nvls_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

 

 

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

 

For the quarterly period ended June 30, 2015.

 

 

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

 

For the transition period from            to           

Commission file number: 001-37449

 


 

Nivalis Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 


 

 

 

 

Delaware

 

20-8969493

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

3122 Sterling Circle, Suite 200
Boulder, Colorado

 

80301

(Address of principal executive offices)

 

(Zip Code)

(720) 945-7700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

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 a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of July 31, 2015 was 15,451,821.

 

 


 

Table of Contents

 

NIVALIS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

    

    

 

ITEM 1. 

 

FINANCIAL STATEMENTS

 

 

 

 

 

 

Balance Sheets

 

 

 

 

 

 

Statements of Operations and Comprehensive Loss

 

 

 

 

 

 

Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

Statements of Cash Flows

 

 

 

 

 

 

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

 

 

 

ITEM 2. 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

12 

 

 

 

 

ITEM 3. 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

21 

 

 

 

 

ITEM 4. 

 

CONTROLS AND PROCEDURES

21 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

ITEM 1. 

 

LEGAL PROCEEDINGS

22 

 

 

 

 

ITEM 1A. 

 

RISK FACTORS

22 

 

 

 

 

ITEM 2. 

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

57 

 

 

 

 

ITEM 3. 

 

DEFAULTS UPON SENIOR SECURITIES

58 

 

 

 

 

ITEM 4. 

 

MINE SAFETY DISCLOSURES

58 

 

 

 

 

ITEM 5. 

 

OTHER INFORMATION

58 

 

 

 

 

ITEM 6. 

 

EXHIBITS

58 

 

 

 

 

 

 

SIGNATURES

60 

 

 

 

 

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PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

 

Nivalis Therapeutics, Inc.

Balance Sheets

(In thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2015

    

2014

  

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

100,521

 

$

27,812

 

Prepaid expenses and other current assets

 

 

569

 

 

630

 

Total current assets

 

 

101,090

 

 

28,442

 

 

 

 

 

 

 

 

 

Property and equipment and other assets, net

 

 

157

 

 

101

 

Total assets

 

$

101,247

 

$

28,543

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

3,432

 

$

929

 

Accrued direct program expenses

 

 

1,682

 

 

1,244

 

Accrued employee benefits

 

 

977

 

 

210

 

Accrued other liabilities

 

 

32

 

 

32

 

Total current liabilities

 

 

6,123

 

 

2,415

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock with liquidation preference; $0.001 par value; zero and 23,228,986 shares authorized, respectively; zero and 19,978,986 shares issued and outstanding, respectively

 

 

 —

 

 

41,880

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 and zero shares authorized, respectively; no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 200,000,000 and 35,000,000 shares authorized, respectively; 15,451,821 and 2,211,158 shares issued and outstanding, respectively

 

 

15

 

 

2

 

Additional paid-in capital

 

 

231,294

 

 

110,265

 

Accumulated deficit

 

 

(136,185)

 

 

(126,019)

 

Total stockholders’ equity (deficit)

 

 

95,124

 

 

(15,752)

 

Total liabilities and stockholders’ equity (deficit)

 

$

101,247

 

$

28,543

 

 

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

 

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Nivalis Therapeutics, Inc.

Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Revenue

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,465

 

 

3,363

 

 

7,482

 

 

7,214

 

General and administrative

 

 

1,387

 

 

594

 

 

2,685

 

 

1,133

 

Loss from operations

 

 

(5,852)

 

 

(3,957)

 

 

(10,167)

 

 

(8,347)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 —

 

 

9

 

 

1

 

 

261

 

Interest expense

 

 

 —

 

 

(241)

 

 

 —

 

 

(453)

 

Net loss and comprehensive loss

 

 

(5,852)

 

 

(4,189)

 

 

(10,166)

 

 

(8,539)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

 

4,159

 

 

163

 

 

3,189

 

 

162

 

Net loss per share - basic and diluted

 

$

(1.41)

 

$

(25.70)

 

$

(3.19)

 

$

(52.71)

 

 

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

 

 

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Nivalis Therapeutics, Inc.

Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series 1

 

Series 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

Convertible

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

Preferred Stock

 

Preferred Stock

 

 

Common Stock

 

Paid‑in

 

Accumulated

 

Stockholders’

 

 

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

 

Balance as of December 31, 2014

 

8,813

 

$

11,945

 

11,166

 

$

29,935

 

 

2,211

 

$

2

 

$

110,265

 

$

(126,019)

 

$

(15,752)

 

Conversion of convertible preferred stock to common stock

 

(8,813)

 

 

(11,945)

 

(11,166)

 

 

(29,935)

 

 

6,916

 

 

7

 

 

41,873

 

 

 —

 

 

41,880

 

Issuance of common stock, net of $9.8 million of offering costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

6,325

 

 

6

 

 

78,786

 

 

 —

 

 

78,792

 

Employee stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

370

 

 

 —

 

 

370

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,166)

 

 

(10,166)

 

Balance as of June 30, 2015

 

 —

 

$

 —

 

 —

 

$

 —

 

 

15,452

 

$

15

 

$

231,294

 

$

(136,185)

 

$

95,124

 

 

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

 

 

 

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Nivalis Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2015

    

2014

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(10,166)

 

$

(8,539)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

31

 

 

53

 

Stock-based compensation expense

 

 

370

 

 

40

 

Change in value of preferred stock warrant liabilities and derivative

 

 

 —

 

 

(261)

 

Amortization of deferred financing costs and noncash interest

 

 

 —

 

 

320

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other

 

 

61

 

 

54

 

Accounts payable

 

 

419

 

 

155

 

Accrued direct program expenses

 

 

438

 

 

45

 

Accrued employee benefits

 

 

767

 

 

(24)

 

Accrued other liabilities

 

 

 —

 

 

(1)

 

Net cash used in operating activities

 

 

(8,080)

 

 

(8,158)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(87)

 

 

(4)

 

Net cash used in investing activities

 

 

(87)

 

 

(4)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

80,876

 

 

 —

 

Decrease in restricted cash

 

 

 —

 

 

454

 

Proceeds from notes payable, net

 

 

 —

 

 

7,613

 

Principal payment on debt

 

 

 —

 

 

(882)

 

Net cash provided by financing activities

 

 

80,876

 

 

7,185

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

72,709

 

 

(977)

 

Cash and cash equivalents, beginning of period

 

 

27,812

 

 

1,098

 

Cash and cash equivalents, end of period

 

$

100,521

 

$

121

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

 —

 

$

124

 

Conversion of convertible preferred stock to common stock

 

$

41,880

 

$

 —

 

Conversion of convertible debt and accrued interest to convertible preferred stock, net

 

$

 —

 

$

12,365

 

 

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

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NIVALIS THERAPEUTICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

Nivalis Therapeutics, Inc., formerly N30 Pharmaceuticals, Inc. (the ‘‘Company’’ or ‘‘Nivalis’’), was incorporated on August 1, 2012, under the laws of the State of Delaware, upon the conversion of its predecessor entity N30 Pharmaceuticals, LLC (‘‘N30 LLC’’), from a Delaware limited liability company to a Delaware Corporation (the ‘‘Company Conversion’’). On February 11, 2015, the Company changed its name to Nivalis Therapeutics, Inc.

The Company is a clinical stage pharmaceutical company committed to the discovery, development and commercialization of therapeutics for people with cystic fibrosis. In addition to developing innovative solutions intended to extend and improve the lives of people with cystic fibrosis, Nivalis plans to utilize its proprietary S-nitrosoglutathione reductase (GSNOR) inhibitor portfolio to develop therapeutics for other diseases.

2. Liquidity Risks

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing research and development spending. As of June 30, 2015, the Company had an accumulated deficit of $136.2 million. Net losses and net cash used in operating activities for the six months ended June 30, 2015 were $10.2 million and $8.1 million, respectively. The Company anticipates that operating losses and net cash used in operating activities will continue and substantially increase over the next several years as it expands development activities for its N91115 product candidate.

The Company has historically financed its operations primarily through the sale of its equity securities and debt offerings. The Company will continue to be dependent upon such sources of funds until it is able to generate positive cash flows from its operations. Management has determined that the Company’s existing cash and cash equivalents as of June 30, 2015 will be sufficient to fund operations at least through the next twelve months.  

The Company will be required to fund future operations through the sale of its equity securities, incurring debt, entering into partnerships, or obtaining grants or other nondilutive sources of financing. There can be no assurance that sufficient funds from these sources will be available to the Company when needed. If the Company is unable to obtain additional funding from these or other sources when needed, or to the extent needed, this would have a negative impact on the Company’s financial condition and its ability to pursue its business strategy. This could force the Company to delay, limit, reduce or terminate research and development programs and commercialization efforts. Failure to receive additional funding could cause the Company to cease operations, in part or in full.  

3. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the presentation of the Company’s financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining accrued liabilities and the fair value‑based measurement of equity instruments. The Company evaluates its estimates and assumptions as facts and circumstances dictate.

Unaudited Interim Financial Data

The balance sheet at December 31, 2014 was derived from audited financial statements, but does not include all the disclosures required by U.S. GAAP. The accompanying balance sheet as of June 30, 2015, statements of operations and comprehensive loss for the three and six months ended June 30, 2015 and 2014, statement of convertible preferred stock and stockholders’ equity (deficit) for the six months ended June  30, 2015, and the statements of cash flows for the six months ended June 30, 2015 and 2014 are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in

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accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2014. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to state fairly the Company’s financial position as of June  30, 2015 and the results of operations and cash flows for the three and six months ended June  30, 2015 and 2014. The results for the three and six months ended June  30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any other interim period.

2014 Stock Conversion and Reverse Stock Split

Effective September 23, 2014, all outstanding shares of preferred stock were converted on an 11.556-for-1 basis into shares of common stock (the ‘‘Stock Conversion’’). Concurrent with this conversion, the Company effected a reverse stock split of its common stock, par value $0.001 per share. Every four shares of common stock were reclassified and combined into one share of common stock. Fractional shares were issued as a result of the reverse stock split. The total number of authorized shares of common stock was also proportionally decreased by a ratio of 1:4 and the par value per share of the common stock continued to be $0.001. 

2015 Stock Conversion and Reverse Stock Split

On May 26, 2015, the Company’s Board of Directors approved a 1-for-2.889 reverse stock split of its common stock. The reverse stock split became effective upon filing of a certificate of amendment to the Company’s amended and restated certificate of incorporation on June 1, 2015. Upon the effectiveness of the reverse stock split, (i) every 2.889 shares of outstanding common stock were decreased to one share of common stock, (ii) the number of shares of common stock into which each outstanding option, right and warrant to purchase common stock is exercisable was proportionally decreased on a 1-for-2.889 basis and the exercise price of each outstanding option, right and warrant to purchase common stock was proportionately increased on a 1-for-2.889 basis, and (iii) the conversion ratio for each share of the Company’s convertible preferred stock which was convertible into common stock was proportionally decreased on a corresponding basis in connection with the 1-for-2.889 reverse split. No fractional shares were issued as a result of the reverse stock split. The total number of authorized shares of common stock and the par value per share of common stock did not change as a result of the reverse stock split.

Effective June 22, 2015, all outstanding shares of convertible preferred stock were converted on a 2.889-for-1 basis into shares of common stock.

All of the share numbers, share prices, exercise prices and other per share information throughout these financial statements for all periods presented have been adjusted, on a retroactive basis, to reflect the 1-for-4 reverse stock split and the 1-for-2.889 reverse stock split.

Comprehensive Loss

Comprehensive loss, as defined, includes all changes in equity during a period from non-owner sources. Net income or loss is the Company’s only component of comprehensive income or loss for the three and six months ended June  30, 2015.

Net Loss per Share

The Company reports net loss per share in accordance with the standard codification of ASC “Earnings per Share” (“ASC 260”). Under ASC 260, basic earnings per share, which excludes dilution, is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net loss available to common stockholders by the weighted average of common shares outstanding plus the dilutive potential common shares.  Diluted earnings per share excludes the impact of convertible preferred stock, employee stock options, restricted stock and stock purchase rights, as the effect would be anti-dilutive. During a loss period, the assumed exercise of in-the-money stock options and other potentially diluted instruments has an anti-dilutive effect and therefore, these instruments are excluded from the computation of dilutive earnings per share.

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Fair Value of Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accrued compensation, accrued direct program expenses and accounts payable, approximate fair value due to their short-term maturities.

The Company accounted for its preferred stock warrants pursuant to ASC Topic 480, Distinguishing Liabilities from Equity, and classified warrants for redeemable preferred stock as liabilities. The fair value of the outstanding preferred stock warrant liabilities at December 31, 2013 was $267,750.  Subsequent to the completion of the Stock Conversion on September 23, 2014, whereby all outstanding shares of preferred stock were converted into shares of common stock, the fair value of the preferred stock warrant liabilities were remeasured at fair value and reclassified into equity. During the three and six months ended June 30, 2014 a remeasurement gain of $2,000 and $261,750, respectively, was recognized in other income (expense), net in the statement of comprehensive loss. Upon the Stock Conversion, the remaining balance of $2,000 was reclassified from liabilities to equity.

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and to provide disclosures when certain criteria are met. The guidance is effective for annual periods beginning in 2016 and interim reporting periods starting in the first quarter of 2017. Early application is permitted. We do not expect the standard will have a material impact on our disclosures.

Fair Value Measurements

In general, asset and liability fair values are determined using the following categories:

Level 1 – inputs utilize quoted prices in active markets for identical assets or liabilities.

Level 2 – inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs are unobservable inputs and include situations where there is little, if any, market activity for the balance sheet items at period end. Pricing inputs are unobservable for the terms and are based on the Company’s own assumptions about the assumptions that a market participant would use.

The Company’s financial instruments, including money market investments are measured at fair value on a recurring basis. There were no transfers between levels for the six months ended June 30, 2015.

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of June 30, 2015 and December 31, 2014 (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

Quoted prices

 

 

 

 

 

 

in active

 

 

 

 

in active

 

 

 

 

 

 

markets for

 

 

 

 

markets for

 

 

 

June 30, 

 

identical assets 

 

December 31, 

 

identical assets 

 

Description

    

2015

    

(Level 1)

    

2014

    

(Level 1)

 

Assets measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market investments (included in cash and cash equivalents)

 

$

99,727

 

$

99,727

 

$

26,926

 

$

26,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4. Notes Payable

As of June 30, 2015, the Company has no debt outstanding.

Loan and Security Agreement

During February 2011, the Company entered into a $5,000,000 loan and security agreement (“Security Agreement”) with Horizon Technology Finance (“Horizon”). The interest rate for these loans was 11.25%. In accordance with the terms of certain amendments to the Security Agreement, the Company was required to maintain $2,500,000 in an account that was subject to an Account Control Agreement and was restricted from withdrawing the funds from this

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account without Horizon’s prior written consent. During February 2014, the Company was allowed access to $454,464 of previously restricted funds. During July 2014, the entire outstanding balance under the Security Agreement was paid in full and the remaining restricted cash held by the Company was fully released. The payment also released all previously pledged assets held as collateral under the loan.

Convertible Debt

During February, March, April, June, July, August and September 2014 (the “2014 Notes”), the Company issued subordinated secured convertible debt to two investors totaling $12,000,000 at an interest rate of 8.0% per annum, $7,700,000 of which was issued during the six months ended June  30, 2014. The outstanding principal and any accrued but unpaid interest were due and payable on February 3, 2015, unless earlier converted. The outstanding principal and accrued and unpaid interest was convertible at the option of the investor into preferred shares in the Company. The conversion price was $0.35 per share of Series E preferred shares or 75% of the price at which a new series of preferred stock was issued by the Company. 

The 2014 Notes included a change in control redemption which was deemed an embedded derivative.  This redemption right and the right to convert at 75% of the price at which a new series of preferred stock was issued required the Company to bifurcate and separately account for the embedded derivatives, however the amount recorded and the impact on net loss was not material.

On September 23, 2014, there were three transactions for the purpose of simplifying the Company’s capital structure to allow the Company to seek additional financing from outside investors. First, the investors holding convertible preferred stock agreed to the conversion of all outstanding preferred stock into common stock. Second, the holders of the 2014 Notes agreed to the issuance of shares of a newly created Series 1 convertible preferred stock in settlement of the 2014 Notes. The Company issued 8,813,203 Series 1 convertible preferred shares at a price of $1.40 per share through the settlement of $12,373,741 of convertible debt and related interest held by two separate investors.  This transaction resulted in a gain on extinguishment of $378,251, which was recognized through equity during three months ended September 30, 2014, as this was a transaction with stockholders. Finally, as discussed in Note 3, the Company initiated a one-for-four reverse stock split, which decreased the number of common shares outstanding.

5. Stockholders’ Equity

During February 2014, the Company increased its authorized number of shares of convertible preferred stock to 30,233,694 shares.  During March 2014, the Company increased its authorized number of shares of convertible preferred stock to 60,503,445 shares and increased its authorized number of shares of common stock to 25,000,000 shares.

Immediately following the Stock Conversion and the one-for-four reverse stock split effected in September 2014, the Company reestablished its authorized number of shares of convertible preferred stock to 8,866,753 shares and its authorized number of shares of common stock to 15,742,382 shares.

During November 2014, the Company increased its authorized number of shares of convertible preferred stock to 23,228,986 shares and increased its authorized number of shares of common stock to 35,000,000 shares.

Concurrent with the Company’s initial public offering completed in June 2015  (the IPO”), the Company increased its authorized number of shares of common stock to 200,000,000 shares, eliminated its authorized shares of convertible preferred stock and authorized 10,000,000 shares of preferred stock for future issuance.

Convertible Preferred Stock

As of December 31, 2013, the Company had six series of outstanding convertible preferred stock: Series A-1 convertible preferred stock (“Series A-1 Preferred”), Series A-2 convertible preferred stock (“Series A-2 Preferred”), Series C-1 convertible preferred stock (“Series C-1 Preferred”), Series C-2 convertible preferred stock (“Series C-2 Preferred”), Series D  Preferred and Series E Preferred. The convertible preferred stock was initially recorded at the issuance price on the date of issuance, net of issuance costs. On September 23, 2014 all outstanding preferred stock was converted into shares of common stock on an 11.556-for-1 basis. Concurrent with the Stock Conversion, a newly created Series 1 convertible preferred stock (“Series 1 Preferred”) was issued in the settlement of the 2014 Notes. In November and December 2014, the Company raised $31.0 million gross proceeds in a private placement of Series 2 convertible preferred stock (“Series 2 Preferred”)

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On June 22, 2015, prior to the closing of the Company’s IPO, all outstanding shares of convertible preferred stock, amounting to 19,978,986 shares, were automatically converted into 6,915,525 shares of common stock in accordance with the terms of the Company’s amended and restated certificate of incorporation then in existence.  

As of June 30, 2015, the Company had no preferred stock or convertible preferred stock outstanding.

Common Stock

On June 22, 2015, the Company completed its IPO of 6,325,000 shares of its common stock, including 875,000 shares from the exercise of the underwriters’ over-allotment option. The Company received proceeds of $78.8 million from its IPO, net of $9.8 million in expenses and underwriters’ discounts and commissions relating to the issuance and distribution of the securities. As of June 30, 2015, $2.1 million of these expenses were unpaid.

At June 30, 2015, shares of common stock have been reserved for issuance as follows (in thousands):

 

 

 

 

Issued and unissued options to purchase common stock

    

2,370

 

Employee stock purchase plan

 

232

 

Common stock warrants

 

19

 

Restricted stock purchase rights

 

22

 

 

 

2,643

 

 

 

6. Net Loss per Share

The Company excluded the following common stock equivalents, outstanding as of the three and six months ended June 30, 2015 and 2014 from the computation of diluted net loss per share for these same periods because they had an anti-dilutive impact on the computation (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

 

    

2015

    

2014

 

Options to purchase common stock

 

1,288

 

121

 

Unvested restricted common stock

 

1

 

7

 

Convertible preferred stock

 

 —

 

2,040

 

Warrants to purchase convertible preferred and common stock

 

19

 

19

 

Stock purchase rights

 

22

 

22

 

Total

 

1,330

 

2,209

 

 

 

7. Subsequent Events

The Company has evaluated events up to the filing date of these interim financial statements and determined that no subsequent event activity required disclosure.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q and the information incorporated herein by reference includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our liquidity and future funding needs, our results of operations, financial condition, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry in which we operate may differ materially from the forward-looking statements contained herein. You should also read carefully the factors described in the “Risk Factors” section of this Quarterly Report on Form 10-Q to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of this report, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

Overview

We are a clinical stage pharmaceutical company committed to the discovery, development and commercialization of therapeutics for people with cystic fibrosis. In addition to developing innovative solutions intended to extend and improve the lives of people with cystic fibrosis, we plan to utilize our proprietary S-nitrosoglutathione reductase, or GSNOR, inhibitor portfolio to develop therapeutics for other diseases.

Cystic fibrosis, or CF, is a life-shortening genetic disease that affects an estimated 70,000 people worldwide, predominately in the United States and Europe. CF is characterized by a defect in the chloride channel of human cells known as the “cystic fibrosis transmembrane conductance regulator,” or CFTR, which is caused by mutations in the CFTR gene. N91115 works through a novel mechanism of action called GSNOR inhibition to modulate the unstable and defective CFTR protein responsible for CF. GSNOR inhibition restores GSNO levels thereby modifying the chaperones responsible for CFTR protein degradation. This stabilizing effect increases the function of the CFTR chloride channel and leads to an increase in net chloride secretion. Nivalis discovered and owns exclusive rights to N91115 in the United States and all other major markets, including U.S. composition of matter patent protection until at least 2031.

Enrollment of our Phase 1b clinical trial of N91115 in people who have CF and have two copies of the F508del mutation has now been completed. The randomized, double-blind, placebo-controlled, study of orally administered N91115 was designed to assess the safety, tolerability and pharmacokinetics of various doses of N91115 (50, 100 and 200 mg twice daily) in a total of 48 people with CF.  The independent data safety and monitoring committee has met and reviewed un-blinded preliminary data from the trial as recently as late July 2015 and found no dose-limiting toxicity at the highest dose tested. The trial is anticipated to be completed in the third quarter of 2015 with results presented at an appropriate scientific meeting later this year.  

A Phase 2 study of N91115 in people with CF who have two copies of the F508del mutation is subject to regulatory review and is planned to be initiated in the fourth quarter of 2015. This Phase 2 study is anticipated to be a  

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twelve-week randomized, double-blind placebo-controlled clinical trial to demonstrate safety and efficacy of N91115 when added to Orkambi™ (lumacaftor/ivacaftor), owned by Vertex Pharmaceuticals, Inc. 

Our operations to date have focused on discovery and development of our portfolio of GSNOR inhibitors, including N91115 and N6022. N6022 was the first product candidate to emerge from our GSNOR inhibitor portfolio and was optimized for inhaled delivery with low oral bioavailability. In order to provide translational evidence of GSNOR’s role in lung disease, we initially explored the effects of N6022 in patients with mild asthma using an intravenous formulation. N6022 demonstrated a significant, beneficial effect on the airways in these patients, thus confirming the beneficial effects of N6022 observed in our preclinical studies of asthma. N6022 paved the way for N91115 by establishing initial safety of the class in healthy subjects and patients with CF. Because an oral dosage form is preferable in CF, a systemic disease that is not confined to the lungs, we elected to discontinue further development of N6022 in the chronic management of CF, but we may pursue development of N6022 in an inhaled dosage form for other potential indications.

During June 2015, we completed our initial public offering, or IPO, of an aggregate 6,325,000 shares of common stock at a price to the public of $14.00 per share for aggregate gross proceeds of $88.6 million, before underwriting commission and discounts and offering expenses. Our common stock is listed on the NASDAQ Global Market under the symbol “NVLS”.

To date, we have not generated any revenue. Based on our current plans, we do not expect to generate any revenue for the foreseeable future. Since inception, we have financed our operations primarily through the proceeds from our IPO, as well as private placements of equity, debt and convertible debt. From our inception in July 2003 to June 30, 2015, we raised $225.0 million in net proceeds from these sources of which all $5.0 million in debt has been repaid. As of June 30, 2015, we had no debt, and cash and cash equivalents of $100.5 million.

We have incurred losses from operations in each year since our inception. Our net losses were $5.9 million and $10.2 million for the three and six months ended June 30, 2015, respectively. As of June 30, 2015, we had an accumulated deficit of $136.2 million. We expect to continue incurring losses for the foreseeable future as we advance our lead product candidate, N91115, through clinical development, regulatory approval and, if approved, commercialization. We expect that research and development expenses will increase as we continue to develop our product candidates, and general and administrative costs will increase as we operate as a public company. We anticipate that we will need to raise additional capital in addition to the recently raised IPO proceeds prior to the commercialization of N91115 or any other potential product candidate. Until such time that we can generate revenue from product sales, which, based on our current development plans, we do not expect to occur until 2018 at the earliest, we expect to finance our operating activities primarily through selling equity, incurring debt, entering into partnerships, and obtaining grants or other nondilutive sources of financing. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, if at all. Our failure to raise capital when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. This could force us to delay, limit, reduce or terminate our research and development programs and commercialization efforts. Failure to receive additional funding could cause us to cease operations, in part or in full.

Financial Operations Overview

Revenue

To date, we have not generated any revenue. In the future, we may generate revenue from sales or licensing of N91115 or other potential product candidates. Based on our current development plans, however, we do not expect to generate product revenue until 2018 at the earliest. If we fail to complete the clinical development of an N91115-based therapy, our ability to generate future revenue, and our results of operations and financial position, will be adversely affected.

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Research and Development Expense

Research and development expense consists of costs incurred for the development of our product candidates, which include:

·

employee-related expenses, including salaries, benefits, travel and other compensation expenses;

·

expenses incurred for contract research organizations, or CROs, clinical investigators, clinical consultants and clinical sites that will conduct our preclinical studies and clinical trials as well as costs associated with acquiring, developing and manufacturing preclinical and clinical supplies, which we refer to collectively as direct program expenses;

·

costs associated with regulatory filings; and

·

costs of laboratory supplies, facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other operating costs related to research and development.

Research and development costs are expensed as incurred. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development primarily due to the increased size and duration of later-stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we seek to advance clinical development of our lead product candidate, N91115.

The following table identifies direct program expenses on a program-specific basis for our product candidates. All other research and development costs, including salaries, benefits and stock-based compensation, consulting and outsourced services, facilities and depreciation, and other expenses are not allocated to specific programs as they are deployed across a number of projects under development. Other expenses include travel, lab and office supplies, business insurance and other miscellaneous expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Direct Program Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

N91115 CF expenses

 

$

2,848

 

$

1,016

 

$

4,435

 

$

1,981

 

N6022 CF expenses

 

 

 —

 

 

552

 

 

 —

 

 

1,603

 

Total Direct Program Expenses

 

 

2,848

 

 

1,568

 

 

4,435

 

 

3,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel and Other Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, benefits and stock-based compensation

 

 

1,240

 

 

1,382

 

 

2,339

 

 

2,783

 

Consulting and outsourced services

 

 

80

 

 

162

 

 

137

 

 

310

 

Facilities and depreciation

 

 

67

 

 

76

 

 

135

 

 

144

 

Other expenses

 

 

230

 

 

175

 

 

436

 

 

393

 

Total research and development costs

 

$

4,465

 

$

3,363

 

$

7,482

 

$

7,214

 

All of our research and development expenses for the three and six months ended June 30, 2015 and 2014 relate to the development of N91115 and N6022. We have expended an aggregate of approximately $11.9 million for direct program expenses related to N91115 from inception through June 30, 2015. The successful development of N91115 or any other potential product candidate is uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when the period in which we receive material net cash inflows may commence, from N91115 or any other potential product candidate. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

·

the number and results of our clinical trials;

·

the number of clinical sites included in the trials;

·

the number of patients that ultimately participate in the trials;

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·

the length of time required to enroll suitable patients; and

·

the ability to obtain a drug supply for our trials.

Our expenditures are subject to additional uncertainties, including the timing of the commercialization of Vertex’s lumacaftor/ivacaftor, our preclinical study and clinical trial expenses, our costs to acquire, develop and manufacture preclinical study and clinical trial materials, the timing of regulatory approval for N91115 and post-commercialization and other incremental research and development costs for N91115 or any other potential product candidate. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Changes in variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or other regulatory authorities were to require us to conduct preclinical studies or clinical trials beyond those which we anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the clinical development of our product candidates.

General and Administrative Expense

General and administrative expense consists principally of salaries and related costs not included in research and development expenses, including stock-based compensation, for personnel in executive, finance, business development and information technology functions. Other general and administrative expenses include facility costs and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expense will increase during the next two fiscal years due to many factors. The most significant of these factors include:

·

increased personnel expenses, other than research and development personnel, to support the clinical development of N91115;

·

increased patent filing and prosecution costs related to maintaining our patent portfolio; and

·

increased expenses related to becoming and operating as a publicly traded company, including increased legal and accounting services, addition of new headcount to support stock exchange and SEC reporting compliance, public and investor relations and communication needs and increased insurance premiums.

Other Income (Expense), Net

Other income (expense), net consists primarily of the gain or loss due to the change in the fair value of preferred stock warrant liabilities. Subsequent to the completion of the stock conversion on September 23, 2014, all outstanding shares of preferred stock were converted into shares of common stock and warrants exercisable for shares of our preferred stock automatically adjusted to become exercisable for shares of common stock, and therefore changes in the fair value of preferred stock warrant liabilities will no longer impact other income (expense), net.

Interest Expense

Interest expense consists primarily of interest accrued on our convertible debt and interest paid on our Loan and Security Agreement with Horizon Technology Finance dated February 18, 2011, or the Horizon Loan. We repaid all outstanding principal and interest under the Horizon Loan in full in July 2014. Also included in interest expense is the amortization of the discount on the Horizon Loan and convertible debt during 2014.

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2015 and 2014.

Research and Development Expenses.  Research and development expenses for the three and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Research and development expenses

 

$

4,465

 

$

3,363

 

$

7,482

 

$

7,214

 

Increase from prior year

 

$

1,102

 

$

 —

 

$

268

 

$

 —

 

% change from prior year

 

 

32.8

%  

 

 

 

 

3.7

%  

 

 

 

The increase in research and development expenses for the three months ended June 30, 2015 compared to the same period in the prior year was primarily due to an increase in direct program expenses. Clinical trial expenses for N91115 increased by $1.4 million during the comparable periods due to the Phase 1b trial that was initiated during the first quarter of fiscal 2015.  The remaining increase in direct program expenses of approximately $430,000 was attributed to the production of clinical trial materials with contract manufacturers and initiation of long-term toxicology studies. Partially offsetting these increases were decreased clinical trial expenses for N6022 of $552,000 during the comparable periods as a Phase 1b trial with N6022 was completed in April 2014.

The increase in research and development expenses for the six months ended June 30, 2015 compared to the same period in the prior year was primarily due to an increase in direct program expenses of $851,000 which was partially offset by decreased personnel and other expenses of $583,000. Clinical trial expenses for N91115 increased by $1.8 million during the comparable periods due to the Phase 1b trial that was initiated during the first quarter of fiscal 2015. During the first half of fiscal 2014, a smaller Phase 1a safety trial was in process. The remaining increase in direct program expenses of approximately $650,000 was attributed to the production of clinical trial materials with contract manufacturers for the Phase 1b trial of N91115. Partially offsetting these increases were decreased clinical trial expenses for N6022 of $1.6 million during the comparable periods as the Phase 1b trial of N6022 in people with CF was completed in April 2014. The decrease in personnel and other expenses during the six months ended June 30, 2015 compared to the same period in the prior year was primarily attributable to a decrease in headcount as a result of a reduction in force that was implemented in July 2014, along with related decreases in lab supplies and equipment costs.

General and Administrative Expenses.  General and administrative expenses for the three and six months ended June 30, 2015 and 2014 were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

General and administrative expenses

 

$

1,387

 

$

594

 

$

2,685

 

$

1,133

 

Increase from prior year

 

$

793

 

$

 —

 

$

1,552

 

$

 —

 

% change from prior year

 

 

133.5

%  

 

 

 

 

137.0

%  

 

 

 

The increase in general and administrative expenses for the three and six months ended June 30, 2015 compared to the same periods in the prior year was primarily due to preparation to operate as a publicly-traded company, including increased salary expense, employee benefits and stock-based compensation expense tied to a revised employee incentive plan and the hiring of a new CEO and CFO during the early part of 2015. Additionally, audit fees, legal support costs, patent expenses, travel costs and various investor relations expenses increased by approximately $303,000 and $634,000 during the three and six months ended June 30, 2015, respectively, compared with the same periods in the prior year.

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Other Income (Expense), Net.  Other income (expense), net for the three and six months ended June 30, 2015 and 2014 were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Other income (expense), net

 

$

 —

 

$

9

 

$

1

 

$

261

 

Decrease from prior year

 

$

(9)

 

$

 —

 

$

(260)

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The decrease in other income (expense), net for the three and six months ended June 30, 2015 compared to the same periods in the prior year was primarily due to approximately $2,000 and $260,000 recorded as a gain during the three and six months ended June 30, 2014, respectively, due to the change in the fair value of preferred stock warrant liabilities that were adjusted to fair market value. These preferred stock warrant liabilities were reclassified as a component of equity during September 2014. Therefore no similar mark‑to‑market adjustment was recorded during 2015. 

Interest Expense. Interest expense for the three and six months ended June 30, 2015 and 2014 were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Interest expense

 

$

 —

 

$

241

 

$

 —

 

$

453

 

Decrease from prior year

 

$

(241)

 

$

 —

 

$

(453)

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The decrease in interest expense for the three and six months ended June 30, 2015 compared to the same periods in the prior year was due to interest paid on the outstanding Horizon Loan and interest accrued on the convertible debt outstanding during the first half of fiscal 2014. The Horizon Loan was fully repaid in July 2014 and all remaining convertible debt and accrued interest was converted to shares of Convertible Preferred Stock during September 2014. Nivalis had no debt or resulting interest expense during the first half of fiscal 2015.  

Liquidity and Capital Resources

We have funded our operations primarily through the proceeds from our IPO as well as private placements of equity, convertible debt and the Horizon Loan. We received  $78.8 million in net proceeds from the IPO  ($2.1 million of offering costs included in net proceeds were unpaid as of June 30, 2015), $88.8 million in net proceeds from the issuance of convertible preferred stock, $52.4 million of net proceeds through the issuance of convertible debt and $5.0 million of net proceeds from the issuance of the Horizon Loan, which was fully repaid on July 2, 2014.  As of June 30, 2015, we had cash and cash equivalents of $100.5 million.

The following table sets forth the primary sources and uses of cash for the six months ended June 30, 2015 and 2014: 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(8,080)

 

$

(8,158)

 

Net cash used in investing activities

 

 

(87)

 

 

(4)

 

Net cash provided by financing activities

 

 

80,876

 

 

7,185

 

Net increase (decrease) in cash and cash equivalents

 

$

72,709

 

$

(977)

 

Operating Activities

During the first half of fiscal 2015, our net loss of $10.2 million included noncash charges of $401,000, primarily associated with stock‑based compensation. During this same period, our net operating liabilities, excluding cash, increased by approximately $1.7 million and thus decreased our net cash used in operating activities to $8.1 million. This was primarily the result of increases in accrued employee benefits by $767,000, accrued direct program

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expenses by $438,000 and accounts payable by $419,000 (excluding $2.1 million of unpaid IPO related costs). Accrued employee benefit costs increased due to the 2015 employee incentive plan that was initiated at the beginning of the year. Increases in accounts payable and accrued direct program expenses were directly related to research and development costs for our Phase 1b clinical trial which began in the first quarter of 2015.

During the first half of fiscal 2014, our net loss of $8.5 million included noncash charges of $152,000. During the same period, our net operating liabilities, excluding cash, increased by $229,000. This was largely the result of increased accounts payable and decreased prepaid expenses. 

Investing Activities

The net cash used in investing activities of $87,000 for the six months ended June 30, 2015 was primarily related to the development of our public company website. 

Financing Activities

The cash provided by financing activities for the first half of fiscal 2015 resulted from  $80.9 million of net proceeds for the sale of common stock in our IPO that closed during June 2015. There were $2.1 million of unpaid IPO related costs at June 30, 2015, which after payment in the third quarter of 2015 reduced the net proceeds from the sale of common stock in our IPO to $78.8 million. The cash provided by financing activities for the first half of fiscal 2014 was primarily the result of $7.6 million received from the issuance of convertible debt and $454,000 from the release of restricted cash associated with the Horizon Loan. These increases were partially offset by the repayment of $882,000 on the Horizon Loan during the first half of fiscal 2014.

Funding Requirements

We believe existing cash and cash equivalents provide resources to complete the Phase 2 clinical program and to fund our operating expenses and capital expenditure requirements to mid-2017 when we expect to be enrolling patients in our Phase 3 clinical program for N91115. We have based these estimates on assumptions that may prove to be incorrect, and given the risks and uncertainties associated with drug development and commercialization, we could use our capital resources sooner than expected. Our present and future funding requirements will depend on many factors, including but not limited to:

·

personnel-related expenses, including salaries, benefits, travel and other compensation expenses;

·

our ability to advance the clinical development program for our lead product candidate, N91115;

·

the scope, progress, results and costs of preclinical development and clinical trials of N91115 and any other product candidate;

·

the costs, timing and outcome of regulatory review of N91115 or any other potential product candidate;

·

the revenue, if any, received from commercial sales of N91115 or any other potential product candidate for which we, or any future partner, may receive marketing approval;

·

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for N91115 or any other potential product candidate for which we receive marketing approval and do not partner for commercialization; and

·

the extent to which we acquire, in-license or out-license other products and technologies.

Existing cash and cash equivalents will not be sufficient to fund our operations through successful development and commercialization of N91115 or any other potential product candidate. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of our planned development and commercialization activities, which could harm our business. For more information as to the risks associated with our future funding requirements, see Item 1A. – “Risk Factors.”

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Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued Direct Program Expenses

Substantial portions of our preclinical studies and clinical trials are performed by third parties, such as CROs, laboratories, medical centers and other vendors. As part of the process of preparing our financial statements, we are required to estimate our accrued direct program expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our direct program expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. Examples of direct program expenses include:

·

fees owed to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

·

fees owed to investigative sites in connection with clinical trials;

·

fees owed to contract manufacturers in connection with the production of drug supply materials; and

·

other fees owed in relation to direct programs.

We have not had any material adjustments to estimated amounts recorded in previous periods. At June 30, 2015 and December 31, 2014, we had accrued direct program expenses of $1.7 million and $1.2 million, respectively.

Convertible Debt

We have entered into, and may in the future enter into, debt financing transactions whereby such debt is convertible into preferred or common shares. We account for such instruments under Accounting Standards Codification, or ASC, 470-20 “Debt with Conversion and Other Options” which require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. We account for convertible debt instruments that have been determined to be free standing derivative financial instruments in accordance with ASC 815 “Derivatives and Hedging”. Under ASC 815, a portion of the proceeds received upon the issuance of the convertible debt is allocated to the fair value of the derivative and a corresponding discount is recorded on the convertible debt. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

During 2014, we issued an aggregate of $12.0 million of convertible debt to investors. The 2014 convertible debt instruments contained a change in control redemption, which was deemed an embedded derivative and required us to bifurcate and separately account for the embedded derivative as a liability. These derivatives were recognized at fair value with an immaterial mark-to-market gain recognized in other income (expense), net in the Statements of Operations and Comprehensive Loss during the three months ended June 30, 2014 and an immaterial mark-to-market loss recognized in other income (expense), net in the Statement of Operations and Comprehensive Loss during the six months ended June 30, 2014. The discount on the debt was amortized through interest expense for which an immaterial amount

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was recognized in the Statement of Comprehensive Loss during the three and six months ended June 30, 2014. All of this debt converted into shares of Series 1 convertible preferred stock in September 2014.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 

(in thousands)

 

 

 

(unaudited)

 

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than 5 years

 

Purchase obligations

 

$

6,610

 

$

5,409

 

$

1,201

 

$

 —

 

$

 —

 

Operating leases

 

 

765

 

 

277

 

 

280

 

 

208

 

 

 —

 

Total obligations

 

$

7,375

 

$

5,686

 

$

1,481

 

$

208

 

$

 —

 

We have entered into contracts with third parties to provide future services, which include research and development, clinical development support and testing services. These purchase obligations include both cancellable and non-cancellable amounts. Increases in these purchase obligations during the second quarter of 2015 were directly related to our Phase 1b clinical trial which began in the first quarter of 2015. We also have an operating lease obligation for office and laboratory space, which will expire on March 31, 2018. We have the option to renew the lease for an additional three-year term and the option to terminate the lease at any time after March 31, 2017, for a termination fee of $25,000.

Related Party Transactions

At various points during 2014, we issued an aggregate of $12.0 million of convertible debt to certain existing investors. Interest accrued on these loans until the loans and all accrued interest were converted in full on September 23, 2014 to Series 1 convertible preferred stock.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet activities, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and to provide disclosures when certain criteria are met. The guidance is effective for annual periods beginning in 2016 and interim reporting periods starting in the first quarter of 2017. Early application is permitted. We do not expect the standard will have a material impact on our disclosures.

Other accounting standards that have been issued or proposed by the FASB or other standards- setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, which allows us to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we irrevocably chose to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. As of June 30, 2015, we had cash and cash equivalents of $100.5 million, consisting of deposits with commercial banks in checking, interest-bearing and demand money market accounts. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs.

Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

 

 

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a−15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. In connection with the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015.

Changes in Internal Control over Financial Reporting

This Quarterly Report on Form 10-Q does not include a report on changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter due to a transition period established by the Exchange Act for newly public companies. 

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

ITEM 1A.RISK FACTORS

Investing in our common stock involves a high degree of risk. In evaluating our business, investors should carefully consider the following risk factors, together with all other information included in this Quarterly Report, before deciding whether to invest in shares of our common stock. These risk factors contain, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. The order in which the following risks are presented is not intended to reflect the magnitude of the risks described. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and prospects. In that case, the trading price of our common stock could decline, and an investor may lose part or all of his, her or its investment.

Risks Relating to Our Financial Condition and Need for Additional Capital

We have incurred significant losses since our inception. We anticipate that we will continue to incur significant losses for the foreseeable future.

We are a clinical stage pharmaceutical company focused primarily on developing our lead product candidate, N91115, for CF. We have incurred significant net losses in each year since our inception, including net losses of $10.2 million and $8.5 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, we had an accumulated deficit of $136.2 million.

To date, we have financed our operations primarily through sales of our equity securities and convertible debt. We have devoted most of our financial resources to research and development, including our preclinical research and development activities and clinical trials. We have not completed the development of any product candidate. We expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future. The size of our losses will depend, in part, on the rate of future expenditures and our ability to generate revenue. We expect to incur substantial and increased expenses arising from the clinical development of N91115 or any other potential product candidate, including, in particular, as we:

·

prepare for and execute on the Phase 2 and Phase 3 clinical programs for N91115;

·

scale up development, including contracted manufacturing processes and quantities to prepare for larger clinical trials and the commercialization of N91115;

·

seek to obtain regulatory approvals for N91115;

·

prepare for the commercialization of N91115, including establishing an infrastructure for the sales, marketing and distribution of N91115 for any indications for which we receive regulatory approval;

·

expand our research and development activities to identify and potentially advance other product candidates;

·

maintain, expand and protect our intellectual property portfolio; and

·

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

Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.

We have had recurring losses from operations and reports on our financial statements by our independent registered public accounting firm have included an explanatory paragraph with respect to our ability to continue as a going concern. We will likely not generate meaningful revenue until and unless N91115 or another potential product candidate is approved by the FDA or comparable regulatory agencies in other countries and successfully marketed, either

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by us or a partner, an outcome which may not occur. We believe that our existing cash and cash equivalents and interest thereon will be sufficient to fund our projected operating requirements to mid‑2017. However, if we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation and dissolution could be significantly lower than the values reflected in our financial statements. The perception that we may not be able to continue as a going concern may have an adverse impact on our business due to concerns about our ability to meet our contractual obligations. If we are unable to continue as a going concern, an investor could lose all or part of his, her or its investment in our company.

Our ability to generate future revenue and achieve and maintain profitability is uncertain and depends upon our ability to successfully develop, obtain regulatory approval for and commercialize N91115 or any other potential product candidate.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators, to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize, a product candidate. We have never obtained approval for or commercialized a product candidate. Our N91115 development program is currently focused on demonstrating the clinical benefit of a triple therapy for CF patients. This triple therapy includes N91115, a CFTR stabilizer, administered with Vertex’s co‑formulated CFTR modulators, lumacaftor with ivacaftor, or lumacaftor/ivacaftor. We do not anticipate generating revenue from sales of N91115 or any other potential product candidate for the foreseeable future, if ever. Our ability to generate future revenue depends heavily on:

·

obtaining regulatory approval in the United States for N91115 in CF and equivalent foreign regulatory approvals;

·

the commercial launch of lumacaftor/ivacaftor in the U.S. and the regulatory approval and commercial launch of lumacaftor/ivacaftor in other geographic regions and the timing of such approvals and launch;

·

the continued commercial viability of lumacaftor/ivacaftor as a leading therapy in CF;

·

whether N91115 may be combined with other future commercially successful therapies, if any, that could influence the standard of care in CF, and the age groups and geographic regions in which these other therapies are available;

·

launching and commercializing N91115, including establishing an infrastructure for the sales, marketing and distribution of N91115;

·

achieving broad market acceptance of N91115 in the medical community and with third party payers;

·

obtaining favorable results for and continuing to develop N91115, including successfully initiating and completing our planned Phase 2 clinical program, as well as future trials thereafter; and

·

generating a pipeline of product candidates other than N91115.

Conducting preclinical testing and clinical trials is a time‑consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data required to obtain regulatory approval and generate revenue. Our anticipated development costs would likely increase if we do not obtain favorable clinical results or if development of N91115 or any other potential product candidate is delayed. In particular, if the commercialization of Vertex’s lumacaftor/ivacaftor is delayed or abandoned and/or we are required by the U.S. Food and Drug Administration, or FDA, or comparable regulatory authorities in other countries, to perform studies or trials in addition to those that we currently anticipate, we would likely incur higher costs than we currently anticipate. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of any increase in our anticipated development costs.

In addition, N91115 or any other potential product candidate, if approved, may not achieve commercial success. Our commercial revenue, if any, will be derived from sales of products that we do not expect to be commercially available until at least 2018, if at all. Even if a product candidate is approved for commercial sale, we anticipate incurring significant costs in connection with commercialization. As a result, we cannot assure that we will be able to generate revenue, or that we will achieve or maintain profitability even if we do generate revenue.

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Even if N91115 or any other potential product candidate receives regulatory approvals or is commercialized, if it later shows unanticipated properties, or if revenue is insufficient, we will not achieve or maintain profitability and our business may fail. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our company could cause an investor to lose all or part of his, her or its investment.

We will need to raise additional funding to launch and commercialize N91115 or any other potential product candidate, which may not be available on acceptable terms, if at all. If we fail to obtain additional financing, we could be forced to delay, reduce or eliminate development efforts for N91115 and any other potential product candidate, seek corporate partners or relinquish or license on unfavorable terms our rights to technologies or product candidates.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time‑consuming, expensive and uncertain process that takes years to complete. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our clinical program for N91115.

Based upon our current operating plan, we expect that our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements to mid‑2017 when we expect to be enrolling patients in our Phase 3 clinical trial for N91115. We will require additional funding prior to the completion of development, approval and commercialization of N91115. However, changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expected, or the FDA may require us to perform studies or trials in addition to those that we currently anticipate. We will need to raise additional funds if we choose to initiate clinical trials for a potential product candidate other than N91115 or to administer N91115 with drugs other than lumacaftor/ivacaftor. We will also need to raise additional funds if we need to obtain regulatory approval to expand the label for N91115 in distinct CF populations. In any event, we will require additional capital to obtain regulatory approval for, and the commercialization of, our product candidates.

Securing additional financing may divert our management from our day‑to‑day activities, which may adversely affect our ability to develop and commercialize N91115 or any other potential product candidate. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

·

significantly delay, scale back or discontinue the development or commercialization of N91115 or any other potential product candidate;

·

seek corporate partners at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

·

relinquish or license on unfavorable terms, our rights to technologies or to N91115 or any other potential product candidate that we otherwise would seek to develop or commercialize ourselves, or sell all of our assets or our entire business.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects, and may cause us to cease operations.

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

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs primarily through public or private equity or convertible debt offerings, partnerships, grants or other nondilutive sources of financing. We currently do not have any committed external source of funds.

To the extent that we raise additional capital through the sale of equity or convertible debt, the ownership interests of our stockholders will be diluted. In addition, the terms of any equity or convertible debt we agree to issue may include liquidation or other preferences that adversely affect the rights of our stockholders. Convertible debt

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financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, and declaring dividends, and will impose limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.

If we are unable to raise additional funds, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our research and development or commercialization efforts, or grant others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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

We are a clinical stage pharmaceutical company with a limited operating history. Our operations to date have been primarily limited to organizing and staffing our company, acquiring and developing product and technology rights and conducting research and development activities. We are currently in Phase 1b clinical development for N91115. We have not obtained regulatory approval for N91115 or any other potential product candidate. Consequently, any predictions about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history, more experience with clinical development or approved products on the market.

Our inability to utilize our net operating loss carryforwards before they expire may adversely affect our results of operations and financial condition.

As of December 31, 2014 we had federal and state net operating loss carryforwards of $34.6 million, which may be utilized against future federal and state income taxes. In general, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre‑change net operating loss carryforwards, or NOLs, to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders, generally stockholders beneficially owning five percent or more of our common stock, applying certain look‑through and aggregation rules, increases by more than 50% over such stockholders’ lowest percentage ownership during the testing period, generally three years. Purchases of our common stock in amounts greater than specified levels, which will be beyond our control, could create a limitation on our ability to utilize our NOLs for tax purposes in the future. Limitations imposed on our ability to utilize NOLs could cause us to pay U.S. federal and state income taxes earlier than we would otherwise be required if such limitations were not in effect and could cause such NOLs to expire unused. Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they expire beginning in 2032. In addition, at the state level there may be periods during which the use of NOLs is suspended or otherwise limited, which would accelerate or may permanently increase state taxes owed. If any of these events occur, we may not derive some or all of the expected benefits from our NOLs, and our results of operations and financial condition may be adversely affected as a result. As of June 30, 2015, we have not performed a formal study to determine whether limitations to our NOLs have occurred or whether such limitations could result from the sale of shares in our initial public offering in June 2015. Such limitations could be significant.

Risks Relating to Clinical Development and Regulatory Approval

We depend almost entirely on the success of our lead product candidate, N91115, which is currently in Phase 1b clinical testing, and will need regulatory approval, with which we have no experience, before it can be commercialized. We may not be able to obtain or may be delayed in obtaining regulatory approval for N91115.

We depend almost entirely on the success of our lead product candidate, N91115, which is currently in Phase 1b clinical testing. Regulatory agencies, including the FDA, ultimately must approve any product candidate before it can be promoted, marketed or commercially distributed. N91115 and any other potential product candidate we develop will be subject to extensive and rigorous review and regulation by governmental authorities. We have never obtained approval for or commercialized a product candidate. The timing of this process can be unpredictable and may include post‑marketing studies and surveillance, which would require the expenditure of additional resources beyond our existing cash or cash equivalents. Of the large number of drugs in development for approval in the United States, only a

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small percentage successfully complete the regulatory approval process and are commercialized. The success of N91115 depends on, among other things:

·

our ability to complete clinical trials and other product research and development activities;

·

whether our clinical trials for N91115 demonstrate statistically significant and clinically meaningful efficacy not outweighed by safety issues;

·

meeting FDA and other regulatory agencies’ requirements to obtain approval for a product candidate; and

·

ensuring that the manufacturing processes and facilities of the third parties with which we contract to manufacture our product candidates are in compliance with all relevant regulatory requirements, including those of the FDA.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays in our ability to obtain regulatory approval of N91115, including, but not limited to, denial of a new drug application, or NDA. We have never applied for, and have never received, regulatory approval for a drug. If we are unable to successfully complete the clinical development of N91115 and meet other related regulatory requirements, we will be unable to obtain approval of an NDA from the FDA. It is possible that, even if we successfully complete the clinical development of N91115, the FDA may refuse to accept our NDA for substantive review or may conclude after review of our data that our application is insufficient. If the FDA does not accept or approve our NDA, it may require that we conduct additional clinical, nonclinical or manufacturing studies or analyses and submit that data to it before it will reconsider our application. Depending on the extent of these or any other FDA requirements, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDA.

In addition, the regulatory agencies may not complete their review processes in a timely manner, or additional delays may result if N91115 is brought before an FDA advisory committee, which could recommend restrictions on approval or recommend non‑approval of the product candidate. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical studies and the review process. As a result, we cannot predict when, if at all, we will receive regulatory approval of any product candidate.

Any delay in obtaining, or an inability to obtain, regulatory approvals would prevent us from commercializing N91115, generating revenue and achieving and sustaining profitability. If any of these outcomes occur, we may be forced to abandon our development efforts for N91115, which would have a material adverse effect on our business and could potentially cause us to cease operations. These factors could materially harm our business, and the value of our common stock would likely decline.

Our lead product candidate, N91115, is initially being developed for a triple therapy of N91115 along with Vertex’s lumacaftor/ivacaftor, and we may be unsuccessful in obtaining regulatory approval for, or commercially launching, N91115 if Vertex is unable to, or decides not to, obtain approval or proceed with its commercial launch of lumacaftor/ivacaftor.

Our initial development plans for N91115 focus on a triple therapy of N91115 along with Vertex’s lumacaftor/ivacaftor, which was approved by the FDA on July 2, 2015, but has not yet been approved in other geographic regions. Consequently, the development of N91115 depends upon the successful and timely commercial launch of lumacaftor/ivacaftor in the U.S. and the regulatory approval and commercial launch of lumacaftor/ivacaftor in other geographic regions. If Vertex is unable to, or decides not to proceed with its commercial launch of lumacaftor/ivacaftor, this could prevent or significantly delay our ability to advance N91115 through clinical development to commercialization.

We have no agreements in place with Vertex, including any agreements to incentivize Vertex to proceed with its commercial launch of lumacaftor/ivacaftor or to provide us with clinical supply of lumacaftor/ivacaftor, and our plans to develop N91115 have not been established in conjunction with Vertex. Vertex is not obligated in any way to continue with its currently disclosed plans and could stop the commercial launch of lumacaftor/ivacaftor at any time. We have no control over Vertex’s interactions with the FDA or other regulatory authorities and cannot intervene in that process. It is

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also possible that Vertex may experience a number of unforeseen events during their attempts to commercialize lumacaftor/ivacaftor that prevent it from pursuing commercialization. Vertex could decide to de‑prioritize commercialization of lumacaftor/ivacaftor in relation to other projects, or deploy insufficient resources to support the commercialization of lumacaftor/ivacaftor. Also, Vertex could merge with a third party that decides to terminate or de‑prioritize the commercialization of lumacaftor/ivacaftor. In any of such events, we may be forced to abandon our development efforts of N91115 or reinitiate our efforts to test administration of N91115 with different therapies. Any of these events would have a material adverse effect on our business and could potentially cause us to cease operations.

The timing of the development of N91115 and its commercial launch may be significantly delayed if there are setbacks or delays in the commercial launch of lumacaftor/ivacaftor.

We are dependent on publicly disclosed information with respect to Vertex’s commercialization timeline for lumacaftor/ivacaftor, and this may make it more difficult to evaluate our business and prospects at any given point in time, and could also impair our ability to raise capital on our desired timeline. The commercialization of lumacaftor/ivacaftor could take longer than we currently expect, which would significantly delay our plans to develop N91115, including the conduct of clinical trials, ultimate approval and commercial marketing of N91115.

Even if Vertex commercially launches lumacaftor/ivacaftor on a timely basis, we may be unsuccessful or significantly delayed in the development and commercial launch of N91115 if Vertex fails to comply with ongoing regulatory requirements or does not continue to produce or commercialize lumacaftor/ivacaftor, or we are otherwise unable to obtain lumacaftor/ivacaftor.

Even if Vertex commercially launches lumacaftor/ivacaftor, the development of N91115 also depends upon Vertex’s continued compliance with regulatory requirements and the continued commercial availability of lumacaftor/ivacaftor for use in our clinical trials and for our commercialization efforts. Vertex’s failure to comply with ongoing regulatory requirements could result in a major delay in, or prevent, the development and approval of N91115.

Even if Vertex completes the commercial launch of lumacaftor/ivacaftor, it has no obligation to continue producing, commercializing or making lumacaftor/ivacaftor available to patients, or to continue producing lumacaftor/ivacaftor in any particular quantity, which could prevent our ability to obtain lumacaftor/ivacaftor for use in our planned clinical trials or impact the number of patients taking lumacaftor/ivacaftor who are available to enroll in our clinical trials. For example, Vertex may encounter manufacturing or other production issues and fail to produce enough lumacaftor/ivacaftor for us to successfully complete our studies and clinical trials, and this could cause our N91115 development program or commercialization efforts to fail or be significantly delayed. This could result in insufficient or no revenue and force us to pursue an alternative plan of business or cease operations entirely.

Even if Vertex commercially launches lumacaftor/ivacaftor on a timely basis, we may be unsuccessful or significantly delayed in the development and commercial launch of N91115 if there are not enough appropriate patients available to conduct our clinical trials.

Even if Vertex commercially launches lumacaftor/ivacaftor on a timely basis, if there are not enough available patients treated with lumacaftor/ivacaftor to enroll in our clinical trials, we may be unable to advance N91115 through clinical development or be significantly delayed. For example, if Vertex fails to gain reimbursement for lumacaftor/ivacaftor, there could be insufficient patients treated to conduct our clinical trials or enrollment in our clinical trials could take longer, and we may be forced to pay to obtain the drug for patients enrolling in our clinical trials, which could delay our clinical development, reduce the number of patients enrolling and require us to seek additional sources of funding to complete our development plans.

In addition, patients and their physicians may conclude lumacaftor/ivacaftor is sufficiently effective on its own, leading to an insufficient number of patients available to enroll in our clinical trials, which would cause our clinical trials to fail or be delayed. Patients and their doctors may decide to wait for longer than we currently anticipate in order to evaluate the effect of lumacaftor/ivacaftor prior to enrolling in our clinical trials, which would significantly delay our N91115 development program. In addition, if physicians or patients do not perceive the benefits of lumacaftor/ivacaftor as clinically meaningful, this may negatively affect uptake and patients may stop taking lumacaftor/ivacaftor. Moreover, if only patients who are unsuccessfully treated on lumacaftor/ivacaftor decide to enroll in our clinical trials for N91115, our clinical trials may not be successful and could fail. Any of these would have a material adverse effect on our business and could potentially cause us to cease operations.

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Even if Vertex commercially launches lumacaftor/ivacaftor on a timely basis, we may be unsuccessful or significantly delayed in the development and commercial launch of N91115 if lumacaftor/ivacaftor has unexpected longer term safety or efficacy issues.

Our plans for the development of N91115 depend on our expectation that lumacaftor/ivacaftor will be safe and effective, successfully marketed, physicians will prescribe lumacaftor/ivacaftor and patients will continue treatment. However, lumacaftor/ivacaftor could encounter unexpected results in the future and be associated with adverse outcomes during long‑term use, forcing Vertex to amend its label or discontinue commercialization. This would have a material adverse effect on our business and could potentially cause us to cease operations.

If we pursue regulatory approval of N91115 for a triple therapy only along with lumacaftor/ivacaftor, and lumacaftor/ivacaftor subsequently becomes obsolete as a standard of care or its use is discontinued, we may be unsuccessful or significantly delayed in the development and commercial launch of N91115, or we may be forced to abandon or reinitiate our development efforts for N91115.

Our initial development plans for N91115 focus on a triple therapy of N91115 along with lumacaftor/ivacaftor. Changes in standard of care or use patterns of lumacaftor/ivacaftor could make our triple therapy obsolete. If N91115 is approved specifically by indication from the FDA to be administered only along with lumacaftor/ivacaftor and use of another therapy becomes more prevalent than lumacaftor/ivacaftor or makes a stabilizer obsolete, revenue from sales of N91115 could be negatively impacted and our financial results and stock price would be adversely affected. We may also be forced to abandon our development efforts of N91115 or reinitiate our efforts to test administration of N91115 along with a different drug. This would have a material adverse effect on our business and could potentially cause us to cease operations.

The regulatory approval processes of the FDA, the European Medicines Agency, or EMA, and comparable foreign regulatory authorities are lengthy, time‑consuming and inherently unpredictable.

We are not permitted to market N91115 or any other potential product candidate in the United States or outside the United States until we receive approval of an NDA from the FDA or approval of a marketing application from the comparable regulatory authority in other countries, respectively. Prior to submitting an NDA to the FDA for approval of N91115, we will need to complete our ongoing preclinical and toxicology studies in CF, as well as all necessary clinical trials. We are still conducting ongoing preclinical studies and Phase 1 clinical trials. We have not yet commenced our Phase 2 clinical trial to assess the safety and efficacy of N91115 in CF patients. Successfully initiating and completing our Phase 2 and Phase 3 clinical programs and obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and FDA and other comparable foreign regulatory authorities may delay, limit or deny approval of N91115 or any other potential product candidate for many reasons, including, among others:

·

the results of our clinical trials may not meet the level of statistically significant and clinically meaningful efficacy with an acceptable safety profile as required by FDA, or other comparable regulatory authorities in other countries, for marketing approval;

·

the FDA or other comparable regulatory authorities in other countries may disagree with the number, design, size, conduct or implementation of our clinical trials;

·

the FDA or other comparable regulatory authorities may find the data from preclinical studies and clinical trials insufficient to demonstrate that the potential clinical and other benefits outweigh its safety risks;

·

the FDA or other comparable regulatory authorities in other countries may disagree with our interpretation of data from our preclinical studies and clinical trials;

·

the FDA or other comparable regulatory authorities in other countries may not accept data generated at one or more of our clinical trial sites;

·

if our NDAs or similar applications, if and when submitted, are reviewed by FDA or other comparable regulatory authorities, as applicable, the regulatory authorities may have difficulties scheduling the necessary review meetings in a timely manner, may recommend against approval of our application or may recommend that FDA or other comparable regulatory authorities, as applicable, require, as a condition of

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approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and restrictions on use;

·

the FDA may determine that our NDAs, if and when submitted, must follow a different regulatory pathway than we have attempted, and there may be potentially extended standards, timelines, and/or costs in order to pursue approval;

·

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

·

the FDA or other comparable regulatory authorities may determine that the manufacturing processes or facilities of third party manufacturers with which we contract are not in compliance with all relevant regulatory requirements, including current good manufacturing practice, or cGMP, requirements; or

·

the FDA or other comparable regulatory authorities may change their approval policies or adopt new regulations.

Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market N91115 or any other potential product candidate. Moreover, because we are almost entirely dependent on N91115, any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

We depend on the successful completion of clinical trials for N91115 or any other potential product candidate. The positive clinical results, if any, obtained by us in clinical trials may not be repeated in later‑stage clinical trials.

Before obtaining regulatory approval for the sale of N91115 or any other potential product candidate, we must conduct extensive clinical trials to demonstrate safety and efficacy in humans. We have not completed the clinical trials necessary to support an application for approval to market our lead product candidate, N91115. Successful completion of such clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of N91115 or any other potential product candidate. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later preclinical testing or clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products.

To date, we have completed a dose escalation trial in healthy subjects and a pharmacokinetic trial in CF patients as part of our Phase 1 clinical program. We need to complete our ongoing preclinical and toxicology studies, as well as Phase 1, Phase 2 and Phase 3 clinical trials prior to submitting N91115 for regulatory approval. We have conducted limited safety studies in humans to date and have not yet commenced our planned Phase 2 or Phase 3 clinical programs to assess the safety and efficacy of N91115 in CF patients. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in late stage clinical development, even after seeing promising results in earlier clinical trials.

We may experience a number of unforeseen events during, or as a result of, clinical trials for N91115 or any other potential product candidate that could adversely affect the completion of our clinical trials, including:

·

regulators, and/or institutional review boards or other reviewing bodies may not authorize us or our investigators to commence a clinical trial, or to conduct or continue a clinical trial at a prospective or specific trial site;

·

our clinical trials are subject to review by the Protocol Review Committee, or PRC, of the Therapeutic Development Network of the Cystic Fibrosis Foundation’s Therapeutics Branch. The PRC may not sanction our trial for conduct at prospective trial sites or may provide a ranking that adversely impacts recruitment in our clinical trials compared with other investigational new drugs in CF;

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·

clinical trials of N91115 or any other potential product candidate may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

·

the number of subjects required for clinical trials of N91115 or any other potential product candidate may be larger than we anticipate, enrollment in these clinical trials may be insufficient or slower than we anticipate, particularly given the small patient population with CF and the number of clinical trials being conducted at any given time is high leading to fewer available patients for any given clinical trial, or subjects may drop out of these clinical trials at a higher rate than we anticipate;

·

our third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

·

we might have to suspend or terminate clinical trials of N91115 or any other potential product candidate for various reasons, including a finding that the subjects are being exposed to unacceptable health risks;

·

regulators, institutional review boards or data monitoring committees may require or recommend that we or our investigators suspend or terminate clinical research for various reasons, including safety signals or noncompliance with regulatory requirements;

·

the cost of clinical trials of N91115 or any other potential product candidate may be greater than we anticipate;

·

the supply or quality of N91115 or any other potential product candidate or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and

·

N91115 or any other potential product candidate may have undesirable side effects or other unexpected characteristics.

Negative or inconclusive results of our clinical trials of N91115, or any other clinical trial we conduct, could mandate repeated or additional clinical studies. Despite the safety results reported in earlier clinical trials for N91115, we do not know whether any other clinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market N91115 or any other potential product candidate. If later stage clinical trials do not produce favorable results, our ability to obtain regulatory approval for N91115 or any other potential product candidate may be adversely impacted.

Delays in clinical trials are common and have many causes, and any delay could have a material adverse effect on our business such as increased costs and delays in our ability to obtain regulatory approval and commence product sales. We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Clinical trials must be conducted in accordance with FDA regulations or other applicable foreign government regulations, and are subject to oversight by the FDA or other foreign regulatory authorities and institutional review boards at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under current Good Manufacturing Practices, or cGMP, and may require large numbers of test subjects.

We may experience delays in clinical trials at any stage of development and testing of N91115 or any other potential product candidate. We plan to begin our Phase 2 clinical trial as soon as feasible after the commercial launch of lumacaftor/ivacaftor. Our planned clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all.

Events, excluding our current dependence on the commercial launch of lumacaftor/ivacaftor in the U.S. and the regulatory approval and commercial launch of lumacaftor/ivacaftor in other geographic regions, which may result in a delay or unsuccessful completion of clinical trials for N91115, include:

·

inability to raise funding necessary to initiate or continue a trial;

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·

delays in obtaining regulatory approval to commence a trial;

·

delays in reaching agreement with FDA or regulatory authorities in other countries on final trial design;

·

delays in the review of our clinical trials by the PRC of the Therapeutic Development Network of the Cystic Fibrosis Foundation’s Therapeutic branch;

·

imposition of a clinical hold based on the submission of results of clinical and preclinical studies or following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;

·

delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;

·

delays in obtaining required institutional review board approval at each site;

·

delays in recruiting and retaining suitable subjects to participate in a trial;

·

delays in having subjects complete participation in a trial or return for post‑treatment follow‑up;

·

delays caused by subjects dropping out of a trial due to side effects or otherwise;

·

clinical sites dropping out of a trial to the detriment of enrollment;

·

study personnel may administer the wrong version of N91115 or other potential product candidate or assign study therapy to the wrong treatment group, resulting in disqualification of subjects from data analysis;

·

study personnel may not perform in accordance with good clinical practices;

·

N91115 or other potential product candidate may have unforeseen adverse side effects;

·

time required to add new clinical sites; and

·

delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.

If initiation or completion of any of our clinical trials, including our Phase 2 clinical trial of N91115, are delayed for any of the above reasons, our development may be arrested, development costs may increase, our approval process could be delayed, any periods during which we may have the exclusive right to commercialize N91115 or any other potential product candidate may be reduced and our competitors may have more time to bring products to market before we do or otherwise delay us. Any of these events could impair our ability to generate revenue from product sales and impair our ability to generate regulatory and commercialization milestones and royalties, all of which could have a material adverse effect on our business.

N91115 or any other potential product candidate may cause adverse events or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Undesirable adverse events caused by N91115 or any other potential product candidate could cause us or regulatory authorities to interrupt, delay, halt or terminate clinical trials and could result in the denial of regulatory approval by the FDA or other comparable foreign regulatory authorities for any or all targeted indications. It is possible that during the course of the clinical development of N91115 or any other potential product candidate, results of our clinical trials could reveal an unacceptable severity and prevalence of adverse events. In addition, our remaining preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to abandon N91115 or other potential product candidate. Also, N91115 or any other potential product candidate may have unfavorable pharmacology or toxicity characteristics, or cause undesirable side effects.

Undesirable adverse events caused by N91115 or any other potential product candidate could affect patient recruitment or the ability of enrolled patients to complete a clinical trial or result in potential product liability claims. In addition, adverse events that occur in our trials as a consequence of the serious disease that is being studied may negatively affect the profile of N91115 or any other potential product candidate. The FDA or other regulatory authorities

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may determine that additional safety testing is required for N91115 or any other potential product candidate, which would cause a delay in our clinical development of such product candidate.

Additionally if N91115 or any other potential product candidate receives marketing approval, and we or others later identify undesirable adverse events caused by such products, a number of potentially significant negative consequences could result, including:

·

regulatory authorities may withdraw approval of N91115 or any other potential product candidate or impose restrictions on their distribution in the form of a modified risk evaluation and mitigation strategy;

·

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

·

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

·

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

·

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects. Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

N91115 and any other potential product candidate based on our GSNOR inhibitor portfolio are based on a novel technology, which may raise development issues we may not anticipate or be able to resolve, and regulatory issues that could delay or prevent approval.

N91115 and any other potential product candidate based on our GSNOR inhibitor technology platform are based on a novel technology, and there can be no assurance that unforeseen development problems related to our novel technology will not arise in the future and cause significant delays. We may be unable to resolve any such unforeseen problems.

Regulatory approval of novel product candidates can be more expensive and take longer than other, more well‑known or extensively studied pharmaceutical product candidates due to our and regulatory agencies’ lack of experience with them. There are no other GSNOR inhibitors that we know of in clinical development and none have been approved to date. The novelty of our platform may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of N91115 or any other potential product candidate based on our GSNOR inhibitor technology platform or lead to significant post‑approval limitations or restrictions. For example, the FDA could require additional studies or characterization that may be difficult or impossible to perform.

If we are not able to obtain orphan product status for N91115 and any other potential product candidate for which we seek this status, we will not be able to claim the tax credits for our clinical trials of such product candidate provided by this status or potentially take advantage of other benefits of orphan drug status.

Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs 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 drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States who have been diagnosed as having the disease or condition at the time of the submission of the request for orphan drug designation. Under Regulation No. (EC) 141/2000 on Orphan Medicinal Products, a medicinal product may be designated as an orphan medicinal product if, among other things, it is intended for the diagnosis, prevention or treatment of a life‑threatening or chronically debilitating condition affecting not more than five in 10,000 people in the European Union when the application is made. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of market exclusivity. This exclusivity precludes the EMA or the FDA, as applicable, from approving another marketing application for the same or, in the European Union, a similar drug for the same indication for that time period, unless, among other things, the later product is clinically superior. The applicable period is seven years in the United States and ten years in the European Union following marketing approval. The EU exclusivity period can be reduced to six years if a drug no longer

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meets the criteria for orphan drug designation, for example if the drug is sufficiently profitable so that