at the outset of the arrangement that none of the future milestone payments included in the arrangement qualified as substantive milestones. A $2.0 million non-substantive milestone payment earned during the year ended December 31, 2014 was being recognized, along with the other arrangement consideration, over the four-year research term of the agreement, with a cumulative catch-up for the elapsed portion of the research term. In December 2016, Biogen exercised its right to terminate the agreement and the Company recognized all remaining deferred revenue upon termination. Revenue recognized under the Biogen Agreement during the years ended December 31, 2016 and 2015 totaled $3.0 million and $2.4 million, respectively.

Cystic Fibrosis Foundation Therapeutics, Inc.

In March 2012, the Company entered into a Research, Development and Commercialization Agreement (the “CFFT Agreement”) with Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”). Under terms of the CFFT Agreement, which was subsequently amended in May 2013 and January 2014, CFFT agreed to provide up to $5.7 million (the “Award’) in research funding to the Company over two non-consecutive one-year periods from March 2012 to March 2013 and from January 2014 to December 2014. The Company did not recognize any revenue under the CFFT Agreement during the years ended December 31, 2017, 2016 and 2015.


Under the CFFT agreement, the Company has agreed to make future sales-based milestone payments (which the agreement refers to as royalties) to CFFT of up to $34.2 million upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the collaboration agreement. The Company has also agreed to pay to CFFT royalties of a mid single-digit percentage, up to an aggregate of $22.8 million, on any amounts received by the Company from the sale, license or transfer to a third party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the first three sales-based milestone payments owed by the Company through the second anniversary of the first commercial sale of a product developed as a result of this collaboration. As of December 31, 2017, 2016 and 2015, the Company had not developed a commercial product in connection with this collaboration, and it had not sold, licensed or transferred rights in the technology resulting from this collaboration.

In lieu of the milestone and royalty payments described above, in the event of a change of control of the Company, CFFT may elect to accept a one-time payment equal to the consideration CFFT would have received if it had owned (a) 268,265 shares of the Company’s common stock if the change of control occurs prior to the selection by the Company of a compound intended for product approval, or (b) 444,025 shares of the Company’s common stock if the change of control occurs after the selection by the Company of a compound intended for product approval. This alternative payment option upon a change of control would be cash settled in the event of a change of control and meets the definition of an embedded derivative. The Company estimated the fair value of this liability and concluded that the liability was immaterial as of the inception date of the CFFT Agreement. The Company estimated the fair value of this derivative liability to be less than $0.1 million and $0.1 million as of December 31, 2017 and 2016, respectively (see Note 4).

The CFFT Agreement will expire when there are no longer any payment obligations, unless terminated earlier. Each party may terminate for an uncured material breach of any material covenants or obligations or if any representation or warranty is materially untrue as of the date made and uncured after 30 days from notice. CFFT may also terminate if a case or proceeding under the bankruptcy laws is filed against the Company and not dismissed within 60 days, or if the Company files for insolvency, reorganization, receivership, dissolution or liquidation.

Presidents and Fellows of Harvard College Licensing Agreement

The Company has acquired certain exclusive and nonexclusive rights to use, research, develop and offer for sale certain products and patents under a licensing agreement, as amended in December 2013, with Presidents and Fellows of Harvard College (the “Harvard Agreement”). The Harvard Agreement was terminated in October 2017. The surviving rights obligate the Company to make payments to the licensor for milestones and royalties. Due to the termination of the Harvard Agreement, the future development, clinical and commercialization and sales milestone payments under the licensing agreement are up to $2.375 million. Under the surviving provisions of the licensing agreement, the Company will also owe low single-digit royalties on sales of commercial products, if any, developed using the licensed technologies for 10 years following the first commercial sale. As of December 31, 2017, 2016 and 2015, the Company had not developed a commercial product using the licensed technologies and no pre-commercialization milestones had been achieved.

The Company recorded research and development expenses of $0.1 million during each of the years ended December 31, 2017, 2016 and 2015, respectively, for licensing fees due under the Harvard Agreement.  

14.

Income Taxes

During the years ended December 31, 2017, 20162020 and 2015,2019, the Company recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated in each year or interim period, due to its uncertainty of realizing a benefit from those items. All of the Company’s losses before income taxes were generated in the United States.The Company has no foreign operations and therefore, has not provided for any foreign taxes.

146



A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Federal statutory income tax rate

 

 

(34.0

)%

 

 

(34.0

)%

 

 

(34.0

)%

State income taxes, net of federal benefit

 

 

(5.6

)

 

 

(5.1

)

 

 

(5.0

)

Research and development tax credit

   carryforwards

 

 

(3.2

)

 

 

(4.3

)

 

 

(4.4

)

Expiration of state net operating loss

   carryforwards

 

 

 

 

 

 

 

 

 

Non-deductible expenses

 

 

0.7

 

 

 

0.5

 

 

 

1.2

 

Change in deferred tax asset valuation allowance

 

 

2.0

 

 

 

42.9

 

 

 

42.2

 

Effect of U.S. Tax Reform

 

 

40.1

 

 

 

 

 

 

 

Effective income tax rate

 

 

(0.0

)%

 

 

(0.0

)%

 

 

(0.0

)%

   Year Ended December 31, 
   2020  2019 

Federal statutory income tax rate

   (21.0)%   (21.0)% 

State taxes, net of federal benefit

   (1.6  (6.1

Federal and state research and development tax credits

   (2.5  (1.1

In-process research and development (1)

   10.4   —   

Other

   1.2   0.4 

Change in deferred tax asset valuation allowance

            13.5          27.8 
  

 

 

  

 

 

 

Effective income tax rate

   0.0  0.0
  

 

 

  

 

 

 

 

(1)

Represents the tax effect on the in-process research and development expense recorded on the acquisition of PTI

Net deferred tax assets as of December 31, 2017 and 2016 consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Net operating loss carryforwards

 

 

52,861

 

 

$

53,723

 

Research and development tax credit carryforwards

 

 

9,232

 

 

 

6,633

 

Accrued expenses and other

 

 

1,583

 

 

 

2,152

 

Total deferred tax assets before valuation allowance

 

 

63,676

 

 

 

62,508

 

Valuation allowance

 

 

(63,660

)

 

 

(62,442

)

Net deferred tax assets

 

 

16

 

 

 

66

 

Depreciation

 

 

(16

)

 

 

(66

)

Net deferred tax assets

 

$

 

 

$

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”) tax reform legislation. The legislation resulted in significant changes to the U.S. corporate income tax system, including reducing the U.S. corporate tax rate from a top marginal rate of 35% down to a flat rate of 21% effective for tax years beginning after December 31, 2017, elimination, reduction or limitation of certain domestic deductions and credits, limitation of the deduction for NOLs to 80% of current year taxable income, elimination of NOL carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits, including the orphan drug tax credit.

As a result of the enacted tax law, the Company has revalued the deferred tax assets and liabilities at the new rate. The revaluation resulted in a reduction in deferred tax assets of $24.0 million with a corresponding reduction in the valuation allowance and therefore no net effect on the 2017 tax provision affecting the Company’s statement of operations.

   December 31, 
   2020  2019 

Deferred tax assets:

   

Net operating loss carryforwards

  $122,460  $23,142 

Research and development tax credit carryforwards

   18,654   2,324 

Property and equipment

   184   312 

Accrued expenses

   539   360 

Capitalized intellectual property costs

   89   109 

Stock/equity-based compensation expense

   1,084   370 

Operating lease liabilities

   4,670   79 

Other

      103 
  

 

 

  

 

 

 

Total deferred tax assets

   147,680   26,799 
  

 

 

  

 

 

 

Deferred tax liabilities:

   

Operating lease right-of-use assets

   (5,836  (75

Other

   (172  —   
  

 

 

  

 

 

 

Total deferred tax liabilities

   (6,008  (75
  

 

 

  

 

 

 

Valuation allowance

   (141,672  (26,724
  

 

 

  

 

 

 

Net deferred tax assets

  $—    $—   
  

 

 

  

 

 

 

As of December 31, 2017,2020, the Company had U.S. federal and state net operating loss carryforwards (“NOLs”) of $196.9$453.8 million and $182.1$429.9 million, respectively, which may be available to offset future taxable income and federalincome. Federal and state NOLsnet operating loss carryforwards of $228.1 million and $429.9 million, respectively, begin to expire in 2026 and 2030, respectively. Federal net operating loss carryforwards of $225.7 million do not expire but may be limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2017,2020, the Company also had U.S. federal and state research and development tax credit carryforwards of $6.8$14.3 million and $3.1$5.5 million, respectively, which may be available to offset future income tax liabilities. Federalliabilities and state research and development tax credit carryforwards begin to expire in 2027 and 2026, respectively.2027.


Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under SectionSections 382 and 383 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. future, including those tax attributes acquired from PTI via the Merger.

147


These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income andor tax respectively.liabilities. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not currently completed an evaluation of ownership changes through December 31, 2017conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the Company’s net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382. To382, which is determined by first multiplying the extent anvalue of the Company’s stock at the time of the ownership change occursby the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in the future,expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to limitation.before utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company has not yet conducted a study of its research and development credit carryforwards. This study may result in an increase or decrease to the Company’s credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the statements of operations and comprehensive loss or statements of cash flows if an adjustment were required.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised principally of net operating losses and research and development tax credit carryforwards.assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 20172020 and 2016.2019. Management reevaluates the positive and negative evidence at each reporting period.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 20172020 and 20162019 related primarily to the increasesincrease in net operating loss carryforwards and research and development tax credit carryforwards and were as follows (in thousands):

 

 

 

Year Ended December

 

 

 

2017

 

 

2016

 

Valuation allowance at beginning of year

 

$

(62,442

)

 

$

(46,476

)

Increases recorded to income tax provision

 

 

(1,218

)

 

 

(15,966

)

Valuation allowance at end of year

 

$

(63,660

)

 

$

(62,442

)

   Year Ended December 31, 
   2020   2019 

Valuation allowance as of beginning of year

  $26,724   $18,044 
  

 

 

   

 

 

 

Increases recorded to income tax provision

   7,777    8,680 

Amounts from Merger with PTI

   107,171    —   
  

 

 

   

 

 

 

Valuation allowance as of end of year

  $141,672   $26,724 
  

 

 

   

 

 

 

TheAs of December 31, 2020, the Company hashad not yet recorded any amounts for unrecognized tax benefits,benefits. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2020, the Company had no accrued interest or penalties historically through December 31, 2017.related to uncertain tax positions and no amounts had been recognized in the Company’s consolidated statements of operations. The Company files income tax returns inas prescribed by the U.S. federal and statetax laws of the jurisdictions in which it operates. The Company’s income tax returns are generallyIn the normal course of business, the Company is subject to tax examinations for the tax years ended December 31, 2014 to the present.examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. ToThe Company is open to future tax examination under statute from 2016 to the extent the Company has tax attribute carryforwards, the tax years in which the attribute waspresent; however, carryforward attributes that were generated prior to December 31, 2016 may still be adjusted upon examination by the Internal Revenue Service andfederal, state or local tax authorities to the extent utilizedif they either have been or will be used in a future period.

As part of Congress’ response to the COVID-19 pandemic, the Families First Coronavirus Response Act, or FFCR Act, was enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted on March 27, 2020. COVID-19 relief provisions were also included in the Consolidated Appropriations Act, 2021, or CAA, which was enacted on December 27, 2020. The FFCR Act, the CARES Act, and the CAA contain numerous tax provisions. In particular, the CARES Act retroactively and temporarily (for taxable years beginning before January 1, 2021) suspends application of the 80%-of-income

148



15.

limitation on the use of net operating losses, which was enacted as part of the TCJA. It also provides that net operating losses arising in any taxable year beginning after December 31, 2017, and before January 1, 2021, are generally eligible to be carried back up to five years. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxes the limitation on the tax deductibility of net interest expense by increasing the limitation from 30% to 50% of adjusted taxable income.

14. Net Loss Per Share

Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(59,432

)

 

$

(37,232

)

 

$

(25,040

)

Modifications of Series A preferred stock

 

 

 

 

 

 

 

 

11,481

 

Modifications of Series B preferred stock

 

 

 

 

 

 

 

 

(26

)

Accruing dividends on preferred stock

 

 

 

 

 

(1,378

)

 

 

(9,724

)

Net loss attributable to common stockholders

 

$

(59,432

)

 

$

(38,610

)

 

$

(23,309

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding—basic and diluted

 

 

25,407,943

 

 

 

18,759,369

 

 

 

553,162

 

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(2.34

)

 

$

(2.06

)

 

$

(42.14

)

   Year Ended December 31, 
   2020  2019 

Numerator:

   

Net loss

  $(57,487 $(31,209

Gain on extinguishment of Class B preferred units

   6,697   —   

Net loss applicable to common shareholders

  $(50,790 $(31,209
  

 

 

  

 

 

 

Denominator:

   

Weighted average common shares/units outstanding, basic and diluted

   2,354,143   2,121,843 
  

 

 

  

 

 

 

Net loss per share/unit, basic and diluted

  $(21.57 $(14.71
  

 

 

  

 

 

 

The Company’s potential dilutive securities, which includefollowing common stock options, convertible preferred stock and a warrant to purchase preferred stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares,equivalents presented based on amounts outstanding at each period end, have been excluded from the computationcalculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:impact:

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Convertible preferred stock (as converted to

   common stock)

 

 

 

 

 

 

 

 

9,699,600

 

Payment of accruing dividends on Series A preferred

   stock in shares of common stock upon conversion

   of Series A preferred stock

 

 

 

 

 

 

 

 

2,590,742

 

Options to purchase common stock

 

 

2,838,558

 

 

 

2,030,517

 

 

 

979,334

 

Warrant for the purchase of convertible preferred

   stock (as converted to common stock)

 

 

 

 

 

14,800

 

 

 

14,800

 

 

 

 

2,838,558

 

 

 

2,045,317

 

 

 

13,284,476

 

   As of December 31, 
   2020   2019 

Options to purchase common stock

   944,961    815,885 

Warrants to purchase common stock or shares convertible into common stock

   99,986    99,986 
  

 

 

   

 

 

 
     1,044,947         915,871 
  

 

 

   

 

 

 

15. Leases

16.

Build-to-suit Lease

On September 19, 2017,The Company leased office and laboratory facilities in Cambridge, Massachusetts (the “Old Premises”) from an investor in the Company under a noncancelable operating lease that began in April 2015 and expired in March 2020. In February 2020, the Company amended the lease for the Old Premises to extend the lease expiration to April 30, 2020. The amendment was accounted for as a lease reassessment and the right-of-use asset and lease liability were remeasured at the reassessment date of February 2020 resulting in an increase of $0.1 million to the right-of-use asset for prepaid rent and a reduction of $0.1 million to the lease liability. In May 2020, the Company amended the lease for the Old Premises to extend the lease expiration to May 23, 2020 and recognized the final rent payment of less than $0.1 million in expense.

In February 2020, the Company entered into a license agreement with a third party for the use of office and laboratory space in Boston, Massachusetts, commencing in May 2020 (the “New Premises”). The Company determined that this license agreement qualified as a lease under ASC 842, Leases (“ASC 842”). The initial term of the license agreement is three years with the option to extend for a total of three one-year periods at fair-market rent at the time of each extension. In addition to use of office and laboratory space, the license fee includes various laboratory, office, and operational support services to be provided by the licensor. The initial monthly license fee escalates 3% annually and totals approximately $12.0 million for the three-year term.

149


Additionally, the licensee agreement for its new headquarters, consistingthe New Premises requires the Company to pay for a non-exclusive, irrevocable license to use forty-two unreserved parking spaces adjacent to the New Premises at the prevailing monthly parking rate. On May 1, 2020, the lease commencement date was met and the Company recorded an operating lease asset of $10.6 million and a corresponding lease liability of $10.2 million.

On December 22, 2020, as part of the Merger, the Company acquired a lease for approximately 30,000 square feet of office and laboratory and office space located in Brighton,Boston, Massachusetts. The lease commenced in January 2018 with rent commencement date will bepayments commencing in April 2018. The initial term of the earlier of (i)lease was ten years with the first date on which tenant has commenced occupancy for the conduct of business in the premises, or (ii) April 15, 2018, subjectoption to extension for certain delays. The lease will extend for a lease term froman additional seven years at fair-market rent at the rent commencement date and then for ten years starting with the first daytime of the month following the month in which the commencement date falls, if the rent commencement date does not fall on the first dayextension. In addition to use of a month. The Company is entitled to one seven-year option to extend. Annual rent under the lease, exclusive of operating expensesoffice and real estate taxes, will be approximately $1.7 million in the first year after taking occupancy, with annual increases of 2.75% each year thereafter. Total expected rental payments through the initial lease term are approximately $18.8 million. The Company will be entitled to an improvement allowance of approximately $4.8 million for certain permitted costs related to the design and construction of Company improvements on the premises. The lease contains customary provisions allowing the landlord to terminate the lease if the Company fails to remedy a breach of any of its obligations within specified time periods, or upon bankruptcy or insolvency of the Company.


The Company is not the legal owner of the leased space. However, in accordance with ASC 840, Leases,laboratory space, the Company is deemed to beresponsible for paying its allocable portion of building and laboratory operating expenses separately from rent, based on actual costs incurred. Remaining fixed lease payments at the ownertime of the leased space duringMerger were approximately $14.2 million. On December 22, 2020, the construction period becauseCompany recorded an operating lease asset and corresponding lease liability of $10.2 million associated with this lease. The operating lease asset was increased by the value attributable to the below-market lease of $3.1 million and an allocated portion of the excess purchase price for the Merger of $1.9 million (see Note 3).

The Company also leases property and equipment under agreements that are accounted for as finance leases.

The components of lease cost were as follows (in thousands):

   Year Ended December 31, 
           2020                   2019         

Operating lease cost

  $3,097   $1,101 

Short-term lease cost

  $—     $—   

Variable lease cost

  $271   $583 

Finance lease cost:

    

Amortization of lease assets

  $361   $896 

Interest on lease liabilities

   20    55 
  

 

 

   

 

 

 

Total finance lease cost

  $381   $951 
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information related to leases was as follows (in thousands):

   Year Ended December 31, 
           2020                   2019         

Cash paid for amounts included in the measurement of operating lease liabilities (operating cash flows)

  $2,461   $1,131 

Cash paid for amounts included in the measurement of finance lease liabilities (operating cash flows)

  $20   $55 

Cash paid for amounts included in the measurement of finance lease liabilities (financing cash flows)

  $347   $958 

Operating lease liabilities arising from obtaining right-of-use assets

  $10,219   $469 

Finance lease liabilities arising from obtaining right-of-use assets

  $102   $—   

150


The weighted-average remaining lease term and discount rate were as follows:

   As of December 31, 
   2020  2019 

Weighted-average remaining lease term (in years) used for:

   

Operating leases

   5.03   0.25 

Finance leases

   1.26   1.42 

Weighted-average discount rate used for:

   

Operating leases

   9.01  8.11

Finance leases

   6.46  6.09

Because the interest rates implicit in the license agreement and lease agreement assumed from PTI were not readily determinable, the Company’s incremental borrowing rate was used to calculate the present value of each. The present value of the Company’s involvement withfinance leases was calculated using the build-out of the space. As a result, the Company has capitalized approximately $16.1 million as construction-in-progress within property, plant and equipment equal to the estimated fair value of its leased portion of the premises. Also, the Company has recognized a corresponding build-to-suit facility lease financing obligation with a current portion of $0.9 million classified as other liabilities and $15.3 million classified as other non-current liabilities on its balance sheet as of December 31, 2017. The Company’s expected costs to complete construction is estimated to be $0.7 million as of December 31, 2017. The construction is expected to be completedrate implicit in the second quarter of 2018, upon which time the Company will assess and determine if the assets and corresponding liability should be de-recognized. lease.

As of December 31, 2017, minimum rental commitments2020, future annual lease payments under thisthe Company’s real estate operating leases and equipment finance leases were as follows (in thousands):

Year Ending December 31,

  Operating Leases  Finance Leases 

2021

  $5,997  $173 

2022

   6,173   49 

2023

   2,977   —   

2024

   1,931   —   

2025

   1,985   —   

Thereafter

   4,841   —   
  

 

 

  

 

 

 

Total future lease payments

   23,904   222 

Less: Imputed interest

   (4,957  (8
  

 

 

  

 

 

 

Total lease liabilities

  $18,947  $214 
  

 

 

  

 

 

 

The following table presents lease assets and liabilities and their classification on the consolidated balance sheet (in thousands):

Leases

  

Consolidated Balance Sheet Classification

  Amount 

Assets:

    

Operating lease assets

  Operating lease right-of- use assets  $23,678 

Finance lease assets

  Property and equipment, net   199 
    

 

 

 

Total leased assets

    $23,877 
    

 

 

 

Liabilities:

    

Current:

    

Operating lease liabilities

  Operating lease liabilities  $4,468 

Finance lease liabilities

  Current portion of finance lease obligation   166 

Non-current:

    

Operating lease liabilities

  Operating lease liabilities, net of current portion   14,479 

Finance lease liabilities

  Finance lease obligation, net of current portion   48 
    

 

 

 

Total lease liabilities

    $19,161 
    

 

 

 

151


16. Commitments and Contingencies

License agreement

The Company has a tangible property and patent license agreement with Whitehead Institute for eachBiomedical Research (“Whitehead”) entered into in 2016 and subsequently amended in 2016 and 2018, under which the Company obtained a certain exclusive and non-exclusive, royalty-bearing, sublicensable, worldwide license to make, sell and distribute products under certain patents owned by Whitehead for certain know-how related to specific neurodegenerative diseases. In consideration for the rights granted by the agreement, the Company paid a one-time license fee of less than $0.1 million and issued 300,000 common units valued at $0.8 million. The Company is required to pay annual maintenance fees of up to $0.1 million through the termination of the next five fiscalagreement. The Company is also required to pay up to an aggregate of approximately $1.9 million upon the achievement of certain developmental and regulatory milestones for the first two licensed products under its first indication. The Company is also required to pay additional milestone amounts for subsequent licensed products under its first or subsequent indications, but at a lower rate. The Company did not meet any milestones for the years ended December 31, 2020 or 2019. The Company must also pay a royalty in the low single digits on future sales by the Company and total thereafter are as follows:a mid single to low double digit percentage of certain income received from sublicensees and certain partners. The license agreement remains in effect until the expiration of the last-to-expire patent licensed under the agreement. Whitehead may terminate the agreement upon the Company’s uncured material breach of the agreement, including failure to make required payments under the agreement or to achieve certain milestones, or if the Company becomes insolvent or bankrupt. The Company may terminate the license agreement at any time upon providing certain written notice to Whitehead.

2018

 

$

1,173

 

2019

 

 

1,686

 

2020

 

 

1,733

 

2021

 

 

1,780

 

2022

 

 

1,830

 

Thereafter

 

 

10,636

 

Total

 

$

18,838

 

17.

Commitments and Contingencies

LeaseContingent Value Rights Agreement

In March 2009,connection with the Merger, the Company entered into a lease agreement for office and laboratory space, which,Contingent Value Rights Agreement (the “CVR Agreement”) with Shareholder Representative Services LLC as amended, has a term expiring on May 31, 2018. Monthly lease payments, inclusive of non-rent shared tenant occupancy costs, total less than $0.2 million. Monthly lease payments include base rent charges of $0.1 million, which are subject to an annual increase of 1.4%. The Company recognizes rent expense on a straight-line basis over the lease period and has recorded deferred rent for rent expense incurred but not yet paid.

The Company issued an unconditional and irrevocable standby letter of credit in the amount of $0.3 million as a security deposit pursuant to the lease agreement. The irrevocable standby letter of credit is secured by a certificate of deposit, renews annually automatically and expires on May 31, 2018. The Company recorded the certificate of deposit purchase as restricted cash in its financial statements.

The Company recorded rent expense of $1.7 million during eachrepresentative of the years ended December 31, 2017 and 2015 and $1.6 million during the year ended December 31, 2016, respectively.

PTI stockholders. The following table summarizes the future minimum lease payments due under the operating leaseCVR Agreement entitles each holder of Company Common Stock as of December 31, 2017 (in thousands):

2018

 

$

563

 

Total

 

$

563

 

Also see Note 16 for the Company’s build-to-suit lease and related lease commitments.

Dr. Stelios Papadopoulos

In May 2016, the Company entered into a Letter Agreement with Dr. Stelios Papadopoulos with an effective date of July 1, 2016 and a term of 36 months. Under the terms of the Letter Agreement, Dr. Papadopoulos will provide certain consulting and advisory services to the Company as and when requested. The Company will pay a quarterly retainer of $0.2 million to Dr. Papadopoulos for the duration of the Letter Agreement with aggregate fees totaling $2.5 million over the term of the Letter Agreement. The retainer may be paid in cash, common stock of the Company or a combination of the two at the discretion of the Company. Any common stock issued in settlement of payments due under this agreement will be valued at the average closing price of the stock for 20 trading days, as


listed on the NASDAQ, ending three trading daysimmediately prior to the issuanceeffective time of the shares. Additionally, underMerger (the “Effective Time”) to receive certain net proceeds, if any, derived from the termsgrant, sale or transfer of rights of the Letter Agreement, ifCF Assets ( the Company consummates a merger and acquisition (“M&A”“CF Assets”) transaction, as defined in the Letter Agreement, with another partycompleted during the term9-month period after the Effective Time (with any potential payment obligations continuing until the 10-year anniversary of the Agreement or the 12-month period following the expirationclosing of the Letter Agreement, Dr. Papadopoulos will be entitled to a M&A transaction fee equal to 1%Merger Agreement). The CVR agreement became effective at Closing of the valueMerger and will continue in effect until the payment of all amounts payable thereunder or, if no CF Asset sale is completed, at the nine-month anniversary of the transaction, as defined in the Letter Agreement. During the years endedEffective Time. No liability has been recorded at December 31, 2017 and 2016,2020 associated with the Company issued 188,462 and 27,221 shares under this consulting agreement for $0.8 million and $0.4 million, respectively, which is recorded within general and administrative expense in the accompanying statements of operations.CVR’s as any related amounts are not considered probable or estimable.

The following table summarizes the future retainer payments due under the Letter Agreement as of December 31, 2017 (in thousands):

2018

 

$

840

 

2019

 

 

420

 

Total

 

$

1,260

 

Collaboration and License Agreements

The Company has entered into collaboration and licenseIndemnification agreements under which it is obligated to make contingent payments (see Note 13).

Research Commitments

During the year ended December 31, 2015, the Company entered into research and development agreements with various vendors to provide chemists, research scientists and testing services to assist with its research and development efforts.

Legal Proceedings

The Company is not currently a party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, contract research organizations, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, theThe Company has not incurred any material costs as a result of such indemnifications. The Companyindemnifications and is not currently aware of any indemnification claims.

Legal Matters

Between October 14 and December 7, 2020, following the announcement of the proposed merger among PTI, Yumanity, Inc. and Merger Sub, a wholly owned subsidiary of PTI, nine lawsuits were filed by purported stockholders of PTI challenging the Merger. The first lawsuit, brought as a putative class action, is captioned Aniello v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-08578 (S.D.N.Y. filed Oct. 14, 2020). The remaining eight lawsuits, brought by the plaintiffs individually, are captioned Culver v. Proteostasis Therapeutics, Inc., et al., 1:20-cv-08595 (S.D.N.Y. filed

152


Oct. 15, 2020); Donolo v. Proteostasis Therapeutics, Inc. et al., 1:20-cv-01400 (D. Del. filed Oct. 16, 2020); Straube v.Proteostasis Therapeutics, Inc., et al., 1:20-cv-08653 (S.D.N.Y. filed Oct. 16, 2020); Beck v. ProteostasisTherapeutics, Inc., et al., 1:20-cv-08783 (S.D.N.Y. filed Oct. 21, 2020); Dreyer v. Proteostasis Therapeutics, Inc., et al., 1:20-cv-05193 (E.D.N.Y. filed Oct. 28, 2020); Kopkin v. Proteostasis Therapeutics, Inc. et al., No. 1:20-cv-12103 (D. Mass. filed Nov. 23, 2020); Merritt v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-10275 (S.D.N.Y. filed Dec. 6, 2020); and Koh v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-10296 (S.D.N.Y. filed Dec. 7, 2020). All of the complaints named PTI and the individual members of PTI’s board of directors as defendants. The Aniello complaint also named Yumanity, Inc. as an additional defendant, and the Donolo complaint named Yumanity, Inc. and Merger Sub as additional defendants. The complaints asserted violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 14a-9 promulgated thereunder against PTI and its directors, and violations of Section 20(a) of the Exchange Act against PTI’s directors. The Donolo complaint asserted an additional violation of Section 20(a) of the Exchange Act against Yumanity, Inc. The Aniello complaint asserted additional claims under indemnification arrangements,for breach of fiduciary duty against PTI’s directors and itaiding and abetting against PTI and Yumanity, Inc.. The plaintiffs contended that the registration statement on Form S-4 filed by PTI with the Securities and Exchange Commission on September 23, 2020 (the “Registration Statement”) or the proxy statement/prospectus on Form 424B3 filed by PTI with the SEC on November 12, 2020 (the “Definitive Proxy”) omitted or misrepresented certain material information regarding the Merger. The complaints sought injunctive relief, rescission, or rescissory damages, dissemination certain information requested by the plaintiffs, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. While PTI and Yumanity, Inc. believed that the disclosures set forth in the Registration Statement and Definitive Proxy complied fully with all applicable law and denied the allegations in the pending actions described above, in order to moot plaintiffs’ disclosure claims, avoid nuisance and possible expense and business delays, and provide additional information to its stockholders, on December 9, 2020, PTI filed a Form 8-K voluntarily to supplement certain disclosures in the Definitive Proxy related to plaintiffs’ claims with the supplemental disclosures (the “Supplemental Disclosures”). Following the filing of the Supplemental Disclosures, all of the actions discussed above were voluntarily dismissed by the respective plaintiffs. On March 18, 2021, the parties executed a confidential fee and settlement agreement, pursuant to which all claims were released by plaintiffs and their counsel and an immaterial payment of a mootness fee will be paid to plaintiffs’ counsel, a portion of which will be paid by the Company’s insurer.

17. Defined Contribution Plan

The Company has a 401(k) defined contribution plan (the “401(k) Plan”) for its employees. Eligible employees may make pretax contributions to the 401(k) Plan up to statutory limits. To date, the Company has not accruedmade any liabilities relatedcontributions to such obligationsthe plan.

18. Related Parties

The Company leased certain office and laboratory space from an investor in its financial statementsthe Company until May 2020 (see Note 15). Lease expense associated with this lease agreement for the years ended December 31, 2020 and 2019 was $0.4 million and $1.1 million, respectively. Amounts paid to the investor under the lease agreement during the years ended December 31, 2020 and 2019 were $0.6 million and $1.7 million, respectively. There were no amounts payable to the investor as of December 31, 20172020 or 2016.2019.

19. Subsequent Events

Sublease agreement

In January 2021, the Company entered into an 18-month sublease of the approximately 30,000 square feet of office and laboratory space under the lease acquired as part of the Merger, for which it will receive approximately $2.9 million of base rent payments over the sublease term. In accordance with the terms of the sublease, rent payments commenced in February 2021.

On March 29, 2021, the New Loan was amended again to allow for the creation of a new foreign subsidiary, as well as changing certain covenants related to the financial operations of said subsidiary. The subsidiary has not yet been formed.

153


18.

ITEM 9.

401(k) Savings PlanCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer and our Chief Business Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The Companyterm “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our President and Chief Executive Officer and our Chief Business Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria established a defined contribution savings plan under Section 401(k)in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment, our management has concluded that our internal control over financial reporting was effective, as of December 31, 2020.

Changes in Internal Revenue Code. This plan covers substantially all employees who meet minimum ageControl over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and service requirements15d-15(f) under the Exchange Act) occurred during the three months ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

154


PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and allows participantsis incorporated herein by reference.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this Item 11 will be included in our definitive proxy statement to deferbe filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

155


PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1. Financial Statements

For a portionlist of their annual compensation on a pre-tax basis. Company contributionsthe financial statements included herein, see Index to the plan may be made at the discretionConsolidated Financial Statements on page 117 of the Company’s board of directors. To date, no contributionsthis Annual Report on Form 10-K, incorporated into this Item by reference.

2. Financial Statement Schedules

Financial statement schedules have been made toomitted because they are either not required or not applicable or the plan byinformation is included in the Company.


19.

Quarterly Financial Data (Unaudited)

The following information has been derived from unaudited consolidated financial statements that,or the notes thereto.

3. Exhibits

The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Annual Report on Form 10-K are listed in the opinionExhibit Index immediately preceding the signature page of management, include all recurring adjustments necessary for a fair statement of such information (in thousands).this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index are incorporated by reference herein.

 

 

 

Three Months Ended

 

 

 

March 31,

2017

 

 

June 30,

2017

 

 

September 30,

2017

 

 

December 31,

2017

 

Revenue

 

$

1,021

 

 

$

1,147

 

 

$

1,551

 

 

$

1,622

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,108

 

 

 

15,370

 

 

 

12,894

 

 

 

12,282

 

General and administrative

 

 

3,170

 

 

 

2,902

 

 

 

2,741

 

 

 

2,847

 

Total operating expenses

 

 

16,278

 

 

 

18,272

 

 

 

15,635

 

 

 

15,129

 

Loss from operations

 

 

(15,257

)

 

 

(17,125

)

 

 

(14,084

)

 

 

(13,507

)

Interest income

 

 

191

 

 

 

169

 

 

 

155

 

 

 

126

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(30

)

 

 

(2

)

 

 

(25

)

 

 

(43

)

Net loss

 

 

(15,096

)

 

 

(16,958

)

 

 

(13,954

)

 

 

(13,424

)

Modification of Series A preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Modification of Series B preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Accruing dividends on Series A preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(15,096

)

 

$

(16,958

)

 

$

(13,954

)

 

$

(13,424

)

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(0.60

)

 

$

(0.68

)

 

$

(0.56

)

 

$

(0.51

)

Weighted average common shares

   outstanding—basic and diluted

 

 

25,020,337

 

 

 

25,040,131

 

 

 

25,093,344

 

 

 

26,465,521

 

ITEM 16.

FORM 10-K SUMMARY

Not applicable.

 

 

 

Three Months Ended

 

 

 

March 31,

2016

 

 

June 30,

2016

 

 

September 30,

2016

 

 

December 31,

2016

 

Revenue

 

$

1,158

 

 

$

1,451

 

 

$

1,715

 

 

$

4,060

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

6,876

 

 

 

7,404

 

 

 

9,218

 

 

 

10,461

 

General and administrative

 

 

2,301

 

 

 

3,115

 

 

 

3,266

 

 

 

3,198

 

Total operating expenses

 

 

9,177

 

 

 

10,519

 

 

 

12,484

 

 

 

13,659

 

Loss from operations

 

 

(8,019

)

 

 

(9,068

)

 

 

(10,769

)

 

 

(9,599

)

Interest income

 

 

 

 

 

20

 

 

 

36

 

 

 

190

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

28

 

 

 

(5

)

 

 

(38

)

 

 

(8

)

Net loss and comprehensive loss

 

 

(7,991

)

 

 

(9,053

)

 

 

(10,771

)

 

 

(9,417

)

Modification of Series A preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Modification of Series B preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Accruing dividends on Series A preferred stock

 

 

(1,378

)

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(9,369

)

 

$

(9,053

)

 

$

(10,771

)

 

$

(9,417

)

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(0.87

)

 

$

(0.47

)

 

$

(0.54

)

 

$

(0.38

)

Weighted average common shares

   outstanding—basic and diluted

 

 

10,766,722

 

 

 

19,139,183

 

 

 

20,073,685

 

 

 

24,975,010

 

Exhibit
Number

Description

    2.1++

Agreement and Plan of Merger and Reorganization, dated as of August  22, 2020, by and among Proteostasis Therapeutics, Inc., Pangolin Merger Sub, Inc., Yumanity Therapeutics, Inc. and Yumanity Holdings, LLC (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37695) as filed with the SEC on August 24, 2020 and incorporated herein by reference).

    2.2

First Amendment to Merger Agreement, dated as of November  6, 2020, by and among Proteostasis Therapeutics, Inc. Pangolin Merger Sub, Inc., Yumanity Therapeutics, Inc. and Yumanity Holdings LLC (filed as Exhibit 2.2. to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on November 6, 2020 and incorporated herein by reference).

    3.1

Fifth Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-3 (File No. 333-228529) as filed with the SEC on November 23, 2018 and incorporated herein by reference).

    3.2

Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Company related to the Reverse Stock Split, dated December 22, 2020 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37695) as filed with the SEC on December 30, 2020 and incorporated herein by reference).

    3.3

Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Company related to the Name Change, dated December 22, 2020 (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37695) as filed with the SEC on December 30, 2020 and incorporated herein by reference).

    3.4

Third Amended and Restated By-laws  of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37695)  as filed with the SEC on August 24, 2020 and incorporated herein by reference).

 

F-34156


    4.1

Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-208735) as filed with the SEC on February 1, 2016 and incorporated herein by reference).

    4.2*

Description of Securities Registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.

  10.1

Third Amended and Restated Stockholders’ Agreement of the Registrant (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-208735) as filed with the SEC on February 1, 2016 and incorporated herein by reference).

  10.2

Contingent Value Rights Agreement, dated as of December  22, 2020 by and among the Company and Shareholder Representative Services LLC (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.  001-37695) as filed with the SEC on December 30, 2020 and incorporated herein by reference).

  10.3

Unconditional Secured Guaranty and Pledge Agreement, dated December  22, 2020 by and between the Company and Hercules Capital, Inc. (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37695)  as filed with the SEC on December 30, 2020 and incorporated herein by reference).

  10.4#

2016 Stock Option and Incentive Plan and forms of award agreements thereunder (filed as Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-208735) as filed with the SEC on February 1, 2016 and incorporated herein by reference).

  10.5#

2016 Employee Stock Purchase Plan (filed as Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-208735) as filed with the SEC on February 1, 2016 and incorporated herein by reference).

  10.6#

Senior Executive Cash Incentive Bonus Plan (filed as Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-208735) as filed with the SEC on February 1, 2016 and incorporated herein by reference).

  10.7

Lease between the Registrant, as Tenant, and Ice Box, LLC, as Landlord, dated as of September  19, 2017 (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37695) as filed with the SEC on November  14, 2017 and incorporated herein by reference).

  10.8

First Amendment to Lease by and between the Registrant and Ice Box, LLC (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37695) as filed with the SEC on August 8, 2018 and incorporated herein by reference).

  10.9+

Tangible Property and Exclusive Patent License Agreement, by and between Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.), Yumanity Holdings, LLC and Whitehead Institute for Biomedical Research, dated as of February 4, 2016 (filed as Exhibit 10.16 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September 23, 2020 and incorporated herein by reference).

  10.10+

Exclusive License and Research Collaboration Agreement, by and between Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) and Merck Sharp & Dohme Corp., dated as of June 19, 2020 (filed as Exhibit 10.17 to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on October 28, 2020 and incorporated herein by reference).

  10.11

License Agreement, by and between Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) and MIL 40G LLC, dated as of February 5, 2020 (filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September 23, 2020 and incorporated herein by reference).

157


  10.12

Loan and Security Agreement, by and among Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) and Hercules Capital, Inc., dated as December 20, 2019 (filed as Exhibit 10.19 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September 23, 2020 and incorporated herein by reference).

  10.13

Fourth Amendment and Consent to Loan and Security Agreement dated as of December  22, 2020, by and among Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.), the lenders party thereto and Hercules Capital, Inc. (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-37695) as filed with the SEC on December 30, 2020 and incorporated herein by reference).

  10.14*

Amended and Restated Warrant Agreement to Purchase Common Stock of the Company issued to Hercules Capital, Inc., dated December 22, 2020.

  10.15#

Employment Agreement, by and between Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) and Richard Peters, M.D., Ph.D., dated as of June 30, 2019 (filed as Exhibit 10.21 to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on October 28, 2020 and incorporated herein by reference).

  10.16#

Employment Agreement, by and between Yumanity, Inc. (formerly Yumanity Therapeutics, Inc. (as successor to Yumanity Pharmaceuticals, LLC)) and Paulash Mohsen, dated as of April 8, 2015 (filed as Exhibit 10.22 to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on October 28, 2020 and incorporated herein by reference).

  10.17#

Employment Agreement, by and between Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) and Brigitte Robertson, M.D., dated as of November 18, 2019 (filed as Exhibit 10.23 to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on October 28, 2020 and incorporated herein by reference).

  10.18#

Form of indemnification agreement with Yumanity Therapeutics, Inc. directors and officers (filed as Exhibit 10.24 to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on October 28, 2020 and incorporated herein by reference).

  10.19#

Yumanity Therapeutics, Inc. Amended and Restated 2018 Stock Option and Grant Plan and forms of award agreements thereunder (filed as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (File No. 001-37695) as filed with the SEC on December 30, 2020 and incorporated herein by reference).

  10.20

U.S. Small Business Administration Paycheck Protection Program Note with Silicon Valley Bank, dated as of April  24, 2020 (filed as Exhibit 10.26 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September  23, 2020 and incorporated herein by reference).

  10.21

Common Unit Warrant issued to Alexandria Equities, LLC (as predecessor to Alexandria Venture Investments, LLC) on October  9, 2015 (filed as Exhibit 10.27 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September  23, 2020 and incorporated herein by reference).

  10.22

Common Unit Warrant issued to Redmile Capital Offshore II Master Fund, Ltd. on August  14, 2015 (filed as Exhibit 10.28 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September  23, 2020 and incorporated herein by reference).

  10.23

Common Unit Warrant issued to Redmile Biotechnologies Investments I AF, LP (as predecessor to Redmile Biopharma Investments I, L.P.) on August 14, 2015 (filed as Exhibit 10.29 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September 23, 2020 and incorporated herein by reference).

158


  10.24

Common Unit Warrant issued to Susan L. Lindquist Family Trust (as successor to the Estate of Susan L. Lindquist) dated August  14, 2015 (filed as Exhibit 10.30 to the Registrant’s Registration Statement on Form S-4/A (File No. 333-248993) as filed with the SEC on October  28, 2020 and incorporated herein by reference).

  10.25

Common Unit Warrant issued to N. Anthony Coles on August  14, 2015 (filed as Exhibit 10.31 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September  23, 2020 and incorporated herein by reference).

  10.26

Warrant to Purchase Limited Liability Company Interests issued to Silicon Valley Bank on June  14, 2018 (filed as Exhibit 10.32 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September  23, 2020 and incorporated herein by reference).

  10.27

Warrant to Purchase Limited Liability Company Interests issued to Oxford Finance LLC dated June  14, 2018 (filed as Exhibit 10.33 to the Registrant’s Registration Statement on Form S-4 (File No. 333-248993) as filed with the SEC on September  23, 2020 and incorporated herein by reference).

  10.28#

Amended and Restated Employment Agreement, by and between Yumanity, Inc. (formerly known as Yumanity Therapeutics, Inc.) and N.  Anthony Coles M.D., dated as of January 29, 2016 (filed as Exhibit 10.34 to the Registrant’s Registration Statement on Form S-4/A (File No.  333-248993) as filed with the SEC on November 6, 2020 and incorporated herein by reference).

  10.29

Subscription Agreement, dated as of December  14, 2020 by among the Company and certain purchasers listed therein (filed as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No.  001-37695) filed on December 15, 2020).

  10.30

Registration Rights Agreement, dated as of December  22, 2020 by among the Company and certain purchasers listed therein (filed as Exhibit 10.5 of the Registrant’s Current Report on Form 8-K (File No.  001-37695) filed on December 30, 2020).

  21.1*

Subsidiaries of Yumanity Therapeutics, Inc.

  23.1*

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.

  31.1*

Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer.

  31.2*

Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer.

  32.1**

Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*

101.SCH*

101.CAL*

101.DEF*

101.LAB*

101.PRE*

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

*

Filed herewith.

+

Portions of this Exhibit (indicated with [***]) have been omitted as the Registrant has determined that (i) the omitted information is not material and (ii) the omitted information would likely cause competitive harm to the Registrant if publicly disclosed.

++

Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.

#

Indicates a management contract or any compensatory plan, contract or arrangement.

**

The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.

159


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Yumanity Therapeutics, Inc.
Date: March 31, 2021By:

/s/ Richard Peters

Richard Peters

President, Chief Executive Officer and

Principal Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/Richard Peters

Director, President, Chief Executive Officer
(Principal Executive Officer)
March 31, 2021
Richard Peters

/s/ Paulash Mohsen

Chief Business Officer

(Principal Financial Officer)

March 31, 2021
Paulash Mohsen

/s/ Marie Epstein

Vice President, Finance

(Principal Accounting Officer)

March 31, 2021
Marie Epstein

/s/ N. Anthony Coles

DirectorMarch 31, 2021
N. Anthony Coles

/s/ Patricia Allen

DirectorMarch 31, 2021
Patricia Allen

/s/ David Arkowitz

DirectorMarch 31, 2021
David Arkowitz

/s/ Kim C. Drapkin

DirectorMarch 31, 2021
Kim C. Drapkin

/s/ Richard A. Heyman

DirectorMarch 31, 2021
Richard A. Heyman

/s/ Jeffery W. Kelly

DirectorMarch 31, 2021
Jeffery W. Kelly

/s/ Cecil B. Pickett

DirectorMarch 31, 2021
Cecil B. Pickett

/s/ Lynne Zydowsky

DirectorMarch 31, 2021
Lynne Zydowsky

160