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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

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

For the fiscal year ended December 31, 2017

OR

 

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

For the transition period from                             to                            

OR

 

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

Date of event requiring this shell company report                    

Commission file number 001-37452

 

 

CELYAD S.A.

(Exact name of Registrant as specified in its charter and translation of Registrant’s name into English)

 

 

Belgium

(Jurisdiction of incorporation or organization)

Rue Edouard Belin 2

1435 Mont-Saint-Guibert, Belgium

(Address of principal executive offices)

Christian Homsy, MD, MBA

Chief Executive Officer

Celyad SA

Rue Edouard Belin 2

1435 Mont-Saint-Guibert, Belgium

Tel: +32 10 394 100 Fax: +32 10 394 141

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing one ordinary share, no nominal value per share   The Nasdaq Stock Market LLC
Ordinary shares, no nominal value per share*   The Nasdaq Stock Market LLC*

 

* Not for trading, but only in connection with the registration of the American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.

Ordinary shares, no nominal value per share: 9,867,844 as of December 31, 2017

 

 

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☒  No

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

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

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

Large accelerated filer  ☐             Accelerated filer  ☒            Non-accelerated filer  ☐            Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐   

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17    ☐  Item 18

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE  

INTRODUCTION

  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  

PART I

     
Item 1.    Identity of Directors, Senior Management and Advisers      4  
Item 2.    Offer Statistics and Expected Timetable      4  
Item 3.    Key Information      4  
  

A. Selected Financial Data

     4  
  

B. Capitalization and Indebtedness

     6  
  

C. Reasons for the Offer and Use of Proceeds

     6  
  

D. Risk Factors

     6  
Item 4.    Information on the Company      44  
  

A. History And Development of the Company

     44  
  

B. Business Overview

     44  
  

C. Organizational Structure

     73  
  

D. Property, Plants and Equipment

     74  
Item 4A.    Unresolved Staff Comments      74  
Item 5.    Operating and Financial Review and Prospects      74  
  

A. Operating Results

     77  
  

B. Liquidity and Capital Resources

     86  
  

C. Research and Development, Patents and Licenses, Etc.

     90  
  

D. Trend Information

     90  
  

E. Off-Balance Sheet Arrangements

     90  
  

F. Tabular Disclosure of Contractual Obligations

     91  
  

G. Safe Harbor

     91  
Item 6.    Directors, Senior Management and Employees      91  
  

A. Directors and Senior Management

     91  
  

B. Compensation

     97  
  

C. Board Practices

     102  
  

D. Employees

     104  
  

E. Share Ownership

     104  
Item 7.    Major Shareholders and Related Party Transactions      104  
  

A. Major Shareholders

     104  
  

B. Related Party Transactions

     106  
  

C. Interests of Experts and Counsel

     109  
Item 8.    Financial Information      109  
  

A. Consolidated Statements and Other Financial Information

     109  
  

B. Significant Changes

     110  
Item 9.    The Offer and Listing      110  
  

A. Offer and Listing Details

     110  
  

B. Plan of Distribution

     111  
  

C. Markets

     111  
  

D. Selling Shareholders

     111  
  

E. Dilution

     111  
  

F. Expenses of the Issue

     111  
Item 10.    Additional Information      112  
  

A. Share Capital

     112  
  

B. Memorandum and Articles of Association

     112  
  

C. Material Contracts

     112  
  

D. Exchange Controls

     112  
  

E. Taxation

     112  
  

F. Dividends and Paying Agents

     122  
  

G. Statement by Experts

     122  
  

H. Documents on Display

     122  
  

I. Subsidiary Information

     123  

 

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Item 11.    Quantitative and Qualitative Disclosures About Market Risk.      123  
Item 12.    Description of Securities Other Than Equity Securities      123  
   A. Debt Securities      123  
   B. Warrants and Rights      124  
   C. Other Securities      124  
   D. American Depositary Shares      124  
PART II      
Item 13.    Defaults, Dividend Arrearages and Delinquencies      126  
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds      126  
Item 15.    Controls and Procedures      127  
Item 16.    Reserved   
Item 16A.    Audit Committee Financial Expert      129  
Item 16B.    Code of Ethics      129  
Item 16C.    Principal Accountant Fees and Services      129  
Item 16D.    Exemptions from the Listing Standards for Audit Committees      130  
Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers      130  
Item 16F.    Change in Registrant’s Certifying Accountant      130  
Item 16G.    Corporate Governance      130  
Item 16H.    Mine Safety Disclosure      131  
PART III      
Item 17.    Financial Statements      132  
Item 18.    Financial Statements      132  
Item 19.    Exhibits      132  

 

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INTRODUCTION

Unless otherwise indicated, “Celyad,” “the company,” “our company,” “we,” “us” and “our” refer to Celyad S.A. and its consolidated subsidiaries.

We own various trademark registrations and applications, and unregistered trademarks and service marks, including “CELYAD”, “C-CATH ez ” and our corporate logo. All other trademarks or trade names referred to in this Annual Report on Form 20-F are the property of their respective owners. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 20-F are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Annual Report on Form 20-F may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Our audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. Our consolidated financial statements are presented in euros. All references in this Annual Report on Form 20-F to “$,” “US$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “€”, “EUR”, and “euros” mean euros, unless otherwise noted. Throughout this Annual Report on Form 20-F, references to ADSs mean ADSs or ordinary shares represented by ADSs, as the case may be.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 20-F, or Annual Report, contains forward-looking statements. All statements other than present and historical facts and conditions contained in this Annual Report, including statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward-looking statements. When used in this Annual Report, the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “is designed to,” “may,” “might,” “plan,” “potential,” “predict,” “objective,” “should,” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

  the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

 

  our ability to advance drug product candidates into, and successfully complete, clinical trials;

 

  our ability to successfully manufacture drug product for our clinical trials, including drug product with the desired number of T cells under our clinical trial protocols, and our ability to improve and automate these manufacturing procedures in the future;

 

  our reliance on the success of our drug product candidates;

 

  the timing or likelihood of regulatory filings and approvals;

 

  our ability to develop sales and marketing capabilities;

 

  the commercialization of our drug product candidates, if approved;

 

  the pricing and reimbursement of our drug product candidates, if approved;

 

  the implementation of our business model, strategic plans for our business, drug product candidates and technology;

 

  the scope of protection we are able to establish and maintain for intellectual property rights covering our drug product candidates and technology;

 

  our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights and proprietary technology of third parties;

 

  cost associated with enforcing or defending intellectual property infringement, misappropriation or violation; product liability; and other claims;

 

  regulatory development in the United States, the European Union and other jurisdictions;

 

  estimates of our expenses, future revenues, capital requirements and our needs for additional financing and ability to obtain such financing when needed;

 

  the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;

 

  our ability to maintain and establish collaborations or obtain additional grant funding;

 

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

 

  our financial performance;

 

  developments relating to our competitors and our industry, including competing therapies;

 

  our ability to effectively manage our anticipated growth;

 

  our ability to attract and retain qualified employees and key personnel;

 

  our ability to build our finance infrastructure, improve our accounting systems and controls and remedy the material weakness identified in our internal control over financial reporting;

 

  our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

 

 

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  statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and share performance;

 

  our expectations regarding our passive foreign investment company, or PFIC, status;

 

  the future trading price of our ADSs and our ordinary shares and impact of securities analysts’ reports on these prices; and

 

  other risks and uncertainties, including those listed in the section of this Annual Report titled “Item 3.D.—Risk Factors.”

You should refer to the section of this Annual Report titled “Item 3.D.—Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this Annual Report and the documents that we reference in this Annual Report with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This Annual Report contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this Annual Report is generally reliable, such information is inherently imprecise.

 

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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

Our consolidated audited financial statements have been prepared in accordance with IFRS, as issued by the IASB. We derived the selected statements of consolidated income (loss) data, selected statements of consolidated financial position and selected statements of consolidated cash flows, each as of December 31, 2017, 2016 and 2015 from our consolidated audited financial statements

appended to this Annual Report. Our selected consolidated statements of consolidated income (loss) data, selected statements of consolidated financial position and selected statements of consolidated cash flows as of December 31, 2014 and 2013 and for the years ended December 31, 2014 and 2013 have been extracted from our audited consolidated financial statements, which are not included herein. This data should be read together with, and is qualified in its entirety by reference to, “Item 5—Operating and Financial Review and Prospects” as well as our financial statements and notes thereto appearing elsewhere in this Annual Report. Our historical results are not necessarily indicative of the results to be expected in the future.

Statement of Income (Loss) Data:

 

(€‘000)   

For the year ended December 31

 
     2017     2016     2015     2014     2013  

Revenues

     3,540       8,523       3       146       —    

Cost of sales

     (515     (53     (1     (115     —    

Gross profit

     3,025       8,471       2       31       —    

Research and development expenses

     (22,908     (27,675     (22,766     (15,865     (9,046

General and administrative expenses

     (9,310     (9,744     (7,230     (5,016     (3,972

Net other operating income

     2,590       3,340       322       4,413       64  

Amendment of Celdara Medical and Dartmouth College agreements

     (24,341     —         —         —         —    

Write-off C-Cure and Corquest assets and derecognition of related liabilities

     (1,932     —         —         —         —    

Operating loss

     (52,876     (25,609     (29,672     (16,437     (12,954

Financial income

     933       2,204       542       277       60  

Financial expenses

     (4,454     (207     (236     (41     (1,595

Share of loss of investments accounted for using the equity method

     —         —         252       (252     —    

Loss before taxes

     (56,396     (23,612     (29,114     (16,453     (14,489

Income taxes

     1       6       —         —         —    

Loss for the year (1)

     (56,395     (23,606     (29,114     (16,453     (14,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share (in €)

     (5.86     (2.53     (3.43     (2.44     (3.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of outstanding shares

     9,627,601       9,313,603       8,481,583       6,750,383       4,099,216  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For 2017, 2016 and 2015, the Group does not have any non-controlling interests and the losses for the year are fully attributable to owners of the parent.

 

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Selected Statement of Financial Position Data:

 

     2017      2016      2015      2014      2013  
     Euro      Euro      Euro      Euro      Euro  

Cash and cash equivalents

     23,253        48,357        100,175        27,633        19,058  

Short term investments

     10,653        34,230        7,338        2,671        3,000  

Total assets

     77,626        138,806        159,525        43,976        32,386  

Total equity

     47,535        90,885        111,473        26,684        16,898  

Total non-current liabilities

     22,146        36,646        36,562        11,239        12,099  

Total current liabilities

     7,945        11,275        11,490        6,053        3,389  

Total liabilities

     30,091        47,922        48,052        17,292        15,488  

Total equity and liabilities

     77,626        138,806        159,525        43,976        32,386  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Selected statements of consolidated cash flows

 

(€‘000)   

For the year ended December 31

 
     2017     2016     2015     2014     2013  

Net cash used in operations

     (44,441     (24,692     (27,303     (17,414     (10,638

Net cash from/(used in) investing activities

     17,613       (30,157     (10,691     (1,768     (3,532

Net cash from financing activities

     605       3,031       110,535       27,757       31,583  

Net cash and cash equivalents at the end of the period

     23,253       48,357       100,175       27,633       19,058  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exchange Rate Information

The following table sets forth, for each period indicated, the low and high exchange rates for euros expressed in U.S. dollars, the exchange rate at the end of such period and the average of such exchange rates on the last day of each month during such period, based on the noon buying rate of the Federal Reserve Bank of New York for the euro. As used in this document, the term “noon buying rate” refers to the rate of exchange for the euro, expressed in U.S. dollars per euro, as certified by the Federal Reserve Bank of New York for customs purposes. The exchange rates set forth below demonstrate trends in exchange rates, but the actual exchange rates used throughout this Annual Report may vary.

 

     2013      2014      2015      2016      2017  

High

     1.3816        1.3927        1.2015        1.1569        1.2041  

Low

     1.2774        1.2101        1.0524        1.0364        1.0416  

Rate at end of period

     1.3779        1.2101        1.0927        1.0541        1.2022  

Average rate per period

     1.3281        1.3297        1.1104        1.1069        1.1298  

The following table sets forth, for each of the last six months, the low and high exchange rates for euros expressed in U.S. dollars and the exchange rate at the end of the month based on the noon buying rate as described above.

 

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     October
2017
     November
2017
     December
2017
     January
2018
     February
2018
     March
2018
 

High

     1.1847        1.1936        1.2022        1.2488        1.2482        1.2440  

Low

     1.1580        1.1577        1.1725        1.1922        1.2211        1.2216  

Rate at end of period

     1.1648        1.1898        1.2022        1.2428        1.2211        1.2320  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On December 29, 2017, the noon buying rate of the Federal Reserve Bank of New York for the euro was €1.00 = US$1.2022. Unless otherwise indicated, currency translations in this annual report reflect the December 29, 2017 exchange rate.

On March 30, 2018, the noon buying rate of the Federal Reserve Bank of New York for the euro was €1.00 = $1.2320.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business faces significant risks. You should carefully consider all of the information set forth in this Annual Report and in our other filings with the U.S. Securities and Exchange Commission, or the SEC, including the following risk factors which we face and which are faced by our industry. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See “Special Note Regarding Forward-Looking Statements” above.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred losses in each period since our inception and anticipate that we will continue to incur losses for the foreseeable future.

We are not profitable and have incurred losses in each period since its inception. For the years ended December 31, 2017 and 2016, we incurred a loss for the year of €56.4 million and €23.6 million, respectively. As of December 31, 2017, we had an accumulated deficit of €180.4 million. We expect these losses to increase as we continue to incur significant research and development and other expenses related to our ongoing operations, continue to advance our drug product candidates through preclinical studies and clinical trials, seek regulatory approvals for our drug product candidates, scale-up manufacturing capabilities and hire additional personnel to support the development of our drug product candidates and to enhance our operational, financial and information management systems.

Even if we succeed in commercializing one or more of our drug product candidates, we will continue to incur losses for the foreseeable future relating to our substantial research and development expenditures to develop our technologies. We anticipate that our expenses will increase substantially if and as we:

 

    continue our research, preclinical and clinical development of our drug product candidates;

 

    expand the scope of therapeutic indications of our current clinical trials for our drug product candidates;

 

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    initiate additional preclinical studies or additional clinical trials of existing drug product candidates or new drug product candidates;

 

    further develop the manufacturing processes for our drug product candidates;

 

    seek regulatory approvals for our drug product candidates that successfully complete clinical trials;

 

    establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval, in the European Union and the United States;

 

    make milestone or other payments under any in-license agreements;

 

    maintain, protect and expand our intellectual property portfolio; and

 

    create additional infrastructure to support our operations as a U.S. public company.

We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue.

Our prior losses and expected future losses have had and will continue to have an adverse effect on our shareholders’ equity and working capital. Further, the losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period to period comparison of our results of operations may not be a good indication of our future performance.

We have generated only limited revenue from sales of C-Cath ez to date, and do not expect to generate material revenue until we receive regulatory approval for one of our drug product candidates.

We have generated only limited revenue from sales of C-Cath ez , our proprietary catheter for injecting cells into the heart, to research laboratories and clinical stage companies. We expect that revenue from sales of C-Cath ez will remain insignificant as we sell C-Cath ez only to research laboratories and clinical stage companies. We have no drug products approved for commercial sale, have not generated any revenue from drug product sales, and do not anticipate generating any revenue from drug product sales until after we have received regulatory approval, if at all, for the commercial sale of a drug product candidate. Our ability to generate revenue and achieve profitability depends significantly on our success in many factors, including:

 

    completing research regarding, and preclinical and clinical development of, our drug product candidates;

 

    pursuing regulatory approvals and marketing authorizations for drug product candidates for which we complete clinical trials;

 

    developing a sustainable and scalable commercial-scale manufacturing process for our drug product candidates, including establishing our own manufacturing capabilities and infrastructure or establishing and maintaining commercially viable supply relationships with third parties;

 

    launching and commercializing drug product candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;

 

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

 

    addressing any competing technological and market developments;

 

    identifying, assessing, acquiring and/or developing new drug product candidates;

 

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

 

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

 

    attracting, hiring, and retaining qualified personnel.

Even if one or more of the drug product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved drug product candidate. Our expenses could increase beyond expectations if we are required by the U.S. Food and Drug

 

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Administration, or the FDA, European Medicines Agency, or EMA, or other applicable regulatory agencies, to change our manufacturing processes or assays, or to perform clinical, preclinical, or other types of studies in addition to those that we currently anticipate. If we are successful in obtaining regulatory approvals to market one or more of our drug product candidates, our revenue will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the drug product, the ability to get coverage and adequate reimbursement, and whether we own the commercial rights for that territory. If the number of our addressable disease patients is not as significant as we estimate, the indication approved by regulatory authorities is narrower than we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of such products, even if approved. If we are not able to generate revenue from the sale of any approved drug products, we may never become profitable.

If we fail to obtain additional financing, we will be unable to complete the development and commercialization of our drug product candidates.

Our operations have required substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the clinical development of our drug product candidates, including our ongoing and planned clinical trials for CYAD-01 (CAR-T-NKG2D) and any of our future drug product candidates. If approved, we will require significant additional amounts in order to launch and commercialize our drug product candidates.

As of December 31, 2017, we had €23.3 million in cash and cash equivalents and €10.7 million in short-term investments.

We believe that our existing cash and cash equivalents and short-term investments, will be sufficient to fund our operations at least until the end of the first quarter of 2019. However, changing circumstances may cause us to increase our spending significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We may require additional capital for the further development and commercialization of our drug product candidates and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate.

We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our drug product candidates or other research and development initiatives. Our licenses may also be terminated if we are unable to meet the payment obligations under the agreements. We could be required to seek collaborators for our drug product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to our drug product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves. Any these events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our ADSs or ordinary shares to decline.

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

We may seek additional funding through a combination of equity offerings, debt financings, collaborations and/or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of the ADSs or the ordinary shares. The incurrence of indebtedness and/or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur additional debt and/or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of the ADSs or the ordinary shares to decline. In the event that we enter into collaborations and/or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights to technologies or drug product candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable terms.

 

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Risks Related to Product Development, Regulatory Approval and Commercialization

We are heavily dependent on the regulatory approval of CYAD-01 in the United States and Europe, and subsequent commercial success of CYAD-01, both of which may never occur.

We are a clinical-stage biopharmaceutical company with no products approved by regulatory authorities or available for commercial sale. We have generated limited revenue to date and do not expect to generate any revenue from product sales for the foreseeable future. As a result, our future success is currently dependent upon the regulatory approval and commercial success of CYAD-01 in one or more of the indications for which we intend to seek approval. Our ability to generate revenues in the near term will depend on our ability to obtain regulatory approval and successfully commercialize CYAD-01 on our own in the United States, the first country in which we intend to seek approval for CYAD-01. We may experience delays in obtaining regulatory approval in the United States for CYAD-01, if it is approved at all, and the price of our ordinary shares and/or ADSs may be negatively impacted. Even if we receive regulatory approval, the timing of the commercial launch of CYAD-01 in the United States is dependent upon a number of factors, including, but not limited to, hiring sales and marketing personnel, pricing and reimbursement timelines, the production of sufficient quantities of commercial drug product and implementation of marketing and distribution infrastructure.

In addition, we have incurred and expect to continue to incur significant expenses as we continue to pursue the approval of CYAD-01 in the United States, Europe and elsewhere. We plan to devote a substantial portion of our effort and financial resources in order to continue to grow our operational capabilities. This represents a significant investment in the clinical and regulatory success of CYAD-01, which is uncertain. The success of CYAD-01, if approved, and revenue from commercial sales, will depend on several factors, including:

 

    execution of an effective sales and marketing strategy for the commercialization of CYAD-01;

 

    acceptance by patients, the medical community and third-party payors;

 

    our success in educating physicians and patients about the benefits, administration and use of CYAD-01;

 

    the incidence and prevalence of the indications for which our CYAD-01 drug product candidate is approved in those markets in which CYAD-01 is approved;

 

    the prevalence and severity of side effects, if any, experienced by patients treated with CYAD-01;

 

    the availability, perceived advantages, cost, safety and efficacy of alternative treatments, including potential alternate treatments that may currently be available or in development or may later be available or in development or approved by regulatory authorities;

 

    successful implementation of our manufacturing processes that we plan to include in a future biologics license application and production of sufficient quantities of commercial drug product;

 

    maintaining compliance with regulatory requirements, including current good manufacturing practices, or cGMPs, good laboratory practices, or GLPs, and good clinical practices, or GCPs; and

 

    obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity and otherwise protecting our rights in our intellectual property portfolio.

We may also fail in our efforts to develop and commercialize future drug product candidates, including CYAD-101 (the allogeneic version of our CYAD-01 drug product candidate). If this were to occur, we would continue to be heavily dependent on the regulatory approval and successful commercialization of CYAD-01, our development costs may increase and our ability to generate revenue or profits, or to raise additional capital, could be impaired.

 

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Our THINK trial is ongoing and not complete. Initial success in our ongoing clinical trial may not be indicative of results obtained when this trial is completed. Furthermore, success in early clinical trials may not be indicative of results obtained in later trials.

Our clinical experience with our lead drug product candidate CYAD-01 is limited. We have treated a small number of patients as of the date of this Annual Report. In particular, the results of the CM-CS1 trial and the interim results of the THINK trial should not be relied upon as evidence that our ongoing or future clinical trials will succeed. Trial designs and results from previous or ongoing trials are not necessarily predictive of future clinical trial results, and initial or interim results may not continue or be confirmed upon completion of the trial. These data, or other positive data, may not continue or occur for these patients or for any future patients in our ongoing or future clinical trials, and may not be repeated or observed in ongoing or future trials involving our drug product candidates. There are limited data concerning long-term safety and efficacy following treatment with CYAD-01. Our drug product candidates may fail to show the desired safety and efficacy in later stages of clinical development despite having successfully advanced through initial clinical trials. There can be no assurance that any of these trials will ultimately be successful or support further clinical advancement or regulatory approval of CYAD-01 or other drug product candidates.

There is a high failure rate for drugs and biologics proceeding through clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in later stage clinical trials even after achieving promising results in earlier stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development.

In previous clinical trials involving T cell-based immunotherapies, some patients experienced serious adverse events. Our lead drug product candidate CYAD-01 may demonstrate a similar effect or have other properties that could halt its clinical development, prevent its regulatory approval, limit its commercial potential, or result in significant negative consequences.

In previous and ongoing clinical trials involving CAR-T cell products by other companies or academic researchers, many patients experienced side effects such as neurotoxicity and cytokine release syndrome, or CRS, which have in some cases resulted in clinical holds in ongoing clinical trials of CAR-T drug product candidates. There have been life threatening events related to severe neurotoxicity and CRS, requiring intense medical intervention such as intubation or pressor support, and in several cases, resulted in death. Severe neurotoxicity is a condition that is currently defined clinically by cerebral edema, confusion, drowsiness, speech impairment, tremors, seizures, or other central nervous system side effects, when such side effects are serious enough to lead to intensive care. In some cases, severe neurotoxicity was thought to be associated with the use of certain lymphodepletion preconditioning regimens used prior to the administration of the CAR-T cell products. CRS is a condition that is currently defined clinically by certain symptoms related to the release of cytokines, which can include fever, chills, low blood pressure, when such side effects are serious enough to lead to intensive care with mechanical ventilation or significant vasopressor support. The exact cause or causes of CRS and severe neurotoxicity in connection with treatment of CAR-T cell products is not fully understood at this time. In addition, patients have experienced other adverse events in these studies, such as a reduction in the number of blood cells (in the form of neutropenia, thrombocytopenia, anemia or other cytopenias), febrile neutropenia, chemical laboratory abnormalities (including elevated liver enzymes), and renal failure.

Undesirable side effects caused by our CYAD-01 drug product candidate or other T cell-based immunotherapy drug product candidates, could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trials or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff, as toxicities resulting from T cell-based immunotherapies are not normally encountered in the general patient population and by medical personnel. We expect to have to

 

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train medical personnel regarding our T cell-based immunotherapy drug product candidates to understand their side effects for both our planned clinical trials and upon any commercialization of any T cell-based immunotherapy drug product candidates. Inadequate training in recognizing or managing the potential side effects of T cell-based immunotherapy drug product candidates could result in patient deaths. Any of these occurrences could have a material adverse effect on our business, financial condition and prospects.

Our CYAD-01 drug product candidate is a new approach to cancer treatment that presents significant challenges.

We have concentrated our research and development efforts on cell-based immunotherapy technology, and our future success is highly dependent on the successful development of cell-based immunotherapies in general and in particular our approach using NKG2D receptor ligands, an activating receptor of NK cells. We cannot be sure that our T cell immunotherapy technologies will yield satisfactory products that are safe and effective, scalable or profitable.

Our approach to cancer immunotherapy and cancer treatment generally poses a number of challenges, including:

 

    obtaining regulatory approval from the FDA and other regulatory authorities that have very limited experience with the commercial development of genetically modified T cell therapies for cancer;

 

    developing and deploying consistent and reliable processes for engineering a patient’s T cells ex vivo and infusing the engineered T cells back into the patient;

 

    preconditioning patients with chemotherapy or other product treatments in conjunction with delivering each of our drug product candidates, which may increase the risk of adverse side effects;

 

    educating medical personnel regarding the potential side effect profile of each of our drug product candidates, such as the potential adverse side effects related to cytokine release or neurotoxicity;

 

    developing processes for the safe administration of these drug product candidates, including long-term follow-up for all patients who receive our drug product candidates;

 

    sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process our drug product candidates;

 

    developing a manufacturing process and distribution network with a cost of goods that allows for an attractive return on investment;

 

    establishing sales and marketing capabilities after obtaining any regulatory approval to gain market acceptance, and obtaining adequate coverage, reimbursement, and pricing by third-party payors and government authorities; and

 

    developing therapies for types of cancers beyond those addressed by our current drug product candidates.

Additionally, because our technology involves the genetic modification of patient cells ex vivo using a virus, we are subject to many of the challenges and risks that gene therapies face, including:

 

    Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. To date, only two products that involve the genetic modification of patient cells have been approved in the United States.

 

    In the event of improper insertion of a gene sequence into a patient’s chromosome, genetically modified products could lead to lymphoma, leukemia or other cancers, or other aberrantly functioning cells.

 

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    Although our viral vectors are not able to replicate, there is a risk with the use of retroviral or lentiviral vectors that they could lead to new or reactivated pathogenic strains of virus or other infectious diseases.

 

    The FDA recommends a 15 year follow-up observation period for all patients who receive treatment using gene therapies, and we may need to adopt such an observation period for our drug product candidates.

 

    Clinical trials using genetically modified cells conducted at institutions that receive funding for recombinant DNA research from the National Institutes of Health, are subject to review by the Recombinant DNA Advisory Committee (RAC). Although the FDA decides whether individual protocols may proceed, the RAC review process can impede the initiation of a clinical trial, even if the FDA has reviewed the study and approved its initiation.

Moreover, public perception of therapy safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical trials, or if approved, of physicians to subscribe to the novel treatment mechanics. Physicians, hospitals and third-party payors often are slow to adopt new products, technologies and treatment practices that require additional upfront costs and training. Physicians may not be willing to undergo training to adopt this novel and personalized therapy, may decide the therapy is too complex to adopt without appropriate training and may choose not to administer the therapy. Based on these and other factors, hospitals and payors may decide that the benefits of this new therapy do not or will not outweigh its costs.

We have limited experience with our new monoclonal antibody manufacturing process, and there can be no guarantee that we will be able to consistently produce the required number of T cells in our drug product candidate.

The manufacturing processes for our CYAD-01 drug product candidate is complex. We recently modified the manufacturing process we use to manufacture our CYAD-01 drug product candidate, with the objective of increasing the yield of T cell expansion in the drug product candidate we produce. However, there can be no assurance that we will be successful in improving the yield of T cell expansion, or that drug product candidates manufactured using this process will have similar or improved safety and clinical activity compared to drug product candidates manufactured using our prior manufacturing process.

Until recently, our CYAD-01 drug product candidate was manufactured using a process, which we refer to as the LY process, intended to reduce the co-expression of NKG2D and stress ligands induced by the manufacturing process. However, this reduction of the co-expression was not sufficient, especially at higher doses, and yielded a higher than anticipated fratricide effect; that is, the expressed T cells in the drug product candidate would kill each other or kill themselves. As a result, the LY process failed to consistently produce the required number of T cells in the drug product candidate, resulting in some cases our inability to manufacture drug product candidate consistent with the protocol for our THINK trial. All 15 patients treated in the THINK trial as of December 31, 2017 were treated with drug product candidate manufactured using the LY process. Of these 15 patients, 10 were dosed at the per-protocol intended dose and five were treated at a dose lower than the per-protocol intended dose due to our inability to obtain sufficient cell numbers in the drug product candidate using this manufacturing method. Of the 10 patients dosed at the per-protocol intended dose, we observed clinical activity in six patients, ranging from stable disease, or SD, to complete response, or CR. However, no signs of clinical activity were shown in patients treated with a dose lower than the per-protocol intended dose.

In response to these manufacturing challenges, we modified the manufacturing process to include a monoclonal antibody, or mAb, that inhibits NKG2D expression on the T cell surface during production. We believe that this method will enable us to consistently manufacture our drug product candidate with significantly higher cell numbers than the LY process. Although we have evaluated this new manufacturing process in both in vivo and ex vivo models in order to demonstrate reproducibility and comparability, and our THINK protocol has been amended for this new approach, there can be no assurance that drug product candidates manufactured using this process will enable us to consistently manufacture drug product candidates with the required number of T cells or that such drug product candidates will have similar or improved safety and clinical activity compared to drug product candidates manufactured using our prior manufacturing process. We have limited experience with this approach. If we fail to consistently manufacture drug product candidate with the required number of T cells we may not observe signs of clinical activity in our THINK clinical trial, which would adversely affect our clinical development, potential approval and commercial viability of our drug product candidate.

 

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The first patient in our THINK trial to be administered drug product candidate manufactured using the mAb process was treated in late January 2018. As of the date of this Annual Report, four patients have been dosed using the new process. To date, no critical safety issues related to the cell therapy have been reported. There can be no assurance that drug product candidate manufactured using the mAb process will have similar or improved safety and clinical activity compared to drug product candidate manufactured using the LY manufacturing process.

In addition, we may develop additional process changes in the future, as we seek to advance our drug product candidates through the clinic and prepare for a potential commercial launch. In some circumstances, changes in the manufacturing process may require us to perform additional comparability studies or to collect additional clinical data from patients prior to undertaking additional clinical studies or filing for regulatory approval. These requirements may lead to delays in our clinical development and commercialization plans as well as potential increased costs.

We have not yet finalized our clinical development program for CYAD-01 in AML and CRC. The FDA and comparable foreign regulators may not agree with our proposed protocols for these clinical trials, which could result in delays.

We are still considering the clinical development program for CYAD-01 in AML and CRC. Prior to initiating new clinical trials for our drug product candidates, we are required to submit clinical trial protocols for these trials to the FDA and comparable foreign regulators in other jurisdictions where we plan to undertake clinical trials. We may not reach agreement with these regulators, or there may be a delay in reaching agreement. These regulators may want to see additional clinical or preclinical data regarding our CYAD-01 drug product candidate before we initiate new clinical trials. Any of these decisions could have a material adverse effect on our expected clinical and regulatory timelines, business, prospects, financial condition and results of operations.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons, including:

 

    the size and nature of the patient population;

 

    the patient eligibility criteria defined in the protocol;

 

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

 

    the proximity of patients to trial sites;

 

    the design of the trial;

 

    our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

    competing clinical trials for similar therapies;

 

    clinicians’ and patients’ perceptions as to the potential advantages and side effects of the drug product candidate being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating;

 

    our ability to obtain and maintain patient consents; and

 

    the risk that patients enrolled in clinical trials will not complete a clinical trial.

In addition, our clinical trials will compete with other clinical trials for drug product candidates that are in the same therapeutic areas as our drug product candidates, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the number of qualified

 

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clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites. Moreover, because our drug product candidates represent a departure from more commonly used methods for ischemic heart failure and cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, rather than enroll patients in our clinical trials.

Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of our clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our drug product candidates.

Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials as well as data from any interim analysis of ongoing clinical trials may not be predictive of future trial results. Clinical failure can occur at any stage of clinical development.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Although drug product candidates may demonstrate promising results in early clinical (human) trials and preclinical (animal) studies, they may not prove to be effective in subsequent clinical trials. For example, testing on animals may occur under different conditions than testing in humans and therefore the results of animal studies may not accurately predict human experience. Likewise, early clinical trials may not be predictive of eventual safety or effectiveness results in larger-scale pivotal clinical trials. The results of preclinical studies and previous clinical trials as well as data from any interim analysis of ongoing clinical trials of our drug product candidates, as well as studies and trials of other products with similar mechanisms of action to our drug product candidates, may not be predictive of the results of ongoing or future clinical trials. Drug product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and earlier clinical trials. In addition to the safety and efficacy traits of any drug product candidate, clinical trial failures may result from a multitude of factors including flaws in trial design, dose selection, placebo effect and patient enrollment criteria. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials, and it is possible that we will as well. Based upon negative or inconclusive results, we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval.

The regulatory approval processes of the FDA, EMA and other comparable regulatory authorities is lengthy, time-consuming, and inherently unpredictable, and we may experience significant delays in the clinical development and regulatory approval, if any, of our drug product candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing, and distribution of drug products, including biologics, are subject to extensive regulation by the FDA, EMA and other comparable regulatory authorities. We are not permitted to market any biological product in the United States until we receive a Biologics License Application, or BLA, from the FDA or a marketing authorization application, or MAA, from the EMA. We have not previously submitted a BLA to the FDA, MAA to the EMA, or similar approval filings to comparable foreign authorities. A BLA must include extensive preclinical and clinical data and supporting information to establish that the drug product candidate is safe, pure, and potent for each desired indication. The BLA must also include significant information regarding the chemistry, manufacturing, and controls for the product, and the manufacturing facilities must complete a successful pre-license inspection. We expect the nature of our biologic product candidates to create further challenges in obtaining regulatory approval. For example, the FDA and EMA have limited experience with commercial development of genetically modified T-cell therapies for cancer. The FDA may also require a panel of experts, referred to as an Advisory Committee, to deliberate on the adequacy of the safety and efficacy data to support licensure. The opinion of the Advisory Committee, although not binding, may have a significant impact on our ability to obtain licensure of the drug product candidates based on the completed clinical trials. Accordingly, the regulatory approval pathway for our drug product candidates may be uncertain, complex, expensive, and lengthy, and approval may not be obtained.

 

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Obtaining and maintaining regulatory approval of our drug product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our drug product candidates in other jurisdictions.

If we obtain and maintain regulatory approval of our drug product candidates in one jurisdiction, such approval does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a drug product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the drug product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a drug product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our drug product candidates will be harmed.

A Breakthrough Therapy Designation by the FDA for our drug product candidates may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that our drug product candidates will receive marketing approval.

We may seek a Breakthrough Therapy Designation for some of our drug product candidates. A breakthrough therapy is defined as a product that is intended, alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drug product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drug product candidates designated as breakthrough therapies by the FDA may also be eligible for accelerated approval.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our drug product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a Breakthrough Therapy Designation for a drug product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our drug product candidates qualify as breakthrough therapies, the FDA may later decide that the drug product candidates no longer meet the conditions for designation.

A Fast Track Designation by the FDA may not actually lead to a faster development or regulatory review or approval process.

We may seek Fast Track Designation for some of our drug product candidates. If a product is intended for the treatment of a serious or life-threatening condition and the product demonstrates the potential to address unmet medical needs for this condition, the product sponsor may apply for Fast Track Designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe a particular drug product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program.

We may seek Orphan Drug Designation for some of our drug product candidates, and we may be unsuccessful or may be unable to maintain the benefits associated with Orphan Drug Designation, including the potential for market exclusivity.

As part of our business strategy, we may seek Orphan Drug Designation for some of our drug product candidates, and we may be unsuccessful. Regulatory authorities in some jurisdictions, including the United States

 

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and the European Union, may designate products for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a product intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the product will be recovered from sales in the United States. In the United States, Orphan Drug Designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.

Similarly, in the European Union, after recommendation from the EMA’s Committee for Orphan Medicinal Products, the European Commission grants Orphan Drug Designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the European Union and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to those affected). Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the product in the European Union would be sufficient to justify the necessary investment in developing the product. In the European Union, Orphan Drug Designation entitles a party to financial incentives such as reduction of fees or fee waivers.

Generally, if a drug product candidate with an Orphan Drug Designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same product and indication for that time period, except in limited circumstances. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a product no longer meets the criteria for Orphan Drug Designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified.

Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products can be approved for the same condition or the same products can be approved for different conditions. If one of our drug product candidates that receives an orphan drug designation is approved for a particular indication or use within the rare disease, the FDA may later approve the same product for additional indications or uses within that rare disease that are not protected by our exclusive approval. Even after an orphan drug is approved, the FDA can subsequently approve the same product for the same condition if the FDA concludes that the later product is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition or if another product with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient care. Orphan Drug Designation neither shortens the development time or regulatory review time of a product nor gives the product any advantage in the regulatory review or approval process. While we intend to seek Orphan Drug Designation for some of our drug product candidates, we may never receive such designations. Even if we do receive such designations, there is no guarantee that we will enjoy the benefits of those designations.

Even if we receive regulatory approval of our drug product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our drug product candidates.

If our drug product candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive FDA, and comparable foreign regulatory authority, requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP, and in certain cases current Good Tissue Practices, or cGTP, regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance, to the extent applicable, with cGMP and adherence

 

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to commitments made in any BLA, other marketing application, and previous responses to inspection observations. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

Any regulatory approvals that we receive for our drug product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the drug product candidate. The FDA may also require a REMS program as a condition of approval of our drug product candidates, which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves our drug product candidates, we will have to comply with requirements including submissions of safety and other post-marketing information and reports, establishment registration, as well as continued compliance with cGMPs and GCPs for any clinical trials that we conduct post-approval.

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

 

    restrictions on the marketing or manufacturing of our products, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

    fines, untitled or warning letters, or holds on clinical trials;

 

    refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;

 

    product seizure or detention, or refusal to permit the import or export of our drug product candidates; and

 

    injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our drug product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

We will need to obtain FDA approval of any proposed product trade names, and any failure or delay associated with such approval may adversely impact our business.

Any trade name we intend to use for our drug product candidates will require approval from the FDA, regardless of whether we have secured a formal trademark registration from the United States Patent and Trademark Office, or USPTO. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names and/or medication or prescribing errors. The FDA may also object to any product name we submit if it believes the name inappropriately implies medical claims. If the FDA objects to any of our proposed product names, we may be required to adopt an alternative name for our drug product candidates. If we adopt an alternative name, we would lose the benefit of our existing trademark applications for such drug product candidate, and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our drug product candidates.

 

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Even if we obtain regulatory approval of our drug product candidates, the products may not gain market acceptance among physicians, patients, hospitals and others in the medical community.

Our autologous engineered-cell therapies may not become broadly accepted by physicians, patients, hospitals, and others in the medical community. Numerous factors will influence whether our drug product candidates are accepted in the market, including:

 

    the clinical indications for which our drug product candidates are approved;

 

    physicians, hospitals, and patients considering our drug product candidates as a safe and effective treatment;

 

    the potential and perceived advantages of our drug product candidates over alternative treatments;

 

    the prevalence and severity of any side effects;

 

    product labeling or product insert requirements of the FDA, EMA, or other regulatory authorities;

 

    limitations or warnings contained in the labeling approved by the FDA or EMA;

 

    the timing of market introduction of our drug product candidates as well as competitive products;

 

    the cost of treatment in relation to alternative treatments;

 

    the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities;

 

    the willingness of patients to pay out-of-pocket in the absence of coverage by third-party payors and government authorities;

 

    relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies; and

 

    the effectiveness of our sales and marketing efforts.

In addition, although we are not utilizing embryonic stem cells in our drug product candidates, adverse publicity due to the ethical and social controversies surrounding the therapeutic use of such technologies, and reported side effects from any clinical trials using these technologies or the failure of such trials to demonstrate that these therapies are safe and effective may limit market acceptance of our drug product candidates due to the perceived similarity between our drug product candidates and these other therapies. If our drug product candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, or others in the medical community, we will not be able to generate significant revenue.

Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our products, are more cost effective or render our products obsolete.

Coverage and reimbursement may be limited or unavailable in certain market segments for our drug product candidates, which could make it difficult for us to sell our drug product candidates profitably.

Successful sales of our drug product candidates, if approved, depend on the availability of adequate coverage and reimbursement from third-party payors. In addition, because our drug product candidates represent novel approaches to the treatment of cancer, we cannot accurately estimate the potential revenue from our drug product candidates. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors are critical to new product acceptance.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

    a covered benefit under its health plan;

 

    safe, effective and medically necessary;

 

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    appropriate for the specific patient;

 

    cost-effective; and

 

    neither experimental nor investigational.

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Moreover, one payor’s decision to cover a particular drug product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of our products. Patients are unlikely to use our drug product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our drug product candidates. Because our drug product candidates have a higher cost of goods than conventional therapies, and may require long-term follow up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater.

We intend to seek approval to market our drug product candidates in the United States, European Union, and in selected other foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions for our drug product candidates, we will be subject to rules and regulations in those jurisdictions. For example, in the countries of the European Union, the pricing of biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval of a drug product candidate. In addition, market acceptance and sales of our drug product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our drug product candidates and may be affected by existing and future health care reform measures.

Healthcare legislative reform measures and constraints on national budget social security systems may have a material adverse effect on our business and results of operations.

Third-party payors, whether domestic or foreign, or governmental or private, are developing increasingly sophisticated methods of controlling healthcare costs. In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. In particular, in 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the ACA, was enacted, which, among other things, subjected biologic products to potential competition by lower-cost biosimilars, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs, and provided incentives to programs that increase the federal government’s comparative effectiveness research. Some of the provisions of the Affordable Care Act have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Congress may consider other legislation to replace elements of the ACA.

 

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The Tax Cuts and Jobs Act of 2017, or TCJA, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plan, the annual fee imposed on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device exercise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to reduce the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” Congress also could consider subsequent legislation to replace elements of the Affordable Care Act that are repealed. Thus, the full impact of the Affordable Care Act, any law replacing elements of it, and the political uncertainty surrounding any repeal or replacement legislation on our business remains unclear.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013, and will remain in effect through 2027 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012, was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:

 

    the demand for our drug product candidates, if we obtain regulatory approval;

 

    our ability to set a price that we believe is fair for our products;

 

    our ability to generate revenue and achieve or maintain profitability;

 

    the level of taxes that we are required to pay; and

 

    the availability of capital.

Any denial in coverage or reduction in reimbursement from Medicare or other government programs may result in a similar denial or reduction in payments from private payors, which may adversely affect our future profitability.

Our drug product candidates are biologics, which are complex to manufacture, and we may encounter difficulties in production, particularly with respect to process development or scaling-out of our manufacturing capabilities. If we or any of our third-party manufacturers encounter such difficulties, our ability to provide supply of our drug product candidates for clinical trials or our products for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.

Our drug product candidates are biologics and the process of manufacturing our products is complex, highly-regulated and subject to multiple risks. The manufacture of our drug product candidates involves complex processes, including harvesting cells from patients, selecting and expanding certain cell types, engineering or reprogramming the cells in a certain manner to create CAR-T NKR cells, expanding the cell population to

 

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obtain the desired dose, and ultimately infusing the cells back into a patient’s body. As a result of the complexities, the cost to manufacture our drug product candidates, is higher than traditional small molecule chemical compounds, and the manufacturing process is less reliable and is more difficult to reproduce. Our manufacturing process is susceptible to product loss or failure due to logistical issues associated with the collection of blood cells, or starting material, from the patient, shipping such material to the manufacturing site, shipping the final product back to the patient, and infusing the patient with the product, manufacturing issues associated with the differences in patient starting materials, interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, inconsistency in cell growth, and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects, and other supply disruptions. If for any reason we lose a patient’s starting material or later-developed product candidate at any point in the process, the manufacturing process for that patient will need to be restarted and the resulting delay may adversely affect that patient’s outcome. If microbial, viral, or other contaminations are discovered in our drug product candidates or in the manufacturing facilities in which our drug product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Because our drug product candidates are manufactured for each particular patient, we are required to maintain a chain of identity with respect to materials as they move from the patient to the manufacturing facility, through the manufacturing process, and back to the patient. Maintaining such a chain of identity is difficult and complex, and failure to do so could result in adverse patient outcomes, loss of product, or regulatory action including withdrawal of our products from the market. Further, as drug product candidates are developed through preclinical to late stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause our drug product candidates to perform differently and affect the results of ongoing clinical trials or other future clinical trials.

Although we are working, or will be working, to develop commercially viable processes for the manufacture of our drug product candidates, doing so is a difficult and uncertain task, and there are risks associated with scaling to the level required for later-stage clinical trials and commercialization, including, among others, cost overruns, potential problems with process scale-out, process reproducibility, stability issues, lot consistency, and timely availability of reagents or raw materials. We may ultimately be unable to reduce the cost of goods for our drug product candidates to levels that will allow for an attractive return on investment if and when those drug product candidates are commercialized.

In addition, the manufacturing process that we develop for our drug product candidates is subject to FDA and foreign regulatory authority approval process, and we will need to make sure that we or our contract manufacturers, or CMOs, if any, are able to meet all FDA and foreign regulatory authority requirements on an ongoing basis. If we or our CMOs are unable to reliably produce drug product candidates to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such drug product candidates. Even if we obtain regulatory approval for any of our drug product candidates, there is no assurance that either we or our CMOs will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could have an adverse effect on our business, financial condition, results of operations and growth prospects.

 

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We may face competition from biosimilars, which may have a material adverse impact on the future commercial prospects of our drug product candidates.

Even if we are successful in achieving regulatory approval to commercialize a drug product candidate faster than our competitors, we may face competition from biosimilars. The Biologics Price Competition and Innovation Act of 2009, or BPCI Act, created an abbreviated approval pathway for biological products that are demonstrated to be biosimilar to, or interchangeable with, an FDA-approved biological product. “Biosimilarity” means that the biological product is highly similar to the reference product notwithstanding minor differences in clinically inactive components and there are no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency of the product. To meet the higher standard of “interchangeability,” an applicant must provide sufficient information to show biosimilarity and demonstrate that the biological product can be expected to produce the same clinical result as the reference product in any given patient and, if the biological product is administrated more than once to an individual, the risk in terms of safety or diminished efficacy of alternating or switching between the use of the biological product and the reference product is not greater than the risk of using the reference product without such alternation or switch.

A reference biological product is granted 12 years of exclusivity from the time of first licensure of the product, and the FDA will not accept an application for a biosimilar or interchangeable product based on the reference biological product until four years after first licensure. First licensure typically means the initial date the particular product at issue was licensed in the United States. This does not include a supplement for the biological product or a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or other related entity) for a change that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device, or strength, unless that change is a modification to the structure of the biological product and such modification changes its safety, purity, or potency. Whether a subsequent application, if approved, warrants exclusivity as the first licensure of a biological product is determined on a case-by-case basis with data.

This data exclusivity does not prevent another company from developing a product that is highly similar to the innovative product, generating its own data, and seeking approval. Data exclusivity only assures that another company cannot rely upon the data within the application for the reference biological product to support the biosimilar product’s approval.

In the European Union, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past few years. In the European Union, a competitor may reference data supporting approval of an innovative biological product, but will not be able do so until eight years after the time of approval of the innovative product and to get its biosimilar on the market until ten years from the aforementioned approval. This 10-year marketing exclusivity period will be extended to 11 years if, during the first eight of those ten years, the marketing authorization holder obtains an approval for one or more new therapeutic indications that bring significant clinical benefits compared with existing therapies. In addition, companies may be developing biosimilars in other countries that could compete with our products.

If competitors are able to obtain marketing approval for biosimilars referencing our products, our products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences.

We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our drug product candidates, we may not be able to generate product revenue.

We currently have no sales, marketing, or commercial product distribution capabilities and have no experience in marketing products. We intend to develop an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. If we are unable or decide not to establish internal sales, marketing and commercial distribution capabilities for any or all products we develop, we will likely pursue collaborative arrangements regarding the sales and marketing of our products. However, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be

 

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successful. We may have little or no control over the marketing and sales efforts of such third parties, and our revenue from product sales may be lower than if we had commercialized our drug product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our drug product candidates.

There can be no assurance that we will be able to develop in-house sales and commercial distribution capabilities or establish or maintain relationships with third-party collaborators to successfully commercialize any product in the United States, the European Union, overseas, and as a result, we may not be able to generate product revenue.

We face intense competition and rapid technological change and the possibility that our competitors may develop therapies that are more advanced or effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our drug product candidates.

We face competition both in the United States and internationally, including from major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. In addition, many universities and private and public research institutes are active in our target disease areas. As of the date of this Annual Report, our main competitors for CYAD-01 and our other NKR-T cell product candidates include Bellicum Pharmaceuticals, Inc., Bluebird bio, Inc., Celgene Corporation, Cellectis S.A., Gilead Sciences Inc., Mustang Bio, Novartis AG, NantKwest Inc and Ziopharm Oncology, Inc.

Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, products that are more effective or less costly than any drug product candidate that we may develop, or achieve earlier patent protection, regulatory approval, product commercialization and market penetration than we do. Additionally, technologies developed by our competitors may render our potential drug product candidates uneconomical or obsolete, and we may not be successful in marketing our drug product candidates against competitors.

In addition, as a result of the expiration or successful challenge of our patent rights, we could face litigation with respect to the validity and/or scope of patents relating to our competitors’ products. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and commercialize.

Risks Related to Our Reliance on Third Parties

Cell-based therapies rely on the availability of specialty raw materials, which may not be available to us on acceptable terms or at all.

Engineered-cell therapies require many specialty raw materials, some of which are manufactured by small companies with limited resources and experience to support a commercial product. The suppliers may be ill-equipped to support our needs, especially in non-routine circumstances like an FDA inspection or medical crisis, such as widespread contamination. We also do not have contracts with many of these suppliers, and may not be able to contract with them on acceptable terms or at all. Accordingly, we may experience delays in receiving key raw materials to support clinical or commercial manufacturing.

In addition, some raw materials are currently available from a single supplier, or a small number of suppliers. We cannot be sure that these suppliers will remain in business, or that they will not be purchased by one of our competitors or another company that is not interested in continuing to produce these materials for our intended purpose.

We rely on third parties to conduct, supervise and monitor our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our drug product candidates and our business could be substantially harmed.

We rely on contract research organizations, or CROs, clinical investigators and clinical trial sites to ensure our clinical trials are conducted properly and on time. While we will have agreements governing their

 

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activities, we will have limited influence over their actual performance. We will control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.

We and our clinical investigators and CROs are required to comply with the GCPs for conducting, recording and reporting the results of clinical trials to assure that the data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. The FDA, the Competent Authorities of the Member States of the EEA, and comparable foreign regulatory authorities, enforce these GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our clinical investigators and CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the EMA, or other foreign regulatory authorities may require us to perform additional clinical trials before approving any marketing applications. Upon inspection, the FDA or other regulatory authorities may determine that our clinical trials did not comply with GCPs. In addition, our clinical trials will require a sufficient number of test subjects to evaluate the safety and effectiveness of our drug product candidates. Accordingly, if our clinical investigators or CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.

Our clinical investigators and CROs are not our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time and resources to our clinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other product development activities that could harm our competitive position. If our clinical investigators or CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our drug product candidates. If any such event were to occur, our financial results and the commercial prospects for our drug product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. Further, switching or adding additional CROs involves additional costs and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which could materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

Risks Related to Intellectual Property

We depend on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm our business.

We are dependent on patents, know-how, and proprietary technology, both our own and licensed from others. We license technology from the Trustees of Dartmouth College, or Dartmouth College. Dartmouth College may terminate our license, if we fail to meet a milestone within the specified time period, unless we pay the corresponding milestone payment. Dartmouth College may terminate either the license in the event we default or breach any of the provisions of the applicable license, subject to 30 days’ prior notice and opportunity to cure. In addition, the license automatically terminates in the event we become insolvent, make an assignment for the benefit of creditors or file, or have filed against us, a petition in bankruptcy. Furthermore, Dartmouth College may terminate our license, after April 30, 2024, if we fail to meet the specified minimum net sales obligations for any year, unless we pay to Dartmouth College the royalty we would otherwise be obligated to pay had we met such minimum net sales obligation. Any termination of this license could result in the loss of significant rights and could harm our ability to commercialize our drug product candidates. Disputes may also arise between us and our licensor regarding intellectual property subject to a license agreement, including those relating to:

 

    the scope of rights granted under the license agreement and other interpretation-related issues;

 

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    whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement;

 

    our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

    the amount and timing of milestone and royalty payments;

 

    whether we are complying with our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our drug product candidates; and

 

    the allocation of ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and by us and our partners.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected drug product candidates. We are generally also subject to all of the same risks with respect to protection of intellectual property that we license as we are for intellectual property that we own, which are described below. If we or our licensors fail to adequately protect this intellectual property, our ability to commercialize our products could suffer.

We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our drug product candidates.

The patent application process is expensive and time-consuming, and we and our current or future licensors and licensees may not be able to apply for or prosecute patents on certain aspects of our drug product candidates or deliver technologies at a reasonable cost, in a timely fashion, or at all. It is also possible that we or our current licensor, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, claim scope or patent term adjustments. Under our existing license agreement with Dartmouth College, we have the right, but not the obligation, to enforce our licensed patents. If our current licensor, or any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties from making, using, and selling competing products. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid and unenforceable. Moreover, our competitors may independently develop equivalent knowledge, methods, and know-how. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition and operating results.

We currently have issued patents and patent applications directed to our drug product candidates and medical devices, and we anticipate that we will file additional patent applications both in the United States and in other countries, as appropriate. However, we cannot predict:

 

    if and when any patents will issue from patent applications;

 

    the degree and range of protection any issued patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents;

 

    whether others will apply for or obtain patents claiming aspects similar to those covered by our patents and patent applications; or

 

    whether we will need to initiate litigation or administrative proceedings to defend our patent rights, which may be costly whether we win or lose.

We cannot be certain, however, that the claims in our pending patent applications will be considered patentable by the USPTO or by patent offices in foreign countries, or that the claims in any of our issued patents will be considered valid and enforceable by courts in the United States or foreign countries.

 

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The strength of patents in the biotechnology and pharmaceutical field can be uncertain, and evaluating the scope of such patents involves complex legal and scientific analyses. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our drug product candidates or uses thereof in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the validity, enforceability, or scope thereof, which may result in such patents being narrowed, invalidated, or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing their products to avoid being covered by our claims. If the breadth or strength of protection provided by the patent applications we hold with respect to our drug product candidates is threatened, this could dissuade companies from collaborating with us to develop, and could threaten our ability to commercialize, our drug product candidates. Further, because patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our drug product candidates. Furthermore, for U.S. applications in which all claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. For U.S. applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law in view of the passage of the America Invents Act, which brought into effect significant changes to the U.S. patent laws, including new procedures for challenging pending patent applications and issued patents.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Further, the extensive period of time between patent filing and regulatory approval for a drug product candidate limits the time during which we can market a drug product candidate under patent protection, which may particularly affect the profitability of our early-stage drug product candidates. If we encounter delays in our clinical trials, the period of time during which we could market our drug product candidates under patent protection would be reduced. Without patent protection for our drug product candidates, we may be open to competition from biosimilar versions of our drug product candidates.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on drug product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. For example, a 2017 report from the Office of the United States Trade Representative identified a number of countries, including India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including India and China, have been listed in the report every year since 1989. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information.

In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce, and any other elements of our product discovery and development processes that involve proprietary know-how, information, or technology that is not covered by patents. Trade secrets, however, may be difficult to protect. We seek to protect our proprietary processes, in part, by entering into confidentiality agreements with our employees, consultants, outside scientific advisors, contractors and collaborators. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, outside scientific advisors, contractors, and collaborators might intentionally or inadvertently disclose our trade secret information to competitors. In addition, competitors may otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, or misappropriation of our intellectual property by third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

Third-party claims of intellectual property infringement against us or our collaborators may prevent or delay our product discovery and development efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference, derivation, and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Recently, due to changes in U.S. law referred to as patent reform, new procedures including inter partes review and post-grant review have been implemented. This reform adds uncertainty to the possibility of challenge to our patents in the future.

Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing our drug product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our drug product candidates may give rise to claims of infringement of the patent rights of others.

Although we have conducted analyses of the patent landscape with respect to our drug product candidates, and based on these analyses, we believe that we will be able to commercialize our drug product candidates, third parties may nonetheless assert that we infringe their patents, or that we are otherwise employing their proprietary technology without authorization, and may sue us. There may be third-party patents of which we are currently unaware with claims to compositions, formulations, methods of manufacture, or methods of use or treatment that cover our drug product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our drug product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies or the manufacture, use, or sale of our drug product candidates infringes upon these patents. If any such third-party patents were held by a court of competent jurisdiction to cover our technologies or drug product candidates, the holders of any such patents may be able to block our ability to commercialize the applicable drug product candidate unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on commercially reasonable terms or at all. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, our ability to commercialize our drug product candidates may be impaired or delayed, which could in turn significantly harm our business.

Third parties asserting their patent rights against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our drug product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties, or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. In that event, we would be unable to further develop and commercialize our drug product candidates, which could harm our business significantly.

 

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We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming, and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To cease such infringement or unauthorized use, we may be required to file patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding or a declaratory judgment action against us, a court may decide that one or more of our patents is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceeding could put one or more of our patents at risk of being invalidated, held unenforceable, interpreted narrowly, or amended such that they do not cover our drug product candidates. Such results could also put our pending patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. Interference or derivation proceedings provoked by third parties or brought by the USPTO may be necessary to determine the priority of inventions with respect to, or the correct inventorship of, our patents or patent applications or those of our licensors. An unfavorable outcome could result in a loss of our current patent rights and could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation, interference, or derivation proceedings may result in a decision adverse to our interests and, even if we are successful, may result in substantial costs and distract our management and other employees.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ordinary shares.

Issued patents covering our drug product candidates could be found invalid or unenforceable if challenged in court or before the USPTO or comparable foreign authority.

If we or one of our licensing partners initiate legal proceedings against a third party to enforce a patent covering one of our drug product candidates, the defendant could counterclaim that the patent covering our drug product candidate is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, inter partes review, post-grant review, and equivalent proceedings in foreign jurisdictions, such as opposition or derivation proceedings. Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover and protect our drug product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity of our patents, for example, we cannot be certain that there is no invalidating prior art of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our drug product candidates. Such a loss of patent protection could have a material adverse impact on our business.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves, both technological and legal complexity, and is therefore costly, time-consuming, and inherently uncertain. Numerous recent changes to the patent laws and proposed changes to the rules of the USPTO may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, the Leahy-Smith America Invents Act, or AIA, enacted in 2011 involves significant changes in patent legislation. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a ‘‘first-to-file’’ system for deciding which party should be granted a patent when two or more

 

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patent applications are filed by different parties claiming the same invention. A third party that files a patent application with the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and provide opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

In addition, recent court rulings in cases such as Association for Molecular Pathology v. Myriad Genetics, Inc. (Myriad I); BRCA1- & BRCA2-Based Hereditary Cancer Test Patent Litig. (Myriad II); and Promega Corp. v. Life Technologies Corp. have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. For example, in Assoc. for Molecular Pathology v. Myriad Genetics, Inc. , the U.S. Supreme Court held that certain claims to naturally-occurring substances are not patentable. Although we do not believe that any of the patents owned or licensed by us will be found invalid based on this decision, we cannot predict how future decisions by the courts, the U.S. Congress, or the USPTO may impact the value of our patents.

We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

Failure to comply with proper procedure for obtaining and maintaining patents could have an adverse effect on our business.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process. Although an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees, and failure to properly legalize and submit formal documents. In any such event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

 

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Risks Related to Our Organization, Structure and Operation

We are highly dependent on our Chief Executive Officer and members of our executive management team, and if we are not successful in motivating and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract, motivate and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on members of our executive management team, particularly our chief executive officer, Christian Homsy (permanent representative of LSS Consulting SPRL). We do not maintain “key man” insurance on the life of Christian Homsy, or the lives of any of our other employees. The loss of the services of any members of our executive management team, and our inability to find suitable replacements, could result in delays in product development and harm our business.

Competition for skilled personnel in the biotechnology and pharmaceutical industries is intense and the turnover rate can be high, which may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided warrants that vest over time. The value to employees of these equity grants that vest over time may be significantly affected by movements in our share price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.

We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.

As of December 31, 2017, we employed 70 full-time employees, seven part-time employees (75.4 full time equivalent employees) and 10 senior managers under management services agreements. As our drug product candidates move into later stage clinical development and towards commercialization, we must add a significant number of additional managerial, operational, sales, marketing, financial, and other personnel. Future growth will impose significant added responsibilities on members of management, including:

 

    identifying, recruiting, integrating, maintaining, and motivating additional employees;

 

    managing our internal development efforts effectively, including the clinical and FDA review process for our drug product candidates, while complying with our contractual obligations to contractors and other third parties; and

 

    improving our operational, financial and management controls, reporting systems, and procedures.

Our future financial performance and our ability to commercialize our drug product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our drug product candidates and, accordingly, may not achieve our research, development, and commercialization goals.

If we engage in future acquisitions or strategic collaborations, this may increase our capital requirements, dilute our shareholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.

We may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary products, intellectual property rights, technologies, or businesses. Any potential acquisition or strategic collaboration may entail numerous risks, including:

 

    increased operating expenses and cash requirements;

 

    the assumption of additional indebtedness or contingent liabilities;

 

    assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel;

 

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    the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition;

 

    retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;

 

    risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or drug product candidates and regulatory approvals; and

 

    our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions. We do not currently carry biological or hazardous waste insurance coverage.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities.

Risks from the improper conduct of employees, agents, contractors, consultants or collaborators could adversely affect our reputation and our business, prospects, operating results, and financial condition.

We cannot ensure that our compliance controls, policies, and procedures will in every instance protect us from acts committed by our employees, agents, contractors, or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including, without limitation, healthcare, employment, foreign corrupt practices, environmental, competition, and patient privacy and other privacy laws and regulations. Such improper actions could subject us to civil or criminal investigations, and monetary and injunctive penalties, and could adversely impact our ability to conduct business, operating results, and reputation. In particular, our business activities may be subject to the Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to

 

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influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments.

Additionally, in many other countries, the health care providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and purchasers are subject to regulation under the FCPA. Recently the Securities and Exchange Commission, or SEC, and Department of Justice have increased their FCPA enforcement activities with respect to pharmaceutical companies. There is no certainty that all of our employees, agents, contractors, consultants or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, the closing down of our facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.

Our relationships with health care professionals, customers, independent contractors, consultants and third-party payors may be subject, directly or indirectly, to applicable anti-kickback laws, fraud and abuse laws, false claims laws, health information privacy and security laws, transparency laws and other healthcare laws and regulations, which could expose us to penalties, and could result in contractual damages, reputational harm, administrative burdens and diminished profits and future earnings.

Our arrangements with health care professionals, customers, independent contractors, consultants and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships.

In addition, we may be subject to health information privacy and security regulation of the European Union, the United States and other jurisdictions in which we conduct our business. For example, the laws that may affect our ability to operate include:

 

    the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual, or the purchase or recommendation of an item or service for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs;

 

    U.S. federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

    the U.S. federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

    HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose certain obligations, including mandatory contractual terms, on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal Open Payments Program that was created under the ACA (also known as the Sunshine Act), which requires certain manufacturers of covered pharmaceutical drugs, biologics, devices and medical supplies to track and report annually all payments or other transfers of value provided to physicians and teaching hospitals and certain ownership and investment interests held by physicians or their family members in applicable manufacturers and group purchasing organizations; and

 

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    analogous state and laws and regulations in other jurisdictions, such as state anti-kickback and false claims laws, which may be broader in scope and also apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and state and laws in other jurisdiction governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations or other sanctions. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws and regulations, it may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government funded healthcare programs.

We identified material weaknesses in connection with our internal control over financial reporting. Although we are taking steps to remediate these material weaknesses, we may not be successful in doing so in a timely manner, or at all, and we may identify other material weaknesses.

In connection with the audit of our consolidated financial statements for the year ended December 31, 2017, our management and independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. We have a limited number of personnel in our finance department. The limited number of personnel does not (i) enable effective and proper segregation of duties, (ii) allow for appropriate monitoring of financial reporting matters and internal control over financial reporting, and (iii) allow an effective application and tracking of our current policies and procedures with respect to the review, supervision and monitoring of our accounting and reporting functions. As a result, a number of adjustments to our consolidated financial statements were identified and made during the course of the audit.

A material weakness is a deficiency, or combination of deficiencies, such that there is reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis by our employees.

See “Item 15—Controls and Procedures” of this Annual Report for further discussion of management’s assessment of the ineffectiveness of our internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2016. However, until we cease to be an “emerging growth company,” as that term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm will not be required to attest to and report on the effectiveness of our internal control over financial reporting. As such, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. Had our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional control deficiencies may have been identified by our independent registered public accounting firm, they may have identified additional control deficiencies that could have also represented one or more material weaknesses. We continue to take several remedial actions to address our material weaknesses. In particular, we plan to design, draft and implement an overall, formalized framework and common policies and procedures for financial consolidation and reporting, with the objective of having such policies and procedures effective by mid-year 2018.

Assessing our procedures to improve our internal control over financial reporting is an ongoing process. We can provide no assurance that our remediation efforts described herein will be successful and that we will not have material weaknesses in the future. Any material weaknesses we identify could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to remedy the material weaknesses and conclude that our internal control over financial reporting is

 

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effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of the ADSs could decline, and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our current and future CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations, and those of our third-party research institution collaborators, CROs, CMOs, suppliers, and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, and other natural or man-made disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Damage or extended periods of interruption to our corporate, development or research facilities due to fire, natural disaster, power loss, communications failure, unauthorized entry or other events could cause us to cease or delay development of some or all of our drug product candidates. Although we maintain property damage and business interruption insurance coverage on these facilities, our insurance might not cover all losses under such circumstances and our business may be seriously harmed by such delays and interruption.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our drug product candidates.

We face an inherent risk of product liability as a result of the clinical testing of our drug product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if our drug product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our drug product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

    decreased demand for our products;

 

    injury to our reputation;

 

    withdrawal of clinical trial participants and inability to continue clinical trials;

 

    initiation of investigations by regulators;

 

    costs to defend the related litigation;

 

    a diversion of management’s time and our resources;

 

    substantial monetary awards to trial participants or patients;

 

    product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

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    loss of revenue;

 

    exhaustion of any available insurance and our capital resources;

 

    the inability to commercialize any drug product candidate; and

 

    a decline in our share price.

Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop, alone or with collaborators. Although our clinical trials are currently covered by a clinical trial insurance, the amount of such insurance coverage may not be adequate, we may be unable to maintain such insurance, or we may not be able to obtain additional or replacement insurance at a reasonable cost, if at all. Our insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

Our international operations subject us to various risks, and our failure to manage these risks could adversely affect our results of operations.

We face significant operational risks as a result of doing business internationally, such as:

 

    fluctuations in foreign currency exchange rates;

 

    potentially adverse and/or unexpected tax consequences, including penalties due to the failure of tax planning or due to the challenge by tax authorities on the basis of transfer pricing and liabilities imposed from inconsistent enforcement;

 

    potential changes to the accounting standards, which may influence our financial situation and results;

 

    becoming subject to the different, complex and changing laws, regulations and court systems of multiple jurisdictions and compliance with a wide variety of foreign laws, treaties and regulations;

 

    reduced protection of, or significant difficulties in enforcing, intellectual property rights in certain countries;

 

    difficulties in attracting and retaining qualified personnel;

 

    restrictions imposed by local labor practices and laws on our business and operations, including unilateral cancellation or modification of contracts; and

 

    rapid changes in global government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics and other similar outbreaks or events, and potential failure in confidence of our suppliers or customers due to such changes or events; and tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers.

We are subject to certain covenants as a result of certain non-dilutive financial support we have received to date.

As from the inception of our company until December 31, 2017, we have received recoverable cash advances, grants and subsidies totaling €24.5 million, to support various research programs from the Walloon Region, or the Region. The support has been granted in the form of recoverable cash advances, or RCAs, and subsidies.

In the event we decide to exploit any discoveries or products from the research funded by under an RCA, the relevant RCA becomes refundable, otherwise the RCA is not refundable. We own the intellectual property rights which result from the research programs partially funded by the Region, unless we decide not to exploit, or cease to exploit, the results of the research in which case the results and intellectual property rights are transferred to the Region. Subject to certain exceptions, however, we cannot grant to third parties, by way of

 

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license or otherwise, any right to use the results without the prior consent of the Region. We also need the consent of the Region to transfer an intellectual property right resulting from the research programs or a transfer or license of a prototype or installation. Obtaining such consent from the Region could give rise to a review of the applicable financial terms. The RCAs also contain provisions prohibiting us from conducting research for any other person which would fall within the scope of a research program of one of the RCAs. Most RCAs provide that this prohibition is applicable during the research phase and the decision phase but a number of RCAs extend it beyond these phases.

On December 22, 2017, we have notified the Walloon Region of our decision not to exploit the results of the C-Cure program. As a result and as per contractual terms, we proposed to transfer to the Region the research data and intellectual property rights associated with the research and developments projects co-financed. As of the date of this report, the Region has not yet notified us of its decision to take back the research data and intellectual property rights.

Subsidies received from the Region are dedicated to funding research programs and patent applications and are not refundable. We own the intellectual property rights which result from the research programs or with regard to a patent covered by a subsidy. Subject to certain exceptions, however, we cannot grant to third parties, by way of license, transfer or otherwise, any right to use the patents or research results without the prior consent of the Region. In addition, certain subsidies require that we exploit the patent in the countries where the protection was granted and to make an industrial use of the underlying invention. In case of bankruptcy, liquidation or dissolution, the rights to the patents covered by the patent subsidies will be assumed by the Region by operation of law unless the subsidy is reimbursed. Furthermore, we would lose our qualification as a small or medium-sized enterprise, the patent subsidies will terminate and no additional expenses will be covered by such patent subsidies.

We may be exposed to significant foreign exchange risk.

We incur portions of our expenses, and may in the future derive revenues, in currencies other than the euro, in particular, the U.S. dollar. As a result, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. We currently do not engage in hedging transactions to protect against uncertainty in future exchange rates between particular foreign currencies and the euro. Therefore, for example, an increase in the value of the euro against the U.S. dollar could be expected to have a negative impact on our revenue and earnings growth as U.S. dollar revenue and earnings, if any, would be translated into euros at a reduced value. We cannot predict the impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our financial condition, results of operations and cash flows.

The requirements of being a U.S. public company may strain our resources and divert management’s attention.

We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations adopted by the SEC and the Public Corporation Accounting Oversight Board. Further, compliance with various regulatory reporting requires significant commitments of time from our management and our directors, which reduces the time available for the performance of their other responsibilities. Our failure to track and comply with the various rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, lead to additional regulatory enforcement actions, and could adversely affect the value of the ADSs or the ordinary shares.

The investment of our cash and cash equivalents may be subject to risks that may cause losses and affect the liquidity of these investments.

As of December 31, 2017, we had cash and cash equivalents of €23.3 million and short-term investments of €10.7 million. We historically have invested substantially all of our available cash and cash equivalents in corporate bank accounts. Pending their use in our business, we may invest the net proceeds of the global offering in investments that may include corporate bonds, commercial paper, certificates of deposit and money market funds. These investments may be subject to general credit, liquidity, and market and interest rate risks. We may realize losses in the fair value of these investments or a complete loss of these investments, which would have a negative effect on our financial statements.

 

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Risks Related to Ownership of Our Ordinary Shares and ADSs

The market price for the ADSs may be volatile or may decline regardless of our operating performance.

The trading price of the ADSs has fluctuated, and is likely to continue to fluctuate, substantially. The trading price of the ADSs depends on a number of factors, many of which are beyond our control and may not be related to our operating performance, including, among others:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    actual or anticipated changes in our growth rate relative to our competitors;

 

    competition from existing products or new products that may emerge;

 

    announcements by us, our partners or our competitors of significant acquisitions, strategic collaborations, joint ventures, collaborations, or capital commitments;

 

    failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

    issuance of new or updated research or reports by securities analysts;

 

    fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

    additions or departures of key management or scientific personnel;

 

    disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;

 

    changes to coverage policies or reimbursement levels by commercial third-party payors and government payors and any announcements relating to coverage policies or reimbursement levels;

 

    announcement or expectation of additional debt or equity financing efforts;

 

    sales of the ADSs or ordinary shares by us, our insiders or our other shareholders; and

 

    general economic and market conditions.

These and other market and industry factors may cause the market price and demand for the ADSs to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their ADSs and may otherwise negatively affect the liquidity of our ADSs shares. In addition, the stock market in general, and biotechnology and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.

Fluctuations in the exchange rate between the U.S. dollar and the euro may increase the risk of holding the ADSs.

Our ordinary shares currently trade on Euronext Brussels and Euronext Paris in euros, while the ADSs trade on NASDAQ in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the euro may result in differences between the value of the ADSs and the value of our ordinary shares, which may result in heavy trading by investors seeking to exploit such differences. In addition, as a result of fluctuations in the exchange rate between the U.S. dollar and the euro, the U.S. dollar equivalent of the proceeds that a holder of the ADSs would receive upon the sale in Belgium of any ordinary shares withdrawn from the depositary upon calculation of the corresponding ADSs and the U.S. dollar equivalent of any cash dividends paid in euros on our ordinary shares represented by the ADSs could also decline.

Holders of the ADSs are not treated as shareholders of our company.

Holders of the ADSs are not treated as shareholders of our company, unless they cancel the ADSs and withdraw our ordinary shares underlying the ADSs. The depositary (or its nominee) is the shareholder of the ordinary shares underlying the ADSs. Holders of ADSs therefore do not have any rights as shareholders of our company, other than the rights that they have pursuant to the deposit agreement.

 

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If securities or industry analysts do not publish research or publish inaccurate research or unfavorable research about our business, the price of the ordinary shares and the ADSs and trading volume could decline.

The trading market for the ordinary shares and the ADSs depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for the ordinary shares and the ADSs would be negatively impacted. If one or more of the analysts who covers us downgrades the ordinary shares or the ADSs or publishes incorrect or unfavorable research about our business, the price of the ordinary shares and the ADSs would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, or downgrades the ordinary shares or the ADSs, demand for the ADSs and ordinary shares could decrease, which could cause the price of the ADSs and ordinary shares or trading volume to decline.

We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of the ADSs or the ordinary shares increases.

We have no present intention to pay dividends in the foreseeable future. Any recommendation by our board of directors to pay dividends will depend on many factors, including our financial condition (including losses carried-forward), results of operations, legal requirements and other factors. Furthermore, pursuant to Belgian law, the calculation of amounts available for distribution to shareholders, as dividends or otherwise, must be determined on the basis of our non-consolidated statutory accounts prepared in accordance with Belgian accounting rules. In addition, in accordance with Belgian law and our articles of association, we must allocate each year an amount of at least 5% of our annual net profit under our non-consolidated statutory accounts to a legal reserve until the reserve equals 10% of our share capital. Therefore, we are unlikely to pay dividends or other distributions in the foreseeable future. If the price of the ADSs or the ordinary shares declines before we pay dividends, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.

Our shareholders residing in countries other than Belgium may be subject to double withholding taxation with respect to dividends or other distributions made by us.

Any dividends or other distributions we make to shareholders will, in principle, be subject to withholding tax in Belgium at a rate of 30%, except for shareholders which qualify for an exemption of withholding tax such as, among others, qualifying pension funds or a company qualifying as a parent company within the meaning of the Council Directive (90/435/EEC) July 23, 1990, known as the Parent-Subsidiary Directive, or that qualify for a lower withholding tax rate or an exemption by virtue of a tax treaty. Various conditions may apply and shareholders residing in countries other than Belgium are advised to consult their advisers regarding the tax consequences of dividends or other distributions made by us. Our shareholders residing in countries other than Belgium may not be able to credit the amount of such withholding tax to any tax due on such dividends or other distributions in any other country than Belgium. As a result, such shareholders may be subject to double taxation in respect of such dividends or other distributions. Belgium and the United States have concluded a double tax treaty concerning the avoidance of double taxation, or the U.S.-Belgium Tax Treaty. The U.S.-Belgium Tax Treaty reduces the applicability of Belgian withholding tax to 15%, 5% or 0% for U.S. taxpayers, provided that the U.S. taxpayer meets the limitation of benefits conditions imposed by the U.S.-Belgium Tax Treaty. The Belgian withholding tax is generally reduced to 15% under the U.S.-Belgium Tax Treaty. The 5% withholding tax applies in case where the U.S. shareholder is a company which holds at least 10% of the shares in the company. A 0% Belgian withholding tax applies when the shareholder is a company which has held at least 10% of the shares in the company for at least 12 months, or is, subject to certain conditions, a U.S. pension fund. The U.S. shareholders are encouraged to consult their own tax advisers to determine whether they can invoke the benefits and meet the limitation of benefits conditions as imposed by the U.S.-Belgium Tax Treaty.

 

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We believe that we were a PFIC for the 2015 taxable year and in prior taxable years, but that we likely were not a PFIC for our 2016 or 2017 taxable years. It is uncertain whether we will be a PFIC for the 2018 taxable year or in future taxable years. Our status as a PFIC is a fact intensive determination and we cannot provide any assurances regarding our PFIC status for past, current or future taxable years. U.S. holders of the ADSs may suffer adverse tax consequences if we are characterized as a PFIC for any taxable year.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, including cash, we would be characterized as a passive foreign investment company (PFIC), for U.S. federal income tax purposes. For purposes of these tests, passive income includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. If we are characterized as a PFIC, U.S. holders of the ADSs may suffer adverse tax consequences, including having gains realized on the sale of the ADSs treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on the ADSs by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of sales of the ADSs.

Our status as a PFIC will depend on the composition of our income, including the receipt of milestones, and the composition and value of our assets (which may be determined in large part by reference to the market value of the ADSs and ordinary shares, which may be volatile) from time to time.

We believe we were a PFIC in our 2015 taxable year and in prior taxable years, but that we likely were not a PFIC for our 2016 or 2017 taxable years. With respect to our 2018 taxable year and possibly future taxable years, it is uncertain whether we will be a PFIC based upon the expected value of our assets, including any goodwill, and the expected composition of our income and assets. Our status as a PFIC is a fact intensive determination made on an annual basis and we cannot provide any assurances regarding our PFIC status for past, current or future taxable years.

Future sales of ordinary shares or ADSs by existing shareholders could depress the market price of the ADSs.

If our existing shareholders sell, or indicate an intent to sell, substantial amounts of ordinary shares or ADSs in the public market, the trading price of the ADSs could decline significantly. In the future we may file one or more registration statements with the SEC covering ordinary shares available for future issuance under our equity incentive plans. Upon effectiveness of such registration statements, any shares subsequently issued under such plans will be eligible for sale in the public market, except to the extent that they are restricted by the lock-up agreements referred to above and subject to compliance with Rule 144 in the case of our affiliates. Sales of a large number of the shares issued under these plans in the public market could have an adverse effect on the market price of the ADSs and the ordinary shares.

We are a Belgian public limited liability company, and shareholders of our company may have different and in some cases more limited shareholder rights than shareholders of a U.S. listed corporation.

We are a public limited liability company incorporated under the laws of Belgium. Our corporate affairs are governed by Belgian corporate and securities law. The rights provided to our shareholders under Belgian corporate law and our articles of association differ in certain respects from the rights that you would typically enjoy as a shareholder of a U.S. corporation under applicable U.S. federal and state laws. Under Belgian corporate law, other than certain information that we must make public and except in certain limited circumstances, our shareholders may not ask for an inspection of our corporate records, while under Delaware corporate law any shareholder, irrespective of the size of its shareholdings, may do so. Shareholders of a Belgian corporation have more limited rights to initiate a derivative action, a remedy typically available to shareholders of U.S. companies, in order to enforce a right of our Company, in case we fail to enforce such right ourselves.

A liability action can be instituted for our account by one or more of our shareholders who, individually or together, hold securities representing at least 1.0% of the votes or a part of the capital worth at least €1.25 million and have not approved of the discharge from liability that was granted to the directors. If the court orders the directors to pay damages, they are due to us, though the amounts advanced by the minority shareholders (for example attorney’s fees) are to be reimbursed by us. If the action is disallowed, the minority shareholders may be ordered to pay the costs, and, should there be grounds therefor, to pay damages to the directors, for example for having conducted provocative and reckless legal proceedings.

 

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In addition, a majority of our shareholders present or represented at our meeting of shareholders may release a director from any claim of liability we may have, provided that the financial position of the company is accurately reflected in the annual accounts. This includes a release from liability for any acts of the directors beyond their statutory powers or in breach of the Belgian Company Code, provided that the relevant acts were specifically mentioned in the convening notice to the meeting of shareholders deliberating on the discharge. In contrast, most U.S. federal and state laws prohibit a company or its shareholders from releasing a director from liability altogether if he or she has acted in bad faith or has breached his or her duty of loyalty to the company. Finally, Belgian corporate law does not provide any form of appraisal rights in the case of a business combination. As a result of these differences between Belgian corporate law and our articles of association, on the one hand, and the U.S. federal and state laws, on the other hand, in certain instances, you could receive less protection as an ADS holder of our company than you would as a shareholder of a listed U.S. company.

Takeover provisions in the national law of Belgium may make a takeover difficult.

Public takeover bids on our shares and other voting securities, such as warrants or convertible bonds, if any, are subject to the Belgian Act of April 1, 2007 on public takeover bids, as amended and implemented by the Belgian Royal Decree of April 27, 2007, or Royal Decree, and to the supervision by the Belgian Financial Services and Markets Authority, or FSMA. Public takeover bids must be made for all of our voting securities, as well as for all other securities that entitle the holders thereof to the subscription to, the acquisition of or the conversion into voting securities. Prior to making a bid, a bidder must issue and disseminate a prospectus, which must be approved by the FSMA. The bidder must also obtain approval of the relevant competition authorities, where such approval is legally required for the acquisition of our company. The Belgian Act of April 1, 2007 provides that a mandatory bid will be required to be launched for all of our outstanding shares and securities giving access to ordinary shares if a person, as a result of its own acquisition or the acquisition by persons acting in concert with it or by persons acting on their account, directly or indirectly holds more than 30% of the voting securities in a company that has its registered office in Belgium and of which at least part of the voting securities are traded on a regulated market or on a multilateral trading facility designated by the Royal Decree. The mere fact of exceeding the relevant threshold through the acquisition of one or more shares will give rise to a mandatory bid, irrespective of whether or not the price paid in the relevant transaction exceeds the current market price.

There are several provisions of Belgian company law and certain other provisions of Belgian law, such as the obligation to disclose important shareholdings and merger control, that may apply to us and which may make an unfriendly tender offer, merger, change in management or other change in control, more difficult. These provisions could discourage potential takeover attempts that third parties may consider and thus deprive the shareholders of the opportunity to sell their shares at a premium (which is typically offered in the framework of a takeover bid).

Holders of ADSs do not have the same voting rights as holders of our ordinary shares.

Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, if we so request, the depositary shall distribute to the holders as of the record date (1) the notice of the meeting or solicitation of consent or proxy sent by us and (2) a statement as to the manner in which instructions may be given by the holders. You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary shares so that you can vote them yourself. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

 

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Holders of ADSs may be subject to limitations on the transfer of their ADSs and the withdrawal of the underlying ordinary shares.

ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason, subject to your right to cancel your ADSs and withdraw the underlying ordinary shares. Temporary delays in the cancellation of your ADSs and withdrawal of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares.

In addition, you may not be able to cancel your ADSs and withdraw the underlying ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities.

We are an “emerging growth company” and are availing ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make the ADSs or the ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find the ADSs or the ordinary shares less attractive because we may rely on these exemptions. If some investors find the ADSs or the ordinary shares less attractive as a result, there may be a less active trading market for the ADSs or the ordinary shares and the price of the ADSs or the ordinary shares may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (3) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; and (4) December 31, 2020. We may choose to take advantage of some but not all of these exemptions.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company. This may limit the information available to holders of ADSs or ordinary shares.

We are a “foreign private issuer,” as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to public companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act, including the U.S. proxy rules under Section 14 of the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we currently make annual and semi-annual filings with respect to our listing on Euronext Brussels and Euronext Paris, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. domestic issuers and will not be required to file quarterly reports on Form 10-Q or current reports on Form 8-K under the Exchange Act. Accordingly, there will be less publicly available information concerning our company than there would be if we were not a foreign private issuer.

 

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As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from NASDAQ corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards.

As a foreign private issuer listed on NASDAQ, we are subject to corporate governance listing standards. However, rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in Belgium, which is our home country, may differ significantly from corporate governance listing standards. For example, neither the corporate laws of Belgium nor our articles of association require a majority of our directors to be independent and we could include non-independent directors as members of our Nomination and Remuneration Committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. Currently, we intend to follow home country practice to the maximum extent possible. Therefore, our shareholders may be afforded less protection than they otherwise would have under corporate governance listing standards applicable to U.S. domestic issuers. See “Item 16G—Corporate Governance.”

We may lose our foreign private issuer status in the future, which could result in significant additional cost and expense.

While we currently qualify as a foreign private issuer, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2018. In the future, we would lose our foreign private issuer status if we to fail to meet the requirements necessary to maintain our foreign private issuer status as of the relevant determination date. For example, if more than 50% of our securities are held by U.S. residents and more than 50% of the members of our executive management team or members of our board of directors are residents or citizens of the United States, we could lose our foreign private issuer status.

The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly more than costs we incur as a foreign private issuer. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive in certain respects than the forms available to a foreign private issuer. We would be required under current SEC rules to prepare our financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, rather than IFRS, and modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion of our financial statements to U.S. GAAP could involve significant time and cost. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers such as the ones described above and exemptions from procedural requirements related to the solicitation of proxies.

I t may be difficult for investors outside Belgium to serve process on, or enforce foreign judgments against, us or our directors and senior management.

We are a Belgian public limited liability company. Less than a majority of the members of our board of directors and members of our executive management team are residents of the United States. All or a substantial portion of the assets of such non-resident persons and most of our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process upon such persons or on us or to enforce against them or us a judgment obtained in U.S. courts. Original actions or actions for the enforcement of judgments of U.S. courts relating to the civil liability provisions of the federal or state securities laws of the United States are not directly enforceable in Belgium.

The United States and Belgium do not currently have a multilateral or bilateral treaty providing for reciprocal recognition and enforcement of judgments, other than arbitral awards, in civil and commercial matters. In order for a final judgment for the payment of money rendered by U.S. courts based on civil liability to produce any effect on Belgian soil, it is accordingly required that this judgment be recognized or be declared enforceable by a Belgian court in accordance with Articles 22 to 25 of the 2004 Belgian Code of Private International Law. Recognition or enforcement does not imply a review of the merits of the case and is irrespective of any reciprocity requirement. A U.S. judgment will, however, not be recognized or declared enforceable in Belgium if it infringes upon one or more of the grounds for refusal that are exhaustively listed in Article 25 of the Belgian Code of Private International Law. Actions for the enforcement of judgments of U.S. courts might be successful only if the Belgian court confirms the substantive correctness of the judgment of the U.S. court and is satisfied that:

 

    the effect of the enforcement judgment is not manifestly incompatible with Belgian public policy;

 

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    the judgment did not violate the rights of the defendant;

 

    the judgment was not rendered in a matter where the parties transferred rights subject to transfer restrictions with the sole purpose of avoiding the application of the law applicable according to Belgian international private law;

 

    the judgment is not subject to further recourse under U.S. law;

 

    the judgment is not compatible with a judgment rendered in Belgium or with a subsequent judgment rendered abroad that might be recognized in Belgium;

 

    a claim was not filed outside Belgium after the same claim was filed in Belgium, while the claim filed in Belgium is still pending;

 

    the Belgian courts did not have exclusive jurisdiction to rule on the matter;

 

    the U.S. court did not accept its jurisdiction solely on the basis of either the nationality of the plaintiff or the location of the disputed goods; and

 

    the judgment submitted to the Belgian court is authentic.

In addition to recognition or enforcement, a judgment by a federal or state court in the United States against us may also serve as evidence in a similar action in a Belgian court if it meets the conditions required for the authenticity of judgments according to the law of the state where it was rendered. The findings of a federal or state court in the United States will not, however, be taken into account to the extent they appear incompatible with Belgian public policy.

We may be subject at an increased risk of securities class action litigation.

Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant share price volatility in recent years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Tax law changes could adversely affect our shareholders and our business and financial condition.

We and our subsidiaries are subject to income and other taxes in Belgium, the United States, and other tax jurisdictions throughout the world. Tax laws and rates in these jurisdictions are subject to change. Our financial condition can be impacted by a number of complex factors, including, but not limited to: (i) interpretations of existing tax laws; (ii) the tax impact of existing or future legislation; (iii) changes in accounting standards; and (iv) changes in the mix of earnings in the various tax jurisdictions in which we operate. The U.S. government has recently enacted comprehensive tax legislation that includes significant changes to the taxation of U.S. business entities. This legislation, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate, limitation of the tax deduction for net interest (except for certain small businesses), limitation of the deduction for net operating losses and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely), and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). The overall impact of this tax reform is uncertain, and it is possible that our shareholders and our business and financial condition could be adversely affected. We continue to examine the impact this tax reform legislation may have on our U.S. operations. We urge our shareholders to consult with their legal and tax advisors with respect to any such legislation and the potential tax consequences of investing in our common shares.

 

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ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Our legal and commercial name is Celyad SA. Prior to May 5, 2015, our corporate name was Cardio3 Biosciences SA. We are a limited liability company incorporated in the form of a naamloze vennootschap /société anonyme under Belgian law. We are registered with the Register of Legal Entities (RPM Nivelles) under the enterprise number 891.118.115. We were incorporated in Belgium on July 24, 2007 for an unlimited duration. Our fiscal year ends December 31.

Our principal executive and registered offices are located at rue Edouard Belin 2 1435 Mont-Saint-Guibert, Belgium and our telephone number is +32 10 394 100. Our agent for service of process in the United States is C T Corporation System, with an address at 111 8 th Avenue, New York, NY 10011. We also maintain a website at www.celyad.com . The reference to our website is an inactive textual reference only and the information contained in, or that can be accessed through, our website is not a part of this Annual Report.

Our actual capital expenditures for the years ended December 31, 2015, 2016 and 2017 amounted to €0.8 million, €1.8 million and €0.9 million, respectively. These capital expenditures primarily consisted of the acquisition of laboratory equipment and industrial tools, the refurbishment of our research and development laboratories and leasehold improvements of our corporate offices located in Belgium and the United States. We expect our capital expenditures to increase in absolute terms in the near term as we continue to advance our research and development programs and grow our operations. We anticipate our capital expenditure in 2018 to be financed mostly from finance leases.

In March 2018, we dissolved and wound up the affairs of our wholly owned subsidiary OnCyte, LLC, or OnCyte, pursuant to the Delaware Limited Liability Company Act. As a result of the dissolution of OnCyte, all the assets and liabilities of OnCyte, including the contingent consideration payable and our license agreement with Dartmouth College, were fully distributed to and assumed by Celyad SA. Celyad SA will continue to carry out the business and obligations of OnCyte, including under our license agreement with Dartmouth College.

B. Business Overview

Overview

We are a clinical-stage biopharmaceutical company focused on the development of specialized cell-based therapies. We utilize our expertise in cell engineering to target cancer. Our lead drug product candidate, CYAD-01 (CAR-T-NKG2D), is an autologous chimeric antigen receptor, or CAR, using NKG2D, an activating receptor of Natural Killer, or NK, cells transduced on T-lymphocytes, or T cells. NK cells are lymphocytes of the immune system that kill diseased cells. The receptors of the NK cells used in our therapies target the binding molecules, called ligands, that are expressed in cancer cells, but are absent or expressed at very low levels in normal cells. We believe our CAR-T-NKG2D approach has the potential to treat a broad range of both solid and hematologic tumors.

In December 2016, following the successful completion of a proof-of-concept clinical trial we conducted at the Dana-Farber Cancer Institute, in which we observed no treatment related safety concerns and we observed initial signs of clinical activity, we initiated a Phase 1 clinical trial, called THINK ( TH erapeutic I mmunotherapy with NK R-2), to assess the safety and clinical activity of multiple administrations of CYAD-01 in seven refractory cancers, including both solid and hematologic cancers. As of December 31, 2017, we had treated 15 patients with CYAD-01 in the THINK trial, and we did not observe the same Grade 4 or above adverse event in two or more patients and no patient experienced a Grade 5 adverse event. No patient experienced an adjudicated Grade 4 or higher cytokine release syndrome, or CRS, adverse event or neurotoxic adverse event. In six of the 10 patients treated at the per-protocol intended dose we observed signs of clinical activity ranging from Stable Disease, or SD, to Complete Response, or CR. We plan to enroll up to 36 patients in the dose escalation part and up to 86 patients in the extension part of the THINK trial. Based on the promising interim results of the THINK trial, we plan to further evaluate CYAD-01 in a series of additional Phase 1 clinical trials in patients with acute myeloid leukemia, or AML, and colorectal cancer, or CRC.

 

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Our Lead Drug Product Candidate: CYAD-01

Company Product Pipeline

 

LOGO

Introduction

Cancer is the second leading cause of death in the United States after cardiovascular diseases, according to the U.S. Centers for Disease Control and Prevention. According to the American Cancer Society, in 2014, there were an estimated 1.6 million new cancer cases diagnosed and over 550,000 cancer deaths in the United States alone. In the past decades, the cornerstones of cancer therapies have been surgery, chemotherapy and radiation therapy. Since 2001, molecules that specifically target cancer cells have emerged as standard treatments for a number of cancers. For example, Gleevec is marketed by Novartis AG for the treatment of leukemia, and Herceptin is marketed by Genentech, Inc. for the treatment of breast and gastric cancer. Although targeted therapies have significantly improved the outcomes for certain patients with these cancers, there is still a high unmet need for the treatment of these and many other cancers.

Below are the statistics regarding certain forms of solid and hematological cancers and their estimated death rates in the United States for 2017:

 

     2017 estimates for the United States  
     New cases      Deaths  

Acute myeloid leukemia

     21,380        11,960  

Multiple myeloma

     30,280        12,790  

Colorectal cancer

     135,430        50,260  

Pancreatic cancer

     53,670        43,090  

Urinary bladder cancer

     79,030        16,870  

Ovary cancer

     22,440        14,080  

Triple negative breast cancer

     30,620        >>4,900  

Source: SEER, American Cancer Society

CAR T-Cell Therapy

The immune system has a natural response to cancer, as cancer cells express antigens that can be recognized by cells of the immune system. Upon recognition of a cancer antigen, activated T-cells release substances that kill cancer cells and attract other immune cells to assist in the killing process. However, cancer cells can develop the ability to release inhibitory factors that allow them to evade immune response, resulting in the formation of cancers.

 

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CAR T-cell therapy is a new technology that broadly involves engineering patients’ own T-cells to express CARs so that these re-engineered cells recognize and kill cancer cells, overcoming cancer cells’ ability to evade the immune response. CARs are comprised of the following elements:

 

    binding domains that encode proteins, such as variable fragments of antibodies that are expressed on the surface of a T-cell and allow the T-cell to recognize specific antigens on cancer cells;

 

    intracellular signaling domains derived from T-cell receptors that activate the signaling pathways responsible for the immune response following binding to cancer cells. This allows the T cell to trigger the killing activity of the target cancer cell once it is recognized; and

 

    costimulatory and adaptor domains, which enhance the effectiveness of the T-cells in their immune response.

Once activated, CAR T-cells proliferate and kill cancer cells directly through the secretion of cytotoxins that destroy cancer cells, and these cytokines attract other immune cells to the tumor site to assist in the killing process.

The CAR T-cell manufacturing process starts with collecting cells from a patient’s blood. T-cells are then selected, following which the CAR is introduced into the T-cells using vectors. The CAR T-cells are then expanded prior to injection back into the patient.

Current Investigational Treatments of Cancer Using CAR T-Cells

CAR-T cell therapy is an emerging approach for the treatment of some cancers, such as B-cell malignancies.

CAR CD19 is the most studied CAR. CAR CD19 has an antigen binding domain that recognizes the CD19 antigen that is present on all B lymphocytes. This means that if a cancer originates from B lymphocytes, such as Acute Lymphoblastic Leukemia (ALL), then a CAR bearing the CD19 antibody could potentially recognize it and destroy it. Indeed, results of a clinical trial reported in the New England Journal of Medicine in October 2014 demonstrated that CAR CD19 CAR therapy was effective in treating patients with relapsed and refractory ALL. Treatment was associated with a complete remission rate of 90% and sustained remissions of up to two year after treatment. Despite its promise, CAR CD19 therapy is inherently limited to the treatment of B-cell malignancies. CAR CD19 also targets normal B lymphocytes leading to the need to treat those patients with gamma globulins.

Our Approach

Our lead drug product candidate, CYAD-01, is an autologous CAR-T cell therapy that uses the native sequence of NKG2D in the CAR construct. In CYAD-01, the human natural sequence of NKG2D is expressed outside the T cell and bound to an intracellular domain called CD3 Zeta. This intracellular domain is used in most other CARs and is responsible for the activation of the T cell once NKG2D recognizes and binds to its target. In addition, the complex NKG2D CD3 Zeta binds to endogenous DAP 10, which is a co-stimulatory molecule present on T cells, which means that the activation triggered by the primary stimulatory chain CD3 Zeta is further strengthened by DAP 10, a secondary or co-stimulatory domain.

NKG2D receptor ligands are expressed in numerous solid tumors and blood cancers, including ovarian, bladder, breast, lung and liver cancers, as well as leukemia, lymphoma and myeloma. In preclinical studies, we have observed bioactivity of CYAD-01 when as few as 7% of the cancer cells within a given cell population expressed a NKG2D receptor ligand.

Cells under stress induced by factors such as viral infection, cancer or inflammation express the ligands recognized by the NKG2D receptor, which is naturally present on NK cells. Eight NKG2D ligands have been characterized (namely ULBP families 1 to 6, MICA and MICB). Those ligands are a signal for NK cells that the stressed cells are malfunctioning and should be destroyed. NKG2D ligands are present in most cells, but their expression at the cell surface is tightly regulated, meaning that expression at the cell surface is absent or limited in healthy cells but overexpressed in infected or stressed cells. Preclinical studies have demonstrated that multiple solid and hematological cancer tumors express one or more NKG2D ligands.

 

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However, in preclinical studies we have not observed the cell surface expression of NKG2D ligands in healthy tissue.

 

LOGO

In addition, preclinical mouse studies conducted by Charles Sentman, Ph.D., of our academic collaborator Dartmouth College, have demonstrated that CAR-T NKG2D may have bioactivity beyond a direct cytotoxic effect of the CAR on the targeted tumor cell. Three additional potential modes of such activity are:

 

    Both regulatory T cells that modulate the immune system and bone marrow immune cells, called myeloid-derived suppressor cells (MDSCs), were shown to express NKG2D ligands when they are present in tumors. Hence, those immune suppressive cells are also a target of CYAD-01, thereby potentially suppressing immune inhibition in the tumor cell.

 

    Cells from rapidly dividing micro vessels in the tumor mass were shown to express NKG2D ligands. Hence, the blood supply to the tumor is a potential target of CYAD-01.

 

    In animals in which the tumors were eliminated following the administration of CAR-T NKG2D, a re-challenge by the same tumor cell line was ineffective, rendering the animal potentially “immunized” against this tumor cell line. Surviving animals challenged with other tumor cell lines showed evidence of tumor growth.

CYAD-01 Multi-Faceted Attack on the Tumor

 

LOGO

 

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Preclinical Development

CYAD-01 has been tested in preclinical models of solid and blood cancers, including lymphoma, ovarian cancer, melanoma and myeloma. In preclinical studies, treatment with CYAD-01 significantly increased survival. In studies, 100% of treated mice survived through the follow-up period of the applicable study, which in one study was 325 days. All untreated mice died during the follow-up period of the applicable study.

In one representative study, as shown in the figure below, the treatment with CYAD-01 completely prevented tumor development in mice injected with ovarian cancer cells and followed over a period of 225 days. In contrast, all mice injected with ovarian cancer cells that were treated with unmodified T-cells developed cancerous tumors and died during that period.

 

LOGO

Our preclinical models have shown that administration of CYAD-01 is followed by changes in a tumor’s micro-environment resulting from the local release of chemokines, a family of small cytokines.

In a preclinical study, mice that had been injected with 5T33MM cancer cells (a myeloma cancer) and treated with CYAD-01 were rechallenged, either with the 5T33MM cancer cells or a different tumor type (RMA lymphoma cells). The mice that were rechallenged with the same tumor type survived, while the mice that were challenged with a different tumor type died, as shown in the figure below. Of note, at the time of the re-challenge of the surviving animals, no CYAD-01 was detected in the animals, hence the protection against the original tumor is linked to an adaptive immunity mechanism.

 

LOGO

We do not believe that this effect has been observed with other CARs.

Moreover, preclinical studies have suggested that CYAD-01 could potentially have a direct effect on tumor vasculature. Tumor vessels express ligands for the NKG2D receptor that are not generally expressed by normal vessels. We believe that this expression may be linked to genotoxic stress, hypoxia and re-oxygenation in tumors and therefore that CYAD-01 could potentially inhibit tumor growth by decreasing tumor vasculature, which enhances the activity through a virtuous circle of anoxia of tumor cells and increased ligand expression of tumor cells.

Preclinical studies also suggest that CYAD-01 is active without lymphodepletion conditioning, which is the destruction of lymphocytes and T-cells, normally by radiation. We believe this absence of a pre-conditioning regimen may significantly expand the range of patients eligible for CAR T-cell treatment, reduce costs, reduce toxicity and thereby improve patient experience and acceptance.

 

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No significant toxicology findings were reported from preclinical multiple-dose studies at dose levels below 10 7 CYAD-01 per animal. Some temporary weight loss was noted in animals treated with CYAD-01 at doses of 2x10 7 per animal, a dose practically unattainable in human equivalents.

Clinical Development Program

The CM-CS1 Phase 1 Clinical Trial

In December 2016, results from the first clinical trial of CYAD-01, called the CM-CS-1 trial, were presented at the American Society of Hematology, or ASH, Annual Meeting. The CM-CS-1 trial was a Phase 1 dose escalation clinical trial conducted at the Dana-Farber Cancer Institute in patients with AML and multiple myeloma, or MM. Patients received doses from 1×10 6 up to 3×10 7 CAR-T NKR-2 in a single intravenous injection. One AML patient treated with the highest dose level was observed to have normalized hematologic parameters for six months following treatment. No serious treatment-related adverse events were reported at the four doses tested in this trial, and signs of clinical activity were observed.

THINK Phase 1 Clinical Trial

Overview

In December 2016, we initiated the THINK ( TH erapeutic I mmunotherapy with NK r-2) trial, a multinational (E.U./U.S.), open-label Phase 1 clinical trial to assess the safety and clinical activity of multiple administrations of CYAD-01 in seven metastatic tumor types, including five solid tumors (colorectal, ovarian, bladder, triple-negative breast and pancreatic cancers) and two hematological tumors (AML and MM) in patients who did not respond to or relapsed after first and second line therapies. CYAD-01 is administered as a monotherapy in patients without chemotherapy preconditioning.

The trial contains two consecutive segments: a dose escalation segment with two arms (one in solid tumor types and one in hematological tumor types) at three dose levels adjusted to body weight (up to 3x10 8 , 1x10 9 and 3x10 9 CAR-T NKR-2 cells) and an expansion phase that includes seven tumor types (five solid tumors and two hematological tumors). At each dose, the patients are intended to receive three successive administrations of the specified dose, two weeks apart. The dose escalation part of the study is expected to enroll up to 36 patients while the extension phase is planned to enroll up to 86 patients. The primary endpoint of the dose escalation segment is a safety endpoint—the occurrence of dose limiting toxicities in patients during the treatment until 14 days after the last treatment. The primary endpoint in the expansion segment is objective response rate.

Interim Clinical Data as of December 31, 2017

As of December 31, 2017, we had treated 15 patients with CYAD-01 drug product in the THINK trial. Patients have been treated at the first and/or second dose level in both the solid and hematological tumor cohort of the dose escalation part of the trial. We are currently enrolling patients for the third dose level phase in the solid tumor cohort and completing the second dose level phase in the hematological arm.

As of December 31, 2017, we did not observe the same Grade 4 or above adverse event in two or more patients and no patient experienced a Grade 5 adverse event. No patient experienced an adjudicated Grade 4 or higher CRS adverse event or neurotoxic adverse event.

 

Data as of December 31, 2017

 

Adverse Events (AEs)

  Grade 3     Grade 4     Grade 5     Total % of Patients  
    Events (Patients)     Events (Patients)     Events (Patients)        

Anaemia

    (2)      —         —         13.3

Back pain

    (2)      —         —         13.3

Febrile neutropenia

    (2)      —         —         13.3

General physical health deterioration

    (2)      —         —         13.3

Hypophosphataemia

    (2)      —         —         13.3

Lymphocyte count decreased

    5 (2)      1 (1)      —         20.0

 

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Data as of December 31, 2017

 

Adverse Events (AEs)

   Grade 3      Grade 4     Grade 5      Total % of Patients  
     Events (Patients)      Events (Patients)     Events (Patients)         

Hypoxia

     —          1 (1)      —          6.7  

All adverse events if occurred in ³ 2 patients and if Grade 3 or below. All events if Grade 4 or above.

Solid (n=8) and hematologic (n=7) cancer patients.

Dose-level 1 (solid and hematologic cohorts) and dose-level 2 (solid cohort and one patient hematologic cohort).

Of the 15 patients treated as of December 31, 2017, 10 were dosed at the per-protocol intended dose and five were treated at a dose lower than the per-protocol intended dose due to an inability to obtain sufficient cell numbers in the drug product using our prior manufacturing method. See “—Manufacturing” below. No patient received chemotherapy preconditioning prior to administration of CYAD-01.

In six of the 10 patients treated at the per-protocol intended dose we observed signs of clinical activity ranging from SD to CR. Signs of clinical activity were observed in patients with AML, CRC and ovarian cancer. No signs of clinical activity were observed in patients treated with a dose lower than the per-protocol intended dose.

Based on the interim individual data of patients treated, we believe that a second cycle of therapy may be beneficial in strengthening the responses seen to date, and we plan to evaluate this approach in future clinical trials. See “—Future Clinical Development” below.

AML Cohort

In all three AML patients treated at the per-protocol intended dose we observed signs of clinical activity as summarized below. A fourth AML patient was treated at a dose lower than the per-protocol intended dose and did not show signs of clinical activity.

 

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Evidence of Clinical Activity in 3/3 Relapsed/Refractory AML Patients Treated at the Specified Dose

 

LOGO

 

CRi: Complete remission with incomplete hematological recovery

CR (MRD-): Complete response without minimal residual disease

SD HI: Stable disease with hematological improvement

HSCT: Hematopoietic stem cell transplant

One patient receiving the first dose level showed a CR with incomplete hematological recovery. Another patient receiving the first dose level showed morphological leukemia free status (MLFS) (defined as bone marrow blast count under 5%), with a bone marrow blast count at 2%. Blood cell parameters for this patient were close to, but did not meet, the lower cut off for a CR (defined as platelets above 100,000/mm 3 and neutrophils above 1,000/mm 3 ) with platelets at 95,000/mm 3 and neutrophils at 950/mm 3 . This patient underwent hematopoietic stem cell transplantation (HSCT) made possible by the MLFS status, and has since further improved to CR with negative minimal residual disease (MRD) (defined as no detection of tumor cells by high sensitivity methods). One patient receiving the second dose level showed SD at the two-month follow-up with reduction in blasts and improvement in hematological parameters.

CRC Cohort

In two of four CRC patients treated at the per-protocol intended dose, we observed signs of clinical activity. These two patients showed SD at the three-month follow-up date, both receiving the first dose level. A fifth CRC patient was treated at a dose lower than the per-protocol intended dose and did not show signs of clinical activity.

Ovarian Cancer Cohort

In the only ovarian cancer patient treated at the per-protocol intended dose—in this case, the second dose level—we observed SD at the two-month follow-up date. A second ovarian cancer patient was treated at a dose lower than the per-protocol intended dose and received only one injection before withdrawing from the study.

Nature of Interim Data

It should be noted that the interim data summarized above are current as of December 31, 2017 and are preliminary in nature. Our THINK trial is not complete. It should also be noted that all of the patients treated prior to December 31, 2017 were treated using drug product candidate manufactured using our prior manufacturing process. See “—Manufacturing” below. There is limited data concerning safety and clinical activity following treatment with our CYAD-01 drug product candidate. These results may not be repeated or observed in ongoing or future studies involving our CYAD-01 drug product candidate.

 

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Future Clinical Development

AML Clinical Development Program

Based on the promising interim results of the THINK trial, we intend to further explore the administration of CYAD-01 in AML patients.

AML is one of the deadliest cancers in hematological malignancies, with a five-year survival rate of 26.9%. Currently the only available potentially curative therapy for AML is allogenic HSCT. However, this approach has significant limitations, including difficulties in finding appropriate genetically-matched donors and the risk of transplant-related rejection, graft-versus-host disease, or GVHD, and mortality, and is therefore typically only available on a limited basis. First line therapies can result in a complete response, but the risk of relapse is high. Until 2017, there were no therapies approved by the U.S. Food and Drug Administration, or FDA, for relapsed refractory patients. We estimate the incidence of AML in the United States is approximately 21,830 new cases per year.

As an initial matter, as we seek to complete the dose escalation phase of the THINK trial, we plan to recruit only AML patients for the hematological tumor arm. We also plan to evaluate the effect of a second cycle of treatment in AML patients who have responded to an initial cycle of treatment, perhaps as part of the THINK trial, subject to our amending the protocol for this trial.

In addition, we are designing a protocol for a new Phase 1 clinical trial in AML patients that would administer CYAD-01 after patients have undergone a conventional chemotherapy preconditioning program, which is intended to provide an environment for the engineered T cells to thrive, and could result in a higher rate of objective response. However, because chemotherapy preconditioning can lead to undesirable side effects, we expect that a proper risk-benefit ratio will be considered and contrasted with a monotherapy approach as we progress this program into later stages of clinical development. Subject to our agreement with the applicable regulatory bodies on the protocol for this trial, we plan to initiate this trial in mid-2018. In addition, we are designing a protocol for a Phase 1 clinical trial that would evaluate the administration of CYAD-01 in combination with standard-of-care (SOC) therapy. We expect this trial would be initiated after the preconditioning trial is initiated, subject to agreement with applicable regulatory bodies.

Lastly, we are considering a trial to evaluate the administration of CYAD-01 in AML patients who have relapsed after a bone marrow transplant, using T cells from the bone marrow donor. If successful, this approach could potentially open access to a different patient population that does not currently have access to effective treatments.

CRC Clinical Development Program

Based on the promising interim results of the THINK trial, we intend to further explore the administration of CYAD-01 in CRC patients.

CRC is the third most diagnosed cancer and the second in terms of deaths. The median progression free survival rate of patients treated with the current standards of care (regorafinib or trifluridine/tipiracil) is between 1.9 and 3.2 months. We estimate the incidence of CRC in the United States is approximately 134,000 new cases per year.

Similar to our planned approach in AML, we plan to evaluate the effect of a second cycle of treatment in CRC patients that have responded to an initial cycle of treatment, perhaps as part of the THINK trial, subject to our amending the protocol for this trial. We are also considering evaluating CYAD-01 in CRC patients after patients have undergone a conventional chemotherapy preconditioning program.

In addition, we have initiated two open-label Phase 1 clinical studies to further evaluate CYAD-01 in CRC patients:

 

    The first study, called the SHRINK trial ( S tandard c H emotherapy R egimen and I mmunotherapyy with NK R-2), is designed to assess the safety and clinical activity of multiple administrations of CYAD-01 concurrently with a conventional chemotherapy for CRC called FOLFOX as first line therapy, with the goal of reducing liver metastasis and allowing for surgical resection. This trial is being conducted outside the United States and is currently open for enrollment.

 

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    The second study, called the LINK trial ( L ocoregional I mmunotherapy with NK R-2), is designed to assess the safety and clinical activity of multiple administrations of CYAD-01 in the hepatic artery in CRC patients with primarily liver metastasis. This patient population has non-resectable liver metastasis, and we hope to demonstrate the ability to stabilize the disease, allowing longer progression free survival, and/or increase the resectability rate of the metastasis in this population. This trial is being conducted outside the United States and is currently open for enrollment.

Allogenic Platform

While autologous CAR-T cells have yielded impressive results in B cell malignancies, addressing larger indications such as CRC using the current centralized manufacturing paradigm may be more challenging, at least from a cost and logistical perspective. However, we believe that an allogeneic approach must address two key challenges: (1) graft versus host disease (GvHD) which is the rejection of the patient tissues by the grafted cells, and (2) rejection of the graft by the host immune system, or transplant rejection. GvHD is mediated by the T Cell Receptor (TCR) complex on T lymphocytes. We have developed a method to interfere with the TCR signaling through the expression of a TCR Inhibiting Molecule (TIM). In preclinical mouse models, we observed that mice treated with TIM transduced T cells did not demonstrate GvHD, while 80% of the animals treated with control T cells died from GvHD within a 50 day window. In addition, we demonstrated in a similar mouse model bearing a colorectal cancer that the antitumor activity of CYAD-101 (the allogeneic version of our CYAD-01 drug product candidate) is maintained. We plan to initiate clinical development of CYAD-101 in 2018, subject to discussions with applicable regulatory authorities.

Seasonality

Our business is currently not materially affected by seasonality.

Manufacturing

We recently modified the manufacturing process we use to produce our CYAD-01 drug product candidate, in order to significantly increase the yield of T cell expansion in the drug product candidate we produce, while at the same time aiming to reduce process complexity and cost.

Until recently, our CYAD-01 drug product candidate was manufactured using a process, which we refer to as the LY process, intended to reduce the co-expression of NKG2D and stress ligands induced by the manufacturing process. However, this reduction of the co-expression was not sufficient, especially at higher doses, and yielded a higher than anticipated fratricide effect; that is, the expressed T cells in the drug product candidate would kill each other or kill themselves. As a result, the LY process failed to consistently produce the required number of T cells in the drug product candidate, resulting in some cases in our inability to manufacture drug product candidate consistent with the protocol for our THINK trial. All 15 patients treated in the THINK trial as of December 31, 2017 were treated with drug product manufactured using the LY process. Of these 15 patients, 10 were dosed at the per-protocol intended dose and five were treated at a dose lower than the per-protocol intended dose due to our inability to obtain sufficient cell numbers in the drug product candidate using this manufacturing method.

In response to these manufacturing challenges, we modified the manufacturing process to include a monoclonal antibody (mAb) that inhibits NKG2D expression on the T cell surface during production. This method has the potential to yield significantly higher cell numbers than the LY process. We have evaluated this new manufacturing process, which we refer to as the mAb process, in both in vivo and ex vivo models, in order to demonstrate reproducibility and comparability, and our THINK protocol has been amended for this new approach.

The first patient in our THINK trial to be administered drug product candidate manufactured using the mAb process was treated in late January 2018. As of the date of this Annual Report, four patients have been dosed using the new process. To date, no critical safety issues related to the cell therapy have been reported. There can be no assurance that drug product candidate manufactured using the mAb process will have similar or improved safety and clinical activity compared to drug product candidate manufactured using the LY manufacturing process.

 

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In addition, we are seeking to develop an automated and closed system to manufacture our cells, with minimal human interactions, with a goal of further reducing manufacturing costs, minimizing operator errors and allowing the manufacturing process to be run in lower grades or classified manufacturing space. This concept could potentially be deployed as a point-of-care manufacturing system in the future.

Termination of C-Cure and Heart-Xs Programs

Until mid-2016, we were focused on the development of a cardiovascular drug product candidate called C-Cure, an autologous cell therapy for the treatment of patients with ischemic heart failure. This program was funded in part through various research programs from the Walloon Region of Belgium. In June 2016, we reported topline results from a Phase 3 clinical trial for this drug product candidate. Following the announcement of these results, we explored strategic options to further develop and commercialize C-Cure, while we focused on our CAR-T oncology drug product candidates. In December 2017, we elected to shelve this program, as a result of which the research data and intellectual property rights associated with this development program were transferred to the Walloon Region which partially financed the C-Cure program.

Also in December 2017, our board of directors decided to pause the development of the Heart-Xs platform.

Licensing and Collaboration Agreements

Academic and Clinical Collaborations

Dartmouth College and Celdara

Background

In January 2015, we entered into a stock purchase agreement with Celdara Medical, LLC, or Celdara, pursuant to which we purchased all of the outstanding membership interests of OnCyte, LLC, or OnCyte. In connection with this transaction, we, Celdara and OnCyte entered into an asset purchase agreement pursuant to which Celdara sold to OnCyte certain data, protocols, regulatory documents and intellectual property, including the rights and obligations under two license agreements between OnCyte and Dartmouth College, or Dartmouth, related to our CAR-T development programs. In connection with the asset purchase agreement, OnCyte and Celdara entered into a services agreement under which Celdara provided certain development activities related to the development of CAR-T products.

Amended Asset Purchase Agreement

On August 3, 2017, we, Celdara and OnCyte, our wholly-owned subsidiary, entered into an amendment to the asset purchase agreement described above. In connection with the amendment, the following payments were made to Celdara: (i) an amount in cash equal to $10.5 million, (ii) newly issued shares of Celyad valued at $12.5 million, (iii) an amount in cash equal to $6.0 million in full satisfaction of any payments owed to Celdara in connection with a clinical milestone related to our CAR-T NKR-2 product candidate, (iv) an amount in cash equal to $0.6 million in full satisfaction of any payments owed to Celdara in connection with our license agreement with Novartis International Pharmaceutical Ltd., and (v) an amount in cash equal to $0.9 million in full satisfaction of any payments owed to Celdara in connection with our license agreement with Ono Pharmaceutical Co., Ltd.

Under the amended asset purchase agreement, OnCyte is obligated to make certain development-based milestone payments to Celdara up to $40.0 million for our clinical-stage product candidate (using autologous NKR-2 T-cells), the first product candidate in the first of four defined product groups. We are also obligated to make certain development-based milestone payments up to $36.5 million for the first product candidate in one of three additional defined preclinical-stage product groups. Under the prior agreement these payments were payable once per licensed product whereas under the amended asset purchase agreement these payments are now payable for the first CAR-T product in each of these four defined CAR-T product groups. We are also obligated to make sales-based milestone payments up to $76.0 million for the first CAR-T product in the first of the four defined CAR-T product groups and up to $80.0 million for the first CAR-T product in the next three defined CAR-T product groups. Under the amended asset purchase agreement, OnCyte is required to make tiered single-digit royalty payments to Celdara in connection with the sales of CAR-T products within each of the four defined CAR-T product groups, subject to reduction in countries in which there is no patent coverage for the applicable product or in the

 

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event OnCyte is required to secure licenses from third parties to commercialize the applicable product. Such royalties are payable on a product-by-product and country-by-country basis until the later of (i) the last day that at least one valid patent claim covering the applicable product exists, or (ii) the tenth anniversary of the day of the first commercial sale of the applicable product in such country.

Under the amended asset purchase agreement, in lieu of royalties previously payable on sales by sublicensees, OnCyte is now required to pay Celdara a percentage of sublicense income, including royalty payments, for each sublicense ranging from the mid-single digits to the mid-twenties, depending on which of a specified list of clinical and regulatory milestones the applicable product has achieved at the time the sublicense is executed. These percentages will be applied on a product-by-product basis to each payment included within sublicense income that is attributable to the grant of rights in, or the achievement of a milestone with respect to a specific product that is subject to, such sublicense. Under the amended asset purchase agreement, OnCyte is required to pay Celdara a single-digit percentage of any research and development funding received by OnCyte for each of the four defined CAR-T product groups, not to exceed $7.5 million for each product group. We can opt out of the development of any product if the data does not meet the scientific criteria of success. We may also opt out of development of any product for any other reason upon payment of a termination fee of $2.0 million to Celdara.

In connection with the amended asset purchase agreement, OnCyte and Celdara terminated the services agreement related to certain development activities related to the development of CAR-T products in consideration of a cash payment to Celdara in the amount of $0.9 million out of the $1.8 million remaining contractual amount.

Amended Dartmouth License

As described above, as a result of our acquisition of all of the outstanding membership interests of OnCyte and the asset purchase agreement among us, Celdara and OnCyte, OnCyte became our wholly-owned subsidiary and acquired certain data, protocols, regulatory documents and intellectual property, including the rights and obligations under two license agreements between OnCyte and Dartmouth. The first of these two license agreements concerned patent rights related, in part, to methods for treating cancer involving chimeric NK and NKP30 receptor targeted therapeutics and T cell receptor-deficient T cell compositions in treating tumor, infection, GVHD, transplant and radiation sickness, or the CAR-T License, and the second of these two license agreements concerned patent rights related, in part, to anti-B7-H6 antibody, fusion proteins and methods of using the same, or the B7H6 License. On August 2, 2017, OnCyte and Dartmouth entered into an amendment agreement in order to combine OnCyte’s rights under B7H6 Agreement with OnCyte’s rights under the CAR-T License, resulting in the termination of the B7H6 License, and in order to make certain other changes to the agreement. In connection with the amendment, OnCyte paid Dartmouth a non-refundable, non-creditable amendment fee in the amount of $2.0 million, charged to the income statement of 2017 as part of the costs of the amendments of the Celdara and Dartmouth agreements.

Under the amended license agreement, Dartmouth granted OnCyte an exclusive, worldwide, royalty-bearing license to certain know-how and patent rights to make, have made, use, offer for sale, sell, import and commercialize any product or process for human therapeutics, the manufacture, use or sale of which, is covered by such patent rights or any platform product. Dartmouth reserves the right to use the licensed patent rights and licensed know-how, in the same field, for education and research purposes only. The patent rights included in the amended license agreement also include the patents previously covered by the B7H6 License.

In consideration for the rights granted to us under the amended license agreement, OnCyte is required to pay to Dartmouth an annual license fee as well as a low single-digit royalty based on annual net sales of the licensed products by OnCyte, with certain minimum net sales obligations beginning April 30, 2024 and continuing for each year of sales thereafter. Under the amended license agreement, in lieu of royalties previously payable on sales by sublicensees, OnCyte is now required to pay Dartmouth a percentage of sublicense income, including royalty payments, (i) for each product sublicense ranging from the mid-single digits to low-single digits, depending on which of a specified list of clinical and regulatory milestones the applicable product has achieved at the time the sublicense is executed and (ii) for each platform sublicense in the mid-single digits. These percentages will be applied on a product-by-product basis to each payment included within sublicense income that is attributable to the grant of rights in, or the achievement of a milestone with respect to a specific product that is subject to, such sublicense. Additionally, the agreement

 

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requires that OnCyte exploit the licensed products, and OnCyte has agreed to meet certain developmental and regulatory milestones. Upon successful completion of such milestones, OnCyte is obligated to pay to Dartmouth certain clinical and regulatory milestone payments up to an aggregate amount of $1.5 million and a commercial milestone payment in the amount of $4.0 million. We are responsible for all expenses in connection with the preparation, filing, prosecution and maintenance of the patents covered under the agreement.

After April 30, 2024, Dartmouth may terminate the amended license if OnCyte fails to meet the specified minimum net sales obligations for any year, unless OnCyte pays to Dartmouth the royalty OnCyte would otherwise be obligated to pay had OnCyte met such minimum net sales obligation. Dartmouth may also terminate the license if OnCyte fails to meet a milestone within the specified time period, unless OnCyte pays the corresponding milestone payment. Either party may terminate the agreement in the event the other party defaults or breaches any of the provisions of the agreement, subject to 30 days’ prior notice and opportunity to cure. In addition, the agreement automatically terminates in the event OnCyte becomes insolvent, make an assignment for the benefit of creditors or file, or have filed against us, a petition in bankruptcy. Absent early termination, the agreement will continue until the expiration date of the last to expire patent right included under the agreement in the last to expire territory. We expect that the last to expire patent right included under this agreement will expire in 2033, absent extensions or adjustments.

Dissolution of OnCyte

In March 2018, we dissolved and wound up the affairs of our wholly owned subsidiary OnCyte, LLC, or OnCyte, pursuant to the Delaware Limited Liability Company Act. As a result of the dissolution of OnCyte, all the assets and liabilities of OnCyte, including the contingent consideration payable and our license agreement with Dartmouth College, were fully distributed to and assumed by Celyad SA. Celyad SA will continue to carry out the business and obligations of OnCyte, including under our license agreement with Dartmouth College.

ONO Pharmaceuticals

On July 11, 2016, we entered into a license and collaboration agreement with ONO Pharmaceuticals Co., Ltd., or ONO, in connection with which we granted ONO an exclusive license for the development, manufacture and commercialization of allogenic products incorporating our NKR-T cell technology in Japan, Korea and Taiwan. Under the terms of the collaboration, ONO is solely responsible for and bears all costs incurred in the research, development and commercialization of such products in its geographies. In addition, we granted ONO an exclusive option to obtain an exclusive license to develop, manufacture and commercialize autologous products incorporating our autologous CAR-T NKR-2 cell technology in Japan, Korea and Taiwan.

In consideration for the rights granted to ONO under the agreement, we received in August 2016 an upfront payment in the amount of 1.25 billion JPY ($12.5 million) and we are eligible to receive additional milestones for up to 30.075 billion JPY ($299 million) in development and commercial milestones. In addition, we are entitled to receive double digit royalties on nets sales of licensed products in licensed territories.

Intellectual Property

Patents and Patent Applications

Patents, patent applications and other intellectual property rights are important in the sector in which we operate. We consider on a case-by-case basis filing patent applications with a view to protecting certain innovative products, processes, and methods of treatment. We may also license or acquire rights to patents, patent applications or other intellectual property rights owned by third parties, academic partners or commercial companies which are of interest to us.

Our patent portfolio includes pending patent applications and issued patents in the United States and in foreign countries.

The term of a U.S. patent may be eligible for patent term extension under the Hatch-Waxman Act to account for at least some of the time the drug or device is under development and regulatory review after the patent is granted. With regard to a drug or device for which FDA approval is the first permitted marketing of the active ingredient, the Hatch-Waxman Act allows for extension of the term of one U.S. patent. The extended patent term cannot exceed the shorter of five years beyond the non-extended expiration of the patent or 14 years from the date of the FDA approval of the drug or device. Some foreign jurisdictions have analogous patent term extension provisions that allow for extension of the term of a patent that covers a device approved by the applicable foreign regulatory agency.

 

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NKR-T Cell Platform Patents

As of February 28, 2018, our CAR T-cell portfolio includes four patent families exclusively licensed to us by Dartmouth. This portfolio includes nine issued U.S. patents; eight pending U.S. patent applications; and 13 foreign patent applications pending in jurisdictions including Australia, Brazil, Canada, China, Europe, Hong Kong, India, Japan, Mexico and Russia. These patents and patent applications relate to specific chimeric antigen receptors and to T-cell receptor deficient T-cells, and are further detailed below.

A first patent family relates to chimeric NK receptors and methods for treating cancer. There are two granted U.S. patents in this family (US 7,994,298 and US 8,252,914) and a further pending US application. The scope of this patent family includes chimeric natural killer cell receptors (NKR CARs), T-cells with such receptors (NKR CAR-T cells) and methods of treating cancer with these NKR CAR-T cells.

A second patent family is entitled “NKp30 receptor targeted therapeutics” and describes a specific NKR CAR based on the NKp30 receptor. One U.S. patent is granted (US 9,833,476) and there is a further U.S. application pending.

A third family relates to an anti-B7H6 antibody, CARs and BiTE molecules containing the antibody; to CAR-T cells; and methods of treating cancer with the CAR-T cells. One U.S. patent is granted (US9,790,278), and applications are pending in China, Europe, Japan and the United States.

A fourth patent family relates to T-cell receptor-deficient compositions. T-cell receptor, or TCR, deficient human T-cells could be particularly useful to generate allogeneic CAR-T cells. The family includes members that relate to the concept (irrespective of the way the T-cell is made TCR deficient), as well as members describing specific ways of making the cells TCR deficient. There are five granted U.S. patents in this family (US 9,181,527; US 9,273,283; US9,663,763; US9,822,340; and US9,821,011), as well as five further pending US applications and ten applications in other jurisdictions. Claim 1 of patent US9,181,527 was challenged by an anonymous third party in an ex parte re-examination procedure, but the USPTO has determined that the claim was patentable in amended form.

Trade Secrets

In addition to our patents and patent applications, we keep certain of our proprietary information as trade secrets, which we seek to protect by confidentiality agreements with our employees and third parties, and by fragmenting know-how between different individuals, in accordance with standard industry practices.

Competition

The industry in which we operate is subject to rapid technological change. We face competition from pharmaceutical, biopharmaceutical and medical devices companies, as well as from academic and research institutions. Some of these competitors are pursuing the development of medicinal products and other therapies that target the same diseases and conditions that we are targeting.

Some of our current or potential competitors, either alone or with their collaboration partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and gene therapy 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.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. The key competitive factors affecting the success of all of our programs are likely to be their efficacy, safety and convenience.

 

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Many of our competitors have substantially greater financial, technical and other resources.

For a breakdown of our total revenues by activity and geographic market, please see “Note 6—Operating segment information” in our consolidated financial statements appended to this Annual Report.

CAR T-Cell Therapy

Early results from clinical trials have fueled continued interest in CAR T-cell therapies and our competitors as of the date of this Annual Report include Bellicum Pharmaceuticals, Inc., Bluebird bio, Inc., Celgene Corporation, Cellectis S.A., Gilead Sciences Inc., Mustang Bio, Novartis AG, NantKwest Inc and Ziopharm Oncology, Inc.

Government Regulation

U.S. Regulation

Government authorities in the United States at the federal, state and local level and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug and biological products, or biologics, such as our drug product candidates. Generally, before a new drug or biologic can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific for each regulatory authority, submitted for review and an application for marketing authorization must be approved by the regulatory authority.

Certain products may be comprised of components that are regulated under separate regulatory authorities and by different centers at the FDA. These products are known as combination products. A combination product is comprised of a combination of a drug and a device; a biological product and a device; a drug and a biological product; or a drug, a device, and a biological product. Under regulations issued by the FDA, a combination product includes:

 

    a product comprised of two or more regulated components that are physically, chemically, or otherwise combined or mixed and produced as a single entity;

 

    two or more separate products packaged together in a single package or as a unit and comprised of drug and device products, device and biological products, or biological and drug products;

 

    a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device or biological where both are required to achieve the intended use, indication, or effect and where upon approval of the proposed product the labeling of the approved product would need to be changed, e.g., to reflect a change in intended use, dosage form, strength, route of administration, or significant change in dose; or

 

    any investigational drug, device, or biological packaged separately that according to its proposed labeling is for use only with another individually specified investigational drug, device, or biological product where both are required to achieve the intended use, indication, or effect.

Under the FDCA, the FDA is charged with assigning a center with primary jurisdiction, or a lead center, for review of a combination product. That determination is based on the “primary mode of action” of the combination product, which means the single mode of action that provides the most important therapeutic action of the combination product, i.e., the mode of action expected to make the greatest contribution to the overall intended therapeutic effects of the combination product. Thus, if the primary mode of action of a device-biologic combination product is attributable to the biologic product, that is, if it acts by means of a virus, therapeutic serum, toxin, antitoxin, vaccine, blood, blood component or derivative, allergenic product, or analogous product, the FDA center responsible for premarket review of the biologic product (the Center for Biologics Evaluation and Research, or CBER) would have primary jurisdiction for the combination product.

 

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U.S. Biological Product Development

In the United States, the FDA regulates biologics under the Federal Food, Drug, and Cosmetic Act, or FDCA, and the Public Health Service Act, or PHSA, and their implementing regulations. Biologics are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval or license revocation, a clinical hold, untitled or warning letters, product recalls or withdrawals from the market, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.

Our drug product candidates must be approved by the FDA through the Biologics License Application, or BLA, process before they may be legally marketed in the United States. The process required by the FDA before a biologic may be marketed in the United States generally involves the following:

 

    completion of extensive nonclinical, sometimes referred to as preclinical, laboratory tests, animal studies and formulation studies in accordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, regulations;

 

    submission to the FDA of an IND, which must become effective before human clinical trials may begin;

 

    performance of adequate and well-controlled human clinical trials in accordance with applicable IND regulations, good clinical practices, or GCPs, and other clinical trial-related regulations to establish the safety and efficacy of the proposed drug product candidate for its proposed indication;

 

    submission to the FDA of a BLA;

 

    satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the product is produced to assess compliance with the FDA’s current good manufacturing practice, or cGMP, requirements to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality, purity and potency;

 

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

 

    FDA review and approval of the BLA prior to any commercial marketing or sale of the product in the United States.

The data required to support a BLA is generated in two distinct development stages: preclinical and clinical. The preclinical development stage generally involves laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which support subsequent clinical testing. The conduct of the preclinical studies must comply with federal regulations, including GLPs. The sponsor must submit the results of the preclinical studies, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, as well as other information, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for human trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug product candidate at any time before or during clinical trials due to safety concerns, non-compliance, or other issues affecting the integrity of the trial. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that could cause the trial to be suspended or terminated. Where a trial is conducted at, or sponsored by, institutions receiving NIH funding for recombinant DNA research, prior to the submission of an IND to the FDA, a protocol and related documentation is submitted to and the trial is registered with the NIH Office of Biotechnology Activities, or OBA, pursuant to the NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules, or NIH Guidelines. Compliance with the NIH Guidelines is mandatory for investigators at institutions receiving NIH funds for research involving recombinant DNA, however many companies and

 

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other institutions not otherwise subject to the NIH Guidelines voluntarily follow them. The NIH is responsible for convening the Recombinant NDA Advisory Committee, or RAC, a federal advisory committee, which discusses protocols that raise novel or particularly important scientific, safety or ethical considerations at one of its quarterly public meetings. The OBA will notify the FDA of the RAC’s decision regarding the necessity for full public review of a gene therapy protocol. RAC proceedings and reports are posted to the OBA web site and may be accessed by the public.

The clinical stage of development involves the administration of the drug product candidate to healthy volunteers and patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.

There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries. Sponsors of certain clinical trials of FDA-regulated products, including biologics, are required to register and disclose certain clinical trial information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved. However, there are evolving rules and increasing requirements for publication of trial-related information, and it is possible that data and other information from trials involving biologics that never garner approval could in the future require disclosure. In addition, publication policies of major medical journals mandate certain registration and disclosures as a pre-condition for potential publication, even if not currently mandated as a matter of law. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

Clinical trials are generally conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may overlap. Phase 1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses of the drug product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug product candidate and, if possible, to gain early evidence on effectiveness. Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the same time, safety and further pharmacokinetic and pharmacodynamic information is collected, as well as identification of possible adverse effects and safety risks and preliminary evaluation of efficacy. Phase 3 clinical trials generally involve large numbers of patients at multiple sites, in multiple countries, and are designed to provide the data necessary to demonstrate the efficacy of the product for its intended use, its safety in use, and to establish the overall benefit/risk relationship of the product and provide an adequate basis for product approval. Phase 3 clinical trials may include comparisons with placebo and/or other comparator treatments. The duration of treatment is often extended to mimic the actual use of a product during marketing. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of a BLA.

Post-approval trials, sometimes referred to as Phase IV clinical trials, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials to further assess the biologic’s safety and effectiveness after BLA approval.

Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA, and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the biologic, findings from animal or in vitro testing that suggest a significant risk for human subjects, and any clinically important increase in the rate of a serious suspected adverse reaction over

 

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that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA, the IRB, or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated intervals based on access to certain data from the trial. We may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate. Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug product candidate as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug product candidate does not undergo unacceptable deterioration over its shelf life.

BLA and FDA Review Process

Following trial completion, trial data are analyzed to assess safety and efficacy. The results of preclinical studies and clinical trials are then submitted to the FDA as part of a BLA, along with proposed labeling for the product and information about the manufacturing process and facilities that will be used to ensure product quality, results of analytical testing conducted on the chemistry of the drug product candidate, and other relevant information. The BLA is a request for approval to market the biologic for one or more specified indications and must contain proof of safety, purity, potency and efficacy, which is demonstrated by extensive preclinical and clinical testing. The application may include both negative or ambiguous results of preclinical and clinical trials as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and efficacy of a use of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the investigational product to the satisfaction of the FDA. FDA approval of a BLA must be obtained before a biologic may be marketed in the United States.

Under the Prescription Drug User Fee Act, or PDUFA, as amended, each BLA must be accompanied by a significant user fee, which is adjusted on an annual basis. PDUFA also imposes an annual prescription drug product program fee. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business.

Once a BLA has been accepted for filing, which occurs, if at all, sixty days after the BLA’s submission, the FDA’s goal is to review BLAs within 10 months of the filing date for standard review or six months of the filing date for priority review, if the application is for a product intended for a serious or life-threatening condition and the product, if approved, would provide a significant improvement in safety or effectiveness. The review process is often significantly extended by FDA requests for additional information or clarification.

After the BLA submission is accepted for filing, the FDA reviews the BLA to determine, among other things, whether the proposed drug product candidate is safe and effective for its intended use, and whether the drug product candidate is being manufactured in accordance with cGMP to assure and preserve the drug product candidate’s identity, strength, quality, purity and potency. The FDA may refer applications for novel drug product candidates or drug product candidates which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. The FDA will likely re-analyze the clinical trial data, which could result in extensive discussions between the FDA and us during the review process. The review and evaluation of a BLA by the FDA is extensive and time consuming and may take longer than originally planned to complete, and we may not receive a timely approval, if at all.

Before approving a BLA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether they comply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. In

 

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addition, before approving a BLA, the FDA may also audit data from clinical trials to ensure compliance with GCP requirements. After the FDA evaluates the application, manufacturing process and manufacturing facilities, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application will not be approved in its present form. A Complete Response Letter usually describes all of the specific deficiencies in the BLA identified by the FDA. The Complete Response Letter may require additional clinical data and/or an additional pivotal Phase III clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, withdraw the application or request a hearing. Even if such data and information is submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive, and the FDA may interpret data differently than we interpret the same data.

There is no assurance that the FDA will ultimately approve a product for marketing in the United States, and we may encounter significant difficulties or costs during the review process. If a product receives marketing approval, the approval may be significantly limited to specific populations, severities of allergies, and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling or may condition the approval of the BLA on other changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct post-market testing or clinical trials and surveillance to monitor the effects of approved products. For example, the FDA may require Phase IV testing which involves clinical trials designed to further assess the product’s safety and effectiveness and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized. The FDA may also place other conditions on approvals including the requirement for a Risk Evaluation and Mitigation Strategy, or REMS, to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following initial marketing.

Expedited Development and Review Programs

The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet certain criteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and nonclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product concurrently with, or at any time after, submission of an IND, and the FDA must determine if the product qualifies for Fast Track designation within 60 days of receipt of the sponsor’s request. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.

Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review, or review within a six-month timeframe from the date a complete BLA is accepted for filing, if it has the potential to provide a significant improvement in safety and effectiveness compared to available therapies. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological product designated for priority review in an effort to facilitate the review.

Additionally, a product may be eligible for accelerated approval. An investigational drug may obtain accelerated approval if it treats a serious or life-threatening condition and generally provides a meaningful advantage over available therapies and demonstrates an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely to predict an effect on IMM or other clinical benefit.

 

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As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug shown to be effective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions as it deems necessary to assure safe use of the drug, such as:

 

    distribution restricted to certain facilities or physicians with special training or experience; or

 

    distribution conditioned on the performance of specified medical procedures.

The limitations imposed would be commensurate with the specific safety concerns presented by the product. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast Track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

Breakthrough Designation

A product can be designated as a breakthrough therapy if it is intended to treat a serious or life-threatening condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. A sponsor may request that a drug product candidate be designated as a breakthrough therapy concurrently with, or at any time after, the submission of an IND, and the FDA must determine if the drug product candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request. If so designated, the FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the sponsor throughout the product’s development, providing timely advice to the sponsor to ensure that the development program to gather preclinical and clinical data is as efficient as practicable, involving senior managers and experienced review staff in a cross-disciplinary review, assigning a cross-disciplinary project lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor, and taking steps to ensure that the design of the clinical trials is as efficient as practicable.

Accelerated Approval for Regenerative Advanced Therapies

As part of the 21st Century Cures Act, Congress amended the FD&C Act to create an accelerated approval program for regenerative advanced therapies, which include cell therapies, therapeutic tissue engineering products, human cell and tissue products, and combination products using any such therapies or products. Regenerative advanced therapies do not include those human cells, tissues, and cellular and tissue based products regulated solely under section 361 of the Public Health Service Act and 21 CFR Part 1271. The new program is intended to facilitate efficient development and expedite review of regenerative advanced therapies, which are intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition. A drug sponsor may request that FDA designate a drug as a regenerative advanced therapy concurrently with or at any time after submission of an IND. FDA has 60 calendar days to determine whether the drug meets the criteria, including whether there is preliminary clinical evidence indicating that the drug has the potential to address unmet medical needs for a serious or life-threatening disease or condition. A new drug application or BLA for a regenerative advanced therapy may be eligible for priority review or accelerated approval through (1) surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit or (2) reliance upon data obtained from a meaningful number of sites. Benefits of such designation also include early interactions with FDA to discuss any potential surrogate or intermediate endpoint to be used to support accelerated approval. A regenerative advanced therapy that is granted accelerated approval and is subject to postapproval requirements may fulfill such requirements through the submission of clinical evidence, clinical studies, patient registries, or other sources of real world evidence, such as electronic health records; the collection of larger confirmatory data sets; or postapproval monitoring of all patients treated with such therapy prior to its approval.

Pediatric Trials

Under the Pediatric Research Equity Act, or PREA, a BLA or supplement to a BLA must contain data to assess the safety and efficacy of the product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDCA requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within sixty days of an end-of-Phase II meeting or as may be agreed between the sponsor and FDA. The

 

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initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials, and/or other clinical development programs. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of data or full or partial waivers.

Post-Marketing Requirements

Following approval of a new product, a manufacturer and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities of adverse experiences with the product, providing the regulatory authorities with updated safety and efficacy information, product sampling and distribution requirements, and complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs and biologics for off-label uses, manufacturers may not market or promote such off-label uses.

Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject to the approval of the FDA and other regulators, which may or may not be received or may result in a lengthy review process. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or the PDMA, a part of the FDCA.

In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMPs. The cGMP requirements for constituent parts of cross-labeled combination products that are manufactured separately and not co-packaged are the same as those that would apply if these constituent parts were not part of a combination product. For single-entity and co-packaged combination products, there are two ways to demonstrate compliance with cGMP requirements, either compliance with all cGMP regulations applicable to each of the constituent parts included in the combination product, or a streamlined approach demonstrating compliance with either the drug/biologic cGMPs or the medical device quality system regulation rather than demonstrating full compliance with both, under certain conditions. These conditions include demonstrating compliance with specified provisions from the other of these two sets of cGMP requirements. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the manufacture and distribution of approved products are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. These regulations also impose certain organizational, procedural and documentation requirements with respect to manufacturing and quality assurance activities. BLA holders using contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of qualified firms, and, in certain circumstances, qualified suppliers to these firms. These firms and, where applicable, their suppliers are subject to inspections by the FDA at any time, and the discovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions that interrupt the operation of any such facilities or the ability to distribute products manufactured, processed or tested by them. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA, including, among other things, recall or withdrawal of the product from the market.

The FDA also may require post-approval testing, sometimes referred to as Phase IV testing, risk minimization action plans and post-marketing surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative enforcement, untitled or warning letters

 

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from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.

Other Regulatory Matters

Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services, or CMS, other divisions of the Department of Health and Human Services, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments. In the United States, sales, marketing and scientific/educational programs must also comply with federal and state fraud and abuse laws, data privacy and security laws, transparency laws, and pricing and reimbursement requirements in connection with governmental payor programs, among others. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition laws.

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

The failure to comply with regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts, including government contracts. In addition, even if a firm complies with FDA and other requirements, new information regarding the safety or efficacy of a product could lead the FDA to modify or withdraw product approval. Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially affect our business in an adverse way.

Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.

U.S. Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of the FDA approval of our drug product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of a BLA plus the time between the submission date of a BLA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The U.S. PTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may apply for restoration of patent term for our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant BLA.

An abbreviated approval pathway for biological products shown to be biosimilar to, or interchangeable with, an FDA-licensed reference biological product was created by the Biologics Price Competition and Innovation Act of 2009, or BPCI Act, which was part of the Patient Protection and Affordable Care Act, as amended by

 

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the Health Care and Education Reconciliation Act of 2010, or collectively the ACA. This amendment to the PHSA attempts to minimize duplicative testing. Biosimilarity, which requires that the biological product be highly similar to the reference product notwithstanding minor differences in clinically inactive components and that there be no clinically meaningful differences between the product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability requires that a biological product be biosimilar to the reference product and that the product can be expected to produce the same clinical results as the reference product in any given patient and, for products administered multiple times, that the product and the reference product may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biological product. However, complexities associated with the larger, and often more complex, structure of biological products as compared to small molecule drugs, as well as the processes by which such products are manufactured, pose significant hurdles to implementation that are still being worked out by the FDA.

A reference biological product is granted twelve years of exclusivity from the time of first licensure of the product, and the FDA will not accept an application for a biosimilar or interchangeable product based on the reference biological product until four years after first licensure. “First licensure” typically means the initial date the particular product at issue was licensed in the United States. This does not include a supplement for the biological product or a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or other related entity) for a change that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device, or strength, unless that change is a modification to the structure of the biological product and such modification changes its safety, purity, or potency. Whether a subsequent application, if approved, warrants exclusivity as the “first licensure” of a biological product is determined on a case-by-case basis with data submitted by the sponsor.

Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which attaches to the twelve-year exclusivity period for reference biologics, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.

European Union Drug Development

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

Clinical Trials

Similar to the United States, the various phases of preclinical and clinical research in the European Union are subject to significant regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the European Union clinical trials regulatory framework, setting out common rules for the control and authorization of clinical trials in the European Union, the European Union Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the Member State regimes. To improve the current system, a new Regulation No. 536/2014 on clinical trials on medicinal drug product candidates for human use, which repealed Directive 2001/20/EC, was adopted on April 16, 2014, and published in the European Official Journal on May 27, 2014. The new Regulation aims at harmonizing and streamlining the clinical trials authorization process, simplifying adverse event reporting procedures, improving the supervision of clinical trials, and increasing their transparency. The new Regulation entered into force on June 16, 2014, and is applicable since May 28, 2016. Until then the Clinical Trials Directive 2001/20/EC will still apply. In addition, the transitory provisions of the new Regulation offer the sponsors the possibility to choose between the requirements of the Directive and the Regulation for one year from the entry into application of the Regulation.

Under the current regime, before a clinical trial can be initiated it must be approved in each of the European Union countries where the trial is to be conducted by two distinct bodies: the National Competent Authority, or NCA, and one or more Ethics Committees, or ECs. More specifically, a clinical trial may not be started until the relevant EC has issued a favorable opinion, and the NCA has not informed the Sponsor of the trial of any grounds for non-acceptance or confirmed that no such grounds exist. Approval will only be granted if satisfactory information demonstrating the quality of the investigational agent and its non-clinical safety has been provided, together with a study plan that details the manner in which the trial will be carried out.

 

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ECs determine whether the proposed clinical trial will expose participants to unacceptable conditions of hazards, while considering, among other things, the trial design, protocol, facilities, investigator and supporting staff, recruitment of clinical trial subjects, the Investigator’s Brochure, or IB, indemnity and insurance, etc. The EC also determines whether clinical trial participants have given informed consent to participate in the trial. Following receipt of an application (which must be submitted in the national language), ECs must deliver their opinion within 60 days (or sooner if the Member State has implemented a shorter time period). For clinical trials of gene therapy, somatic cell therapy, and all medicinal products containing genetically modified organisms, this timeline may be extended (with an additional 120 days).

Similarly, a valid request for authorization (in the national language) must be submitted to the NCA of each Member State where the trial will be conducted. Sponsors must be notified of the decision within 60 days of receipt of the application (unless shorter time periods have been fixed), in the absence of which, the trial is considered approved. However, for clinical trials of gene therapy, somatic cell therapy, and all medicinal products containing genetically modified organisms, a written authorization by the competent NCA is required. Similar timeline extensions as for ECs exist.

Studies must comply with ethical guidelines and Good Clinical Practice (GCP) guidelines. Monitoring of adverse reactions that occur during clinical trials, including, where applicable, notification of the same to the competent NCA and ECs, is also required. Trials can be terminated early if a danger to human health is established or continuing the trial would be considered unethical. Consequently, the rate of completion of clinical trials may be delayed by many factors, including slower than anticipated patient enrollment or adverse events occurring during clinical trials.

Drug Review and Approval

In the European Economic Area, or EEA (which is comprised of the 28 Member States of the European Union plus Norway, Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:

The Centralized MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, advanced-therapy medicines such as gene-therapy, somatic cell-therapy or tissue-engineered medicines, and medicinal products containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and other immune dysfunctions, and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the European Union.

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

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

Marketing Authorization Application

Following positive completion of clinical trials, pharmaceutical companies can submit a MA application. The MA application shall include all information that is relevant to the evaluation of the medicinal products,

 

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whether favorable or unfavorable. The application dossier must include, among other things, the results of pharmaceutical (physico-chemical, biological, or microbiological) tests, preclinical (toxicological and pharmacological) tests, and clinical trials, including the therapeutic indications, contra-indications, and adverse reactions, and the recommended dosing regimen or posology.

In addition to demonstrating the safety and efficacy of the medicinal product, pharmaceutical companies are required to guarantee the consistent quality of the product. Therefore, the conditions for obtaining a MA include requirements that the manufacturer of the product complies with applicable legislation including Good Manufacturing Practice, or GMP, related implementing measures and applicable guidelines that involve, amongst others, ongoing inspections of manufacturing and storage facilities.

Early Access Mechanisms

Several schemes exist in the EU to support earlier access to new medicines falling within the scope of the Centralized Procedure, in particular (i) accelerated assessment; (ii) conditional MAs ; and (iii) MAs granted under exceptional circumstances.

For a medicine, which is of “major public health interest” (in particular, in terms of therapeutic innovation), accelerated assessment can be requested, taking up to 150 days instead of the usual period of up to 210 days. There is no single definition of what constitutes major public health interest. This should be justified by the applicant on a case-by-case basis. The justification should present the arguments to support the claim that the medicinal product introduces new methods of therapy or improves on existing methods, thereby addressing to a significant extent the greater unmet needs for maintaining and improving public health.

Conditional MAs may be granted on the basis of less complete data than usual in order to meet unmet medical needs of patients and in the interest of public health, subject to specific obligations with regard to further studies and intended to be replaced by a full unconditional MA once the missing data is provided. A conditional MA is valid for one year on a renewable basis.

Medicines for which the MA applicant can demonstrate that the normally required comprehensive efficacy and safety data cannot be provided (for example because the disease which the medicine treats is extremely rare) may be eligible for a MA under exceptional circumstances. These are medicines for which it is never intended that a full MA will be obtained. MAs under exceptional circumstances are reviewed annually to reassess the risk-benefit balance.

Supplementary Protection Certificates and Data/market Exclusivity

In Europe, the extension of effective patent term to compensate originator pharmaceutical companies for the period between the filing of an application for a patent for a new medicinal product and the first MA for such product, has been achieved by means of a Supplementary Protection Certificate (SPC) which can be applied for by the originator pharmaceutical company within six months from the granting of the first MA and comes into effect on expiry of the basic patent. Such SPC attaches only to the active ingredient of the medicinal product for which the MA has been granted. The SPC for an active ingredient has a single last potential expiry date throughout the EEA, and cannot last for more than five years from the date on which it takes effect ( i.e. , patent expiry. Furthermore, the overall duration of protection afforded by a patent and a SPC cannot exceed 15 years from the first MA. The duration of a medicinal product SPC can be extended by a single six-month period, or pediatric extension, when all studies in accordance with a pediatric investigation plan, or PIP, have been carried out.

Innovative medicines benefit from specific data and marketing exclusivity regimes. These regimes are intended to provide general regulatory protection to further stimulate innovation. The current rules provide for (i) an 8-year data protection (from the MA of an innovative medicine) against the filing of an abridged application for a follow-on product, referring to the data supporting the MA of the innovative medicine (data exclusivity); and (ii) a 10-year protection against the marketing of a follow-on product (marketing exclusivity), with a possible extension by 1 year if, during the first 8 years, a new therapeutic indication (which is considered to bring a significant clinical benefit in comparison with existing therapies) is approved. This protection is often referred to as the “eight, plus two, plus one” rule. Additional reward mechanisms exist, most notably a 10-year orphan medicines’ marketing exclusivity, and a 1-year data exclusivity for developing a new indication for an old substance and for switch data supporting a change in prescription status.

 

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The current rules also provide for a system of obligations and rewards and incentives intended to facilitate the development and accessibility of pediatric medicinal products, and to ensure that such products are subject to high quality ethical research. Pursuant to such rules, pharmaceutical companies are often required to submit a Pediatric Investigation Plan, or PIP, at a relatively early stage of product development, which defines the pediatric studies to be completed before a MA application can be submitted. Upon completion of the studies in the agreed PIP, the company may be entitled to a “reward”, i.e. , the afore-mentioned 6-month pediatric extension of the SPC for non-orphan medicinal products; or a two-year extension of the 10-year marketing exclusivity period for orphan medicines.

Post-marketing and Pharmacovigilance Requirements

When granting a MA, competent authorities ( i.e. , the EMA or the relevant NCAs) may impose an obligation to conduct additional clinical testing, sometimes referred to as Phase IV clinical trials, or other post-approval commitments, to monitor the product after commercialization. Additionally, the MA may be subjected to limitations on the indicated uses for the product.

Also, after a MA has been obtained, the marketed product and its manufacturer and MA holder will continue to be subject to a number of regulatory obligations, as well as to monitoring/inspections by the competent authorities.

Under applicable pharmacovigilance rules, pharmaceutical companies must, in relation to all their authorized products, irrespective of the regulatory route of approval, collect, evaluate and collate information concerning all suspected adverse reactions and, when relevant, report it to the competent authorities. This information includes both suspected adverse reactions signaled by healthcare professionals, either spontaneously or through post-authorization studies, regardless of whether or not the medicinal product was used in accordance with the authorized SmPC and/or any other marketing conditions, and suspected adverse reactions identified in worldwide-published scientific literature. To that end, a MA holder must have (permanently and continuously) at its disposal an appropriately qualified person responsible for pharmacovigilance and establish an adequate pharmacovigilance system. All relevant suspected adverse reactions, including suspected serious adverse reactions, which must also be reported on an expedited basis, should be submitted to the competent authorities in the form of Periodic Safety Update Reports, or PSURs. PSURs are intended to provide an update for the competent authorities on the worldwide safety experience of a medicinal product at defined time points after authorization. PSURs must therefore comprise a succinct summary of information together with a critical evaluation of the risk/benefit balance of the medicinal product, taking into account any new or changing information. The evaluation should ascertain whether any further investigations need to be carried out, and whether the SmPC or other product information needs to be modified.

To ensure that pharmaceutical companies comply with pharmacovigilance regulatory obligations, and to facilitate compliance, competent authorities will conduct pharmacovigilance inspections. These inspections are either routine ( i.e. aimed at determining whether the appropriate personnel, systems, and resources are in place) or targeted to companies suspected of being non-compliant. Reports of the outcome of such inspections will be used to help improve compliance and may also be used as a basis for enforcement action.

Other Regulatory Matters

Advertising of medicines is subject to tighter controls than general consumer goods and specific requirements are set forth in Directive 2001/83/EC, which apply in addition to the general rules. In general, advertising of unapproved medicinal products or of unapproved uses of otherwise authorized medicinal products ( e.g. , off-label uses) is prohibited, and advertising for prescription medicinal products must be directed only towards health care professionals ( i.e. , advertising of these products to the general public is prohibited). Member States have implemented the advertising rules differently and the requirements vary significantly depending on the specific country. Advertising of medicinal products in an online setting, including social media, can be particularly challenging given the strict rules in place.

Pricing and Reimbursement

United States

Sales of our products will depend, in part, on the extent to which our products, once approved, will be covered and reimbursed by third-party payors, such as government health programs, commercial insurance and

 

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managed healthcare organizations. These third-party payors are increasingly reducing reimbursements for medical products and services. The process for determining whether a third-party payor will provide coverage for a drug product, including a biologic, typically is separate from the process for setting the price of a drug product or for establishing the reimbursement rate that a payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the approved drugs for a particular indication.

In order to secure coverage and reimbursement for any drug product candidate that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the drug product candidate, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Whether or not we conduct such studies, our drug product candidates may not be considered medically necessary or cost-effective. A third-party payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage, and adequate reimbursement, for the product. Third party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in product development.

The containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs, including biologics, have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our drug product candidate or a decision by a third-party payor to not cover our drug product candidate could reduce physician usage of the drug product candidate and have a material adverse effect on our sales, results of operations and financial condition.

For example, the ACA, enacted in March 2010, has had, a significant impact on the health care industry. The ACA has expanded coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the ACA expanded and increased industry rebates for drugs covered under Medicaid programs and made changes to the coverage requirements under the Medicare Part D program.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, started in April 2013 and will stay in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, then President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Some of the provisions of ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Congress may consider other legislation to replace elements of the ACA.

 

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The Tax Cuts and Jobs Act of 2017, or TCJA, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plan, the annual fee imposed on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device exercise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to reduce the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” Congress also could consider subsequent legislation to replace elements of ACA that are repealed. Thus, the full impact of ACA, any law replacing elements of it, or the political uncertainty related to any repeal or replacement legislation on our business remains unclear.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country.

European Union

In Europe, pricing and reimbursement for pharmaceutical products are not harmonized and fall within the exclusive competence of the national authorities, provided that basic transparency requirements (such as maximum timelines) defined at the European level are met as set forth in the EU Transparency Directive 89/105/EEC. A Member State may approve a specific price for a medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. For example, in France, effective access to the market assumes that our future products will be reimbursed by social security. The price of medications is negotiated with the Economic Committee for Health Products, or CEPS.

As a consequence, reimbursement mechanisms by public national healthcare systems, or private health insurers also vary from country to country. In public healthcare systems, reimbursement is determined by guidelines established by the legislator or a competent national authority. In general, inclusion of a product in reimbursement schemes is dependent upon proof of the product efficacy, medical need, and economic benefits of the product to patients and the healthcare system in general. Acceptance for reimbursement comes with cost, use and often volume restrictions, which again vary from country to country.

The pricing and reimbursement level for medicinal products will depend on the strength of the clinical data set and, as for most novel therapies, restrictions may apply. In most countries, national competent authorities ensure that the prices of registered medicinal products sold in their territory are not excessive. In making this judgment, they usually compare the proposed national price either to prices of existing treatments and/or to prices of the product at issue in other countries – so-called “international reference pricing” – also taking into account the type of treatment (preventive, curative or symptomatic), the degree of innovation, the therapeutic breakthrough, volume of sales, sales forecast, size of the target population and/or the improvement (including cost savings) over comparable treatments. Given the growing burden of medical treatments on national healthcare budgets, reimbursement and insurance coverage is an important determinant of the accessibility of medicines.

The various public and private plans, formulary restrictions, reimbursement policies, patient advocacy groups, and cost-sharing requirements may play a role in determining effective access to the market of our product candidates. The national competent authorities may also use a range of policies and other initiatives intended to influence pharmaceutical consumption. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our drug product candidates. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be priced at a significantly lower level.

Other Healthcare Laws and Compliance Requirements

Our business operations in the United States and our arrangements with clinical investigators, healthcare providers, consultants, third-party payors and patients may expose us to broadly applicable federal and state fraud and abuse and other healthcare laws. These laws may impact, among other things, our research,

 

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proposed sales, marketing and education programs of our drug product candidates that obtain marketing approval. The laws that may affect our ability to operate include, among others:

 

    the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration (including any kickback, bribe or rebate), directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order, or recommendation of, an item, good, facility or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

 

    federal civil and criminal false claims laws and civil monetary penalty laws, which impose penalties and provide for civil whistleblower or qui tam actions against individuals and entities for, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or making a false statement or record material to payment of a false claim or avoiding, decreasing, or concealing an obligation to pay money to the federal government, including for example, providing inaccurate billing or coding information to customers or promoting a product off-label;

 

    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program, obtaining money or property of the health care benefit program through false representations, or knowingly and willingly falsifying, concealing or covering up a material fact, making false statements or using or making any false or fraudulent document in connection with the delivery of or payment for healthcare benefits or services.

 

    the federal Physician Payments Sunshine Act, enacted as part of the ACA, which requires applicable manufacturers of covered drugs, devices, biologics and medical supplies to track and annually report to CMS payments and other transfers of value provided to physicians and teaching hospitals and certain ownership and investment interest held by physicians or their immediate family members in applicable manufacturers and group purchasing organizations;

 

    HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and its implementing regulations, which imposes certain requirements on covered entities and their business associates relating to the privacy, security and transmission of individually identifiable health information; and

 

    state law equivalents of each of the above federal laws, such as state anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, state marketing and/or transparency laws applicable to manufacturers that may be broader in scope than the federal requirements, state laws that require biopharmaceutical companies to comply with the biopharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect as HIPAA, thus complicating compliance efforts.

The ACA broadened the reach of the federal fraud and abuse laws by, among other things, amending the intent requirement of the federal Anti-Kickback Statute and certain applicable federal criminal healthcare fraud statutes. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant administrative, civil, and/or criminal penalties, damages, fines, disgorgement, individual imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If the physicians or other healthcare providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they also may be subject to administrative, civil, and/or criminal sanctions, including exclusions from government funded healthcare programs.

 

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Legal Proceedings

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

On July 8, 2016, following the unsuccessful outcome of the conciliation procedure organized under Swiss laws, a Swiss company named AtonRâ Partners SA formalized its claim against us before the Tribunal of First Instance of Geneva (Switzerland), or the Tribunal. AtonRâ Partners SA, or AtonRâ, claims the payment of respectively 95.250 EUR and 300.300 USD as alleged broker intermediary commissions in the context of our fund raising of March 3 2015 and our initial U.S. public offering on the NASDAQ on June 18, 2015. On January 12, 2018, the Tribunal has decided it had no jurisdiction on the case and rejected AtonRâ’s claims. AtonRâ has decided not to appeal the judgment.

C. Organizational Structure

The Company and its subsidiaries, or the Group, is made of the following entities as of December 31, 2017. The following diagram illustrates our corporate structure.

 

Name

  Country of
Incorporation
and Place of
Business
  Nature of Business   Proportion of
ordinary
shares directly
held by parent (%)
    Proportion of ordinary
shares held by the
group (%)
    Proportion of ordinary
shares held by non-
controlling interests (%)
 

Celyad SA

  BE   Biopharma     Parent company      

Celyad Inc.

  US   Biopharma     100     100     0

Biological Manufacturing Services SA

  BE   Manufacturing     100     100     0

OnCyte, LLC

  US   Biopharma     100     100     0

CorQuest Medical, Inc.

  US   Medical Device     100     100     0

 

LOGO

OnCyte, LLC was dissolved in March 2018. See “Item 4.A.—History and Development of the Company.”

 

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D. Property, Plants and Equipment

We rent a 2,284 square meter office space from the Axis Parc developer located at the Axis Parc in Mont-Saint-Guibert pursuant to a lease agreement dated October 15, 2015 as amended from time to time, which expires on September 30, 2025. We also rent a 1,120 square meter office and laboratory space from the Axis Parc developer pursuant to a lease agreement dated November 11, 2017, as amended from time to time, which expires on September 30, 2020. In January 2016, we entered into a six-year lease agreement for our U.S. corporate offices located in Boston, Massachusetts.

We plan to identify additional facilities in the Flemish region of Belgium to construct our contemplated future European manufacturing plant. We have committed to maintain our headquarters and registered office in the Walloon region of Belgium and all of our existing activities will continue to be performed in the Walloon region

 

ITEM 4A. UNRESOLVED STAFF COMMENTS.

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

We are a clinical-stage biopharmaceutical company focused on the development of specialized cell-based therapies. We utilize our expertise in cell engineering to target cancer. Our lead drug product candidate, CYAD-01 (CAR-T-NKG2D), is an autologous chimeric antigen receptor, or CAR, using NKG2D, an activating receptor of Natural Killer, or NK, cells transduced on T-lymphocytes, or T cells. NK cells are lymphocytes of the immune system that kill diseased cells. The receptors of the NK cells used in our therapies target the binding molecules, called ligands, that are expressed in cancer cells, but are absent or expressed at very low levels in normal cells. We believe our CAR-T-NKG2D approach has the potential to treat a broad range of both solid and hematologic tumors.

In December 2016, following the successful completion of a proof-of-concept clinical trial we conducted at the Dana-Farber Cancer Institute, in which we observed no treatment related safety concerns and we observed initial signs of clinical activity, we initiated a Phase 1 clinical trial, called THINK ( TH erapeutic I mmunotherapy with NK R-2), to assess the safety and clinical activity of multiple administrations of CYAD-01 in seven refractory cancers, including both solid and hematologic cancers. As of December 31, 2017, we had treated 15 patients with CYAD-01 in the THINK trial, and we did not observe the same Grade 4 or above adverse event in two or more patients and no patient experienced a Grade 5 adverse event. No patient experienced an adjudicated Grade 4 or higher cytokine release syndrome, or CRS, adverse event or neurotoxic adverse event. In six of the 10 patients treated at the per-protocol intended dose we observed signs of clinical activity ranging from Stable Disease, or SD, to Complete Response, or CR. We plan to enroll up to 36 patients in the dose escalation part and up to 86 patients in the extension part of the THINK trial. Based on the promising interim results of the THINK trial, we plan to further evaluate CYAD-01 in a series of additional Phase 1 clinical trials in patients with acute myeloid leukemia, or AML, and colorectal cancer, or CRC.

In October 2017, we announced a world’s first with the complete response in a patient with refractory and relapsed AML, obtained without preconditioning chemotherapy or other treatments combined with CYAD-01. Importantly, clinical activity has been observed in all AML patients dosed in 2017 at the intended dose, with all patients seeing a reduction in their blast counts in the bone marrow and improvements in their hematological parameters.

Data collected in 2017 in the THINK trial confirmed the safety profile of CYAD-01 and validated activity of the NKG2D. In addition to the results in the liquid arm, data also showed promising results for CYAD-01 in solid tumors: Stabilization of the disease was observed in an ovarian patient and in colorectal patients demonstrating first sign of clinical activity in solid tumors.

At the end of 2017, we initiated the SHRINK trial, an open-label Phase 1 study evaluating the safety and clinical activity of multiple doses of CYAD-01, administered concurrently with the neoadjuvant FOLFOX treatment in patients with potentially resectable liver metastases from colorectal cancer. The trial includes a dose escalation and an extension stage.

 

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The dose escalation design of SHRINK will include three dose-levels of CYAD-01: 1x10 8 , 3x10 8 and 1x10 9 CYAD-01 per administration (adjusted only to body weight for patients below 65 kg). At each dose-level, patients will receive three successive administrations, two weeks apart, at the specified dose administered at a specific timing within the FOLFOX cycle. The dose escalation portion of the study will enroll 3 patients per dose level and the extension phase will enroll 21 additional patients. SHRINK is being conducted in oncology centers in Belgium.

Collaborations

On November 5, 2014, we acquired CorQuest Medical, Inc., a private U.S. company, or CorQuest, for a single cash payment of €1.5 million and a potential earn-out payment to the sellers if the intellectual property acquired from CorQuest is sold, in whole or in part, to a third party within ten years of November 5, 2014. The earn-out payment shall be 2.0% of the value of the cash and non-cash consideration from such sale, or Net Revenue, if the Net Revenue is €10.0 million or less, and 4.0% of the Net Revenue, if the Net Revenue is greater than €10.0 million.

On January 21, 2015, we purchased OnCyte, LLC, or OnCyte, a wholly-owned subsidiary of Celdara Medical, LLC, a privately-held U.S. biotechnology company for an upfront payment of $10.0 million, of which, $6.0 million was paid in cash and $4.0 million was paid in the form of 93,087 of our ordinary shares. A deferred payment of $5.0 million will be due upon the enrolment of the first patient of the second cohort of the NKR-T clinical trial. Additional contingent payments with an estimated fair value of $27.9 million are payable upon the attainment of various clinical and sales milestones. As a result of this transaction we acquired our NKR-T cell drug product candidates and related technology, including technology licensed from the Trustees of Dartmouth College.

In August 2017, we amended the agreements executed in January 2015 with Celdara Medical LLC and Dartmouth College following the acquisition of OnCyte, LLC and related to the CAR-T NK cell drug product candidates. Under the amended agreements Celyad is to receive an increased share of future revenues generated by these assets, including revenues from its sub-licensees. In return, Celyad paid Celdara Medical LLC and Dartmouth College an upfront payment of a total of $12.5 million (€10.6 million), respectively $10.5 million and $2.0 million, and issued to Celdara Medical LLC $12.5 million worth of Celyad’s ordinary shares at a share price of €32.35.

On May 17 2016, we acquired 100% of Biological Manufacturing Services SA, or BMS. BMS owns GMP laboratories and had rented its laboratories to us since 2009. Before this acquisition, BMS was considered as a related party to us.

In July 2016, we granted ONO Pharmaceutical Co. Ltd., or ONO, a leading Japanese immuno-oncology company, an exclusive license for the development and commercialization of our allogeneic CYAD-01 immunotherapy. The license agreement with ONO grants them the exclusive right to develop and commercialize our allogeneic CYAD-01 T-Cell immunotherapy in Japan, Korea and Taiwan. In exchange for receiving a license in these countries, ONO will pay us up to $311.5 million in development and commercial milestones, including an upfront payment of $12.5 million plus double digit royalties on net sales in ONO territories.

In May 2017, we signed a non-exclusive license agreement with Novartis regarding U.S. patents related to allogeneic CAR-T cells. The agreement includes Celyad’s intellectual property rights under U.S. Patent No. 9,181,527. This agreement is related to two undisclosed targets currently under development by Novartis. Under the terms of the agreement, Celyad received an upfront payment and is eligible to receive payments in aggregate amounts of up to $96 million. In addition, Celyad is eligible to receive royalties based on net sales of the licensed target associated products at percentages in the single digits. Celyad retains all rights to grant further licenses to third parties for the use of allogeneic CAR-T cells.

As of December 31, 2017, we have been funded through the following transactions:

 

    proceeds of €42.0 million from private financing rounds;

 

    proceeds of €26.5 million from an initial public offering of our ordinary shares on Euronext Brussels and Euronext Paris in July 2013, or the Euronext IPO;

 

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    proceeds of €25.0 million from a private financing by Medisun International Limited, or Medisun in June 2014;

 

    proceeds of €31.7 million from a private placement in March 2015;

 

    proceeds of €88.0 million from our global offering of 1,460,000 ordinary shares, consisting of an underwritten public offering of 1,168,000 ADSs and a concurrent European private placement of 292,000 ordinary shares, in June 2015.

 

    proceeds of €24.5 million from non-dilutive financing sources, such as government grants and recoverable cash advances, or RCAs; and

We have incurred net losses in each year since our inception. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administration expenses associated with our operations. For the years ended December 31, 2017, 2016 and 2015, we incurred a loss for the year of € 56.4 million, € 23.6 million and, €29.1 million respectively. As of December 31, 2017, we had an accumulated deficit of €180.4 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially in connection with our ongoing activities, as we:

 

    continue the development of our drug product candidates, including planned and future clinical trials;

 

    conduct additional research and development for drug product candidate discovery and development;

 

    seek regulatory approvals for our drug product candidates;

 

    prepare for the potential launch and commercialization of our drug product candidates, if approved;

 

    establish a sales and marketing infrastructure for the commercialization of our drug product candidates, if approved;

 

    in-license or acquire additional drug product candidates or technologies;

 

    build-out additional manufacturing capabilities; and

 

    hire additional personnel, including personnel to support our drug product development and commercialization efforts and operations as a U.S. public company.

We generate limited revenue from sales of C-Cath ez, our proprietary catheter for injecting cells into the heart. We believe that C-Cath ez revenue will remain immaterial in the future as we intend to sell C-Cath ez to research laboratories and clinical-stage companies only.

We do not expect to generate material revenue from drug product sales unless and until we successfully complete development of, and obtain marketing approval for, one or more of our drug product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we anticipate that we will need to raise additional capital prior to commercialization of our lead product candidates. Until such time that we can generate substantial revenue from drug product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, including government grants and RCAs, and collaborations and licensing arrangements. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our development programs or commercialization efforts or grant to others rights to develop or market drug product candidates that we would otherwise prefer to develop and market ourselves. Failure to receive additional funding could cause us to cease operations, in part or in full.

Our financial statements for 2015, 2016 and 2017 have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

 

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Financial Operations Overview

A. Operating Results

Our operating income consist of revenues and other income.

Revenues

For the periods presented in this Annual Report, the revenues we generated were composed of:

 

    non-refundable upfront payments as a result of the Novartis (revenue 2017) and ONO (revenue 2016) agreements; and

 

    third-party sales of C-Cath ez in 2015, 2016 and 2017. There are no recurring sales generated by this device, and we expect revenue from C-Cath ez sales to remain immaterial compared to our operating expenses for the foreseeable future.

Licensing Revenues

In 2017, we received an upfront fee of $4.0 million associated to the license agreement signed with Novartis. The non-exclusive license agreement includes Celyad’s intellectual property rights under U.S. patents related to allogeneic CAR-T cells. This agreement is related to two undisclosed targets currently under development by Novartis. Under its terms, Celyad received an upfront payment and is eligible to receive payments in aggregate amounts of up to $96 million. In addition, Celyad is eligible to receive royalties based on net sales of the licensed target associated products at percentages in the single digits. Celyad retains all rights to grant further licenses to third parties for the use of allogeneic CAR-T cells. The revenue amount booked in 2017 correspond to the upfront payment received from Novartis. The 15% sub-license fee owed to Dartmouth College, the inventor of the CAR-T NKR platform in-licensed by Celyad in January 2015, is reported within Cost of Sales for the year 2017.

In 2016, we received an upfront payment associated to the License Agreement signed with ONO Pharmaceutical. The license agreement with ONO grants them the exclusive right to develop and commercialize our allogeneic CYAD-01 T-Cell immunotherapy in Japan, Korea and Taiwan. In exchange for receiving a license in these countries, ONO will pay Celyad up to $311.5 million in development and commercial milestones, including an upfront payment of $12.5 million plus double-digit royalties on net sales in ONO territories. The revenue amount booked in 2016 correspond to the upfront payment after deduction of the non-refundable Japanese withholding taxes and the 15% sub-license fee owed to Dartmouth College, the inventor of the CAR-T NKR platform in-licensed by Celyad in January 2015.

Cost of sales

Costs of sales are related to the cost of manufacturing C-Cath ez . We expect the costs of sales related to sales of C-Cath ez will remain immaterial compared to our operating expenses for the foreseeable future.

For the year 2017, costs of sales also include an amount of $0.6 million, which represents the above-mentioned 15% sub-license fee on the Novartis upfront fee, owed to Dartmouth College.

Research and Development expenses

Research and development expenses amounted to €22.9 million, €27.7 million and €22.8 million for the years ended December 31, 2017, 2016 and 2015, respectively, represented 41%, 74% and 76% of our total operating expenses. For the periods presented in this report, research and development expenses gathered all operating expenses of Celyad SA and its subsidiaries, or the Group, but the general and administrative expenses. It included all the costs related to our operations in the following departments; research and development, clinical, manufacturing, regulatory, quality and intellectual property.

With the exception of the C-Cath ez development costs capitalized since May 2012, we expense all research and development costs as they are incurred. A total of €1.1 million development costs of C-Cath ez have been capitalized since May 1, 2012, the month following our receipt of the CE mark for C-Cath ez . We may review this policy in the future depending on the outcome of our current development programs.

We utilize our research and development staff and infrastructure resources across projects in our programs and many of our costs historically have not been specifically attributable to a single project. In addition, our research and development expense may vary substantially from period to period based on the timing and scope of our research and development activities, the timing of regulatory approvals or authorizations and the rate of commencement and enrollment of patients in clinical trials.

 

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Research and development activities are central to our business. We expect that our other research and development expenses will continue to grow in the future mostly with the development of drug product candidates from our CAR-T NKR cell program. The expected increase in research and development expenditures will mostly relate to higher personnel costs, outsourcing costs and additional preclinical and clinical studies.

Salaries represented the biggest cost by nature within our operations over the last three years. We at Celyad have the strategy to internalize all operations when they become material or critical to our operations. We subcontract all one-time projects, or tasks that cannot be taken in house for quality or regulatory purposes. The other important nature of costs in our operations are the preclinical studies, clinical studies, scale-up and automation of the production processes.

The costs associated to preclinical studies are laboratory supplies and the costs of our outsourced research and development studies and services.

The costs associated to clinical studies comprised the preparation, the conduct and the supervision of our clinical trials. We expect that these expenses will increase in the near future given the expected clinical trial activities associated with our CAR-T NKR cell drug product candidates. We cannot determine with certainty the duration and completion costs of our current or future clinical trials of our drug product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our drug product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our drug product candidates. The duration, costs and timing of clinical trials and development of our drug product candidates will depend on a variety of factors, including:

 

    per patient clinical trial costs;

 

    the number of patients that participate in clinical trials;

 

    the drop-out or discontinuation rates of patients;

 

    the duration of patient follow-up;

 

    the scope, rate of progress and expense of our ongoing as well as any additional non-clinical studies, clinical trials and other research and development activities;

 

    clinical trial and early-stage results;

 

    the terms and timing of regulatory approvals;

 

    the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and

 

    the ability to market, commercialize and achieve market acceptance of CYAD-01 or any of our other product candidates.

A change in the outcome of any of these variables with respect to the development of CYAD-01 or any other drug product candidate that we are developing could mean a significant change in the costs and timing associated with the development of CYAD-01 or such other drug product candidate. For example, if FDA, European Medicines Agency, or EMA, or other regulatory authority were to require us to conduct additional preclinical studies and clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of our drug product candidates, or if we experience significant delays in enrollment in any clinical trials, we would be required to spend significant additional financial resources and time on the completion of the clinical development of the applicable drug product candidate.

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 have not received regulatory approval from the FDA, EMA or any other regulatory authority to market any of our drug product candidates. The successful development of our drug product candidates is highly uncertain. Our drug product candidates are tested in numerous preclinical studies for safety, pharmacology and efficacy. We then conduct clinical trials for those drug product candidates that are determined to be the most promising. We fund these trials ourselves or through non-dilutive funding. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some drug product candidates in order to focus resources on drug product candidates that we believe are more promising. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to the type, complexity, novelty and intended use of a drug product candidate. The cost of clinical trials for a particular drug product candidate may vary significantly.

 

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At this time we cannot reasonably estimate the time and costs necessary to complete the development of any of our drug product candidates or the period, if any, in which we will generate drug product revenue. There are numerous risks and uncertainties associated with drug product development, including:

 

    terms and timing of regulatory approvals and authorizations; and

 

    the number, the design and the size of the clinical trials required by the regulatory authorities to seek marketing approval.

For the periods presented in this report, the manufacturing expenses included the costs to manufacture our product candidates, namely CYAD-01 (as from the year 2016) and C-Cure (until the year 2016) and the costs associated to the process development of such product candidates, including the scale-up and the automation of such processes. These costs are mainly comprised of production raw material and supplies, maintenance and calibration charges of equipment and the rental of Good Manufacturing Practices laboratory facilities. Raw materials are the main component to the current cost of production of CYAD-01 and will remain as such in the future as they are closely associated to the production of clinical batches. Most of our raw material suppliers are large companies, and pursuant to our internal procedures, we are trying to have an alternative supplier for each critical material, to limit risk of disruption and price sensitivity.

We lease our production facility from a real estate company, through our wholly owned subsidiary Biological Manufacturing Services SA.

Manufacturing expenses are mostly driven by the number and the size of clinical trials that we conduct on our drug product candidates. We expect these expenses will remain significant in the near future and will increase as our clinical trials include a greater number of patients and we potentially commence commercialization of our drug product candidates, if approved.

General and administrative expenses

General and administrative expenses represented 17%, 26% and 24% of our total operating expenses for the years ended December 31, 2017, 2016 and 2015, respectively.

Our general and administrative expenses consist primarily of salaries, fees and other share-based compensation costs for personnel in executive, finance and accounting, people, communication and legal functions. It also includes costs related to professional fees for auditors and lawyers, consulting fees not related to research and development operations, and fees related to functions that are outsourced by us such as information technology, or IT. After having hired a Chief Legal Officer in 2016, general and administrative expenses are expected to remain on an increase trend in the near future with the expansion of our executive management team to include new personnel responsible for IT, sales and marketing, as well as with the additional responsibilities related to becoming a U.S. public company.

Amendments of the Celdara Medical and Dartmouth College agreements

In 2017, the Group recognized non-recurring expenses related to the amendment of the agreements with Celdara Medical LLC and Dartmouth College (totalling €24.3 million, out of which an amount of €10.6 million was settled in shares, and was thus a non-cash expense).

Write-off of C-Cure and Corquest assets and derecognition or related liabilities

In 2017, the Group also proceeded with the write-off of the C-Cure and Corquest assets and derecognition of related liabilities (for net expense amounts of €0.7 million and €1.2 million respectively).

Other operating income

During the periods presented in this Annual Report, our other operating income is primarily generated from (i) government grants received from the Regional government, or Walloon Region, in the form of RCAs and (ii) government grants received from the European Commission under the Seventh Framework Program, or FP7.

For the year 2017, we recognized for the first time a receivable on the amounts to collect from the Belgian federal government as research and development tax credit (reported as an operating income for an amount of €1.2 million). Collection of the research and development tax credits are expected as from 2019.

 

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Recoverable Cash Advances

RCAs support specific development programs and are typically granted by regional governmental entities, and in our case, the Walloon Region. All RCA contracts, in essence, consist of three phases, i.e., the “research phase”, the “decision phase” and the “exploitation phase”. During the research phase, we receive funds from the Walloon Region based on statements of expenses. In accordance with IAS 20.10A and IFRS Interpretations Committee’s, or IC’s, conclusion that contingently repayable cash received from a government to finance a research and development project is a financial liability under IAS 32, ‘Financial instruments; Presentation’, the RCAs are initially recognized as a financial liability at fair value, determined as per IFRS 9/IAS 39. The benefit (RCA grant component) consisting in the difference between the cash received (RCA proceeds) and the above-mentioned financial liability’s fair value (RCA liability component) is treated as a government grant in accordance with IAS 20.

The RCA grant component is recognized in profit or loss on a systematic basis over the periods in which the entity recognizes the underlying research and development expenses subsidized by the RCA. Subsequent measurement of the RCAs liability component (RCA financial liability) is performed at amortized cost using the cumulative catch-up approach, under which the carrying amount of the liability is adjusted to the present value of the future estimated cash flows, discounted at the liability’s original effective interest rate. The resulting adjustment is recognized within profit or loss.

At the end of the research phase, the Group should within a period of six months decide whether or not to exploit the results of the research phase (decision phase). The exploitation phase may have a duration of up to 10 years. In the event the Group decides to exploit the results under an RCA, the relevant RCA becomes contingently refundable, and the fair value of the RCA liability adjusted accordingly, if required. When the Group does not exploit (or ceases to exploit) the results under an RCA, it has to notify the Walloon Region of this decision. This decision is of the sole responsibility of the Group. The related liability is then discharged by the transfer of such results to the Walloon Region. Also, when the Group decides to renounce to its rights to patents which may result from the research, title to such patents will be transferred to the Walloon Region. In that case, the RCA liability is extinguished.

From inception through December 31, 2017, we have banked subsidies RCAs totaling €22.6 million. In 2018 and 2019, we will be required to make exploitation decisions on our remaining outstanding RCAs related to the CAR-T platform.

Other Government Grants

Since inception through December 31, 2017, we received grants totaling €2.5 million and we expect to continue to apply for grants from FP7 and Walloon Region authorities. These grants are used to partially finance early stage projects such as fundamental research, applied research and prototype design.

As of the date of this Annual Report, none of the grants received are subject to any conditions. As per our agreements with these governmental authorities, grants are paid upon our submission of a statement of expenses. We incur project expenses first and ask for partial reimbursement according to the terms of the agreements.

The government grants are recognized in profit or loss on a systematic basis over the periods in which we recognize as expenses the related costs for which the grants are intended to compensate.

Finance income

Finance income relates to interest income earned on bank accounts and from currency exchange rate differences. Our cash and cash equivalents have been deposited primarily in savings and deposit accounts with original maturities of three months or less. Savings and deposit accounts generate a modest amount of interest income. We expect to continue this investment philosophy.

Finance expenses

Finance expenses relate to interest payable on shareholder loans and finance leases, as well as interest on overdrafts and currency exchange rate differences. Due to the depreciation of the USD compared to EUR, the Group recognized an unrealized loss on foreign exchange differences of €4.3 million in 2017. In 2016, the unrealized gain on foreign exchange differences amounted to €0.8 million.

Consolidated Financial Data

The following is a summary of our consolidated financial data.

 

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Recently Issued Accounting Standards

For information regarding recently issued accounting standards, please see “Note 2— General information and statement of compliance” in our consolidated financial statements appended to this Annual Report.

Critical Accounting Policies

For information regarding our critical accounting policies, please see “Note 5—Critical accounting estimates and judgements” in our consolidated financial statements appended to this Annual Report. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. These items are considered further to be the accounting policies that are most critical to our results of operations, financial condition and cash flows.

Comparisons for the Years Ended December 31, 2017 and 2016

Revenues

 

(€‘000)    For the year ended
December 31,
 
     2017      2016  

Out-licensing revenue (non-refundable upfront payment)

     3,505        8,440  

C-Cath ez sales

     35        83  
  

 

 

    

 

 

 
     3,540        8,523  
  

 

 

    

 

 

 

Total revenues amounted to €3.5 million in 2017 and corresponded to the non-refundable upfront payment received from Novartis, as a result of the non-exclusive license agreement signed in June 2017. This upfront payment has been fully recognized upon receipt as there are no performance obligations nor subsequent deliverables associated to the payment. The revenues of 2016 corresponded to the payment received from ONO under the exclusive license agreement signed in July 2016. There was no milestone received from ONO in 2017. In 2017, the total revenue generated with C-Cath ez amounted to €35,000 compared to €83,000 in 2016. There are no recurring sales generated by this device.

Cost of sales

 

(€‘000)    For the year ended
December 31,
 
     2017      2016  

In-licensing cost of sales

     (515      (53

C-Cath ez cost of sales

     —       
  

 

 

    

 

 

 

Total cost of sales

     (515      (53
  

 

 

    

 

 

 

For the year 2017, costs of sales included an amount of €0.5 million, which represents the 15% sub-license fee owed to Dartmouth College on the above-mentioned Novartis upfront payment.

Research and development expenses

 

(€‘000)    For the year ended December 31  
     2017      2016  

Salaries

     7,007        8,160  

Share-based payments

     862        —    

Travel and living

     359        577  

Preclinical studies

     1,995        4,650  

Clinical studies

     3,023        4,468  

Raw materials and consumables

     1,825        —    

Delivery systems

     430        964  

Consulting fees

     1,522        791  

External collaborations

     885        —    

Intellectual property filing and maintenance fees

     513        799  

Scale-up and automation

     1,892        4,164  

Rent and utilities

     371        939  

Depreciation and amortization

     1,488        1,345  

Other costs

     735        817  
  

 

 

    

 

 

 

Total research and development expenses

     22,908        27,675  
  

 

 

    

 

 

 

The research and development expenses decreased by €4.7 million in 2017 compared to 2016, explained by the change in the mix of research and development performed, namely the cardiology business segment versus the immuno-oncology business segment.

 

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In 2017, the vast majority (€20.0 million) of the research and development expenses were dedicated to the development of the immune-oncology programs, namely our CAR-T platform. The research and development expenses associated to the cardiology programs (€2.9 million) related to the follow-up costs of CHART-1 only.

The variance with the prior year is mainly explained by the fact that in 2016 we were still incurring significant expenses in the cardiology segment, relating to our Phase 3 study for C-Cure.

The research and development expenses relating to the immuno-oncology segment (€20.0 million for the year 2017) increased by €5.1 million in comparison with 2016.

General and administrative expenses

 

(€‘000)    For the year ended December 31  
     2017      2016  

Employee expenses

     2,630        2,486  

Share-based payments

     1,707        2,847  

Rent

     1,053        791  

Communication and marketing

     761        728  

Consulting fees

     2,227        2,029  

Travel and living

     211        450  

Post-employment benefits

     —          (24

Depreciation

     229        173  

Other

     490        265  
  

 

 

    

 

 

 

Total general and administrative expenses

     9,310        9,744  
  

 

 

    

 

 

 

General and administrative expenses decreased by €0.4 million compared to 2016. This variance primarily resulted from the valuation of the share-based payments, which relate to our warrant plans.

Net other operating income and expenses

 

(€‘000)

   For the year ended
December 31
 
     2017      2016  

Grant income (RCAs)

     824        2,704  

Grant income (other)

     56        124  

Remeasurement of RCAs

     396        2,154  

Research and development tax credit

     1,161        —    

Change of fair value of contingent liability

     193        —    
  

 

 

    

 

 

 

Total other operating income

     2,630        4,982  
  

 

 

    

 

 

 

Change of fair value of contingent liability

     —          (1,634

Other

     (41      (8
  

 

 

    

 

 

 

Total other operating expenses

     (41      (1,642
  

 

 

    

 

 

 

Total other operating income and expenses

     2,590        3,340  
  

 

 

    

 

 

 

Other operating income and expenses were primarily related to the non-dilutive funding received from the Walloon Region and the European FP7 funding programs. In 2017, the net amount of the other operating income and expenses decreased by €0.8 million. This variance resulted mainly from the change in the RCA fair value adjustment (non-cash entry) and from the decrease in RCA grant income.

For the year 2017, we recognized for the first time a receivable on the amounts to collect from the Belgian federal government as a research and development tax credit (reported as an operating income for an amount of €1.2 million).

 

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Non-recurring operating income and expenses

 

(€‘000)    For the year ended
December 31,
 
     2017      2016  

Amendment of Celdara Medical and Dartmouth College agreements

     (24,341      —    
  

 

 

    

 

 

 

C-Cure IP asset impairment expense

     (6,045      —    

C-Cure RCA reversal income

     5,356        —    

Corquest IP asset impairment expenses

     (1,244      —    
  

 

 

    

 

 

 

Write-off C-Cure and Corquest assets and derecognition of related liabilities

     (1,932   
  

 

 

    

 

 

 

In 2017, the Group recognized non-recurring expenses related to the amendment of the agreements with Celdara Medical LLC and Dartmouth College (totaling €24.3 million, out of which an amount of €10.6 million was equity-settled and thus a non-cash expense). The Group also proceeded with the write-off of the C-Cure and Corquest assets and liabilities (respectively for €0.7 million and €1.2 million). There were no non-recurring items reported on the income statement for 2016.

Operating loss

As a result of the foregoing, our operating loss increased by €27.3 million in 2017 as compared to 2016, totaling €52.9 million in 2017.

Financial income and financial expenses

 

(€‘000)

   For the year ended
December 31
 
     2017      2016  

Interest finance leases

     18        19  

Interest on overdrafts and other finance costs

     36        37  

Interest on RCAs

     90        53  

Exchange differences

     4,309        98  
  

 

 

    

 

 

 

Finance expenses

     4,454        207  
  

 

 

    

 

 

 

Interest income bank account

     927        1,413  

Exchange differences and miscellaneous

     6        791  
  

 

 

    

 

 

 

Finance income

     933        2,204  
  

 

 

    

 

 

 

Financial expenses represent interest paid, bank charges and foreign exchange difference.

Due to the depreciation of the USD compared to EUR, the Group recognized an unrealized loss on foreign exchange differences of €4.3 million in 2017. In 2016, the unrealized gain on foreign exchange differences amounted to €0.8 million.

Interest income on short term deposits decreased significantly from 2016 to 2017, reflecting the decline of the interest rates on such deposits.

Income taxes

As we incurred losses in all the relevant periods, we had no taxable income and therefore incurred no corporate taxes.

Loss for the year

As a result of the foregoing, our loss for the year increased by €32.8 million from €23.6 million in 2016 to €56.4 million in 2017.

 

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Comparisons for the Years Ended December 31, 2016 and 2015

Revenues

 

(€‘000)    For the year ended
December 31,
 
     2016      2015  

Recognition of non-refundable upfront payment

     8,440        —    

C-Cath ez Sales

     83        3  
  

 

 

    

 

 

 
     8,523        3  
  

 

 

    

 

 

 

Total revenues increased by €8.5 million over 2016. In August 2016, the Group has received a non-refundable upfront payment as a result of the ONO agreement. This upfront payment has been fully recognized upon receipt as there are no performance obligations nor subsequent deliverables associated to the payment. The non-refundable upfront payment was rather received as a consideration for the sale of license to ONO. In 2016, the total revenue generated through sales of C-Cath ez was € 0.1 million. Insignificant revenue was generated from sales of C-Cath ez in 2015.

Cost of sales

 

(€‘000)    For the year ended
December 31,
 
     2016      2015  

C-Cath ez cost of sales

     (53      (1
  

 

 

    

 

 

 

Total cost of sales

     (53      (1
  

 

 

    

 

 

 

In 2016, the total cost of sales associated with sales of C-Cath ez amounted to €0.1 million.

Research and development expenses

 

(€‘000)    For the year ended December 31  
     2016      2015  

Salaries

     8,160        5,785  

Travel and living

     577        168  

Preclinical studies

     4,650        2,398  

Clinical studies

     4,468        6,723  

Delivery systems and medical devices

     964        173  

Consulting fees

     791        1,842  

Intellectual property filing and maintenance fees

     799        763  

Scale-up and automation

     4,164        642  

Rent and utilities

     939        1,045  

Depreciation and amortization

     1,345        1,033  

Other costs

     817        2,196  
  

 

 

    

 

 

 

Total research and development expenses

     27,675        22,767  
  

 

 

    

 

 

 

The research and development expenses increased by €4.9 million in 2016 compared to 2015.

In 2016, the majority of the research and development expenses were for the first time related to the development of the immune-oncology programs, namely CAR- T NKR. The research and development expenses associated to the cardio programs were the follow-up costs of CHART-1 and the preclinical testing of the Corquest platform, totaling €12.2 million.

The variance with 2015 is mainly explained by the following elements;

 

    additional staff was hired to support the projects within the research and development departments;

 

    additional preclinical studies on CAR-T NKR-T projects, mostly driven by expenses incurred on the allogeneic program;

 

    the automation of the CYAD-01 production process;

 

    the decrease of the costs of the CHART-1 trial; and

 

    the decrease of consultancy fees.

 

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Among these expenses, the preclinical development expenses of the NKR-T platform are expected to increase significantly in the future periods.

General and administrative expenses

 

(€‘000)    For the year ended December 31  
     2016      2015  

Employee expenses

     2,486        2,761  

Share-based payment

     2,847        796  

Rent

     791        617  

Communication and marketing

     728        891  

Consulting fees

     2,029        1,511  

Travel and living

     450        509  

Post-employment benefits

     (24      (45

Depreciation

     173        —    

Other

     265        190  
  

 

 

    

 

 

 

Total general and administrative expenses

     9,744        7,230  
  

 

 

    

 

 

 

General and administrative expenses increased by €2.5 million compared to 2015. This increase primarily resulted from the valuation of the share based payment, mainly the warrants plan of November 2015. The new warrant plan issued in December 2016 will be effective in 2017, hence not included in the amount booked at year end 2016. Consulting fees also increased due to one off consultancy and strategic projects.

Operating income

 

(€‘000)

   For the year ended December 31  
     2016      2015  

Recoverable cash advances (RCAs)

     2,704        222  

Subsidies

     124        412  

Change of fair value of RCAs

     3,891        —    

Reversal provision for reimbursement RCA

     (1,737      —    

Realized gain on contribution IP into joint venture

     —          (312

Change of fair value of contingent liability

     (1,634   

Other

     (8      —    
  

 

 

    

 

 

 

Total operating income

     3,340        322  
  

 

 

    

 

 

 

Other operating income and expenses are primarily related to the non-dilutive funding received from the Walloon Region and the European FP7 funding programs. In 2016, the net amount of the other operating income and expenses increased by €3.0 million.

This variance resulted mainly from the additional proceeds received on RCAs and FP7 contracts and the non-cash entries posted on the RCAs were reflected at the fair value of such liabilities.

Operating loss

As a result of the foregoing, our operating loss decreased by €4.1 million in 2016 as compared to 2015, totaling €25.6 million in 2016.

 

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Financial income and financial expenses

 

(€‘000)    For the year ended
December 31,
 
     2016      2015  

Interest finance leases

     19        10  

Interest on RCAs

     53        —    

Other finance costs

     37        90  

Exchange differences

     98        135  

Finance expenses

     207        236  
  

 

 

    

 

 

 

Interest income bank account

     1,413        352  

Exchange differences

     791        190  

Finance income

     2,204        542  
  

 

 

    

 

 

 

Financial expenses represent interest paid, bank charges and foreign exchange difference.

Interest income on short term deposits increased significantly from 2016 to 2015, reflecting the increase of our average cash position over the periods, partially compensated by the decline of the interest rates on such deposits.

Income taxes

As we incurred losses in all of the relevant periods, we had no taxable income and therefore incurred no corporate taxes.

Loss for the year

As a result of the foregoing, our loss for the year decreased by €5.5 million from €29.1 million in 2015 to €23.6  million in 2016.

B. Liquidity and Capital Resources

We have financed our operations since inception through several private placements of equity securities, several contributions in kind, an initial public offering on Euronext Brussels and Paris, an initial U.S. public offering on Nasdaq and non-dilutive governmental support. Through December 31, 2017, the total gross proceeds of the placement of our securities amounted to €187 million (net proceeds of €172 million) and, the total non-dilutive funding amounted to €26.7 million. For information on our use of and policies regarding financial instruments, please see Note 3 and Note 21 included in our consolidated financial statements appended to this Annual Report.

The table hereunder summarizes our sources and uses of cash for the years ended December 31, 2017, 2016, and 2015.

 

(€‘000)    For the years ended December 31,  
     2017      2016      2015  
                      

Cash used in operating activities

     (44,441      (24,692      (27,303

Cash from/(used in) investing activities

     17,613        (30,157      (10,691

Cash flows from financing activities

     605        3,031        110,535  

Net increase/(decrease) in cash and cash equivalents

     (26,224      (51,818      72,542  

 

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Comparison between 2017 and 2016

In 2017, the net cash used in our operations amounted to €44.4 million and increased by €24.8 million compared to 2016. This increase is explained by:

 

    the decrease in our net licensing revenue by €5.0 million, mostly offset by the decrease in our research and development expenses by €4.7 million;

 

    the non-recurring expenses for the year, for which the cash component amounted to €13.3 million (compensation relating to the amendment of the agreements with Celdara Medical LLC and Dartmouth College);

The cash used in investing activities varied significantly compared to 2016. The variance is explained by the use of our short-term deposits to finance part of our operations (in 2017, we withdrew a net amount of €23.6 million from our short-term deposits, while in 2016 we invested a net amount of €26.9 million into short term deposits) and by the payment of a clinical development milestones to Celdara Medical LLC of €5.3 million.

Our net cash flow from our financing activities decreased by €2.4 million from €3.0 million in 2016. In 2017, the proceeds from non-dilutive funding cancelled out their repayments, while in 2016 we earned net proceeds from non-dilutive funding of €2.3 million (gross proceeds of €3.1 million, offset by repayments of €0.8 million).

Comparison between 2016 and 2015

In 2016, the decrease of the net cash used in our operations (€2.6 million) is explained by the decrease of the CHART-1 costs, the increase of the CAR-T NKR development costs, the increase of the process automation costs and by the increase of the proceeds received from our license agreement.

The cash used in investing activities increased significantly over 2016 as a consequence of the acquisition of Biological Manufacturing Services SA for €1.6 million), the capital expenditures made mainly in our new corporate offices (€1.7 million) and the net amount invested in short term deposits (€26.9 million).

The acquisition of BMS was accounted for as an asset deal. The fair value of the assets acquired is concentrated in one identifiable asset, i.e. the GMP laboratories. The difference between the purchase price and the net assets of BMS at the date of acquisition is then allocated entirely to the Property, Plant and Equipment.

Our net cash flows provided from our financing activities decreased by €107.5 million in 2016 from €110.5 million in 2015. There was no capital increase performed in 2016. The net proceeds received from non-dilutive funding increased by €1.5 million) over 2016,

We have incurred net losses in each year since our inception. Substantially all of our net losses resulted from costs incurred in connection with our development programs and from general & administrative expenses associated with our operations.

We have financed our capital expenditures of 2016 with a bank loan and with financial leases which are recorded on the balance sheet at year end 2016 €1.5 million.

Cash and Funding Sources

Over the last three years, we obtained new financing mostly through the issuance of our shares. A summary of our funding activities is as follows:

 

(€‘000)

   Total      Equity capital      Finance leases      Loans  

2015

     120,380        119,929        451        —    

2016

     1,165        0        371        794  

2017

     1,168        625        543        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financing

     122,713        120,554        1365        794  
  

 

 

    

 

 

    

 

 

    

 

 

 

We refer to “Note 21—Financial instruments on balance sheet” included in our consolidated financial statements appended to this Annual Report for information related to the maturity profile of our leases and loans.

 

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In 2017, warrants were exercised for an equity capital proceeds amount of €0.6 million.

Further, most of our capital expenditures in 2017 related to laboratory and office equipment are financed with three-year maturity finance leases (€0.5 million), similar to years 2016 (€0.4 million) and 2015 (€0.5 million).

In 2016, we also contracted a bank loan to partially finance the leasehold improvements made in our new corporate offices.

In March 2015, we completed a €31.7 million capital increase via a private placement subscribed by qualified institutional investors in the United States and Europe at a price of €44.50 per share. In June 2015, we completed a €88.0 million global offering on Nasdaq and on Euronext Brussels and Euronext Paris at a price of €60.25 per share. Our capital was also increased in 2015 by way of exercise of warrants (equity capital funding of €0.2 million).

Amounts received from the Walloon Region, booked as advances repayable, correspond to funding received under several RCAs, dedicated to supporting specific development programs related to CAR-T platform, THINK clinical study and C-Cath ez at the end of 2017.

The movements of the advances repayable recorded in 2017, 2016 and 2015 are summarized in the table below:

 

(€‘000)

      

Balance of January 1, 2015

     11,555  
  

 

 

 

+ liability recognition

     1,392  

-repayments

     (529

+/- other transactions including change of fair value

     (1,036
  

 

 

 

Balance at December 31, 2015

     11,382  
  

 

 

 

+ liability recognition

     —    

- repayments

     (842

+/- other transactions including change of fair value

     (2,102

Balance at December 31, 2016

     8,438  
  

 

 

 

+ liability recognition

     —    

- repayments

     (1,233

+/- other transactions including change of fair value

     (5,435

Balance at December 31, 2017

     1,770  
  

 

 

 

For the year 2017, we reversed an RCA liability amount of €5.4 million, relating to the decision of ceasing the exploitation of our product candidate C-Cure (Cardio business).

Capital Expenditures

We do not capitalize our research and development expenses until we receive marketing authorization for the applicable product candidate. At year-end 2017, all clinical, research and development expenditures related to the development of our CAR-T platform and C-Cure and are accounted for as operating expenses.

Our capital expenditures were €0.9 million, €1.8 million and €0.8 million for the years ended December 31, 2017, 2016 and 2015 respectively. In 2018, we anticipate new capital expenditures in our laboratories and manufacturing plant. We plan to finance most of these expenses through new finance leases.

We also completed the acquisitions of (i) OnCyte, LLC in January 2015, resulting in the recognition of a goodwill of €1.0 million and an in-process research and development of €38.3 million and (ii) Biological Manufacturing Services SA in May 2016 resulting in recognition of additional PPE for €1.3 million.

The non-current assets are detailed in the following table.

 

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(€‘000)           As of December 31,  
     2017      2016      2015  

Intangible assets

     36,508        49,566        48,789  

Property, plant and equipment

     3,290        3,563        1,136  

Other non-current assets

     1,434        311        180  
  

 

 

    

 

 

    

 

 

 

Total

     41,232        53,440        50,105  
  

 

 

    

 

 

    

 

 

 

The decrease observed in the caption intangible assets at year-end 2017 compared to year-end 2016 results of:

 

    an impairment of €7.2 million relating to Mayo Clinic (€6.0 million) and Corquest (€1.2 million) patents

 

    a currency translation adjustment of €4.8 million for USD depreciation towards EUR, on OnCyte underlying in-process research and development

Operating Capital Requirements

We believe that our existing cash and cash equivalents, and short-term investments will enable us to fund our operating expenses and capital expenditure requirements, based on the current scope of our activities and including expected cash inflows from our strategic collaborations, at least until the end of the first quarter of 2019. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. In any event, we will require additional capital to pursue preclinical and clinical activities, obtain regulatory approval for, and to commercialize our drug product candidates.

Until we can generate a sufficient amount of revenue from our drug product candidates, if ever, we expect to finance our operating activities through a combination of equity offerings, debt financings, government, including RCAs and subsidies, or other third-party financings and collaborations. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our drug product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and these securities may have rights senior to those of our ordinary shares. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

There are no legal or economic restrictions on the ability of our subsidiaries to transfer funds to Celyad SA in the form of cash dividends, loans or advances.

Our present and future funding requirements will depend on many factors, including, among other things:

 

    the size, progress, timing and completion of our clinical trials for any current or future drug product candidates, including CYAD-01;

 

    the number of potential new drug product candidates we identify and decide to develop;

 

    the costs involved in filing patent applications, maintaining and enforcing patents or defending against claims or infringements raised by third parties;

 

    the time and costs involved in obtaining regulatory approval for drug products and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to any of these drug products; and

 

    the amount of revenue, if any, we may derive either directly or in the form of royalty payments from future potential collaboration agreements on our technology platforms.

For more information as to the risks associated with our future funding needs, see the section of this Annual Report titled “Item 3.D.—Risk Factors”.

 

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JOBS Act Exemptions

We qualify as an “emerging growth company” as defined in the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; and

 

    to the extent that we no longer qualify as a foreign private issuer, (1) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and (2) exemptions from the requirements of holding a non-binding advisory vote on executive compensation, including golden parachute compensation

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities; (3) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; and (4) December 31, 2020. We may choose to take advantage of some but not all of these exemptions. For example, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Given that we currently report and expect to continue to report under IFRS as issued by the IASB, we have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the IASB. We have taken advantage of reduced reporting requirements in this Annual Report. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold equity securities.

C. Research and Development, Patents and Licenses, Etc.

For a discussion of our research and development activities, see “Item 4.B.—Business Overview” and “Item 5.A—Operating Results.”

D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2017 to December 31, 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions. For a discussion of trends, see “Item 4.B.—Business Overview,” “Item 5.A.—Operating Results” and “Item 5.B.—Liquidity and Capital Resources.”

E. Off-Balance Sheet Arrangements

During the periods presented, we did not and do not currently have any off-balance sheet arrangements as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.

During the periods presented, we had bank guarantees granted to the landlords of our Belgian and U.S. offices (€0.3 million). These bank guarantees will last until the termination of the respective lease agreements.

For other contingent liabilities, see “Item 5.F.—Tabular Disclosure of Contractual Obligations” below.

 

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F. Tabular Disclosure of Contractual Obligations

The following table discloses aggregate information about material contractual obligations and periods in which payments (principal only, interest amounts are not material and therefore not included) were due as of December 31, 2017. Future events could cause actual payments to differ from these estimates.

 

            Less than      One to three      Three to      More than  

(€‘000)

   Total      one year      years      five years      five years  

As of December 31, 2017

              

Finance leases (1)

     909        427        461        21        —    

Bank loan (2)

     536        209        326        —          —    

Operating leases (3)

     3,759        857        1,289        725        888  

Pension obligations

     204        —          —          —          204  

Advances repayable (current and non-current) (4)

     1,770        226        412        248        884  

Total

     7,178        226        412        248        1976  

 

(1) We financed most of our office and laboratory equipment through finance leases.
(2) The bank loan was originated in 2016 with an initial term of three years and is related to the leasehold improvements made in our new corporate offices in Belgium.
(3) The operating leases corresponded mainly to the lease agreements related to our offices and laboratories in Belgium and in the United States.
(4) Advances repayable corresponded to the present value of the future repayments related to the recoverable cash advance agreements contracted with the Walloon Region.

G. Safe Harbor

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and as defined in the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements.”

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Board of Directors

As provided by Article 521 of the Belgian Company Code, we are managed by a Board of Directors acting as a collegiate body. The Board of Directors’ role is to pursue our long-term success by providing entrepreneurial leadership and enabling risks to be assessed and managed. The Board of Directors should decide on our values and strategy, its risk preference and key policies. The Board of Directors should ensure that the necessary leadership, financial and human resources are in place for us to meet its objectives.

We have opted for a one-tier governance structure. As provided by Article 522 of the Belgian Company Code, the Board of Directors is our ultimate decision-making body, except with respect to those areas that are reserved by law or by our articles of association to the Shareholders’ Meeting.

Our articles of association state that the number of directors, who may be natural persons or legal entities and who need not be shareholders, must be at least five. At least half of the members of the Board of Directors must be non-executive directors and at least three of them must be independent directors.

 

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A meeting of the Board of Directors is validly constituted if at least half of its members are present in person or represented at the meeting. If this quorum is not met, a new board meeting may be convened by any director to deliberate and decide on the matters on the agenda of the board meeting for which a quorum was not met, provided that at least two members are present. Meetings of the Board of Directors are convened by the Chairman of the Board or the Chief Financial Officer or the Chief Legal Officer, whenever our interest so requires. In principle, the Board of Directors will meet at least four times per year.

The Chairman of the Board of Directors shall have a casting vote on matters submitted to the Board of Directors in the event of a tied vote, save if the Board of Directors is composed of two members.

At the date of this Annual Report, the Board of Directors consists of eight members, one of which is an executive director (as a member of the Executive Management Team) and seven of which are non-executive directors, including four independent directors. In accordance with Art 96, §2 6° of the Belgian Company Code, or BCC, we aim for, in a reasonable timeframe, that one-third of the Board members are of different sex.

 

Name

   Position    Age   

Term [1]

  

Board Committee Membership

Michel Lussier    Chairman    61    2020    Member of the Nomination and Remuneration Committee
LSS Consulting SPRL represented by its permanent representative Christian Homsy    Executive

Director

   59    2020   
Serge Goblet    Non-executive
director
   60    2020   
Chris Buyse    Independent
director
   53    2020   

Member of the Nomination and Remuneration Committee

Member of the Audit Committee

Rudy Dekeyser    Independent
director
   56    2020   

Member of the Nomination and Remuneration Committee

Member of the Audit Committee

Debasish Roychowdhury    Independent
director
   57    2019    Member of the Audit Committee
Chris De Jonghe [1]    Non-executive
director
   45    2017    Member of the Audit Committee
Hanspeter Spek    Independent
director
   68    2018    Member of the Nomination and Remuneration Committee
TOLEFI SA represented by its permanent representative Serge Goblet    Non-executive
director
   —      2018   

 

[1] Chris De Jonghe resigned with an effective date on May 5, 2017.

The business address for our board of directors and executive management team is Rue Edouard Belin 2, 1435 Mont-Saint-Guibert, Belgium.

The following paragraphs contain brief biographies of each of the directors, or in case of legal entities being director, their permanent representatives, with an indication of other relevant mandates as member of administrative, management or supervisory bodies in other companies during the previous five years.

Michel Lussier has served as Chairman of our board of directors since 2007 and is also a co-founder of the Company. Mr. Lussier was also the Chairman of the board of directors and co-founder of the Company’s predecessor entity, Cardio3 SA, until 2008. Mr. Lussier recently founded Medpole Ltd, the North American satellite of MedPole SA, a European incubator for medical technology start-up companies located in Belgium, and serves as the Chief Executive Officer for the group. In this capacity, he is a managing director of Fjord Ventures, a Laguna Hills, California based medical technology accelerator / incubator. Since May 2014, Mr. Lussier has served as the Chief Executive Officer of Metronom Health Inc, an early stage medical device company created by Fjord Ventures, developing a continuous glucose monitoring system. Prior to that, from 2002 to 2013, he worked for Volcano Corporation, where he served in a number of positions, most recently as President, Clinical and Scientific Affairs from 2012 to 2013, and prior to that from 2007 to 2012, Group

 

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President, Advanced Imaging Systems, Global Clinical & Scientific Affairs and General Management of Europe, Africa and the Middle East. Mr. Lussier obtained a Bachelor of Sciences degree in Electrical Engineering and Master’s degree in Biomedical Engineering at the University of Montreal. He also holds an MBA from INSEAD (European Institute of Business Administration), France. In addition to serving on our board of directors, he also serves on the boards of directors of several early stage medical devices companies.

Christian Homsy (permanent representative of LSS consulting SPRL) , has served as a member of our board of directors since 2007 and has been Chief Executive Officer (CEO) of Celyad since its foundation. Christian Homsy obtained his Medical Doctorate at the University of Louvain and holds an MBA from the IMD in Lausanne (Switzerland). Christian gained his business experience in senior research and development, marketing, business development and sales positions at Guidant Corporation, a leading medical device company active in the treatment of cardiovascular disease. He was also founder of Guidant Institute for Therapy Development, a landmark facility for physician and health care professionals’ education that gained international recognition and praise. Before joining Celyad, Christian Homsy was General Manager of Medpole, a European incubator dedicated to initiating the European operations for start-up companies in the medical device or biotechnology fields. He also holds a director mandate in Medpole SA.

Serge Goblet (permanent representative of Tolefi SA) has served as a member of our board of directors since 2008. He holds a Master Degree in Business and Consular Sciences from ICHEC, Belgium and has many years of international experience as director in Belgian and foreign companies. He is the managing director of TOLEFI SA, a Belgian holding company and holds director mandates in subsidiaries of TOLEFI. Serge has two voting rights at our board of directors, one in his own name and one on behalf of TOLEFI, as a permanent representative.

Chris Buyse has served as a member of our board of directors since 2008. He brings more than 30 years of international financial expertise and experience in introducing best financial management practices. He is currently Managing Director of FUND+, a fund that invests in innovative Belgian Life Sciences companies, Between August 2006 and June 2014, Mr. Buyse served as the Chief Financial Officer and board member of ThromboGenics NV, a leading biotech company that is listed on NYSE Euronext Brussels. Before joining ThromboGenics, he was the Chief Financial Officer of the Belgian biotech company CropDesign, where he coordinated the acquisition by BASF in July 2006. Prior to joining CropDesign he was financial manager of WorldCom/MCI Belux, a European subsidiary of one of the world’s largest telecommunication companies and he was also the Chief Financial Officer and interim Chief Executive Officer of Keyware Technologies. Mr. Buyse holds a master degree in applied economic sciences from the University of Antwerp and an MBA from Vlerick School of Management in Gent. He currently serves, in his own name or as permanent representative of a management company, as member of the board of directors of the following publicly and privately held companies: Bone Therapeutics SA, Iteos SA, Bioxodes SA, Bio Incubator NV, Immo David NV, Pinnacle Investments SA, CreaBuild NV, Sofia BVBA, Pienter-Jan BVBA, Life Sciences Research Partners VZW, Inventiva SA, The Francqui Foundation and Keyware Technologies NV.

Rudy Dekeyser has served as a member of our board of directors since 2007. Since 2012 Rudy is managing partner of the LSP Health Economics Fund, a private equity fund investing in late stage European and North American health care companies. Prior to joining LSP, Rudy has been managing director of VIB (Flanders Institute for Biotechnology), where he was also responsible for the intellectual property portfolio, business development and new venture activities. He obtained a Ph.D. in molecular biology at the University Ghent. He holds non-executive director positions in Curetis AG, Sequana Medical AG and Remynd NV, and held non-executive director positions in Devgen NV, CropDesign NV, Ablynx NV, Actogenix NV, Pronota NV, Flandersbio VZW, Bioincubator Leuven NV and Multiplicom NV. He is a co-founder of ASTP (the European associations of technology transfer managers) and Chairman of EMBLEM (EMBL’s business arm). Rudy has been advisor to several seed and venture capital funds and to multiple regional and international committees on innovation.

Debasish Roychowdhury has served as a member of our board of directors since 2015. Debasish is a medical oncologist with over 15 years of comprehensive pharmaceutical industry experience and 14 years of patient care and academic research. In the pharmaceutical industry, Debasish held multiple positions of growing responsibility respectively at Eli Lilly, GSK and Sanofi, with direct therapeutic area experience mostly in oncology and hematology. Based in Boston, Massachusetts, Debasish is now using his extensive experience and global network to advise companies, organizations, and institutions in the biomedical field.

 

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Hanspeter Spek has served as a member of our board of directors since 2014. He started his career at Pfizer where, over more than 10 years and after a thorough comprehensive training in commercial general management, he held positions of increasing responsibility. Hanspeter then joined Sanofi as Marketing Director and rose through the organization to become the Executive Vice President International in 2000. When Sanofi and Aventis merged in 2004, he took on the responsibility of Executive Vice President Operations. In 2009, he was nominated President Global Operations. Hanspeter retired from Sanofi in mid-2013. He has since joined Advent International, Boston, as an Operating Partner for Healthcare and serves as Board Member of Genpact, New York.

Chris De Jonghe served as a member of our board of directors from 2013 until May 5, 2017, the effective date of her resignation. She is Head of Life Sciences & Care at PMV (ParticipatieMaatschappij Vlaanderen). She was first Licensing manager then Business development manager at VIB (Flanders’ Institute for Biotechnology), before joining PMV initially as Senior investment manager in January 2013. Since August 2013 she joined the Group Management Committee, responsible for daily management at PMV. She obtained a PhD in Biochemistry and a Bachelor degree in Laws at the University of Antwerp. She is member of the board of directors of Agrosavfe, Confo Therapeutics, Fast Forward Pharmaceuticals, MyCartis, ViroVet, Biotech Fund Flanders, LSP V, Vesalius Biocapital I & II and Flanders’Bio. She is a member of Flanders’Bio and IFB network.

The Executive Management Team

The Executive Management Team consists of the “Chief Executive Officer” (CEO, who is the chairman of the Executive Management team), the “Chief Financial Officer” (CFO), the “Chief Operating Officer”, the “Chief Legal Officer”, the “Vice President Business Development & IP”, the “Vice President Clinical Development and Medical Affairs”, the “Vice President Operations”, the “Vice President Research & Development”.

The Executive Management Team discusses and consults with the Board of Directors and advises the Board of Directors on our day-to-day management in accordance with our values, strategy, general policy and budget, as determined by the Board of Directors.

Each member of the Executive Management Team has been made individually responsible for certain aspects of our day-to-day management and our business (in the case of the CEO, by way of delegation by the Board of Directors; in the case of the other member of the Executive Management Team, by way of delegation by the CEO). The further tasks for which the Executive Management Team is responsible are described in greater detail in the terms of reference of the Executive Management Team as set out in our corporate governance charter.

The members of the Executive Management Team are appointed and may be dismissed by the Board of Directors at any time. The Board of Directors appoints them on the basis of the recommendations of the Nomination and Remuneration Committee, which shall also assist the Board of Directors on the remuneration policy of the members of the Executive Management Team, and their individual remunerations. The remuneration, duration and conditions of dismissal of Executive Management Team members will be governed by the agreement entered into between the Company and each member of the Executive Management Team in respect of their function within the Company.

In accordance with Schedule C, Section F, subsection 7 of the Corporate Governance Code, all agreements with members of the Executive Management Team entered into on or after July 1, 2009 must refer to the criteria to be taken into account when determining variable remuneration and will contain specific provisions relating to early termination. In principle, the Executive Management Team meets every month. Additional meetings may be convened at any time by the Chairman of the Executive Management Team or at the request of two of its members. The Executive Management Team will constitute a quorum when all members have been invited and the majority of the members are present or represented at the meeting. Absent members may grant a power of attorney to another member of the Executive Management Team. Members may attend the meeting physically or by telephone or video conference. The absent members must be notified of the discussions in their absence by the Chairman (or the Company Secretary, if the Executive Management Team has appointed a Company Secretary from among its members).

 

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The members of the Executive Management Team will provide the Board of Directors with information in a timely manner, if possible in writing, on all facts and developments concerning the Company which the Board of Directors may need in order to function as required and to properly carry out its duties. The CEO (or, in the event that the CEO is not able to attend the Board of Directors’ meeting, the CFO or, in the event that the CFO is not able to attend the Board of Directors’ meeting, another representative of the Executive Management Team) will report at every ordinary meeting of the Board of Directors on the material deliberations of the previous meeting(s) of the Executive Management Team.

The current members of the Executive Management Team are listed in the table below.

 

Name

  

Function

   Age

LSS Consulting SPRL, represented by Christian Homsy

  

Chief Executive Officer

   59

PaJe SPRL, represented by Patrick Jeanmart

  

Chief Financial Officer

   45

KNCL SPRL, represented by Jean-Pierre Latere

  

Chief Operating Officer

   42

NandaDevi SPRL, represented by Philippe Dechamps

  

Chief Legal Officer

   47

Georges Rawadi [1]

  

Vice President Business Development

   50

MC Consult SPRL, represented by Philippe Nobels

  

Global Head of Human Resources

   51

ImXense SPRL, represented by Frederic Lehmann

  

Vice President Immuno-oncology

   53

David Gilham

  

Vice President Research & Development

   52

 

[1] Georges Rawadi resigned with an effective date of March 23, 2018.

The following paragraphs contain brief biographies of each of the members of the Executive Management Team or in case of legal entities being a member of the Executive Management Team or key manager, their permanent representatives.

Christian Homsy (representative of LSS Consulting SPRL), CEO. Reference is made to “—Board of Directors” above.

Patrick Jeanmart (representative of PaJe SPRL), has served as our Chief Financial Officer since September 2007. Prior to joining the Company, Mr. Jeanmart worked for IBA Group (Ion Beam Applications, Belgium) for six years where he held a number of senior financial management positions within the corporate organization and several IBA subsidiaries located in Belgium, Italy, UK and the U.S. Between January 2004 and 2007, he acted as Vice President of Finance of IBA Molecular. He also holds the position of Chief Financial Officer at Medpole SA and at Biological Manufacturing Services SA. Mr. Jeanmart obtained a Master in Economics from the University of Namur, Belgium.

Jean-Pierre Latere (representative of KNCL SPRL), has previously acted as Vice President of Regenerative Medicine and Medical Devices franchise. Since January 2017 he serves as Chief Operating Officer in charge of program management, manufacturing, quality, clinical operations and regulatory affairs. He leads the effort to further strengthen the organization as Celyad grows as a leader in immuno-oncology. He started his career as a Research Associate at the Michigan State University in the US. Following that assignment, he moved to the Johnson & Johnson group where he held various positions, from Scientist to Senior Scientist. He then joined the Company in 2008 as Project Manager Delivery System and left the company in 2012 in the position of Senior Director Business Development. Prior to joining the Company, Mr. Latere served as Beauty Care and Healthcare Market Global Leader at Dow Corning. Mr. Latere holds a PhD in Chemistry from the University of Liège, Belgium.

 

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Philippe Dechamps (representative of NandaDevi SPRL), has served as Chief Legal Officer since September 2016. Mr. Dechamps started his legal career as an associate in Brussels with the law firm Linklaters De Bandt from 1994 to 1998. He left private practice in 1998 and until 2003, he served as an in-house counsel at Solvay Group, the Belgian pharmaceutical and chemical company, to assist the company in its turnaround through several M&A operations in Europe, India and Far-East Asia. In 2003, he took over the position of Legal Director at Guidant, the U.S. company formerly active in the medical devices business before its acquisition by Boston Scientific and Abbott Laboratories in 2005. Within Abbott, Mr. Dechamps took over responsibility for the legal affairs of Abbott Vascular International outside of the United States. In 2008, Mr. Dechamps joined Delhaize Group taking responsibility for the legal and government affairs in Europe and Asia, before becoming Group General Counsel and Secretary to the Board of Directors in 2015. In this position, he piloted the legal strategy to merge Delhaize Group with Royal Ahold in July 2016. Mr. Dechamps earned law degrees from the Université Catholique de Louvain (UCL) and Vrije Universiteit Brussel (VUB), and a Masters of Law (LL.M) from Harvard University.

Georges Rawadi, has served as Vice President Business Development and Intellectual Property since March 2016 and prior to that he has service as Vice President Business Development since June 2014. Prior to joining our team, Dr. Rawadi served as Vice President Business Development with Cellectis. He previously held business development management positions at Galapagos, ProStrakan France and Sanofi-Aventis France, and conducted consultancy assignments in Business Development and Alliance Management. His work included all aspects and stages of business development, driving several projects from target identification and negotiation to closing deals. He holds a Ph.D. in Microbiology from the Pierre et Marie Curie University (France), and a Masters in Management and Strategy in the Health Industry from the ESSEC Business School. Georges has left the company on March 23, 2018.

Philippe Nobels (representative of MC Consult Sprl) has served as Global Head of Human Resources since October 2016. He started his career at Price Waterhouse (now PwC) as auditor in 1989. He also went in rotational assignment in Congo during 2 years on consulting missions for the World Bank. In 1995, he joined Fourcroy as plant controller. Then, he joined Dow Corning in 1997 where he held different positions in Finance and Human Resources. He led the human resources operations in Europe, became the human resources manager for Dow Corning in Belgium, and Human Resources Business Partner for the sales and marketing functions globally. As a member of the sales and marketing Leadership teams, he contributed to the company’s major transformation initiatives to increase organizational effectiveness, employees’ engagement & performance as well as Business results. Philippe hold a master degree in Economics from the University of Namur.

Frédéric Lehmann (representative of ImXense SPRL), has served as the Vice President Clinical Development & Medical Affairs since July 2016 and prior to that he has served as the Vice President Immuno-Oncology Since September 2015. Dr. Lehmann is a physician by training, specialized in hematology and oncology. Dr. Lehmann has extensive experience in oncology drug development spanning early to late phase, including clinical trial design, translational research, regulatory interactions, and clinical risk management. He started his academic career at the Ludwig Institute for Cancer Research in Brussels, followed by a position at the Institute Jules Bordet. He then moved to the European Organization for Research and Treatment of Cancer (EORTC) as Medical Advisor. Dr. Lehmann began his corporate career at GlaxoSmithKline, where he led the early worldwide clinical development program for our cancer vaccines and went on to lead the research and development incubator for cancer immunotherapeutics.

David Gilham, has served as Vice President Research and Development since September 2016. Prior to joining our team, Mr. Gilham was a Reader and Group Leader within the Manchester Cancer Research Centre at the University of Manchester, UK leading a research group of 15 scientists in the area of cellular immunotherapy. Mr. Gilham obtained his Ph.D. from the University of Dundee in 1998 in Molecular Pharmacology under the supervision of Professor Roland Wolf, OBE. After a short post-doctoral position at the University of Bristol, Mr. Gilham moved to the University of Manchester with Professor Robert Hawkins to establish translational research activity in the field of engineered cellular therapy. The group has carried out several clinical trials of CAR-T cells of which Mr. Gilham has been Lead scientific advisor and led several European framework programs bringing together researchers from all over Europe (ATTACK and ATTRACT programs). In 2010, along with Professor Hawkins and other colleagues, Mr. Gilham co-founded Cellular Therapeutics, a cell production company based in Manchester. He has published more than 60 peer reviewed articles and further book chapters and reviews. He has also sat on many review boards and charity grant committees and consulted for several biotechnology companies and pharmaceutical companies concerning immune cell therapies.

 

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Family Relationships

There are no family relationships among any of the members of our executive committee or directors.

B. Compensation

The aggregate compensation paid and benefits in kind granted by us to the current members of our executive management team and directors, including share-based compensation, for the year ended December 31, 2017, was €3.0 million. For the year ended December 31, 2017, approximately €14,000 of the amounts set aside or accrued to provide pension, retirement or similar benefits to our employees was attributable to members of our executive management team.

For a discussion of our employment arrangements with members of our executive management team and consulting arrangement with our directors, see the section of this Annual Report titled “Item 7.B.—Related Party Transactions—Agreements with Our Directors and Members of Our Executive Management Team.” For more information regarding warrant grants, see the section of this report titled “—Warrant Plans.”

Except the arrangements described in the section of this Annual Report titled “Certain relationships and related party transactions-Agreements with Our Directors and Members of our Executive Management Team,” there are no arrangements or understanding between us and any of our other executive officers or directors providing for benefits upon termination of their employment, other than as required by applicable law.

There is no agreements or contracts between the directors and the members of the Executive Management Team and the company or any of its subsidiaries providing for benefits for the directors upon termination of employment or services agreements in place that provide for benefits upon termination of employment.

Compensation of our Board of Directors

The remuneration of our directors and the grant of warrants to our directors are submitted by our board of directors (following advice from the Nomination and Remuneration Committee) for approval to the general shareholders’ meeting and are only implemented after such approval. The aggregate compensation paid and benefits in kind granted by us to our current directors, including share-based compensation, for the year ended December 31, 2017, was €387,250.

The procedure for establishing the remuneration policy and setting remuneration for members of our board of directors is determined by our board of directors on the basis of proposals from the Nomination and Remuneration Committee, taking into account relevant benchmarks from the biotechnology industry.

On November 5, 2015, the Extraordinary Shareholders Meeting approved a remuneration and compensation scheme for the chairman, the independent directors and non-executive directors. This scheme was applicable as from November 2015. The remuneration package was made up of a fixed annual fee of €40,000 for the chairman and €30,000 for the other independent directors. The fee was supplemented with a fixed annual fee of €10,000 for membership of each committee of the Board of Directors, to be increased by €5,000 in case the relevant director chairs the Nomination and Remuneration Committee or the Audit Committee.

On May 9, 2016, the Extraordinary Shareholders meeting approved a new remuneration and compensation scheme for the non-executive directors. The remuneration package is made up of fixed annual fee of €10,000 for non-executive directors, supplemented by a fixed annual fee of €10,000 for the Chairman. The annual fee is supplemented by a €5,000 fee for any non-executive directors covering the participation to the four ordinary board of directors’ meetings. Any participation to an extraordinary board of directors’ meetings gives right to a supplemental fee of €5,000. This remuneration package is also supplemented with a fixed annual fee of €15,000 for membership of each committee of the Board of Directors, to be increased by €5,000 in case the relevant director chairs the Nomination and Remuneration Committee or the Audit Committee. Finally, an extraordinary fee of €3,000 is granted to non-executive directors in case of appointment of such directors, on request of the CEO and with prior approval of the Board of directors, for specific missions requiring the presence of the concerned director. This scheme is applicable directly after the General Meeting of Shareholders of May 9, 2016. The remuneration granted to directors during year 2016 is the consequence of both applications of (i) remuneration and compensation scheme adopted in November 2015 and (ii) the new plan adopted in May 2016. Apart from the above remuneration for non-executive directors, all directors are entitled to company warrants and a reimbursement of out-of-pocket expenses actually incurred as a result of participation in meetings of the Board of Directors.

On the advice of the Nomination and Remuneration Committee, the board of directors may propose to the shareholders’ meeting to grant options or warrants in order to attract or retain non-executive directors with the most relevant skills, knowledge and expertise. Insofar as this grant of options or warrants comprises variable remuneration under Article 554 of the Belgian Company Code, this remuneration shall be submitted for approval to the next annual general shareholders meeting.

 

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The directors’ mandate may be terminated at any time without any form of compensation.

No loans or guarantees were given to members of the board of directors during the year ended December 31, 2017.

There are no employment or service agreements that provide for notice periods or indemnities between us and members of the board of directors who are not a member of the executive management team. In respect of the members of the board of directors who are members of the executive management team, reference is made to the section “—Compensation of Members of the Executive Management Team” below.

The following table sets forth the fees received by our non-executive directors for the performance of their mandate as a board member, during the year ended December 31, 2017:

 

Name

   Fees 
Earned

(€)
 

Michel Lussier

     86,000  

Serge Goblet

     36,000  

Chris Buyse

     71,000  

Debasish Roychowdhury

     62,250  

Hanspeter Spek

     51,000  

Rudy Dekeyser

     81,000  

Tolefi SA, represented by its permanent representative, Serge Goblet

     —    

Chris De Jonghe

     —    

Total

     387,250  

LSS Consulting SPRL, represented by Christian Homsy does not receive any specific or additional remuneration for his service on our board of directors, as this is included in his total remuneration package in his capacity as Chief Executive Officer. For more information regarding LSS Consulting SPRL’s compensation, see the section of this Annual Report titled “—Compensation of Members of the Executive Management Team.”

The table below provides an overview as of December 31, 2017 of the warrants held by the non-executive directors.

 

     Warrant Awards

Name

   Number of
Ordinary Shares
Underlying
Warrants
     Warrant
Exercise
Price in euros
    

Warrant

Expiration

Date

Michel Lussier

     10,000        34.65      November 5, 2020
     10,000        31.34      June 29, 2022

Chris Buyse

     10,000        34.65      November 5, 2020
     10,000        31.34      June 29, 2022

Rudy Dekeyser

     10,000        34.65      November 5, 2020
     10,000        31.34      June 29, 2022

Hanspeter Spek

     5,000        35.79      May 5, 2019
     10,000        34.65      November 5, 2020
     10,000        31.34      June 29, 2022

Debasish Roychowdhury

     10,000        34.65      November 5, 2020
     10,000        31.34      June 29, 2022

Serge Goblet

     10,000        31.34      June 29, 2022

Total

     115,000        

 

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Compensation of Members of the Executive Management Team

The compensation of the members of our executive management team is determined by our board of directors based on the recommendations by our Nomination and Remuneration Committee.

The remuneration of the members of our executive management team consists of different components:

 

    Fixed remuneration: a basic fixed fee designed to fit responsibilities, relevant experience and competences, in line with market rates for equivalent positions. The amount of fixed remuneration is evaluated and determined by the board of directors every year.

 

    Short term variable remuneration: members of the executive management team may be entitled to a yearly bonus, given the level of achievement of the criteria set out in the corporate objective for that year.

 

    Incentive plan: warrants have been granted and may be granted in the future, to the members of the executive management team. For a description of the main characteristics of our warrant plans, see the section of this Annual report titled “—Warrant Plans.”

 

    Other: Members of the executive management team with an employee contract with us entitle them to our pension, company car and payments for invalidity and healthcare cover and other fringe benefits of non-material value.

No loans, quasi-loans or other guarantees were granted to members of our executive management team during the year ended on December 31, 2017.

The following table sets forth information regarding compensation earned by LSS Consulting SPRL, represented by Christian Homsy, our Chief Executive Officer, during the year ended December 31, 2017.

 

     Compensation (in kEuros)  

Fixed fee

     426  

Variable fee

     51  

Total

     477  

In 2017, Mr. Homsy was granted 40,000 warrants and exercised 112,000 warrants issued in May 2013.

The following table sets forth information concerning the aggregate compensation earned during the year ended December 31, 2017 by the other members of our executive management team, including the CEO.

 

     Compensation (in kEuros)  

Fixed remuneration (gross)

     426  

Variable remuneration (short term)

     69  

Fixed fee

     1,725  

Variable fee

     225  

Pension/Life

     14  

Other benefits

     201  

Total

     2,660  

The table below provides an overview as of December 31, 2017 of the warrants held by the members of our executive management team.

 

     Warrant Awards  

Name

   Number of
Ordinary Shares
Underlying
Warrants
     Warrant
Exercise
Price in euros
     Warrant
Expiration
Date
 

Christian Homsy [1]

     40,000        34.65        November 5, 2020  
     40,000        32.36        June 29, 2022  

 

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     Warrant Awards  

Name

   Number of
Ordinary Shares
Underlying
Warrants
     Warrant
Exercise
Price in euros
     Warrant
Expiration
Date
 

Patrick Jeanmart [2]

     20,000        34.65        November 5, 2020  
     20,000        32.36        June 29, 2022  

George Rawadi

     7,500        39.22        May 5, 2024  
     10,000        34.65        November 5, 2025  
     20,000        31.34        June 29, 2022  

Frédéric Lehmann [3]

     20,000        34.65        November 5, 2020  
     20,000        32.36        June 29, 2022  

Jean-Pierre Latere [4]

     20,000        34.65        November 5, 2020  
     3,000        32.36        June 29, 2022  

Philippe Dechamps[5]

     20,000        15.90        December 31, 2021  
     20,000        32.36        June 29, 2022  

David Gilham

     10,000        15.90        November 5, 2025  
     6,000        31.34        June 29, 2022  

 

[1] Christian Homsy holds these warrants in person, whereby he is the representative of LSS Consulting SPRL, his management company, which has been appointed as Chief Executive Officer.
[2] Patrick Jeanmart holds these warrants in person, whereby he is the representative of PaJe SPRL, his management company, which has been appointed as Chief Financial Officer.
[3] Frederic Lehmann holds these warrants in person, whereby he is the representative of ImXense SPRL, his management company, which has been appointed as Vice President Clinical Development & Medical Affairs.
[4] Jean-Pierre Latere holds these warrants in person, whereby he is the representative of KNCL SPRL, his management company, which has been appointed as Chief Operating Officer.
[5] Philippe Dechamps holds these warrants in person, whereby he is the representative of NandaDevi SPRL, his management company, which has been appointed as Chief Legal Officer.

Limitations on Liability and Indemnification Matters

Under Belgian law, the directors of a company may be liable for damages to the company in case of improper performance of their duties. Our directors may be liable to our company and to third parties for infringement of our articles of association or Belgian company law. Under certain circumstances, directors may be criminally liable.

We maintain liability insurance for our directors and officers, including insurance against liability under the Securities Act.

Certain of our non-executive directors may, through their relationships with their employers or partnerships, be insured and/or indemnified against certain liabilities in their capacity as members of our board of directors.

In the underwriting agreement we entered into in connection with our June 2015 global offering, the underwriters agreed to indemnify, under certain conditions, us, the members of our board of directors and persons who control our company within the meaning of the Securities Act against certain liabilities, but only to the extent that such liabilities are caused by information relating to the underwriters furnished to us in writing expressly for use in our registration statement and certain other disclosure documents.

Warrant Plans

We have created various incentive plans under which warrants were granted to our employees, consultants or directors. This section provides an overview of the outstanding warrants as of December 31, 2017.

 

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Upon proposal of the board of directors, the extraordinary shareholders’ meeting approved the issuance of, in the aggregate, warrants giving right to subscribe to shares as follows:

 

    on September 26, 2008, (warrants giving right to 90,000 shares). Of these 90,000 warrants, 50,000 were offered and accepted. None are outstanding as of the date hereof;

 

    on May 5, 2010 (warrants giving right to 50,000 shares). Of these 50,000 warrants (15,000 warrants A, 5,000 warrants B and 30,000 warrants C), 12,710 warrants A were accepted, but none are outstanding as of the date hereof; 5,000 warrants B were accepted and none are outstanding as of the date hereof; and 21,700 warrants C were accepted and none are outstanding as of the date hereof;

 

    on October 29, 2010 (warrants giving right to 79,500 shares). Out of the 79,500 warrants offered, 61,050 warrants were accepted by the beneficiaries and 766 warrants are outstanding as of the date hereof;

 

    on January 31, 2013 (warrants giving right to 140,000 shares). Out of the 140,000 warrants, 120,000 were granted to certain members of the executive management team and a pool of 20,000 warrants was created. The warrants attributed to certain members of the executive management team were fully vested at December 31, 2013 and were all exercised in January 2014 and therefore converted into ordinary shares. The remaining 20,000 warrants were not granted and therefore lapsed;

 

    on May 6, 2013 (11 investor warrants are attached to each Class B Share subscribed in the capital increase in cash which was decided on the same date, with each investor warrant giving the right to subscribe to one ordinary share—as a result, these warrants give rights to a maximum of 2,433,618 ordinary shares, subject to the warrants being offered and accepted by the beneficiaries. On May 31, 2013, warrants giving rights to 2,409,176 ordinary shares were issued and accepted, all of which have been exercised as of the date hereof;

 

    on May 6, 2013 (warrants giving right to 266,241 ordinary shares). Out of the 266,241 warrants offered, 253,150 warrants were accepted by the beneficiaries and 7,000 warrants are outstanding as of the date hereof;

 

    on June 11, 2013 (overallotment warrant giving right to a maximum number of shares equal to 15% of the new shares issued in the context of the offering, i.e. , 207,225 shares). The overallotment warrant was exercised on July 17, 2013;

 

    on May 5, 2014 (warrants giving right to 100,000 shares), a plan of 100,000 warrants was approved. Warrants were offered to new employees, non-employees and directors in several tranches. Out of the warrants offered, 94,400 warrants were accepted by the beneficiaries and 60,697 warrants are outstanding as of the date hereof;

 

    on November 5, 2015 (warrants giving right to 466,000 shares), a plan of 466,000 warrants was approved. Warrants were offered to new employees, non-employees and directors in several tranches. Out of the warrants offered, 353,550 warrants were accepted by the beneficiaries and 253,065 warrants are outstanding as of the date hereof;

 

    on December 12, 2016 (warrants giving right to 100,000 shares), the Board of Directors issued a new plan of 100,000 warrants. An equivalent number of warrants was cancelled from the remaining pool of warrants of the plan approved on November 5, 2015. Warrants were offered to new employees and non-employees in several tranches. Out of the warrants offered, 45,000 warrants were accepted by the beneficiaries and 45,000 warrants are outstanding as of the date hereof.

 

    on September 27, 2017, (warrants giving rights to 520,000 shares), a plan of 520,000 warrants was approved. Warrants were offered to new employees, non-employees and directors in several tranches. Out of the warrants offered, 308,050 warrants were accepted by the beneficiaries and 304,384 warrants are outstanding as of the date hereof.

 

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On December 31, 2017, there were 670,912 warrants outstanding which represented approximately 6.37% of the total number of all our then-issued and outstanding voting financial instruments.

 

Issue

Date

  

Term

   Number
of
Warrants
Issued

[1]
     Number
of
Warrants
Granted

in
number

of shares
[2]
     Exercise
Price (in
Euros)
     Number of
Warrants
No Longer
Exercisable
     Warrants
exercised
     Number of
Warrants
Outstanding
    

Exercise
periods

vested
warrants

[3]

September 26, 2008

   From December 26, 2008 to December 31, 2014      90,000        50,000        22.44        32,501        17,499        —        January 1, 2012 – December 31, 2014

May 5, 2010

   From May 5, 2010 to the day of the contribution in kind of Company’s debt under the Loan C Agreement      15,000        12,710        22.44        410        12,300        —        The day of the contribution in kind of Company’s debt under the Loan C Agreement

May 5, 2010

   From May 5, 2010 to May 5, 2016      5,000        5,000        35.36        5,000        —          —        May 5, 2013 – May 5, 2016

May 5, 2010

   From May 5, 2010 to December 31, 2016      30,000        21,700        22.44        19,035        2,665        —        January 1, 2012 – December 31, 2016

October 29, 2010

   From October 29, 2010 to October 28, 2020      79,500        61,050        35.36        53,418        6,866        766      January 1, 2014 – October 28, 2020

January 31, 2013

   From January 31, 2013 to January 31, 2023      140,000        120,000        4.52        —          120,000        —        From January 1, 2014 to January 31, 2023

May 6, 2013

   From May 6, 2013 to June 4, 2013      2,409,176        2,409,176        0.01        —          2,409,176        —        From May 6, 2013 to June 4, 2013

May 6, 2013

   From May 6, 2013 to May 6, 2023      266,241        253,150        2.64        21,050        225,100        7,000      From January 1, 2017 to May 6, 2023 May 2018 for non-employees and to May 6, 2023 for employees

May 5, 2014

   From May 16, 2014 to May 15, 2024      100,000        94,400       

From 33.49

to 45.05

 

 

     33,703        —          60,697      From January 1, 2018 to May 15, 2019 for non- employees and to May 15, 2024 for employees

November 5, 2015

   From November 5, 2015 to November 4, 2025      466,000        353,550       
From 15.90
to 34.65

 
     100,485        —          253,065      From January 1, 2019 to November 4, 2020 for non-employees and to November 4, 2025 for employees

December 12, 2016

   From December 9, 2016 to December 31, 2021      100,000        45,000       
From 17.60
to 36.81

 
     —          —          45,000      From January 1, 2020 to December 31, 2021

May 5, 2017

   From July 20, 2017 to July 31, 2022      520,000        308,050       
From 31.34