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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

o         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: 001-37467

Catabasis Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(617) 349-1971

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o

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

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 accounting standards provided pursuant to Section 13(a) of the Exchange Act.    x

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

As of October 31, 2018, there were 71,038,419 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

·      our expectations regarding our ability to successfully conduct the PolarisDMD trial, and our expectations regarding the timing, design and results of such trial, including reporting top-line results of this trial in the second quarter of 2020 and the potential consistency of data produced by this trial with prior results from our MoveDMD® trial, as well as any new data and analyses relating to the safety profile and potential clinical benefits of edasalonexent;

·     our plans to identify, develop and commercialize novel therapeutics based on our SMART LinkerSM drug discovery platform;

·      ongoing and planned clinical trials for edasalonexent and other product candidates, whether conducted by us or by any future collaborators, including the timing of initiation of these trials and of the anticipated results;

·      our plans to enter into collaborations for the development and commercialization of product candidates;

·      the potential benefits of any future collaboration;

·     our ability to receive research and development funding and achieve anticipated milestones under any future collaborations;

·      the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

·      the rate and degree of market acceptance and clinical utility of any products for which we receive marketing approval;

·      our commercialization, marketing and manufacturing capabilities and strategy;

·      our intellectual property position and strategy;

·      our ability to identify additional products or product candidates with significant commercial potential;

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

·      developments relating to our competitors and our industry; and

·      the impact of government laws and regulations.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

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Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Catabasis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.              Organization and Operations

The Company

Catabasis Pharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company.  The Company’s lead program is edasalonexent, formerly known as CAT-1004, an oral small molecule designed to inhibit NF-kB, or nuclear factor kappa-light-chain-enhancer of activated B cells, in development for the treatment of Duchenne muscular dystrophy (“DMD”). The Company believes edasalonexent has the potential to be a foundational therapy for all patients affected by DMD, regardless of the underlying dystrophin mutation. DMD is an ultimately fatal genetic disorder involving progressive muscle degeneration. The United States Food and Drug Administration has granted orphan drug, fast track and rare pediatric disease designations to edasalonexent for the treatment of DMD.  The European Commission has granted orphan medicinal product designation to edasalonexent for the treatment of DMD. The Company was incorporated in the State of Delaware on June 26, 2008.

Liquidity

In October 2017, the Company entered into a sales agreement with Cowen and Company LLC (“Cowen”) pursuant to which the Company could issue and sell shares of common stock for an aggregate maximum offering amount of $10.0 million under an at-the-market offering program (the “ATM Program”). Shares sold pursuant to the sales agreement were sold pursuant to a shelf registration statement, which became effective on July 19, 2016. The Company paid Cowen 3% of the gross proceeds from any common stock sold through these sales agreements.

During the nine months ended September 30, 2018, the Company sold an aggregate of 5,390,255 shares of common stock pursuant to the ATM Program, at an average price of $1.59 per share, for gross proceeds of $8.6 million, resulting in net proceeds of $8.3 million after deducting sales commissions and offering expenses. The ATM Program was fully utilized as of February 2018.

On June 20, 2018, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc. relating to an underwritten public offering (the “June 2018 Financing”) of 42,000,000 shares of the Company’s common stock, par value $0.001 per share, and accompanying warrants to purchase up to 42,000,000 shares of common stock, at a combined price to the public of $1.00 per share, for gross proceeds of approximately $42.0 million, and net proceeds of $38.9 million.

As of September 30, 2018, the Company had an accumulated deficit of $191.2 million. The Company has been primarily involved with research and development activities and has incurred operating losses and negative cash flows from operations since its inception.

The Company is subject to a number of risks similar to other life science companies, including, but not limited to, successful discovery and development of its drug candidates, raising additional capital, development by its competitors of new technological innovations, protection of proprietary technology and regulatory approval and market acceptance of the Company’s products. The Company anticipates that it will continue to incur significant operating losses for the next several years as it continues to develop its product candidates.

As of September 30, 2018, the Company had available cash, cash equivalents and short-term investments of $43.2 million. Based on the Company’s current operating plan, the Company believes it has sufficient cash, cash equivalents and short-term investments to fund operations into the second quarter of 2020, and therefore the substantial doubt about the Company’s ability to continue as a going concern disclosed in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2018 (the “2017 Annual Report on Form 10-K”) has been alleviated.

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2.              Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying financial statements and the related disclosures are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Additionally, certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted from this report. Accordingly, these condensed financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2017 and notes thereto included in the 2017 Annual Report on Form 10-K.

Apart from the adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (“ASU 2016-18”) as described below, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to fairly present the Company’s financial position as of September 30, 2018, the results of its operations for the three and nine months ended September 30, 2018 and 2017 and its cash flows for the nine months ended September 30, 2018 and 2017. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018, or for any future period.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Catabasis Securities Corporation.  All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from such estimates.

The Company utilizes certain estimates to record expenses relating to research and development contracts. These contract estimates, which are primarily related to the length of service of each contract and the amount of service provided as of each measurement date, are determined by the Company based on input from internal project management, as well as from third-party service providers.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations based on their grant date fair values. For stock options granted to employees and to members of the board of directors for their services on the board of directors, the Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected term of the option, risk-free interest rates and expected dividend yields of the Common Stock.

For awards subject to service-based vesting conditions, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period.

The Company expenses restricted stock awards based on the fair value of the award on a straight-line basis over the associated service period of the award.

Share-based payments issued to non-employees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period in accordance with the provisions of ASC Topic 505, Equity. For equity instruments granted to non-employees, the Company recognizes stock-based compensation expense on a straight-line basis.

During the three and nine months ended September 30, 2018 and 2017, the Company recorded stock-based compensation expense for employee and non-employee stock options, which was allocated as follows in the condensed consolidated statements of operations (in thousands):

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Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average shares outstanding during the period, without consideration for Common Stock equivalents. Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of Common Stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the Company’s dilutive net loss per share calculation, stock options and warrants to purchase Common Stock were considered to be Common Stock equivalents but were excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share were the same for all periods presented.

The following Common Stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

Cash, Cash Equivalents and Restricted Cash

The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet that sum to the total of the same such amount shown in the statement of cash flows is as follows:

Recent Accounting Pronouncements - Adopted

In October 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. Therefore, amounts 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 Company adopted ASU 2016-18 in the period beginning January 1, 2018. Upon adoption of ASU 2016-18 the Company revised the presentation as well as caption of certain items within the unaudited condensed consolidated statements of cash flows to conform to the current period presentation. These revisions had no impact on the net cash used in operating activities or cash, cash equivalents and restricted cash at end of period.

In February 2018, the FASB issued ASU 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities.  This standard made improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods beginning after June 15, 2018.  The Company adopted the standard in the period ending September 30, 2018. As of September 30, 2018, there was no material impact on the Company’s consolidated financial statements, and any future impact from adoption will be dependent on future transactions involving financial assets and financial liabilities.

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Recent Accounting Pronouncements - Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In February 2016, the FASB issued ASU 2016-02, Leases.  This standard amends the existing guidance to require lessees to present most leases on their balance sheets but recognize corresponding expenses on their statements of operations. The FASB added a transition option to the new leases standard that allows entities to not apply the new guidance in the comparative periods they present in their financial statements in the year of adoption. The FASB also provided a practical expedient that gives lessors an option to combine non-lease and associated lease components when certain criteria are met and requires a lessor to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant component. This standard is effective for annual reporting periods beginning after December 15, 2018, but early adoption is permitted.  The Company will adopt this standard as of January 1, 2019 using the modified retrospective approach recording any cumulative adjustment to retained earnings. The adoption of this standard is expected to have a material impact on lease assets and lease liabilities but will not materially impact consolidated net earnings. The Company will elect a package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification.

In July 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718). This standard simplifies several areas of the accounting for nonemployee share-based payment transactions. This amendment is effective for annual reporting periods beginning after December 15, 2018, and the Company adopted this standard early on October 1, 2018. The Company does not expect any material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).  This standard includes amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and disclosure requirements of measurement uncertainty. This amendment is effective for annual reporting periods beginning after December 15, 2019.  The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the 2017 Annual Report on Form 10-K, and there were no significant changes to such policies in the nine months ended September 30, 2018 that had a material impact on the Company’s results of operations or financial position.

3.              Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability. There were no transfers between fair value measurement levels during the nine months ended September 30, 2018 or 2017.

The Company’s investment portfolio may include fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company apply other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. The Company validates the prices provided by its third party pricing services by obtaining market values from other pricing sources and analyzing pricing data in certain instances. The Company also invests in certain reverse repurchase agreements which are collateralized by deposits in the form of U.S. Government Securities and Obligations for an amount no less than 102% of their value. The Company does not record an asset or liability for the collateral as the Company is not permitted to sell or re-pledge the collateral. The collateral has at least the prevailing credit rating of U.S. Government Treasuries and Agencies. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the reverse repurchase agreements on a daily basis.

Below is a summary of assets measured at fair value on a recurring basis (in thousands):

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At September 30, 2018 the Company’s cash equivalents consisted of money market funds, U.S. reverse repurchase agreements, and corporate debt securities. At December 31, 2017, the Company’s cash equivalents consisted of money market funds. At September 30, 2018, and December 31, 2017, cash equivalents approximated their fair value due to their short-term nature.

At December 31, 2017, the carrying value of the Company’s debt approximated fair value, which was determined using Level 3 inputs, including a quoted interest rate. As of September 30, 2018, the Company had paid the principal balance of the term loan.

4.              Short-Term Investments

As of December 31, 2017, the Company held no short-term investments. The following table summarizes the short-term investments securities held at September 30, 2018 (in thousands):

The contractual maturities of all short-term investments held at September 30, 2018 were one year or less. There were ten short-term investments in an unrealized loss position at September 30, 2018, none of which had been in an unrealized loss position for more than 12 months. The aggregate fair value of these investments at September 30, 2018 was approximately $9.4 million. The Company did not hold any investments with other-than-temporary impairment at September 30, 2018.

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Gross realized gains and losses on the sales of short-term investments are included in other income, net. Unrealized holding gains or losses for the period that have been included in accumulated other comprehensive income, as well as gains and losses reclassified out of accumulated other comprehensive income into other income, net were not material to the Company’s condensed consolidated results of operations. The cost of investments sold or the amount reclassified out of the accumulated other comprehensive income into other income, net is based on the specific identification method for purposes of recording realized gains and losses. There were no proceeds from sales of short-term investments in the three and nine-month periods ended September 30, 2018 and 2017. All proceeds in the three and nine-month periods ended September 30, 2018 and the nine-month period ended September 30, 2017 related to maturities of underlying investments. The gains on proceeds from maturities of short-term investments were not material to the Company’s condensed consolidated results of operations for the three or nine months periods ended September 30, 2018 and 2017.

5.              Accrued Expenses

Accrued expenses consisted of the following (in thousands):

6.              Notes Payable

On August 27, 2014, the Company entered into a credit facility with MidCap Financial Trust, Flexpoint MCLS SPV LLC and Square 1 Bank, which was subsequently amended in March and December 2015 (as amended, the “Credit Facility”). The Credit Facility provided for maximum borrowings of $25.0 million. The Company received total proceeds of $10.0 million under term loans and the remaining amounts available for borrowing under this arrangement expired unused as of July 31, 2015.  All amounts outstanding under the Credit Facility were due on October 1, 2018 and were collateralized by substantially all of the Company’s personal property, other than its intellectual property.

As of September 30, 2018, principal and interest due under the Credit Facility had been paid. A final payment equal to 3.48% of the amounts drawn under the Credit Facility was due upon the earlier of the maturity date, acceleration of the term loans or prepayment of all or part of the term loans. The final payment was accrued as additional interest expense using the effective-interest method from the date of issuance through the maturity date and recorded within other current liabilities. The final payment was made in October 2018.

The Company recognized $10 thousand and $0.1 million of interest expense related to the Credit Facility in the three-month periods ending September 30, 2018 and 2017, respectively. The Company recognized $0.1 million and $0.4 million of interest expense related to the Credit Facility in the nine-month periods ending September 30, 2018 and 2017, respectively.

7.              Commitments

In November 2010, the Company entered into an operating lease agreement for office and laboratory space, which has been amended multiple times. Based on the latest amendment, the lease agreement includes escalating rent payments and is effective through June 30, 2020. The Company is recognizing rent expense on a straight-line basis over the lease term.

Future minimum payments required under the non-cancelable operating lease as of September 30, 2018 are summarized as follows (in thousands):

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During the three months ended September 30, 2018 and 2017, the Company recognized $0.3 million and $0.4 million in rent expense, respectively. The Company recognized $1.0 million in rent expense for each of the nine months ended September 30, 2018 and 2017.

The Company is party to a sublease with Inzen Therapeutics, Inc. (“Izen”), which became effective on October 15, 2018. See further discussion in Note 13.

8.              Revenue Recognition

In August 2017, the Company entered into an option agreement (“Option Agreement”) with an unaffiliated party (“Recipient”), which is within the scope of ASC Topic 606: Revenue from Contracts with Customers. Under the terms of the Option Agreement, the Company agreed to provide compound material for certain of its product candidates and the right for the Recipient to use the material to perform research during the term of the Option Agreement. The Option Agreement included a non-refundable up-front payment to the Company of $250 thousand. The term of the Option Agreement commenced in August 2017 and could be extended upon additional payments of $250 thousand made by the Recipient, at its option, at the beginning of each of the next two quarterly periods. In October 2017, the Company received an additional $250 thousand payment to extend the term for an additional quarterly period. In December 2017, the Recipient terminated the agreement. In the future, the Company will seek to generate additional revenue primarily from a combination of product sales and collaborations with strategic partners.

During the three and nine months ended September 30, 2017, the Company recognized $250 thousand in revenue related to the Option Agreement, respectively. The Company did not recognize revenue in the three and nine months ended September 30, 2018.

9.              Stockholders’ Equity

Preferred Stock

As of September 30, 2018, the Company had 5,000,000 shares of preferred stock authorized for issuance, $0.001 par value per share, with none issued or outstanding.  Preferred stock may be issued from time to time in one or more series, each series to have such terms as stated or expressed in the resolutions providing for the issue of such series adopted by the board of directors of the Company. Preferred stock which may be redeemed, purchased or acquired by the Company may be reissued except as otherwise provided by law.

Common Stock Warrants

June 2018 Warrants

In the June 2018 Financing, the Company issued warrants to purchase 42,000,000 shares of common stock at an exercise price of $1.20 per share, which were immediately exercisable upon issuance, and will expire five years from the date of issuance.

The terms of the warrants include certain provisions related to fundamental transactions, a cashless exercise provision in the event registered shares are not available and do not include any mandatory redemption provisions.  Therefore, the warrants have been classified in stockholders’ equity.  Any changes to fair value of the warrants will not be recognized so long as the warrants continue to be equity classified.

As of September 30, 2018, all warrants related to this transaction were outstanding with a contractual life of 4.73 years.

Warrants Associated with the Term Loan

In conjunction with the term loans (Note 6), the Company issued warrants to purchase 315,688 shares of series B convertible preferred stock.  Upon the closing of the Company’s initial public offering (the “IPO”) in June 2015, the warrants were automatically converted into warrants to purchase an aggregate of 24,566 shares of Common Stock at an exercise price of $12.21 per share. As of September 30, 2018, all warrants related to this transaction were outstanding with a weighted average contractual life of 3.20 years.

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10.       Common Stock Reserved for Future Issuance

The Company has reserved for future issuance the following shares of Common Stock:

11.       Stock Incentive Plans

Prior to the IPO, the Company granted awards to eligible participants under its 2008 Equity Incentive Plan (“2008 Plan”). In May 2015, the Company’s board of directors adopted and, in June 2015, the Company’s stockholders approved the 2015 Stock Incentive Plan (“2015 Plan”), which became effective immediately prior to the effectiveness of the IPO. Subsequent to the IPO, option grants are awarded to eligible participants only under the 2015 Plan.

As of September 30, 2018, the Company had reserved 735,635 shares of Common Stock under the 2008 Plan, of which none remained available for future issuance.  As of September 30, 2018, the Company had reserved 3,753,822 shares of Common Stock under the 2015 Plan, of which 123,227 shares remained available for future issuance. Under the 2015 Plan, stock options may not be granted with exercise prices at less than fair value on the date of the grant.

Terms of stock option agreements, including vesting requirements, are determined by the Company’s board of directors, subject to the provisions of the applicable stock incentive plan. Options granted by the Company generally vest ratably over four years, with a one-year cliff, and options are exercisable from the date of grant for a period of ten years. For options granted through September 30, 2018 the exercise price or purchase price, as applicable, equaled the estimated fair value of the Common Stock as determined by the Company’s board of directors on the date of grant.

A summary of the Company’s stock option activity and related information for employees and nonemployees follows:

There were no options exercised in the three months ended September 30, 2018 and 2017. The total intrinsic value of options exercised for the nine months ended September 30, 2018 and 2017 was $1 thousand and $41 thousand, respectively. The total fair value of employee and non-employee options vested for the three months ended September 30, 2018 and 2017 was $0.3 million and $0.6 million, respectively. The total fair value of employee and non-employee options vested for the nine months ended September 30, 2018 and 2017 was $1.4 million and $1.8 million, respectively. The weighted-average grant date fair value of options granted to employees and non-employees for the three months ended September 30, 2018 and 2017 was $0.46 and $0.86, respectively. The weighted-average

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grant date fair value of options granted to employees and non-employees for the nine months ended September 30, 2018 and 2017 was $0.66 and $0.85, respectively.

At September 30, 2018, the total unrecognized compensation expense related to unvested stock option awards was $2.7 million. The Company expects to recognize that cost over a weighted-average period of approximately 1.8 years.

12.       Restructuring Costs

In April 2018, the Company announced a strategic shift to focus resources on its lead program, edasalonexent. Consequently, the Company reduced its workforce by 40% during the quarter ended June 30, 2018. Pursuant to ASC 420, Exit or Disposal Cost Obligations, charges for employee severance, employee benefits, consolidation of facilities and contract terminations were recorded in the nine months ended September 30, 2018.

The following table summarizes the impact of the April 2018 restructuring activities for the nine months ended September 30, 2018 along with the current liability recorded in the balance sheet as of September 30, 2018 (in thousands):

There were no expenses related to the April 2018 restructuring recognized in the three months ended September 31, 2018. Of the expenses recognized in the nine months ending September 30, 2018, $0.4 million was recorded in the general and administrative section and $0.5 million was recorded in the research and development section of the accompanying condensed consolidated statement of operations.

The Company also recorded a net gain of $0.3 million in connection with the sale or exchange of assets disposed of during the consolidation and relocation of facilities. This net gain has been recorded as a component of other income, (net), in the accompanying consolidated statement of operations.

13.       Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates and to identify matters that require additional disclosure. Subsequent events have been evaluated as required.

The Company is party to a sublease with Inzen, as subtenant, to sub-lease 14,817 square feet of the Company’s facility (the “Sublease”). The Sublease became effective on October 15, 2018, and the term of the Sublease is from October 15, 2018 through June 30, 2020. Under the terms of the sublease, Inzen is obligated to pay the Company approximately $1.8 million in base rent and an additional $0.5 million in operating expenses.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q.  Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

Overview

We are a clinical-stage biopharmaceutical company. Our lead program is edasalonexent, formerly known as CAT-1004, an oral small molecule designed to inhibit NF-kB, or nuclear factor kappa-light-chain-enhancer of activated B cells, in development for the treatment of Duchenne muscular dystrophy, or DMD. We believe edasalonexent has the potential to be a foundational therapy for all patients affected by DMD, regardless of the underlying dystrophin mutation. DMD is an ultimately fatal genetic disorder involving progressive muscle degeneration. The United States Food and Drug Administration, or FDA, has granted orphan drug, fast track and rare pediatric disease designations to edasalonexent for the treatment of DMD.  The European Commission, or EC, has granted orphan medicinal product designation to edasalonexent for the treatment of DMD.

We initiated a global Phase 3 trial for the treatment of DMD in September 2018, which we refer to as the PolarisDMD trial.  The PolarisDMD trial is designed to evaluate the efficacy and safety of edasalonexent for registration purpose, with top-line results expected in the second quarter of 2020.  PolarisDMD enrollment in the United States across approximately 25 sites is expected to run through the remainder of this year and into 2019.  Additional sites in Australia, Canada, Europe and Israel are also expected to open for enrollment early next year.  In total, the PolarisDMD trial is expected to include approximately 40 clinical trial sites globally.  The trial design was informed by discussions with the FDA, as well as input from treating physicians, families of boys affected by DMD and patient advocacy organizations.

The PolarisDMD trial is a randomized, double-blind, placebo-controlled trial, and we anticipate enrolling approximately 125 patients between the ages of four and seven (up to eighth birthday), regardless of mutation type, who have not been on steroids for at least six months. Boys may be eligible to enroll in the trial if they are on a stable dose of EXONDYS 51®, also known as eteplirsen, Sarepta Therapeutics, Inc.’s exon skipping therapy and one of two therapies approved for the treatment of DMD in the United States.  The primary efficacy endpoint is change in North Star Ambulatory Assessment, or NSAA, score after 12 months of treatment with edasalonexent compared to placebo. Key secondary endpoints are the age-appropriate timed function tests: time to stand, 4-stair climb and 10-meter walk/run. Assessments of growth, cardiac and bone health are also planned.  Enrolled boys are being randomized in a 2:1 ratio with two boys receiving edasalonexent for every boy that receives placebo, and we expect that after the initial 12-month treatment period all boys will be offered the opportunity to receive edasalonexent in an open-label extension.

Our MoveDMD® Phase 1/2 trial enrolled ambulatory boys four to seven years old with a genetically confirmed diagnosis of DMD who were steroid naive or had not used steroids for at least six months prior to the trial. Boys enrolled in the trial were not limited to any specific dystrophin mutations and the 31 boys in the trial had 26 different dystrophin mutations.  The MoveDMD trial was designed to be conducted in three sequential parts, Phase 1 and Phase 2, both of which are completed, and an open-label extension, which is on-going.  In Phase 1 of the MoveDMD trial, we assessed the safety, tolerability and pharmacokinetics of edasalonexent in 17 patients, following seven days of dosing, and we reported in January 2016 that all three doses of edasalonexent tested were generally well tolerated with no safety signals observed and there were no serious adverse events and no drug discontinuations.  In the Phase 2 portion of the trial, we assessed the effects of edasalonexent using magnetic resonance imaging, or MRI, T2 as an early biomarker at 12 weeks, and announced in January 2017 that the primary efficacy endpoint of average change from baseline to week 12 in the MRI T2 composite measure of lower leg muscles for the pooled edasalonexent treatment groups compared to placebo was not met, although we observed directionally positive results in the 100/mg/kg/day edasalonexent treatment group that were not statistically significant.

We have completed key efficacy and safety assessments from the MoveDMD trial.  In the open label extension of the MoveDMD trial through 72 weeks of oral 100 mg/kg/day edasalonexent treatment, we observed preserved muscle function and consistent improvements in all four assessments of muscle function: NSAA score, time to stand, 4-stair climb and 10-meter walk/run, compared to the rates of change in the control period for boys prior to receiving edasalonexent treatment.  Additionally, supportive changes in non-effort-based measures of muscle health were seen, supporting the durability of edasalonexent treatment effects. Specifically, we observed statistically significant improvement in the rate of change in lower leg composite MRI T2

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through 12, 24, 36 and 48 weeks on 100 mg/kg of edasalonexent treatment compared to the off-treatment control period.  MRI T2 is closely associated with functional outcomes in DMD supported by data from ImagingDMD, the largest natural history database of MRI assessments in boys with DMD.

The relative proportion of fat in muscle, which is referred to as fat fraction and is correlated with functional ability, can also be determined by magnetic resonance spectroscopy, or MRS. Improvements in the MRS fat fraction rate of change through 48 weeks of edasalonexent treatment compared to the off-treatment control period were observed in both soleus and vastus lateralis leg muscles, which are strongly correlated with ambulatory function. Additionally, boys with DMD in the age range enrolled in the trial typically have resting tachycardia, a heart rate that exceeds the normal resting rate, and we observed that the heart rate of the boys treated with edasalonexent significantly decreased toward age-normative values over a year and a half period of edasalonexent treatment. Significant decreases in muscle enzymes through 72 weeks were also seen in boys treated with edasalonexent, which is consistent with a positive impact on muscle health and supportive of a positive impact from the treatment with edasalonexent.

Through 72 weeks of treatment, edasalonexent continued to be well tolerated with no safety signals observed in the MoveDMD trial. Boys treated with edasalonexent continued to follow age-appropriate growth curves with age-appropriate increases in weight and height and overall body mass index trended down to age-normative values.

We also are evaluating edasalonexent for the potential treatment of Becker muscular dystrophy, or BMD, a related disease where edasalonexent therapy may be beneficial. BMD is a rare disease, and patients with BMD express low levels of dystrophin due to mutations in the dystrophin gene.  Dystrophin production is reduced through the NF-kB-mediated induction of microRNAs that inhibit dystrophin translation. Inhibition of NF-kB in BMD directly enhances dystrophin production.  We are currently investigating potential approaches for clinical trials in BMD.

On November 13, 2018, we announced a collaboration with University of Texas Southwestern, or UT Southwestern, to explore the potential of edasalonexent to improve cardiac function in DMD and BMD. This is a one-year preclinical collaboration with Pradeep Mammen, MD, FACC, FAHA, founder and Medical Director of the Neuromuscular Cardiomyopathy Clinic at UT Southwestern Medical Center as well as Co-Director of the National Institute of Health Sponsored UT Southwestern Senator Paul D. Wellstone Muscular Dystrophy Cooperative Research Center.  Cardiomyopathy is the leading cause of mortality in DMD and BMD.  Preclinical and clinical data support the potential for cardiac benefits with edasalonexent in DMD and BMD.

In addition to edasalonexent, we have developed additional product candidates for rare diseases, including CAT-5571, a potential treatment for cystic fibrosis, or CF.  CAT-5571 is a small molecule that is designed to activate autophagy, a mechanism for recycling cellular components and digesting pathogens, which is important for host defenses and is depressed in CF.  We have completed investigational new drug, or IND, application-enabling activities for CAT-5571.

As of September 30, 2018, we owned six issued U.S. patents with composition of matter and method of use claims directed to edasalonexent and four issued U.S. patents with composition of matter and method of use claims directed to CAT-5571. These patents are expected to expire between 2029 and 2030, without taking into account potential patent term extensions. In addition, our patent portfolio includes over 70 issued foreign patents, four pending U.S. patent applications, three PCT applications, and 19 pending foreign patent applications. This patent portfolio does not include a number of patents and patent applications related to the development of certain product candidates other than those directed to edasalonexent and CAT-5571, because we have elected to abandon those patents or patent applications as part of our recent restructuring in April 2018.

Since our inception in June 2008, we have devoted substantially all of our resources to developing our proprietary platform technology, identifying potential product candidates, undertaking preclinical studies and conducting clinical trials for three clinical-stage compounds, building our intellectual property portfolio, organizing and staffing our company, business planning, raising capital, and providing general and administrative support for these operations. To date, we have primarily financed our operations through private placements of our preferred stock, registered offerings of our common stock, including our initial public offering, or IPO, as well as a secured debt financing. From our inception through September 30, 2018, we raised an aggregate of $245.0 million, of which $92.9 million was from private placements of preferred stock, $69.0 million represented gross proceeds from our IPO, $42.0 million represented gross proceeds from an underwritten public offering of common stock and warrants to purchase common stock in June 2018, or the June 2018 Financing, $11.5 million represented gross proceeds from a registered direct common stock offering, $10.0 million was from a secured debt financing, $18.8 million represented gross proceeds from at-the-market, or ATM, offerings, and $0.8 million was from common stock option and warrant exercises.

Financial Overview

Revenue

As of September 30, 2018, we have not generated any revenue from product sales.

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In August 2017, we entered into an option agreement, or the Option Agreement, with an unaffiliated party, or the Recipient, which is within the scope of Accounting Standards Codification, or ASC, Revenue from Contracts with Customers, or ASC 606. Under the terms of the Option Agreement, we agreed to provide compound material for certain of our product candidates and the right for the Recipient to use the material to perform research during the term of the Option Agreement. The Option Agreement included a non-refundable up-front payment to us of $250 thousand. The term of the Option Agreement commenced in August 2017 and could be extended upon additional payments of $250 thousand made by the Recipient, at its option, at the beginning of each of the next two quarterly periods. In October 2017, we received an additional $250 thousand payment to extend the term for an additional quarterly period. In December 2017, the Recipient terminated the agreement. In the future, we will seek to generate additional revenue primarily from a combination of product sales and collaborations with strategic partners.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

The following summarizes our most advanced current research and development programs:

·                  Edasalonexent for the treatment of DMD - Edasalonexent is a SMART Linker conjugate of salicylic acid and the omega-3 fatty acid docosahexaenoic acid, or DHA, a naturally occurring unsaturated fatty acid with anti-inflammatory properties.  We designed edasalonexent to inhibit NF-kB, the key link between loss of dystrophin and disease pathology that plays a fundamental role in the initiation and progression of skeletal and cardiac muscle disease in DMD.  We reported results from the Phase 1 portion of the MoveDMD trial in January 2016 and reported top-line safety and efficacy results for the 12-week placebo-controlled Phase 2 portion of the trial in January 2017.  In July 2016, we initiated an open-label extension of the MoveDMD trial, which has provided safety and efficacy data through 24, 36, 48, 60 and 72 weeks of edasalonexent treatment, and we reported efficacy and safety results from the open-label extension in October 2017, February 2018, April 2018 and October 2018. We initiated the global Phase 3 PolarisDMD trial of edasalonexent for the treatment of DMD, regardless of mutation type, in the second half of 2018 with top-line results expected in the second quarter of 2020.  The PolarisDMD trial is designed to evaluate the efficacy and safety of edasalonexent in patients with DMD and is intended to support an application for commercial registration of edasalonexent.

·                  Edasalonexent for the treatment of BMD — We are evaluating the potential benefits of edasalonexent treatment in BMD adults and investigating potential approaches for clinical trials in BMD.

·                  CAT-5571 - CAT-5571 is a SMART Linker conjugate that contains cysteamine, a naturally occurring molecule that is a degradation product of the amino acid cysteine, and DHA.  CAT-5571 is a potential oral therapy to treat CF.  CAT-5571 is a small molecule designed to restore host defense by activating autophagy, which is depressed in CF, to reestablish host defense to enhance the clearance of pathogens. People with CF suffer from persistent lung infections with opportunistic pathogens causing chronic infections that are difficult to eradicate and lead to respiratory failure. We have completed IND-enabling activities for CAT-5571.

We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development programs. We record our research and development expenses net of any research and development tax incentives we are entitled to receive from government authorities.

The following table summarizes our research and development expenses by program (in thousands):

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Since inception of the edasalonexent and the CAT-5571 programs, total direct expenses to support the programs have been $35.1 million and $4.2 million, respectively.

The successful development of our product candidates is highly uncertain. Accordingly, at this time, we cannot reasonably estimate the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from edasalonexent or any of our other current or potential product candidates. This is due to our need to raise additional capital to fund further clinical trials of our product candidates and the numerous risks and uncertainties associated with developing medicines, including the uncertainties of:

·                  establishing an appropriate safety profile with IND-enabling toxicology studies;

·                  successful enrollment in, and completion of clinical trials;

·                  receipt of marketing approvals from applicable regulatory authorities;

·                  establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

·                  obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

·                  launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; and

·                  a continued acceptable safety profile of the products following approval.

A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.

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 duration of later-stage clinical trials.  We expect to incur significant research and development costs for the foreseeable future.  We expect that our research and development expenses will increase significantly in the near term in connection with the substantial activities required to conduct our PolarisDMD trial and prepare for registration and commercialization of edasalonexent for the treatment of DMD.  We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services.

We anticipate that in the near term our general and administrative expenses will remain relatively consistent with their current levels.  As we approach the anticipated read out of top-line results from our PolarisDMD trial in the second quarter of 2020, we may increase our general and administrative expenditures to hire personnel to support potential commercialization of edasalonexent, dependent on our available capital resources and our prospects for obtaining additional financing.

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Restructuring

In April 2018, we announced a strategic shift to focus resources on our lead program edasalonexent. Consequently, we reduced our workforce by 40% during the quarter ended June 30, 2018. Charges for employee severance, employee benefits, consolidation of facilities and contract terminations of $0.9 million were recorded in the nine months ended September 30, 2018, of which $0.7 million was paid in the period. Of these costs, $0.4 million was recorded in the general and administrative section and $0.5 million was recorded in the research and development section of the accompanying condensed consolidated statement of operations. We also recorded a net gain in other income, net of $0.3 million in connection with the sale or exchange of assets disposed of during the consolidation and relocation of facilities.

Other Income (Expense)

Other income (expense), net consists of gains and losses on sale and disposal of property and equipment, interest income earned on our cash, cash equivalents, and short-term investments, interest expense incurred on debt instruments, amortized deferred financing costs and amortized debt discount and net amortization expense on short-term investments.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with United States generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the nine months ended September 30, 2018, there were no material changes to our critical accounting policies as reported in our 2017 Annual Report on Form 10-K.

Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017, together with the dollar change in those items (in thousands):

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Revenue

During the three months ended September 30, 2017, we recognized revenue of $250 thousand related to the Option Agreement. We did not recognize any revenue in the three months ended September 30, 2018.

Research and Development Expenses

Research and development expenses decreased by $0.9 million to $3.9 million for the three months ended September 30, 2018 from $4.8 million for the three months ended September 30, 2017, a decrease of 18%. The decrease in research and development expenses was attributable to a $0.6 million decrease in costs not directly allocated to programs, and a net decrease of $0.3 million in direct program costs. The $0.6 million decrease in costs not directly allocated to programs was attributable to a $0.4 million decrease in employee compensation due to a reduction in our workforce, a $0.1 million decrease in the research and development portion of facilities costs and a $0.1 million decrease in professional services expenses. The decrease in direct program expenses included a $0.9 million decrease in costs to support our CAT-5571 program and a $0.4 million decrease in costs to support other research and platform programs. These decreases were partially offset by a $1.0 million increase in costs to support our edasalonexent program due to activities associated with the initiation of the PolarisDMD trial.

General and Administrative Expenses

General and administrative expenses decreased by $0.3 million to $2.1 million for three months ended September 30, 2018 from $2.4 million for the three months ended September 30, 2017, a decrease of 13%. The decrease in general and administrative expenses was attributable to a $0.3 million decrease in professional services expense due to our strategic shift and focus on streamlining resources.

Other Income (Expense), Net

Other income (expense), net increased by $0.4 million in the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to an increase in other income, net of $0.2 million due to the net gain realized on assets sold in consolidation and relocation of our facilities, a decrease in interest expense of $0.1 million due to principal payments made on our credit facility, and an increase of $0.1 million in interest and investment income due to an increase in our interest-bearing assets.

Comparison of the Nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017, together with the dollar change in those items (in thousands):

Revenue

During the nine months ended September 30, 2017, we recognized revenue of $250 thousand related to the Option Agreement. We did not recognize any revenue in the nine months ended September 30, 2018.

Research and Development Expenses

Research and development expenses decreased by $1.3 million to $13.4 million for the nine months ended September 30, 2018 from $14.7 million for the nine months ended September 30, 2017, a decrease of 9%. The decrease in research and development

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expenses was attributable to a net decrease of $0.7 million in direct program costs and a $0.6 million decrease in costs not directly allocated to programs. This decrease in direct program expenses included a $1.3 million decrease in costs to support our CAT-5571 program, and a $0.4 million decrease in costs to support other research and platform programs. These decreases were partially offset by a $1.0 million increase in costs to support edasalonexent associated with the initiation of the POLARIS DMD trial. The $0.6 million decrease in costs not directly allocated to programs was attributable to a $0.3 million decrease in employee compensation due to a reduction in our workforce, a $0.2 million decrease in the research and development portion of facilities expense and a $0.2 million decrease in the research and development portion of general office expenses. These decreases were partially offset by a $0.1 million increase in professional services expense due to increased use of research and development external contractors.

General and Administrative Expenses

General and administrative expenses decreased by $0.3 million to $6.9 million for nine months ended September 30, 2018 from $7.2 million for the nine months ended September 30, 2017, a decrease of 4%. The decrease in general and administrative expenses was attributable to a $0.7 million decrease in professional services expense due to our strategic shift and focus on streamlining resources. This decrease was partially offset by a $0.4 million increase in general and administrative employee costs, due to merit increases and bonuses.

Other Income (Expense), Net

Other income (expense), net increased by $0.7 million in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to an increase in other income, net of $0.3 million due to the net gain realized on assets sold in consolidation and relocation of our facilities, a decrease in interest expense of $0.3 million due to principal payments made on our credit facility, and an increase of $0.1 million in interest and investment income due to an increase in our interest-bearing assets.

Liquidity and Capital Resources

From our inception through September 30, 2018, we raised an aggregate of $245.0 million, of which $92.9 million was from private placements of preferred stock, $69.0 million represented gross proceeds from our IPO, $42.0 million represented gross proceeds from the June 2018 Financing, $11.5 million represented gross proceeds from a registered direct common stock offering, $10.0 million was from a secured debt financing, $18.8 million represented gross proceeds from our ATM offerings, and $0.8 million was from common stock option and warrant exercises. As of September 30, 2018, we had $43.2 million in cash, cash equivalents and short-term investments.

June 2018 Financing

On June 20, 2018, we entered into an underwriting agreement with Oppenheimer & Co. Inc. relating to an underwritten public offering, of 42,000,000 shares of our common stock, and accompanying warrants to purchase up to 42,000,000 shares of common stock, at a combined price to the public of $1.00 per share, for gross proceeds of $42.0 million, resulting in net proceeds of $38.9 million. The warrants were immediately exercisable at an exercise price of $1.20 per share and will expire five years from the date of issuance.

At-the-Market Offering

During the nine months ended September 30, 2018, we sold an aggregate of 5,390,255 shares of common stock pursuant to our ATM offering, at an average price of $1.59 per share, for gross proceeds of $8.6 million, resulting in net proceeds of $8.3 million after deducting sales commissions and offering expenses. The ATM offering was fully utilized as of February 2018.

Credit Facility

On August 27, 2014, we entered into a credit facility with MidCap Financial Trust, Flexpoint MCLS SPV LLC and Square 1 Bank, which was subsequently amended in March and December 2015 (as amended, the “Credit Facility”). The Credit Facility provided for maximum borrowings of $25.0 million. We received total proceeds of $10.0 million under term loans and the remaining amounts available for borrowing under this arrangement expired unused as of July 31, 2015.  In connection with the drawdowns under the Credit Facility, we issued warrants to purchase shares of convertible preferred stock to the lenders, which upon the closing of our IPO were automatically converted into warrants to purchase an aggregate of 24,566 shares of our common stock at an exercise price of $12.21 per share. The warrants were exercisable immediately and expire after seven years.

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As of September 30, 2018, all outstanding principal and interest due under the Credit Facility had been paid. A final payment equal to 3.48% of the amounts drawn under the Credit Facility was paid in October 2018. The Credit Facility has expired.

Cash Flows

Comparison of the Nine Months Ended September 30, 2018 and 2017

The following table provides information regarding our cash flows for the nine months ended September 30, 2018 and 2017 (in thousands):

Net Cash Used in Operating Activities

Net cash used in operating activities was $18.2 million for the nine months ended September 30, 2018 and consisted primarily of a net loss of $19.8 million adjusted for non-cash items, including stock-based compensation expense of $1.3 million, depreciation and amortization expense of $0.1 million, a gain on disposal of property and equipment of $0.3 million, and a net decrease in operating assets of $0.5 million, which resulted primarily from increases in accounts payable and accrued expenses.

Net cash used in operating activities was $21.2 million for the nine months ended September 30, 2017 and consisted primarily of a net loss of $21.9 million adjusted for non-cash items, including stock-based compensation expense of $1.5 million, depreciation and amortization expense of $0.2 million, non-cash interest expense of $0.1 million, and a net increase in operating assets of $1.1 million, which resulted primarily from decreases in accrued expenses and accounts payable, partially offset by an increase in prepaid expenses and other current assets.

Net Cash (Used In) Provided by Investing Activities

Net cash used in investing activities was $23.0 million for the nine months ended September 30, 2018 and consisted of purchases of short-term investments of $39.4 million partially offset by proceeds from maturities of short-term investments of $16.0 million and sales of property and equipment of $0.4 million.  Net cash provided by investing activities was $14.9 million during the nine months ended September 30, 2017, which was primarily attributable to maturities of short-term investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $44.7 million during the nine months ended September 30, 2018, which was primarily attributable to net proceeds of $38.9 million from the June 2018 Financing and net proceeds of $8.3 million from our ATM offering, partially offset by $2.5 million in repayment of principal on the Credit Facility. Net cash provided by financing activities was $4.4 million during the nine months ended September 30, 2017, which was primarily attributable to net proceeds of $6.9 million from our ATM offering, partially offset by $2.5 million in repayment of principal on the Credit Facility.

Funding Requirements

Our primary uses of capital are for compensation and related expenses, manufacturing costs for pre-clinical and clinical materials, third party clinical trial research and development services, clinical costs, legal and other regulatory expenses, and general overhead.

As of September 30, 2018, we had an accumulated deficit of $191.2 million. We have been primarily involved with research and development activities and have incurred operating losses and negative cash flows from operations since our inception.

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As of September 30, 2018, we had available cash, cash equivalents and short-term investments of $43.2 million. We expect that our existing cash, cash equivalents and short-term investments are sufficient to support our operating expenses into the second quarter of 2020, and therefore the substantial doubt about our ability to continue as a going concern disclosed in the 2017 Annual Report on Form 10-K has been alleviated.

Our estimate as to how long we expect our cash, cash equivalents and short-term investments to be able to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements will depend on many factors, including:

·                  the pace of clinical site initiation and patient enrollment in our PolarisDMD Phase 3 trial and any unanticipated costs or expenses related to this trial, including costs and expenses for any additional research or preclinical or clinical development efforts related to this trial;

·                  the progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, our product candidates and potential product candidates, including current and future clinical trials;

·                  our ability to enter into and the terms and timing of any additional collaborations, licensing or other arrangements that we may establish;

·                  the number and characteristics of future product candidates that we pursue and their development requirements;

·                  the outcome, timing and costs of seeking regulatory approvals;

·                  the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

·                  subject to receipt of marketing approval, revenue, if any, received from commercial sales of our product candidates;

·                  our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

·                  the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

·                  the costs of operating as a public company.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Additional debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.

If we raise funds through collaborations, strategic alliances 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 to 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 product candidates that we would otherwise prefer to develop and market ourselves.

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 under applicable Securities and Exchange Commission rules.

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Contractual Obligations

As of September 30, 2018, other than the payment in full of amounts due under our Credit Facility, there had been no material changes to our contractual obligations and commitments disclosed under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2017 Annual Report on Form 10-K.

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Item 3. Qualitative and Quantitative Disclosures about Market Risk

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2018, we had cash, cash equivalents and short-term investments of $43.2 million and, as of December 31, 2017, we had cash and cash equivalents of $16.4 million.  As of September 30, 2018, our cash equivalents consisted of money market funds, U.S. reverse repurchase agreements, and corporate debt securities. As of September 30, 2018, short-term investments consisted of corporate debt securities and U.S reverse repurchase agreements. As of December 31, 2017, our cash equivalents consisted of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our investment portfolio.

We have no significant operations outside the United States and we do not expect to be impacted significantly by foreign currency fluctuations.

Item 4. Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act 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 principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 officer have concluded based upon the evaluation described above that, as of September 30, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting.

During the three months ended September 30, 2018, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1A. Risk Factors

We operate in a dynamic and rapidly changing business environment that involves risks and substantial uncertainty.  The following discussion addresses risks and uncertainties that could cause, or contribute to causing, actual results to differ from expectations in material ways.  In evaluating our business, investors should pay particular attention to the risks and uncertainties described below and in other sections of this Quarterly Report on Form 10-Q and in our subsequent filings with the Securities and Exchange Commission, or SEC.  These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition.  The trading price of our common stock could also decline due to any of these risks, and you could lose all or part of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete.  We recently initiated our Phase 3 clinical trial of edasalonexent and expect that our expenses will increase substantially as we conduct that trial.  In addition, we may in the future initiate new research, preclinical and clinical development efforts for and seek marketing approval for, other product candidates, and would expect our expenses to increase in connection with each of these activities. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator, and these activities would require substantial additional funding. Furthermore, we have incurred and will continue to incur significant additional costs associated with operating as a public company.

Accordingly, we will need to obtain additional funding in connection with our continuing operations and for costs related to seeking regulatory approvals and commercialization activities for edasalonexent in Duchenne muscular dystrophy, or DMD, and for any of our other product candidates that have successful clinical trials. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.  For example, in April 2018 we announced a strategic shift to focus resources on our lead program edasalonexent and reduced our workforce by 40%.  In connection with this restructuring, we suspended our other research and development programs until a collaboration or funding is obtained. Any additional funding may not be available to us on acceptable terms, on a timely basis or at all.  In the event that we are unable to obtain such funding on acceptable terms and in a timely manner, we may not be able to complete the regulatory approval or commercialization of edasalonexent or the clinical development, regulatory approval or commercialization of any other product candidate.

In addition, while we may seek one or more collaborators for future development of our product candidates or programs or for our platform technology, we may not be able to enter into a collaboration for any of our product candidates or programs or for our platform technology on suitable terms or at all. In any event, our existing cash, cash equivalents and short-term investments will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain substantial additional funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources.  We do not have any committed external source of funds.

Adequate additional funding may not be available to us on acceptable terms, on a timely basis or at all, impacting our ability to execute on our strategic plans.  Our failure to raise capital on acceptable terms as and when needed would have a material adverse effect on our business, results of operations, financial condition and ability to pursue our business strategy.

We believe that our existing cash, cash equivalents and short-term investments as of September 30, 2018 will enable us to fund our operating expenses and debt service and capital expenditure requirements based on our current operating plan into the second quarter of 2020, and therefore the substantial doubt about our ability to continue as a going concern disclosed in the 2017 Annual Report on Form 10-K has been alleviated. Our estimate as to how long we expect our cash, cash equivalents and short-term investments securities to be able to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.  Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements will depend on many factors, including:

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·      the pace of clinical site initiation and patient enrollment in our PolarisDMD Phase 3 trial and any unanticipated costs or expenses related to this trial, including costs and expenses for any additional research or preclinical or clinical development efforts related to this trial;

·      the progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, our product candidates and potential product candidates, including current and future clinical trials;

·      our ability to enter into and the terms and timing of any additional collaborations, licensing or other arrangements that we may establish;

·      the number and characteristics of future product candidates that we pursue and their development requirements;

·      the outcome, timing and costs of seeking regulatory approvals;

·      the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

·      subject to receipt of marketing approval, revenue, if any, received from commercial sales of our product candidates;

·      our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

·      the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

·      the costs of operating as a public company.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Significant additional capital will be needed in the future to continue our planned operations.  To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, our existing stockholders’ ownership interest may be substantially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder.  For example, our June 2018 registered offering of common stock and common stock warrants was highly dilutive to existing stockholders’ ownership interests.  Additional debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business.  In addition, securing additional financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional 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 or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds 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 product candidates that we would otherwise prefer to develop and market ourselves.

Any future indebtedness could adversely affect our ability to operate our business.

Any future indebtedness that we may incur, combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:

·      requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;

·      increasing our vulnerability to adverse changes in general economic, industry and market conditions;

·      subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;

·      limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

·      placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

Failure to make payments or comply with other covenants under any debt instruments could result in an event of default and acceleration of amounts due.

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We have incurred significant losses since inception and expect to incur significant losses for at least the next several years. We may never achieve or maintain profitability.

We have incurred significant annual net operating losses in every year since our inception. We expect to continue to incur significant operating losses for at least the next several years. Our net losses were $27.4 million and $36.1 million for the years ended December 31, 2017 and 2016, respectively. For the three and nine months ended September 30, 2018, our net losses were $5.7 million and $19.8 million, respectively. As of September 30, 2018, we had an accumulated deficit of $191.2 million. We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We have financed our operations to date primarily through private placements of our preferred stock, registered offerings of our common stock, including our initial public offering, or IPO, our June 2018 registered offering of common stock and common stock warrants, our at-the-market program, and a secured debt financing, and have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical development programs. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We anticipate that our expenses will increase substantially if and to the extent we:

·      conduct our Phase 3 clinical trial of edasalonexent in DMD;

·      initiate and continue research and preclinical and clinical development efforts for our other product candidates;

·      seek to identify and develop additional product candidates;

·      seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;

·     establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any;

·     require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

·      maintain, expand and protect our intellectual property portfolio;

·      hire and retain additional personnel, such as clinical, quality control and scientific personnel;

·     add operational, financial and management information systems and personnel, including personnel to support our product development and help us comply with our obligations as a public company; and

·      add equipment and physical infrastructure to support our research and development programs.

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. This will require our, or any of our future collaborators’, success in a range of challenging activities, including obtaining funding to conduct clinical trials of our product candidates, completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of increased expenses, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future collaborator does, we may never generate revenues that are large enough for us to achieve profitability. 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 decrease the 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 candidates or continue our operations. A decline in the value of our company could cause our investors to lose all or part of their investments.

We have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

We began operations in 2008. Our operations to date have been limited to financing and staffing our company and developing our technology and conducting preclinical research and clinical trials for our product candidates. We have not yet demonstrated an ability to successfully conduct pivotal clinical trials, obtain marketing approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, our investors should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage biopharmaceutical companies such as ours. Predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

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Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

Our approach to the discovery and development of product candidates based on our SMART LinkerSM drug discovery platform is unproven, and we do not know whether we will be able to develop any products of commercial value.

We are focused on discovering and developing novel small molecule drugs by applying our Safely Metabolized And Rationally Targeted, or SMART, linker drug discovery platform. We have not yet succeeded and may never succeed in demonstrating efficacy and safety for any of our product candidates in a Phase 3 clinical trial or in obtaining marketing approval thereafter. For example, although we have discovered and evaluated numerous compounds using our SMART Linker drug discovery platform, no product created using the SMART Linker drug discovery platform has ever been approved for sale.

We are dependent on the success of our product candidate edasalonexent. If we are unable to complete the clinical development of, obtain marketing approval for or successfully commercialize this product candidate, either alone or with a collaborator, or if we experience significant delays in doing so, our business would be substantially harmed.

We currently have no products approved for sale and are investing substantially all of our efforts and financial resources in the development of edasalonexent for the treatment of DMD.  Our prospects are substantially dependent on our ability, or that of any future collaborator, to develop, obtain marketing approval for and successfully commercialize edasalonexent.  Because our business is almost entirely dependent upon this one product candidate, any setback in obtaining regulatory approval for edasalonexent would have a material adverse effect on our business and prospects.

The success of edasalonexent will depend on several factors, including the following:

·      successful enrollment and completion of our Phase 3 clinical trial of edasalonexent, as well as any additional clinical trials of edasalonexent, including the ongoing open-label extension of our MoveDMD clinical trial;

·      safety, tolerability and efficacy profiles that are satisfactory to the U.S. Food and Drug Administration, or FDA, or any comparable foreign regulatory authority for marketing approval;

·      timely receipt of marketing approvals from applicable regulatory authorities;

·      the performance of our future collaborators, if any;

·      the extent of any required post-marketing approval commitments to applicable regulatory authorities;

·      establishment of supply arrangements with third-party raw materials suppliers and manufacturers;

·      establishment of arrangements with third-party manufacturers to obtain finished drug products that are appropriately packaged for sale;

·      obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

·      protection of our rights in our intellectual property portfolio;

·      successful launch of commercial sales following any marketing approval;

·      a continued acceptable safety profile following any marketing approval;

·      commercial acceptance by patients, the medical community and third-party payors following any marketing approval; and

·     our ability to compete with other therapies, including therapies targeting dystrophin, utrophin, myostatin and inflammatory mediators.

Many of these factors are beyond our control, including the outcome of clinical development, the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborator. If we are unable to develop, receive marketing approval for and successfully commercialize edasalonexent, on our own or with any future collaborator, or experience delays as a result of any of these or other factors, our business would be substantially harmed.

Our SMART Linker drug discovery platform may fail to help us discover and develop additional potential product candidates.

A significant portion of the research that we have conducted and may in the future conduct, involves the development of new compounds using our SMART Linker drug discovery platform. The drug discovery that we are conducting using our SMART Linker drug discovery platform may not be successful in creating compounds that have commercial value or therapeutic utility. Our SMART Linker drug discovery platform may initially show promise in identifying potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization for a number of reasons, including:

·      compounds created through our SMART Linker drug discovery platform may not demonstrate improved efficacy, safety or tolerability;

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·      potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to receive marketing approval and achieve market acceptance;

·     competitors may develop alternative therapies that render our potential product candidates non-competitive or less attractive; or

·      a potential product candidate may not be capable of being produced at an acceptable cost.

Our research programs to identify new product candidates will require substantial technical, financial and human resources, and we may be unsuccessful in our efforts to identify new product candidates. If we are unable to identify suitable additional compounds for preclinical and clinical development, our ability to develop product candidates and obtain product revenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact our stock price.

We have never obtained marketing approval for a product candidate and we may be unable to obtain, or may be delayed in obtaining, marketing approval for any of our product candidates.

We have never obtained marketing approval for a product candidate. It is possible that the FDA may refuse to accept for substantive review any new drug applications, or NDAs, that we submit for our product candidates or may conclude after review of our data that our applications are insufficient to obtain marketing approval of our product candidates. If the FDA does not accept or approve any NDAs we submit, it may require that we conduct additional clinical, nonclinical or manufacturing validation studies and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA-required studies, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDAs.

Any delay in obtaining, or an inability to obtain, marketing approvals would prevent us from commercializing our product candidates, generating revenues and achieving and sustaining profitability. If any of these outcomes occur, we may be forced to abandon our development efforts for our product candidates, which could significantly harm our business.

Results of preclinical studies and early clinical trials may not be predictive of results of future clinical trials.

The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks. The design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we, or any future collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

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 trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. For example, while we observed positive NF-kB biomarker data in the Phase 1 portion of our MoveDMD Phase 1/2 clinical trial of edasalonexent for the treatment of DMD that demonstrated NF-kB target engagement via statistically significant reduction in NF-kB controlled gene expression for the 67 mg/kg/day and 100 mg/kg/day dosing levels, the primary efficacy endpoint in the Phase 2 portion of the trial for the same dosing levels was not met.  If we fail to receive positive results in clinical trials of our product candidates, the development timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly, our business and financial prospects would be negatively impacted.

The regulatory approval processes for product candidates that target rare diseases, including DMD and cystic fibrosis, are uncertain.

Due to the lack of precedent, broad discretion of regulatory authorities, and a multitude of unique factors that impact the regulatory approval process, the likelihood of the approval of any of our product candidates that target rare diseases, such as DMD, or cystic fibrosis, is uncertain, and we may not be able to anticipate, prepare for or satisfy requests or requirements from regulatory authorities, including completing and submitting planned investigational new drug applications and NDAs for our product candidates, in a timely

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manner, or at all. For example, DMD is a rare disease for which there are only two FDA approved therapeutics.  Further, the FDA may determine, after evaluation of our data and analyses, that such data and analyses do not support an NDA submission, filing or approval.  Due to this lack of predictability, we may not have the resources necessary to meet regulatory requirements and successfully complete a potentially protracted, expensive and wide-ranging approval process for commercialization of product candidates for rare diseases.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify as most likely to succeed, in terms of both their potential for marketing approval and commercialization. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to have greater commercial potential.

Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to the product candidate.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, or at all. Further, the clinical development of our product candidates is susceptible to the risk of failure at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case.

In addition to the risk of failure inherent in drug development, certain of the compounds that we are developing and may develop in the future using our SMART Linker drug discovery platform may be particularly susceptible to failure to the extent they are based on compounds that others have previously studied or tested, but did not progress in development due to safety, tolerability or efficacy concerns or otherwise. Our failure to successfully complete clinical trials of our product candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our product candidates would significantly harm our business.

If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other comparable foreign regulators, we, or any future collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.

We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Comparable foreign regulatory authorities, such as the European Medicines Agency, or the EMA, impose similar restrictions. We, and any future collaborators, may never receive such approvals. We, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we, or they, will be able to obtain these approvals.

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have not previously submitted an NDA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates. Any inability to complete preclinical and clinical development successfully could result in additional costs to us, or any future collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. Moreover, if (1) we, or any future collaborators, are required to modify our trial designs, such as required modifications with respect to patient populations, endpoints, comparators or trial duration, (2) we, or any future collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we, or they contemplate, (3) we, or any future collaborators, are unable to successfully complete clinical trials of our product

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candidates or other testing, (4) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (5) there are unacceptable safety concerns associated with our product candidates, we, or any future collaborators, may:

·      be delayed in obtaining marketing approval for our product candidates;

·      not obtain marketing approval at all;

·      obtain approval for indications or patient populations that are not as broad as intended or desired;

·     obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;

·      be subject to additional post-marketing testing or other requirements; or

·      be required to remove the product from the market after obtaining marketing approval.

Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during development that could delay or prevent their marketing approval or limit their use.

Adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, any future collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. For example, in 2014, in our clinical trials of our CAT-2003 compound we observed gastrointestinal tolerability issues, including nausea, diarrhea and vomiting, and in some cases these adverse events led to dose reductions or discontinuations. If any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.

If we, or any future collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.

We, or any future collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval or commercialization of our product candidates, including:

·     clinical trials of our product candidates may produce unfavorable or inconclusive results, such as occurred in our MoveDMD Phase 1/2 clinical trial of edasalonexent for the treatment of DMD, where the primary efficacy endpoint was not met;

·      we, or any future collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;

·      the number of patients required for clinical trials of our product candidates may be larger than we, or any future collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or any future collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any future collaborators, anticipate;

·      the cost of planned clinical trials of our product candidates may be greater than we anticipate;

·      our third-party contractors or those of any future collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any future collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or any future collaborators in a timely manner or at all;

·      regulators or institutional review boards may not authorize us, any future collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

·      we, or any future collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

·      patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;

·      we, or any future collaborators, may have to delay, suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;

·      regulators or institutional review boards may require that we, or any future collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects

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or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;

·      the FDA or comparable foreign regulatory authorities may disagree with our, or any future collaborators’, clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials;

·     the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we, or any future collaborators, enter into agreements for clinical and commercial supplies;

·     the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; 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 to obtain marketing approval.

Product development costs for us, or any future collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we, or any future collaborators, may have the exclusive right to commercialize our product candidates or allow our competitors, or the competitors of any future collaborators, to bring products to market before we, or any future collaborators, do and impair our ability, or the ability of any future collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

If we, or any future collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our or their receipt of necessary regulatory approvals could be delayed or prevented.

We, or any future collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities, such as the EMA. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

·      the size and nature of the patient population;

·      the severity of the disease under investigation;

·      the proximity of patients to clinical sites;

·      the eligibility criteria for the trial;

·      the design of the clinical trial;

·      efforts to facilitate timely enrollment;

·      competing clinical trials; and

·      clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

In particular, the successful completion of our clinical development program for edasalonexent for the treatment of DMD is dependent upon our ability to enroll a sufficient number of patients with DMD. DMD is a rare disease with a small patient population. Further, there are only a limited number of specialist physicians that regularly treat patients with DMD and major clinical centers that support DMD treatment are concentrated in a few geographic regions. In addition, other companies are conducting clinical trials and have announced plans for future clinical trials that are seeking, or are likely to seek, to enroll patients with DMD and patients are generally only able to enroll in a single trial at a time. The small population of patients, competition for these patients and the limited trial sites may make it difficult for us to enroll enough patients to complete our clinical trials for edasalonexent in a timely and cost-effective manner or at all. Furthermore, we intend to enroll a significantly greater number of patients in our Phase 3 clinical trial of edasalonexent in DMD than were enrolled in our previous trials of edasalonexent. As a result, we may be subject to greater risks with respect to patient enrollment.

The clinical trials that we conduct may also have inclusion criteria that further limit the population of patients that we are able to enroll. For example, further clinical trials for edasalonexent may require that the enrolled boys be between certain ages and not on certain other medications. These inclusion criteria, or other inclusion criteria that are not yet defined, could further limit the available patient pool and present challenges to clinical trial enrollment.

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Our inability, or the inability of any future collaborators, to enroll a sufficient number of patients for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. Enrollment delays in our, or their, clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or any future collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline.

If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability, or that of any future collaborators, to market the drug could be compromised.

Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials, or those of any future collaborator, may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

·      regulatory authorities may withdraw their approval of the drug or seize the drug;

·      we, or any future collaborators, may be required to recall the drug, change the way the drug is administered or conduct additional clinical trials;

·      additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular drug;

·      we may be subject to fines, injunctions or the imposition of civil or criminal penalties;

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

·      we, or any future collaborators, may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;

·      we, or any future collaborators, could be sued and held liable for harm caused to patients;

·      the drug may become less competitive; and

·      our reputation may suffer.

Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.

Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.

We have never commercialized a product. Even if one of our product candidates is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.

Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

·      the efficacy and safety of the product;

·      the potential advantages of the product compared to alternative treatments;

·      the prevalence and severity of any side effects;

·      the clinical indications for which the product is approved;

·      whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;

·      limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;

·      our ability, or the ability of any future collaborators, to offer the product for sale at competitive prices;

·      the product’s convenience and ease of administration compared to alternative treatments;

·      the willingness of the target patient population to try, and of physicians to prescribe, the product;

·      the strength of sales, marketing and distribution support;

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·      the approval of other new products for the same indications;

·      changes in the standard of care for the targeted indications for the product;

·      the timing of market introduction of our approved products as well as competitive products;

·      availability and amount of reimbursement from government payors, managed care plans and other third-party payors;

·      adverse publicity about the product or favorable publicity about competitive products; and

·      potential product liability claims.

The potential market opportunities for our product candidates are difficult to estimate precisely. Our estimates of the potential market opportunities are predicated on many assumptions, including industry knowledge and publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates of the potential market opportunities.

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.

We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to use a combination of focused in-house sales and marketing capabilities and third-party collaboration, licensing and distribution arrangements to sell any of our products that receive marketing approval.

We generally plan to seek to retain full commercialization rights for products that we can commercialize with a specialized sales force and to retain co-promotion or similar rights when feasible in indications requiring a larger commercial infrastructure. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire or retain a sales force that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and commercialize the product independently.

We may collaborate with third parties for commercialization of any products that require a large sales, marketing and product distribution infrastructure. We intend to potentially commercialize our product candidates through collaboration, licensing and distribution arrangements with third parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no 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 do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates that receive marketing approval.

We face substantial competition from other pharmaceutical and biotechnology companies, and our operating results may suffer if we fail to compete effectively.

The development and commercialization of new drug products is highly competitive. We expect that we, and any future collaborators, will face significant competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to any of our product candidates that we, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of the key indication of our most advanced program, DMD.

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There are currently two therapies approved for the treatment of DMD in the United States, Sarepta Therapeutics’ drug EXONDYS 51®, also known as eteplirsen, and PTC Therapeutics’ EMFLAZA®, also known as deflazacort, a corticosteroid.  Additionally, corticosteroid therapy, including prednisone, is often prescribed off-label to treat the inflammation underlying DMD and to delay loss of ambulation. PTC Therapeutics’ Translarna™ has conditional marketing authorization in the European Union for the treatment of DMD caused by a nonsense mutation.  A number of companies are developing additional therapies to treat DMD and are in the process of registration or in late stage clinical development, including Hoffman-La Roche Ltd., Italfarmaco S.p.A., Pfizer, Inc., PTC Therapeutics, Santhera Pharmaceuticals and Sarepta Therapeutics.

Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

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, or any future collaborators, may develop. Our competitors also may obtain FDA or other marketing approval for their products before we, or any future collaborators, are able to obtain approval for ours, which could result in our competitors establishing a strong market position before we, or any future collaborators, are able to enter the market.

Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. 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 us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

If the FDA or comparable foreign regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely affected.

Once an NDA is approved, the product covered thereby becomes a “reference-listed drug” in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference-listed drugs through submission of abbreviated new drug applications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference-listed drug and that the generic version is bioequivalent to the reference-listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference-listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference-listed drug may be typically lost to the generic product.

The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference-listed drug has expired. The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity, or NCE. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification that a patent covering the reference-listed drug is either invalid or will not be infringed by the generic product, in which case the applicant may submit its application four years following approval of the reference-listed drug. It is unclear whether the FDA will treat the active ingredients in our product candidates as NCEs and, therefore, afford them five years of NCE data exclusivity if they are approved. If any product we develop does not receive five years of NCE exclusivity, the FDA may approve generic versions of such product three years after its date of approval. Manufacturers may seek to launch these generic products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.

Competition that our products may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.

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