10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2018

OR

 

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

For the transition period from                      to                     

Commission file number: 001-36327

 

 

Aquinox Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   98-0542593

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

450-887 Great Northern Way,

Vancouver, B.C., Canada V5T 4T5

(Address of principal executive offices, including zip code)

(Registrant’s telephone number, including area code): (604) 629-9223

 

 

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 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, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

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

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

As of August 8, 2018, there were 23,537,368 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

Aquinox Pharmaceuticals, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2018

INDEX

 

         Page  
    PART I. FINANCIAL INFORMATION (Unaudited)       

Item 1.

 

Condensed Consolidated Balance Sheets

     2  
 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

     3  
 

Condensed Consolidated Statements of Cash Flows

     4  
 

Notes to Condensed Consolidated Financial Statements

     5  

Item 2.

 

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

     13  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     18  

Item 4.

 

Controls and Procedures

     18  
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     18  

Item 1A.

 

Risk Factors

     18  

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

     50  

Item 3.

 

Defaults Upon Senior Securities

     50  

Item 4.

 

Mine Safety Disclosures

     50  

Item 5.

 

Other Information

     50  

Item 6.

 

Exhibits

     51  

SIGNATURES

     52  

Except as otherwise indicated herein or as the context otherwise requires, references in this report to “Aquinox,” “the company,” “we,” “us,” “our” and similar references refer to Aquinox Pharmaceuticals, Inc., a Delaware corporation, which we refer to in this report as Aquinox USA, and Aquinox Pharmaceuticals (Canada) Inc., a corporation under the Canada Business Corporations Act and a wholly owned subsidiary of Aquinox USA, which we refer to in this report as AQXP Canada. This report contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

AQUINOX PHARMACEUTICALS, INC.

Condensed consolidated balance sheets

(Unaudited)

(In thousands of U.S. dollars, except share amounts)

 

     JUNE 30,
2018
    DECEMBER 31,
2017
 

Assets

    

Current assets

    

Cash and cash equivalents (Note 3)

   $ 99,130     $ 52,032  

Short-term investments (Note 9)

     3,007       56,053  

Receivables, prepayments and deposits

     1,104       740  
  

 

 

   

 

 

 

Total current assets

     103,241       108,825  

Property and equipment, net

     781       905  

Long-term prepayments and deposits

     404       599  
  

 

 

   

 

 

 

Total assets

   $ 104,426     $ 110,329  
  

 

 

   

 

 

 

Liabilities

    

Current liabilities

    

Accounts payable and other liabilities

   $ 13,348     $ 10,956  
  

 

 

   

 

 

 

Total current liabilities

     13,348       10,956  

Other liabilities (Note 5)

     401       486  
  

 

 

   

 

 

 

Total liabilities

     13,749       11,442  
  

 

 

   

 

 

 

Stockholders’ equity

    

Share capital: (Note 6)

    

Common stock - $0.000001 par value - authorized, 50,000,000 as of June 30, 2018 and December 31, 2017; issued and outstanding, 23,537,368 as of June 30, 2018 (December 31, 2017 – 23,472,430)

     —         —    

Additional paid-in capital

     300,886       297,459  

Accumulated deficit

     (210,207     (198,502

Accumulated other comprehensive loss

     (2     (70
  

 

 

   

 

 

 

Total stockholders’ equity

     90,677       98,887  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 104,426     $ 110,329  
  

 

 

   

 

 

 

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

 

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AQUINOX PHARMACEUTICALS, INC.

Condensed consolidated statements of operations and comprehensive income (loss)

(Unaudited)

(In thousands of U.S. dollars, except per share and share amounts)

 

     THREE MONTHS ENDED
JUNE 30,
    SIX MONTHS ENDED
JUNE 30,
 
     2018      2017     2018     2017  

Revenue (Note 4)

   $ 25,000      $ —       $ 25,000     $ —    

Operating expenses

         

Research and development

     17,996        10,475       28,504       16,252  

General and administrative

     4,314        3,520       8,623       6,265  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,310        13,995       37,127       22,517  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     2,690        (13,995     (12,127     (22,517

Other income, net (Note 7)

     228        229       422       435  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,918      $ (13,766   $ (11,705   $ (22,082
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (net loss) per common stock (Note 8)

         

Basic

   $ 0.12      $ (0.59   $ (0.50   $ (0.94

Diluted

   $ 0.12      $ (0.59   $ (0.50   $ (0.94

Weighted average number of common stock outstanding
(Note 8)

         

Basic

     23,521,719        23,444,150       23,501,351       23,433,708  

Diluted

     23,846,256        23,444,150       23,501,351       23,433,708  

Comprehensive income (loss):

         

Net income (loss)

   $ 2,918      $ (13,766   $ (11,705   $ (22,082

Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale securities

     22        —         68       (36
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 2,940      $ (13,766   $ (11,637   $ (22,118
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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AQUINOX PHARMACEUTICALS, INC.

Condensed consolidated statements of cash flows

(Unaudited)

(In thousands of U.S. dollars)

 

     SIX MONTHS ENDED
JUNE 30,
 
     2018     2017  

Operating activities

    

Net loss

   $ (11,705   $ (22,082

Non-cash items:

    

Stock-based compensation (Note 6(c))

     2,825       1,685  

Unrealized foreign exchange loss and others

     322       271  

Changes in operating assets and liabilities:

    

Receivable, prepayments and deposits

     (174     (484

Accounts payable and other liabilities

     2,324       (973
  

 

 

   

 

 

 

Cash used in operating activities

     (6,408     (21,583
  

 

 

   

 

 

 

Investing activities

    

Proceeds from maturity of investments

     53,000       16,500  

Purchase of property and equipment

     (69     (452
  

 

 

   

 

 

 

Cash provided by investing activities

     52,931       16,048  
  

 

 

   

 

 

 

Financing activities

    

Proceeds from exercise of stock options

     602       377  

Payment on capital lease obligations

     (8     (7
  

 

 

   

 

 

 

Cash provided by financing activities

     594       370  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (19     11  
  

 

 

   

 

 

 

Net change in cash and cash equivalents during the period

     47,098       (5,154

Cash and cash equivalents, beginning of period

     52,032       32,301  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 99,130     $ 27,147  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest received

   $ 736     $ 623  

Non-cash investing and financing activities:

    

Accrued purchase of property & equipment

   $ —       $ (77

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

 

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AQUINOX PHARMACEUTICALS, INC.

Notes to the condensed consolidated financial statements

(Unaudited)

1. Nature of operations

Aquinox Pharmaceuticals, Inc. and its subsidiary, Aquinox Pharmaceuticals (Canada) Inc., (consolidated, the “Company”) is a pharmaceutical company developing novel therapeutics for conditions marked by inflammation, inflammatory pain, and blood cancers.

On June 27, 2018, the Company announced that its Phase 3 Leadership 301 clinical trial evaluating once-daily, oral rosiptor for the treatment of interstitial cystitis/bladder pain syndrome (IC/BPS) failed to meet its primary endpoint. As a result, all further development activities with rosiptor were halted. The Company is undertaking a thorough evaluation of its pipeline and other strategic options.

Aquinox Pharmaceuticals, Inc. was originally incorporated under the name of Aquinox Pharmaceuticals (USA) Inc. on May 31, 2007 in the State of Delaware, United States. On January 27, 2014, Aquinox Pharmaceuticals (USA) Inc. changed its name to Aquinox Pharmaceuticals, Inc. (“Aquinox USA”).

Aquinox Pharmaceuticals (Canada) Inc. (“AQXP Canada”) was originally incorporated under the name of 6175813 Canada Inc. on December 26, 2003 under the Canada Business Corporations Act. In May 2014, after a corporate restructuring, the name was changed to Aquinox Pharmaceuticals (Canada) Inc.

The Company operates in Vancouver, British Columbia, Canada.

2. Condensed summary of significant accounting policies

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 12, 2018.

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2018, and results of operations and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

(b) Use of estimates and assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring management estimates include valuation of stock options, amortization and depreciation, accrual of expenses, valuation allowance for deferred income taxes, and contingencies. Actual results could differ from those estimates.

(c) Short-term investments

Short-term investments consist of bank term deposits and U.S. government securities with initial maturities of less than a year. Short-term investments are classified as available-for-sale and carried at their estimated fair value with unrealized gains and losses recorded as a component of other comprehensive loss. Realized gains and losses are recorded in net income (loss). The Company periodically reviews its investments for impairment and when a decline in market value is deemed to be other than temporary, the loss is recognized in net income (loss).

 

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(d) Accounting for stock-based compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. The Company accounts for forfeitures as they occur. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant date fair values.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. Prior to the completion of the Company’s initial public offering in March 2014, the Company’s common stock was not publicly traded. As a result, the expected volatility assumption is based on industry peer information due to insufficient trading history of the Company’s common stock. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation is used.

(e) Revenue recognition

The Company adopted the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective January 1, 2018. During the second quarter of 2018, the Company entered into a license and collaboration agreement which is under the scope of Topic 606. The Company’s only source of revenue is comprised of amounts earned under this license and collaboration agreement. (See Note 2 (h) Recently issued and recently adopted accounting standards and Note 4. License and collaboration agreement for additional information)

(f) Segment reporting

The Company operates in one segment, the development of novel therapeutics for conditions marked by inflammation, inflammatory pain and blood cancers. The Company has significant Canadian operations but its assets are mostly held in the United States with an immaterial amount of long lived assets in Canada.

(g) Earnings (net loss) per common stock

Basic earnings (net loss) per common stock is computed by dividing earnings (net loss) by the weighted-average number of common stock outstanding during the period. Diluted earnings (net loss) per common stock is determined using the weighted-average number of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

(h) Recently issued and recently adopted accounting standards

The Company adopted FASB ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective January 1, 2018. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements subject to the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and identifies performance obligations that are distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when (or as) the performance obligation is satisfied. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three and six months ended June 30, 2018.

The Company adopted FASB ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” effective January 1, 2018 which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amended certain disclosure requirements associated with the fair value of financial instruments. The adoption of this ASU did not have a material impact on the Company’s financial statements as we do not currently hold any equity securities and we have not elected the fair value option for any of our financial liabilities.

 

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In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of ASU 2016-02 on the Company’s financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) Targeted Improvements” which provides entities with an alternative transition method for adopting the new lease standard. Entities can elect to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Consequently, comparative periods will continue to be accounted for in accordance with the current lease standard (Topic 840) and the disclosures will be in accordance with ASC 840. The Company is assessing this option in conjunction with its analysis of ASU 2016-02.

(i) Risks and uncertainties

The Company is subject to numerous risks and uncertainties. These risks, among others, included the following:

 

   

the Company has no source of recurring revenue, has an accumulated deficit of $210.2 million as of June 30, 2018, may never become profitable and may incur substantial and increasing net losses for the foreseeable future as it continues its research and development programs;

 

   

the Company is likely to require additional capital to finance its operations which may not be available to it on acceptable terms, or at all;

 

   

the Company’s success is primarily dependent on the successful development, regulatory approval and commercialization of drug product candidates;

 

   

in June 2018, the Company announced that its Phase 3 Leadership 301 clinical trial evaluating its lead product candidate, rosiptor, for the treatment of IC/BPS failed to meet its primary endpoint and all further development activities with rosiptor were halted; the Company may be unable to identify or acquire another lead product candidate to replace rosiptor;

 

   

the Company is subject to regulatory approval processes that are lengthy, time consuming and inherently unpredictable; the Company may not be able to obtain approval for any drug product candidates from the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities;

 

   

the Company’s intellectual property rights may be subject to claims by third parties and can be difficult and costly to protect;

 

   

the Company may not be able to recruit or retain key employees, including its senior management team;

 

   

the Company depends on the performance of third parties, including contract research organizations and third-party manufacturers; and

 

   

the Company faces competition from other pharmaceutical and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions, among others.

3. Cash and cash equivalents

 

(in thousands)    JUNE 30,
2018
     DECEMBER 31,
2017
 

Cash

   $ 49,244      $ 12,583  

Cash equivalents

     49,886        39,449  
  

 

 

    

 

 

 
   $ 99,130      $ 52,032  
  

 

 

    

 

 

 

 

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4. License and collaboration agreement

In May 2018, the Company entered into an exclusive license and collaboration agreement with Astellas US LLC, a subsidiary of Astellas Pharma Inc. (“Astellas”). The Company has granted Astellas an exclusive, royalty-bearing license to use, research, develop, manufacture and commercialize the Company’s drug candidate, rosiptor, and related compounds for all human diseases and conditions in Japan and certain other countries in the Asia-Pacific region, including major markets such as Taiwan, Indonesia, Malaysia, South Korea, and Australia, but excluding China and India (the “Licensed Territory”).

The Company’s license and collaboration agreement includes contractual milestones. These consist of development and regulatory milestones (such as the initiation of phase 2b, or phase 3 clinical trials in the primary and other indication), and commercialization milestones (such as product sales in excess of a pre-specified threshold). Astellas is solely responsible for the development, registration and commercialization of the licensed compounds in the Licensed Territory, and the achievement of the milestones is based solely on the collaborators’ efforts. Since the Company does not take a substantive role or control the research, development or commercialization of any products generated by Astellas, the Company is not able to reasonably estimate when, if at all, any milestone payments or royalties may be payable to the Company by Astellas. As such, the milestone payments associated with the exclusive license and collaboration agreement involves a substantial degree of uncertainty and risk that they may never be received.

The Company determined that its performance obligations under the agreement are the license and transfer of data, ongoing information sharing with Astellas and manufacturing and supplying rosiptor. The upfront payment of $25.0 million was allocated between each of the performance obligations.

On June 27, 2018, the Company announced the Phase 3 trial of rosiptor failed to meet its primary endpoint and that all further development activities with rosiptor would be halted. As such, the Company will have no further performance obligations under the agreement. The $25.0 million upfront payment is non-refundable and the full amount was recorded in June 2018.

5. Other liabilities

 

(in thousands)    JUNE 30,
2018
     DECEMBER 31,
2017
 

Capital lease obligations

   $ 24      $ 33  

Deferred rent liability

     377        453  
  

 

 

    

 

 

 
   $ 401      $ 486  
  

 

 

    

 

 

 

6. Stockholders’ equity

(a) Share capital

Aquinox USA is authorized to issue two classes of stock, common and preferred. The total number of shares Aquinox USA is authorized to issue is 55,000,000 shares, comprised of 50,000,000 common stock and 5,000,000 preferred stock both with a par value of $0.000001 per share. As of June 30, 2018, the total number of shares of common stock issued and outstanding was 23,537,368 (December 31, 2017 – 23,472,430). As of June 30, 2018 and December 31, 2017, no shares of preferred stock were issued or outstanding.

(b) Stock option plan

On January 27, 2014, the stockholders of Aquinox USA approved a 2014 Equity Incentive Plan (“2014 Plan”). The 2014 Plan became effective on March 6, 2014. The 2014 Plan is the successor to and continuation of the Joint Canadian Stock Option Plan (the “2006 Plan”). No further grants will be made under the 2006 Plan. The 2014 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity awards to employees, directors, and consultants.

As at June 30, 2018, the maximum number of shares of common stock that may be issued under the 2014 Plan was 3,746,176 shares. Additionally, the number of shares of common stock reserved for issuance under the 2014 Plan will

 

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automatically increase on January 1 of each year for a period of up to 10 years, beginning on January 1, 2015 and ending on and including January 1, 2024, by 4% of the total number of shares of capital outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors.

Stock option transactions and the number of stock options outstanding are summarized below:

 

     NUMBER OF
SHARES
     WEIGHTED
AVERAGE
EXERCISE PRICE
     WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE

(IN YEARS)
     AGGREGATE
INTRINSIC
VALUE (IN
THOUSANDS)
 

Outstanding at December 31, 2017

     2,069,167      $ 12.18        7.76      $ 3,187  

Options granted

     963,340        15.92        

Options exercised

     (64,938      9.28        

Options forfeited

     (223,460      14.98        
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2018

     2,744,109      $ 13.33        8.02      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of June 30, 2018

     1,184,621      $ 10.99        6.54      $ —    

During the six months ended June 30, 2018, the Company granted 858,340 stock options to employees and 105,000 stock options to non-employee directors. The stock options granted to employees during the six months ended June 30, 2018 have an exercise price per share ranging from $13.10 to $16.55 and vest 25% one year after the beginning of the vesting period and thereafter ratably each month over the following thirty-six months. The stock options granted to non-employee directors during the six months ended June 30, 2018 have an exercise price per share of $13.10 and have a vesting period of one year in equal monthly installments from the beginning of the vesting period. All stock options under the 2014 Plan are subject to a 10-year expiration period.

During the three and six months ended June 30, 2018, 45,207 and 64,938 shares of common stock were issued upon exercise of options with an aggregate intrinsic value of $0.2 million and $0.3 million, respectively.

(c) Stock-based compensation

The fair value of stock options granted is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

     THREE MONTHS ENDED
JUNE 30,
    SIX MONTHS ENDED
JUNE 30,
 
     2018     2017     2018     2017  

Expected volatility

     86     90     77     91

Expected dividends

     0     0     0     0

Expected terms (years)

     6.00       6.00       6.00       6.00  

Risk free rate

     2.82     1.82     2.74     1.89

Weighted average grant-date fair value of stock options

   $ 9.60     $ 10.25     $ 10.83     $ 12.72  

The Company amortizes the fair value of the stock options on a straight-line basis over the applicable requisite service periods of the awards, which is generally the vesting period. Stock-based compensation expense charged to operating expenses was $1.5 million and $2.8 million for the three and six months ended June 30, 2018, respectively, and $1.1 million and $1.7 million for the three and six months ended June 30, 2017, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $15.4 million and $12.6 million as of June 30, 2018 and June 30, 2017, respectively, which is expected to be recognized over a weighted-average period of 3.00 years (June 30, 2017 – 3.06 years)

 

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7. Other income, net

 

    

THREE MONTHS ENDED

JUNE 30,

    

SIX MONTHS ENDED

JUNE 30,

 
(in thousands)    2018      2017      2018      2017  

Foreign exchange losses

   $ (30    $ (12    $ (31    $ (20

Interest income

     376        250        624        484  

Miscellaneous expenses

     (118      (9      (171      (29
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 228      $ 229      $ 422      $ 435  
  

 

 

    

 

 

    

 

 

    

 

 

 

8. Earnings (net loss) per common stock

Basic and diluted earnings (net loss) per common stock is computed by dividing earnings (net loss) by the weighted average number of shares of common stock outstanding. For the three months ended June 30, 2018, the Company reported net income and therefore included the dilutive effect of 324,537 shares that might be issued upon the exercise of stock options. For the six months ended June 30, 2018, the Company reported net loss and therefore excluded outstanding stock options to purchase 2,744,109 shares as the effect would have been antidilutive. For the three and six months ended June 30, 2017, the Company excluded 2,056,767 shares from the computation of basic and diluted net loss per common stock as the effect would have been antidilutive for the periods presented.

9. Financial instruments

Securities classified as available for sale

The Company’s short-term investments consisted of available-for-sale securities as follows:

 

(in thousands)

June 30, 2018

   Amortized cost      Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value  

Short-term investments:

           

U.S. treasury securities

   $ 3,008      $ —        $ (1    $ 3,007  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contractual maturities:

           

Due within one year

   $ 3,008            $ 3,007  
December 31, 2017    Amortized cost      Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value  

Short-term investments:

           

U.S. treasury securities

   $ 56,123      $ —        $ (70    $ 56,053  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contractual maturities:

           

Due within one year

   $ 56,123            $ 56,053  

 

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The aggregate estimated fair value of the Company’s investments with unrealized losses are as follows:

 

(in thousands)    Period of continuous unrealized loss  
     12 months or less      Greater than 12 months  
June 30, 2018    Fair value      Gross
unrealized
losses
     Fair value      Gross
unrealized
losses
 

U.S. treasury securities

   $ 3,007      $ (1      NA        NA  

December 31, 2017

           

U.S. treasury securities

   $ 15,983      $ (27    $ 40,070      $ (43

Fair value of financial instruments

Fair value is defined as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value of the Company’s financial instruments are determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the hierarchy are as follows:

 

Level 1    -    Quoted prices in active markets for identical assets or liabilities.
Level 2    -    Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3    -    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The carrying amounts of certain of the Company’s financial instruments including cash, cash equivalents, receivables, accounts payable and other liabilities, approximate their fair values because of their nature and/or short maturities. The Company holds short-term investments that are classified as available-for-sale securities, which are measured at fair value determined on a recurring basis according to the fair value hierarchy.

 

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The following table presents the fair value of our financial instruments that are measured at fair value on a recurring basis:

 

     QUOTED
PRICES IN
ACTIVE
MARKETS FOR
IDENTICAL
ASSETS

(LEVEL 1)
     OTHER
OBSERVABLE
INPUTS

(LEVEL 2)
     SIGNIFICANT
UN-OBSERVABLE
INPUTS

(LEVEL 3)
     TOTAL  

BALANCES – June 30, 2018

           

Short-term investments – U.S. treasury securities

   $ 3,007      $ —        $ —        $ 3,007  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,007      $ —        $ —        $ 3,007  
  

 

 

    

 

 

    

 

 

    

 

 

 

BALANCES – December 31, 2017

           

Short-term investments – U.S. treasury securities

   $ 56,053      $ —        $ —        $ 56,053  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 56,053      $ —        $ —        $ 56,053  
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 instruments, which include investments that are valued based on quoted market prices in active markets, consisted of U.S. treasury securities. The Company had no Level 2 or 3 investments as at June 30, 2018 and December 31, 2017. There were no transfers between Levels 1, 2, and 3 during the three and six months ended June 30, 2018 and the year ended December 31, 2017.

As at June 30, 2018, the Company had short-term investments consisting of available-for-sale securities of $3.0 million. Total gains for securities were $0.2 million for each of the three months ended June 30, 2018 and 2017 and $0.4 million for each of the six months ended June 30, 2018 and 2017.

10. Subsequent event

In July 2018, the Company’s Board of Directors approved a restructuring plan to reduce operating costs and better align the Company’s workforce with the needs of its business following the June 27, 2018 announcement that its Phase 3 Leadership 301 clinical trial evaluating once-daily, oral rosiptor for the treatment of IC/BPS failed to meet its primary endpoint. The Company has halted all further development activities with rosiptor.

Under this plan, the Company reduced its workforce by 30 employees (approximately 53% of total employees) and closed its office in San Bruno, California. Affected employees are eligible to receive severance payments and outplacement services. Employee severance benefits are contingent upon an affected employee’s execution (and non-revocation) of a separation agreement, which includes a general release of claims against the Company.

In connection with the restructuring, the Company estimates that it will incur aggregate restructuring charges of approximately $2.5 million related to one-time termination severance payments and other employee-related costs and the shut-down of its San Bruno office. The majority of the cash payments related to the personnel-related restructuring charges will be paid during the third quarter of 2018, with the remainder to be paid during the fourth quarter of 2018. The charges that the Company expects to incur in connection with the workforce reduction are subject to a number of assumptions, and actual results may differ materially. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the workforce reduction.

The Company will account for the restructuring cost in accordance with ASC 420, Exit or Disposal Cost Obligations. ASC 420 specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, except for a liability where employees are required to render service until they are terminated in order to receive termination benefits and will be retained to render service beyond the minimum retention period. A liability for such one-time termination benefits shall be measured initially at the communication date based on the fair value of the liability as of the termination date and recognized ratably over the future service period.

 

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Item 2.

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

You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and our audited consolidated financial statements and notes included as part of our Annual Report on Form 10-K for the year ended December 31, 2017.

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Risk Factors” set forth in Item 1A of Part II of this quarterly report on Form 10-Q, as well as those contained from time to time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We are a pharmaceutical company developing novel therapeutics for conditions marked by inflammation, inflammatory pain and blood cancers. We commenced operations in Canada in December 2003. Aquinox Pharmaceuticals (Canada) Inc., a corporation formed under the Canada Business Corporations Act, is a wholly owned subsidiary of Aquinox Pharmaceuticals, Inc., a Delaware corporation formed in May 2007. We operate in Vancouver, British Columbia, Canada.

On June 27, 2018, we announced that our Phase 3 Leadership 301 clinical trial evaluating once-daily, oral rosiptor for the treatment of interstitial cystitis/bladder pain syndrome (IC/BPS) failed to meet its primary endpoint. As a result, in July 2018, our Board of Directors approved a restructuring plan to reduce operating costs and to better align our workforce with the needs of our business going forward. All further development activities with rosiptor were halted. As of the date of this report, we do not have any product candidates in clinical development or identified for clinical development. We are currently undertaking a thorough evaluation of our pipeline and other strategic options.

Since inception, we have incurred significant operating losses. We have funded our operations primarily through the sale of common stock and preferred stock. As of June 30, 2018, we had $102.1 million in cash, cash equivalents and short-term investments in liquid, high-quality securities. Our net loss for the six months ended June 30, 2018 was $11.7 million, compared to $22.1 million for the six months ended June 30, 2017. As of June 30, 2018, we had an accumulated deficit of $210.2 million. We expect to continue to incur operating losses for the foreseeable future. Unless and until we generate sufficient revenue to be profitable, we will seek to fund our operations through public or private equity or debt financings or other sources. Additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed could have a material adverse effect on our business, results of operations, financial condition, cash flows and future prospects.

Results of Operations

Revenue

On May 9, 2018, we entered into an exclusive license and collaboration agreement with Astellas US LLC, a subsidiary of Astellas Pharma Inc. (“Astellas”). Astellas was granted an exclusive, royalty-bearing license to use, research, develop, manufacture and commercialize rosiptor and related compounds for all human diseases and conditions in Japan and certain other countries in the Asia-Pacific region, including major markets such as Taiwan, Indonesia, Malaysia, South Korea, and

 

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Australia, but excluding China and India. As consideration for entering into this agreement, we received a non-refundable upfront payment of $25.0 million and potential future development and commercial milestone payments, as well as royalties on any future sales of rosiptor within the licensed territory. The upfront payment of $25.0 million is non-refundable and has been recorded as revenue for the three and six months ended June 30, 2018.

Operating Expenses

The following table summarizes our operating expenses for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

    

THREE MONTHS ENDED

JUNE 30,

    

SIX MONTHS ENDED

JUNE 30,

 
(in thousands)    2018      2017      2018      2017  

Research and development

   $ 17,996      $ 10,475      $ 28,504      $ 16,252  

General and administrative

     4,314        3,520        8,623        6,265  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 22,310      $ 13,955      $ 37,127      $ 22,517  
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred for the development of rosiptor and other future product candidates. Research and development expenses include:

 

   

costs associated with research, development and regulatory activities;

 

   

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

 

   

expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials and preclinical studies;

 

   

the cost of acquiring and manufacturing our products, for preclinical studies and clinical trials;

 

   

cost incurred in relation to purchase of technology licenses and patent rights; and

 

   

facilities, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization of equipment and leasehold improvements, insurance and supplies.

On June 27, 2018, we announced that our Phase 3 Leadership 301 clinical trial evaluating once-daily, oral rosiptor for the treatment of IC/BPS failed to meet its primary endpoint. The Leadership 301 clinical trial enrolled 433 participants, including 341 female subjects who were randomized to receive rosiptor 100 mg or 200 mg, or placebo. Rosiptor failed to achieve a statistically significant reduction in the mean change from baseline at Week 12 in maximum daily bladder pain score compared to placebo (P=0.41) in the female subjects, which was the primary endpoint. As a result, all further development activities with rosiptor were halted.

Overall, research and development expenses for the three and six months ended June 30, 2018 were $18.0 million and $28.5 million, respectively, compared to $10.5 million and $16.3 million for the three and six months ended June 30, 2017. Higher expenditure during the three and six months ended June 30, 2018 was primarily driven by increased clinical activities related to our Leadership 301 clinical trial of rosiptor in IC/BPS. We expect research and development expenses to decrease for the second half of 2018 following our termination of all further development of rosiptor.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel related costs (including stock-based compensation and travel expenses), facility-related costs, insurance, public company expenses and professional fees for consulting, legal and accounting services.

 

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For the three and six months ended June 30, 2018, general and administrative expenses were $4.3 million and $8.6 million, respectively, compared to $3.5 million and $6.3 million for the three and six months ended June 30, 2017. The increase was primarily the result of higher personnel related costs and pre-commercial and market assessment activities. We expect general and administrative expenses to decrease for the second half of 2018 following the restructuring plan we announced in July 2018.

Other income, net

 

    

THREE MONTHS ENDED

JUNE 30,

    

SIX MONTHS ENDED

JUNE 30,

 
(in thousands)    2018      2017      2018      2017  

Foreign exchange losses

   $ (30    $ (12    $ (31    $ (20

Interest income

     376        250        624        484  

Miscellaneous expenses

     (118      (9      (171      (29
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income, net

   $ 228      $ 229      $ 422      $ 435  
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign exchange losses were insignificant as the net effect of change in foreign exchange rates on our foreign currency holdings was offset by the net effect on our foreign currency liabilities.

Interest income during the three and six months ended June 30, 2018 increased in comparison to the same period in 2017 as a result of an increase in interest rates offset by a reduction in cash and investment balances for the three and six months ended June 30, 2018.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. Our operating activities used $6.4 million and $21.6 million of cash flows during the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, we had an accumulated deficit of $210.2 million, working capital of $89.9 million and cash, cash equivalents and short-term investments of $102.1 million.

Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2018 and 2017 (in thousands):

 

    

SIX MONTHS ENDED

JUNE 30,

 
     2018      2017  

Net cash (used in) provided by:

     

Operating activities

   $ (6,408    $ (21,583

Investing activities

     52,931        16,048  

Financing activities

     594        370  

Effect of exchange rate changes on cash and cash equivalents

     (19      11  
  

 

 

    

 

 

 

Net change in cash and cash equivalents

   $ 47,098      $ (5,154
  

 

 

    

 

 

 

Net cash used in operating activities

Net cash used in operating activities for the six months ended June 30, 2018 decreased compared to the six months ended June 30, 2017 due to the recognition of the non-refundable upfront payment received from Astellas offset by higher operating expenses.

 

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Net cash provided by provided by investing activities

Net cash provided by investing activities for the six months ended June 30, 2018 was primarily the results of the maturity of short-term investments. Net cash provided by investing activities for the six months ended June 30, 2017 was primarily the results of the maturity of short-term investments offset by leasehold improvements to our office premises.

Net cash provided by financing activities

For the six months ended June 30, 2018 and 2017, net cash provided by financing activities was the result of the exercise of stock options.

Operating and Capital Expenditure Requirements

We have not generated product revenue or achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. We believe that our existing capital resources will be sufficient to fund our operations for at least the next 12 months and we anticipate that we will need to raise substantial financing in the future to fund our operations. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business, results of operations, financial condition, cash flows and future prospects. Our future capital requirements will depend on many factors, including:

 

   

the number and characteristics of any future product candidates we develop or may acquire;

 

   

the scope, progress, results and costs of researching and developing our product candidates or any future product candidates, and conducting preclinical studies and clinical trials;

 

   

the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates;

 

   

the cost of manufacturing our future product candidates and any products that may achieve regulatory approval;

 

   

the cost of commercialization activities if any future product candidates are approved for sale, including marketing, sales and distribution costs;

 

   

the timing, receipt and amount of sales of, or royalties on, future approved products, if any;

 

   

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

 

   

any product liability or other lawsuits related to our products;

 

   

the expenses needed to attract and retain skilled personnel;

 

   

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation.

Please see Item 1A of Part II of this Quarterly Report titled “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

Our future minimum contractual commitments were reported in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. There have been no material changes from the contractual commitments previously discussed in that Annual Report on Form 10-K.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of these financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued liabilities and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe 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. A summary of our significant accounting policies is presented in Part II, Item 8, of our Annual Report on Form 10-K for the year ended

 

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December 31, 2017. The critical accounting policies and significant judgements and estimates used in the preparation of the three and six months ended June 30, 2018 financial statements are consistent with those for the year ended December 31, 2017 except for judgements applied in recognizing the revenue from the license and collaboration agreement and the adoption of new accounting pronouncements discussed below.

License and collaboration agreement

In May 2018, we entered into an exclusive license and collaboration agreement with Astellas in relation to rosiptor. The license and collaboration agreement includes contractual milestones and royalties. We received a non-refundable upfront payment of $25.0 million. Judgments and estimates were used in determining our performance obligations under the agreement, which were: the license and transfer of data, ongoing information sharing with Astellas, and the manufacture and supply of rosiptor. The upfront payment of $25.0 million was allocated between each of the performance obligations.

On June 27, 2018, we announced that our Phase 3 Leadership 301 clinical trial evaluating rosiptor for the treatment of IC/BPS failed to meet its primary endpoint and that all further development activities with rosiptor would be halted. As a result, we have no further performance obligations under the agreement. The $25.0 million upfront payment is nonrefundable and the full amount was recorded in June 2018.

Recent Accounting Pronouncements

We adopted FASB ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective January 1, 2018. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements subject to the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and identify performance obligations that are distinct. We then recognize as revenue the amount of the transaction price that is allocated to each performance obligation when (or as) the performance obligation is satisfied. The adoption of ASU 2014-09 did not have a material impact on our consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three and six months ended June 30, 2018.

We adopted FASB ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” effective January 1, 2018 which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amended certain disclosure requirements associated with the fair value of financial instruments. The adoption of this ASU did not have a material impact on our financial statements as we do not currently hold any equity securities and we have not elected the fair value option for any of our financial liabilities.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact of ASU 2016-02 on our financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) Targeted Improvements” which provides entities with an alternative transition method for adopting the new lease standard. Entities can elect to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Consequently, comparative periods will continue to be accounted for in accordance with the current lease standard (Topic 840) and the disclosures will be in accordance with ASC 840. We are assessing this option in conjunction with our analysis of ASU 2016-02.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Management believes there have been no material changes to our quantitative and qualitative disclosures about market risks during the six months ended June 30, 2018, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC.

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As of June 30, 2018, we had holdings in U.S. government securities of $52.9 million. We have estimated the effect on our investment portfolio of a hypothetical increase in interest rates by one percent (100 basis points) to be a reduction of $0.005 million in the fair value of our investment portfolio as of June 30, 2018.

Foreign Currency Risk

Our exposure to foreign currency risk relates primarily to our Canadian operations, including payments we make to vendors and suppliers. We currently do not hedge against foreign currency risk. If the Canadian dollar strengthens against the U.S. dollar, it can result in higher expenditures and have a negative impact on our financial results. We also maintain bank balances in foreign currencies such as the Canadian dollar and the Euro. If these foreign currencies decline against the U.S. dollar, it can have a negative impact on our financial positions. For the three and six months ended June 30, 2018 and 2017, foreign exchange losses were insignificant as the impact of changes in foreign exchange rates on our foreign currency portfolio was offset by its impact on our foreign currency liabilities.

 

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC 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 disclosures.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

 

Item 1.

Legal Proceedings

We may from time to time be named as a party to legal claims, actions and complaints, including matters involving employment, intellectual property or others.

 

Item 1A.

Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. If any of the events described in the following risk factors occurs, our business, operating results and financial condition could be seriously harmed. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that

 

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are described below and elsewhere in this Quarterly Report on Form 10-Q. We have marked with an asterisk (*) those risk factors below that reflect significant changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Risks Related to Our Financial Position and Capital Needs

We have incurred significant losses in every quarter since our inception and anticipate that we will continue to incur significant losses in the future.*

We are a clinical-stage pharmaceutical company with a limited operating history. Investment in pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval or become commercially viable. We do not have any products approved by regulatory authorities for marketing or commercial sale, we have not generated any revenue from product sales to date, and following our termination of further rosiptor development in June 2018, we do not have any product candidate in clinical development, and we continue to incur significant research, development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in every reporting period since our inception in 2003. For the years ended December 31, 2017 and 2016, and for the six months ended June 30, 2018, we reported a net loss of $50.2 million, $37.0 million and $11.7 million, respectively. As of June 30, 2018, we had an accumulated deficit since inception of $210.2 million.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue the research and development of our product candidates, and potentially begin to commercialize any products that may achieve regulatory approval. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our financial condition. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If any of our future product candidate fails in clinical trials or does not gain regulatory approval, or if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

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

Our operations to date have been primarily limited to organizing and staffing our company, acquiring product and technology rights, discovering and developing novel small molecule drug candidates and undertaking preclinical studies and clinical trials of rosiptor. We have not yet obtained regulatory approval for any product candidate. Consequently, evaluating our performance, viability or possibility of future success will be more difficult than if we had a longer operating history or approved products on the market.

We currently have no source of product revenue and may never become profitable.*

To date, we have not generated any revenues from commercial product sales, or otherwise. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability, alone or with any future collaborators, to successfully commercialize any products that we may develop, in-license or acquire in the future. Even if we are able to successfully achieve regulatory approval for any future product candidates, we do not know when any of these products will generate revenue from product sales for us, if at all. Our ability to generate revenue from any of our future product candidates also depends on a number of additional factors, including our or any future collaborators’ ability to:

 

   

complete development activities, including the necessary clinical trials;

 

   

complete and submit new drug applications, or NDAs, to the U.S. Food and Drug Administration, or FDA, and obtain regulatory approval for indications for which there is a commercial market;

 

   

complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities;

 

   

set a commercially viable price for our products;

 

   

establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;

 

   

develop a commercial organization capable of sales, marketing and distribution for any products for which we obtain marketing approval and intend to sell ourselves in the markets in which we choose to commercialize on our own;

 

   

find suitable distribution partners to help us market, sell and distribute our approved products in other markets;

 

   

obtain coverage and adequate reimbursement from third-party payors, including government and private payors;

 

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achieve market acceptance for our products, if any;

 

   

establish, maintain and protect our intellectual property rights; and

 

   

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, any future product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide, or are required by the FDA or foreign regulatory authorities, to perform studies or trials in addition to those that we currently anticipate. Even if we are able to complete the development and regulatory process for any future product candidates, we anticipate incurring significant costs associated with commercializing these products.

Even if we are able to generate revenues from the sale of any future product candidates that may be approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Our operating results may fluctuate significantly on a quarterly and annual basis, which may make our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.*

Our quarterly and annual operating results have varied significantly in the past and may continue to fluctuate significantly in the future from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control, which may make it difficult for us to predict our future operating results. Factors that may contribute to these fluctuations include the following, as well as other factors described elsewhere in this report:

 

   

our ability to obtain additional funding for research and development and manufacturing activities relating to any of our future product candidates;

 

   

the timing and cost of research and development activities relating to any of our future product candidates, which may change from time to time, including the number, size and duration of clinical trials required to demonstrate safety and efficacy;

 

   

the cost of manufacturing any of our future product candidates, which may vary depending on the quantity of production and the terms of our agreements with manufacturers;

 

   

expenditures that we will or may incur to acquire or develop additional product candidates and technologies;

 

   

the level of demand for any of our future product candidates, should they receive approval, which may vary significantly;

 

   

our ability to enroll patients in clinical trials;

 

   

the success or failure of clinical trials through all phases of clinical development for any of our future product candidates or competing product candidates, or any other change in the competitive landscape of our industry;

 

   

any delays in regulatory review and approval of any of our future product candidates;

 

   

potential side effects of our future product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

 

   

the ability of patients or healthcare providers to obtain coverage of, or sufficient reimbursement for, our future product candidates and our ability to achieve acceptance among patients and physicians;

 

   

competition from existing and potential future drugs that compete with our future product candidates;

 

   

our ability to receive approval and commercialize our future product candidates outside of the United States;

 

   

our dependency on third-party manufacturers to supply or manufacture our future product candidates;

 

   

our ability to establish or maintain collaborations, licensing or other arrangements;

 

   

our ability and third parties’ abilities to protect intellectual property rights;

 

   

costs related to, and outcomes of, potential intellectual property litigation;

 

   

costs associated with recently enacted healthcare legislation;

 

   

our ability to adequately support future growth;

 

   

our ability to attract and retain key personnel to manage our business effectively;

 

   

our ability to build our finance infrastructure and improve our accounting systems and controls;

 

   

potential product liability claims;

 

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potential liabilities associated with hazardous materials;

 

   

fluctuations in foreign currency exchange rates;

 

   

our ability to use potential future operating losses and our federal and state net operating loss carryforwards to offset taxable income;

 

   

potential unforeseen business disruptions that increase our costs or expenses;

 

   

our ability to maintain adequate insurance policies; and

 

   

the changing and volatile U.S., European and global economic environments.

Investors should not rely on our quarterly or annual results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially.

We are likely to require additional capital to finance our operations which may not be available to us on acceptable terms, or at all. If we fail to obtain necessary financing, we may be unable to complete the development and potential commercialization of develop future product candidates.*

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. Our operations have consumed substantial amounts of cash since inception. If we identify and advance any future product candidates into clinical trials and launch and commercialize any product candidates for which we receive regulatory approval, we expect research and clinical development expenses, and our selling, general and administrative expenses to increase substantially. In connection with our ongoing activities, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating requirements for at least the next 12 months. However, circumstances may cause us to consume capital more rapidly than we anticipate. We will likely require additional capital for the further development and potential commercialization of future product candidates and may also need to raise additional funds sooner to pursue a more accelerated development of future product candidates.

If we need to secure additional financing, fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize future product candidates. 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 do not raise additional capital when required or on acceptable terms, we may need to:

 

   

significantly delay, scale back or discontinue clinical trials related to the development or commercialization of any of our future product candidates or cease operations altogether;

 

   

seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available; or

 

   

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

If we need to conduct additional fundraising activities and we do not raise additional capital in sufficient amounts or on terms acceptable to us, we may be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could spend our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

   

our ability to identify additional product candidates for development;

 

   

if we in-license or acquire product candidates from third parties, the cost of in-licensing or acquisition;

 

   

the initiation, progress, timing, costs and results of clinical trials for any future product candidates;

 

   

the clinical development plans we establish for any future product candidates;

 

   

the achievement of milestones and our obligation to make milestone payments under our present or any future in-licensing agreements;

 

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the number and characteristics of product candidates that we discover, or in-license and develop;

 

   

the outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect;

 

   

the cost to establish, maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patent claims and maintaining and enforcing other intellectual property rights;

 

   

the effect of competing technological and market developments;

 

   

the costs and timing of the implementation of commercial-scale outsourced manufacturing activities; and

 

   

the costs and timing of establishing sales, marketing, distribution and pharmacovigilance capabilities for any product candidates for which we may receive regulatory approval in territories where we choose to commercialize products on our own.

If we are unable to expand our operations or otherwise capitalize on our business opportunities due to a lack of capital, our business, results of operations, financial condition and cash flows and future prospects could be materially adversely affected.

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

Until we can generate substantial revenue from product sales, if ever, we expect to finance future cash needs through a combination of private and public equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Additional capital may not be available on reasonable terms, if at all. If we raise additional funds through the issuance of additional debt or equity securities that could result in dilution to our stockholders, and/or increased fixed payment obligations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that include restrictive covenants limiting our ability to take important actions and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, make capital expenditures, acquire, sell or license intellectual property rights or declare dividends. If we raise additional funds through strategic collaborations and alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, or our future product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our ability to use our U.S. net operating losses to offset future taxable income may be subject to certain limitations.*

As of December 31, 2017, we had U.S. net operating losses, or NOLs, of $23.2 million, for which we have recorded a full valuation allowance, which may be used to offset future taxable income. These NOLs and tax credit carryforwards expire in various years beginning in 2028, if not utilized. Utilization of the NOLs may be subject to an annual limitation due to historical or future ownership change rules pursuant to Sections 382 of the Internal Revenue Code, or the Code. If we have experienced an ownership change in the past or will experience an ownership change as a result of future changes in our stock ownership, some of which changes are outside our control, the tax benefits related to the NOLs may be limited or lost. Any such disallowances may result in greater tax liabilities than we would incur in the absence of such a limitation and any increased liabilities could adversely affect our business, results of operations, financial condition and cash flow and future prospects

The recently passed comprehensive tax reform legislation could adversely affect our business and financial condition.*

On December 22, 2017, President Trump signed into law new tax legislation, the Tax Cuts and Jobs Act, that significantly changes the Code. The Tax Cuts and Jobs Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain

 

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new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Any federal net operating losses created in 2018 and thereafter will be carried forward indefinitely pursuant to the Tax Cuts and Jobs Act. We continue to examine the impact this tax legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. The impact of this Tax Cuts and Jobs Act on holders of our common stock is also uncertain and could be adverse. We urge investors to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.

The acquisition of control of AQXP Canada could result in adverse Canadian tax consequences, including limitations on AQXP Canada’s ability to use non-capital loss carryforwards and other similar tax attributes to offset taxable income for Canadian tax purposes.

We underwent a reorganization immediately prior to the closing of our initial public offering in March 2014 which resulted in AQXP Canada becoming a wholly owned subsidiary of Aquinox USA through an exchange of shares. Under the Income Tax Act (Canada), referred to herein as the Tax Act, in connection with the exchange of shares of AQXP Canada for shares of Aquinox USA, there may be limitations on AQXP Canada’s ability to use its non-capital loss carryforwards and other similar tax attributes following the acquisition of control. In general, an acquisition of control would result in AQXP Canada losing its net capital loss carryforwards, if any, and AQXP Canada’s non-capital loss carryforwards and other similar tax attributes only being “useable” to offset income, excluding capital gains, derived from the business operated by AQXP Canada that generated such tax attributes or a business “similar” to such business and provided the business that generated the tax attributes continues to be carried on by AQXP Canada for profit or with a reasonable expectation of profit. We expect that we will continue to carry on the business of AQXP Canada for profit or with a reasonable expectation of profit and that, accordingly, its non-capital loss carryforwards and other similar tax attributes should be available to offset future income for Canadian tax purposes to the extent of income from that business or “similar” businesses, subject to expiry of such loss carryforwards over time pursuant to the provisions of the Tax Act. If our use of these non-capital loss carryforwards or other similar tax attributes is restricted as a result of an acquisition of control or otherwise, our Canadian federal income tax liability may be materially increased, which could adversely affect our business, results of operations, financial condition and cash flow and future prospects.

Fluctuations in foreign currency exchange rates could result in changes in our reported financial results.*

We currently incur significant expenses denominated in foreign currencies, specifically in connection with our operations in Canada. In addition, we utilized numerous clinical trial sites as part of our clinical trials, many of which are located in various countries outside of the United States. These clinical trial sites invoice us in the local currency of the site. We do not engage in foreign currency hedging arrangements for our accounts payable, and, consequently, foreign currency fluctuations may adversely affect our earnings. We may decide to manage this risk by hedging our foreign currency exposure, principally through derivative contracts. Even if we decide to enter into such hedging transactions, we cannot be sure that such hedges will be effective or that the costs of such hedges will not exceed their benefits. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Canadian dollar, could result in material amounts of cash being required to settle the hedge transactions or could adversely affect our financial results.

Risks Related to Our Business and Industry

Our failure to successfully identify, acquire, develop and commercialize additional product candidates or approved products could impair our ability to grow.*

Following the failure of our Phase 3 Leadership 301 clinical trial evaluating rosiptor for the treatment IC/BPS, a key element of our strategy is to acquire, develop and/or market additional products and product candidates. All of our potential product candidates remain in the discovery and preclinical study stages. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select and acquire promising pharmaceutical product candidates and products. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party

 

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products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. Any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we acquire will be manufactured profitably or achieve market acceptance.

Our future success is dependent primarily on the regulatory approval and commercialization of our future product candidates.*

We do not have any products that have gained regulatory approval. As a result, our prospects, including our ability to finance our operations and generate revenue, are substantially dependent on our ability to obtain regulatory approval for, and, if approved, to successfully commercialize any future product candidates. We cannot commercialize our future product candidates in the United States without first obtaining regulatory approval for the product from the FDA; similarly, we cannot commercialize our future product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. The FDA review process for an NDA typically takes more than a year to complete and approval is never guaranteed. Before obtaining regulatory approvals for the commercial sale of our future product candidates for a target indication, we must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical trials, generally including at least two well-controlled Phase 3 trials, and, with respect to approval in the United States, to the satisfaction of the FDA, that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. Obtaining regulatory approval for marketing of our future product candidates in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.

Even if our future product candidates were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, gender or subpopulation of target indication, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we are unable to obtain regulatory approval for one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of any of our future product candidate that we may discover, in-license, develop or acquire in the future. Also, any regulatory approval of any of our future product candidates, once obtained, may be withdrawn. Furthermore, even if we obtain regulatory approval for any of our future product candidates, their commercial success will depend on a number of factors, including the following:

 

   

development of a commercial organization or establishment of a commercial collaboration with a commercial infrastructure;

 

   

establishment of commercially viable pricing and adequate reimbursement from third-party and government payors;

 

   

the ability of our third-party manufacturers to manufacture quantities of our products in commercially sufficient processes and at a scale sufficient to meet anticipated demand and enable us to reduce our cost of manufacturing;

 

   

our success in educating physicians and patients about the benefits, administration and use of our products;

 

   

the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

 

   

the effectiveness of our own or our potential strategic collaborators’ marketing, sales and distribution strategy and operations;

 

   

acceptance of our products as safe and effective by patients and the medical community; and

 

   

a continued acceptable safety profile of our products following approval.

Many of these factors are beyond our control. If we, or our potential commercialization collaborators, are unable to successfully commercialize our product candidates, we may not be able to earn sufficient revenues to continue our business.

 

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Because the results of preclinical testing or earlier clinical trials are not necessarily predictive of future results, any future product candidate we advance into clinical trials, may not have favorable results in later clinical trials or receive regulatory approval*.

Success in preclinical testing or early clinical trials does not ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational drug. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience, have suffered significant setbacks in clinical trials, even after seeing promising results in earlier clinical trials. For example, despite showing positive trends in IC/BPS in our Phase 2 Leadership 201 clinical trial in June 2015, our Phase 3 Leadership 301 clinical trial in IC/BPS, the results of which were announced in June 2018, failed to demonstrate statistically significant results in its primary endpoint. In addition, despite showing positive results in our chronic obstructive pulmonary disease, or COPD, proof-of-concept trial following a lipopolysaccharide (LPS) challenge in healthy subjects, our Phase 2 Flagship clinical trial with rosiptor, the results of which we announced in July 2015, failed to demonstrate efficacy in COPD patients with a history of frequent exacerbations. Our Phase 2 Kinship clinical trial, the results for which we announced in November 2015, failed to demonstrate efficacy in patients with mild to moderate atopic dermatitis. Even if we believe that we have adequate data to support an application for regulatory approval to market our product candidates, FDA or other applicable foreign regulatory authorities may not agree and may require we conduct additional clinical trials. If later-stage clinical trials do not produce favorable results, our ability to achieve regulatory approval for any of our product candidates may be adversely impacted.

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

Clinical testing is expensive, can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and early clinical trials.

We have experienced delays in site initiation. For example, we were behind our initial anticipated schedule in our Leadership 301 clinical trial and may experience delays in future clinical trials. We will not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned or will be completed on schedule, if at all. There can be no assurance that the FDA or other comparable foreign regulatory authority will not put clinical trials of any other of our product candidates on clinical hold in the future. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

 

   

delay or failure in reaching agreement with the FDA or a comparable foreign regulatory authority on a trial design that we are able to execute;

 

   

delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

 

   

delay or failure in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

delay or failure in obtaining institutional review board (IRB) or ethics committee approval or the approval of other reviewing entities, including comparable foreign regulatory authorities, to conduct a clinical trial at each site;

 

   

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

 

   

delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

   

delay or failure in subjects completing a trial or returning for post-treatment follow-up;

 

   

clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

   

inability to identify and maintain a sufficient number of trial sites, many of which may be engaged in other clinical trial programs, including some that may be for the same indication;

 

   

failure of our third parties, such as CROs, to satisfy their contractual duties or meet expected deadlines;

 

   

delay or failure in adding new clinical trial sites;

 

   

ambiguous or negative interim results or results that are inconsistent with earlier results;

 

   

feedback from the FDA, the IRB, data safety monitoring boards, or a comparable foreign regulatory authority, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol for the trial;

 

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decision by the FDA or a comparable foreign regulatory authority to impose a clinical hold following an inspection of our clinical trial operations or trial sites, or recommendation by a data safety monitoring board, the IRB or us, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

   

unacceptable risk-benefit profile, unforeseen safety issues or adverse side effects;

 

   

failure to demonstrate a benefit from using a drug;

 

   

delays in the testing, validation, manufacturing and delivery of the investigational or placebo products to the clinical sites;

 

   

lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical trials or increased expenses associated with the services of our CROs and other third parties; or

 

   

changes in governmental regulations or administrative actions.

As an organization, we have never submitted an NDA to the FDA or other marketing applications to comparable foreign regulatory authorities before, and may be unable to do so for any product candidate we are developing.*

The conduct of pivotal clinical trials and the submission of a successful marketing application is a complicated process. As an organization, we have limited experience in conducting Phase 3 pivotal clinical trial and in preparing, submitting and prosecuting regulatory filings. We have not submitted an NDA to the FDA or any other marketing application to a foreign regulatory authority before. We also have had limited interactions with the FDA and comparable foreign authorities. We may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to marketing application submission and approval of any other product candidate we are developing. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of products that we develop. Failure to commence or complete, or delays in, any future clinical trials, would prevent us from, or delay us in, commercializing any other product candidate we are developing.

If we are unable to enroll subjects in clinical trials, we will be unable to complete these trials in a timely fashion.*

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of subjects to clinical sites, local standard of care, the number of clinical sites and the rate at which they can be initiated, the eligibility criteria for the trial, the design of the clinical trial, delays or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial, ability to obtain and maintain patient consents, risk that enrolled subjects will drop out before completion, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we expect to rely on CROs and clinical trial sites to ensure the proper and timely conduct of any future clinical trials, and while we would expect to have agreements governing their committed activities, we would have limited influence over their actual performance. For example, in our Phase 1b LPS challenge proof-of-concept trial of rosiptor, a large number of data points were lost for one part of the trial through error, rendering an analysis for efficacy uninterpretable for that part. In our Leadership 301 clinical trial, we have experienced delays in initiating clinical sites.

If we experience delays in the completion or termination of, any clinical trial of any future product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, and jeopardize our ability to commence product sales, which would impair our ability to generate revenues and may harm our business, results of operations, financial condition and cash flows and future prospects. In addition, many of the factors that could cause a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our future product candidates.

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our future product candidates, our business will be substantially harmed.*

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable, but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon

 

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numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate, and it is possible that any future product candidates we may discover, in-license or acquire and seek to develop will fail to obtain regulatory approval.

Our product candidates could fail to receive regulatory approval from the FDA or a comparable foreign regulatory authority for many reasons, including:

 

   

disagreement over the design, implementation or number of clinical trials;

 

   

failure to demonstrate that a product candidate is safe and effective for its proposed indication;

 

   

failure of clinical trials to meet the level of statistical significance or clinical meaningfulness required for approval;

 

   

failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

   

disagreement over our interpretation of data from preclinical studies or clinical trials;

 

   

disagreement over whether to accept efficacy results from clinical trial sites outside the United States where the standard of care is potentially different from that in the United States;

 

   

the insufficiency of data collected from clinical trials of our future product candidates to support the submission and filing of an NDA or other submission or to obtain regulatory approval;

 

   

disapproval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; or

 

   

changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.

The FDA or a comparable foreign regulatory authority may require more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program altogether. Even if we do obtain regulatory approval, our future product candidates may be approved for fewer or more limited indications than we request, approval may be granted but contingent on the performance of costly post-marketing clinical trials, or approval with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. In addition, if our future product candidates produce undesirable side effects or safety issues, the FDA may require the establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or a comparable foreign regulatory authority may require the establishment of a similar strategy, that may restrict distribution of our products and impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

Approval by the FDA does not ensure approval by comparable foreign regulatory authorities and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. We may not be able to file for regulatory approvals and even if we file we may not receive the necessary approvals to commercialize our products in any market.

We have conducted, and may in the future conduct, clinical trials for any future product candidates in sites outside the United States and the FDA may not accept data from trials conducted in such locations.*

We have conducted, and may in the future choose to conduct, clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to label the product in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside the United States. If the FDA does not accept the data from any clinical trials we may conduct outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of any future product candidates.

 

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Our future product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any marketing approval.*

Undesirable side effects caused by our future product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority. If toxicities do occur in our future clinical trials they could cause delay or even discontinuance of further development of future product candidates, which would impair our ability to generate revenues and would have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

As a result of undesirable side effects or further safety or toxicity issues that we may experience in our clinical trials in the future, we may not receive approval to market any future product candidates, which could prevent us from ever generating revenues or achieving profitability. Results of our trials could reveal an unacceptably high severity and prevalence of side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of, or deny approval of, our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

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

 

   

we may be forced to suspend marketing of such product;

 

   

regulatory authorities may withdraw their approvals of such product;

 

   

regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such products;

 

   

the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;

 

   

the FDA may require the establishment or modification of a REMS or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome implementation requirements on us;

 

   

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

 

   

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

 

   

we may be subject to litigation or product liability claims; 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.

Even if our future product candidates receive regulatory approval, they may still face future development and regulatory difficulties.*

Even if we obtain regulatory approval for a future product candidate, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of any product will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of any future product candidate, they may require labeling changes or establishment of a REMS or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practice (cGMP), requirements

 

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and other regulations. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates, fail to comply with applicable regulatory requirements, a regulatory agency may:

 

   

issue warning letters or untitled letters;

 

   

impose restrictions on the marketing or manufacturing of the product candidates;

 

   

mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

   

require us or any future collaborator to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific remediation actions and penalties for noncompliance;

 

   

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

 

   

suspend or withdraw regulatory approval;

 

   

suspend any ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to applications filed by us;

 

   

suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

   

seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.

The occurrence of any event or penalty described above may inhibit our ability to commercialize any future product candidates and generate revenue.

The FDA strictly regulates the advertising and promotion of drug products, and drug products may only be marketed or promoted for their FDA approved uses, consistent with the product’s approved labeling. Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the DOJ, the Office of Inspector General of the Department of Health and Human Services, state attorneys general, members of Congress and the public. Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil, criminal and/or administrative sanctions by the FDA and other enforcement authorities. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by relevant foreign regulatory authorities.

In the United States, engaging in impermissible promotion of our future products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to numerous actions, including civil, criminal and/or administrative penalties and fines and agreements that materially restrict the manner in which we promote or distribute our drug products. These false claims statutes include the federal False Claims Act, which allows the federal government, or any individual relator or whistleblower on behalf of the federal government to bring a lawsuit against a pharmaceutical company alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual relator may share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements based on certain sales practices promoting off-label drug uses. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from the Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote our products once they have received regulatory approval, we may become subject to such litigation and, if we are not successful in defending against such actions, those actions could have a material adverse effect our business, results of operations, financial condition and cash flows and future prospects.

Existing government regulations may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of any future product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and/or be subject to fines or enhanced government oversight and reporting obligations, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

 

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Failure to obtain regulatory approval in international jurisdictions would prevent any future product candidates from being marketed outside the United States.*

In order to market and sell our products in the European Union and other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. A failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval of any of our future product candidates by regulatory authorities in the European Union or another jurisdiction, the commercial prospects of that product candidate may be significantly diminished and our business prospects could decline.

Recently enacted and future legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty and cost for us to obtain marketing approval of, and commercialization of, our future product candidates and affect the prices we may obtain.*

The regulations that govern, among other things, marketing approvals, coverage, pricing and reimbursement for new drug products vary from country to country. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our future product candidates, restrict or regulate post-approval activities and affect our ability to successfully sell any product candidates for which we obtain marketing approval.

In the United States in recent years, Congress has considered reductions in Medicare reimbursement for drugs administered by physicians. CMS, the agency that administers the Medicare program, also has the authority to revise reimbursement rates and to implement coverage restrictions for drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of, and reimbursement for, any approved products, which in turn could affect the price we can receive for those products. While Medicare regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in establishing their own coverage polices and reimbursement rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private payors.

In March 2010, President Obama signed into law the Affordable Care Act in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose additional health policy reforms. The Affordable Care Act, among other things, also expanded manufacturers’ rebate liability to include covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and capped the total rebate amount for innovator drugs at 100% of AMP. The Affordable Care Act and subsequent legislation and regulation also revised the definition of AMP for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices. This could increase the amount of Medicaid drug rebates to states. Furthermore, the Affordable Care Act imposes a significant annual, nondeductible fee on companies that manufacture or import certain branded prescription drug products. Substantial provisions affecting compliance were enacted, which may affect our business practices with healthcare practitioners, and a significant number of provisions are not yet, or have only recently become, effective. Some of the provisions of the Affordable Care Act have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment

 

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imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Congress may consider other legislation to repeal or replace elements of the ACA. Because of the continued uncertainty about the implementation of Affordable Care Act, including the potential for further legal challenges or repeal of Affordable Care Act, we cannot quantify or predict with any certainty the likely impact of the Affordable Care Act or its repeal on our business, prospects, financial condition or results of operations.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year that went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. Furthermore, there has been heightened governmental scrutiny recently over the manner in which manufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer’s patient programs, and reform government program reimbursement methodologies for drug products. We cannot be sure whether additional legislative changes will be enacted, or whether existing regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our future product candidates, if any, may be.

In the United States, the European Union and other potentially significant markets for our future product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices. Furthermore, the increased emphasis on managed healthcare in the United States and on country and regional coverage, pricing and reimbursement controls in the European Union will put additional pressure on product coverage, pricing, reimbursement and utilization, which may adversely affect our business, results of operations, financial condition and cash flows and future prospects. These pressures can arise from various sources, including but not limited to, rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.

Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product candidate in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of the product in that particular country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates even if our product candidates obtain marketing approval.

Laws and regulations governing international operations may preclude us from developing, manufacturing and selling certain product candidates outside of the United States and Canada and require us to develop and implement costly compliance programs.

As we expand our operations outside of the United States and Canada, we must comply with numerous laws and regulations in each jurisdiction in which we plan to operate. We must also comply with U.S. laws applicable to the foreign operations of U.S. businesses and individuals, such as the Foreign Corrupt Practices Act, or FCPA, and Canadian laws applicable to the foreign operations of Canadian businesses and individuals, such as the Corruption of Foreign Public Officials Act, or CFPOA. The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.

 

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The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the DOJ. The SEC is involved with enforcement of the books and records provisions of the FCPA.

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

Various laws, regulations and executive orders also restrict the use and dissemination outside the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. Our expanding presence outside the United States will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside the United States, which could limit our growth potential and increase our development costs.

The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting. Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long-term disqualification as a government contractor. The termination of a government contract or relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

The CFPOA prohibits Canadian businesses and individuals from giving or offering to give a benefit of any kind to a foreign public official, or any other person for the benefit of the foreign public official, where the ultimate purpose is to obtain or retain a business advantage. Furthermore, a company may be found liable for violations by not only its employees, but also by its third-party agents. Any failure to comply with the CFPOA, as well as applicable laws and regulations in foreign jurisdictions, could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions, which may have a material adverse impact on us and our share price.

Even if we are able to commercialize our future product candidates, the products may not receive coverage and adequate reimbursement from third-party payors, which could harm our business.*

Our ability to commercialize any products successfully will depend, in part, on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government authorities, private health insurers, health maintenance organizations and third-party payors. Patients who are prescribed medications for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Coverage and adequate reimbursement from government healthcare programs, such as Medicare and Medicaid, and private health insurers are critical to new product acceptance. Patients are unlikely to use our future product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. As a result, government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Third-party payors may also seek additional clinical evidence, beyond the data required to obtain marketing approval, demonstrating clinical benefits and value in specific patient populations before covering our products for those patients. We cannot be sure that coverage and adequate reimbursement will be available for any product that we commercialize and, if reimbursement is available, what that level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

 

 

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There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, obtaining coverage does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sales and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based in part on existing reimbursement amounts for lower cost drugs or may be bundled into the payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage and reimbursement determination process is often a time-consuming and costly process with no assurance that coverage and adequate reimbursement will be obtained or applied consistently. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

We have never marketed a drug before, and if we are unable to establish an effective sales force and marketing infrastructure, or enter into acceptable third-party sales and marketing or licensing arrangements, we may be unable to generate any revenue.

We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical drug products and the cost of establishing and maintaining such an infrastructure may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the FDA and comparable foreign regulatory authorities, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable. We will be competing with many companies that have extensive and well-funded sales and marketing operations. Without an internal commercial organization or the support of a third party to perform sales and marketing functions, we may be unable to compete successfully against these more established companies.

Our future product candidates, if any, may, if approved, fail to achieve adequate market acceptance among physicians, patients, and healthcare payors and others in the medical community necessary for commercial success.*

Even if we obtain regulatory approval for any of our product candidates that we may develop or acquire in the future, the product may not gain market acceptance among physicians, healthcare payors, patients or the medical community. In addition, the reported diagnosis rate for IC/BPS is significantly lower than the number of people estimated to suffer from IC/BPS, which could limit our commercial opportunities for that indication. Our commercial success also depends on coverage and adequate reimbursement of our product candidates by third-party payors, including government payors, generally, which may be difficult or time-consuming to obtain, may be limited in scope and may not be obtained in all jurisdictions in which we may seek to market our products. Market acceptance of any of our product candidates for which we receive approval depends on a number of factors, including:

 

   

the efficacy and safety of such product candidates as demonstrated in clinical trials;

 

   

the clinical indications for which the product candidate is approved;

 

   

acceptance by physicians and patients of the product candidate as a safe and effective treatment;

 

   

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

 

   

the safety of product candidates seen in a broader patient group, including a product candidate’s use outside the approved indications;

 

   

the prevalence and severity of any side effects;

 

   

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

 

   

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

 

   

the cost of treatment in relation to alternative treatments;

 

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

 

   

relative convenience and ease of administration;

 

   

the effectiveness of our sales and marketing efforts and those of any future collaborators; and

 

   

unfavorable publicity relating to the product candidate.

If any of our product candidates are approved but fail to achieve market acceptance among physicians, patients, or healthcare payors, we will not be able to generate significant revenues, which would compromise our ability to become profitable.

Our relationships with healthcare professionals, principal investigators, consultants, customers (actual and potential) and third-party payors are and will be subject, directly and indirectly, to applicable anti-kickback, fraud and abuse, privacy, transparency and other healthcare laws and regulations, which could expose us to penalties, including without limitation, civil, criminal and administrative sanctions, civil penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, integrity obligations, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings and the curtailment or restructuring of our operations.

As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our future arrangements with third-party payors and customers who are in a position to purchase, recommend and/or prescribe our product candidates for which we obtain marketing approval. These broadly applicable fraud and abuse and other healthcare laws and regulations may constrain our future business or financial arrangements and relationships with healthcare professionals, principal investigators, consultants, customers, and third-party payors and other entities, including our marketing practices, educational programs and pricing policies. Restrictions under applicable federal and state healthcare laws and regulations that may affect our ability to operate include, but are not limited to, the following:

 

   

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

 

   

federal civil and criminal false claims laws, including the federal civil False Claims Act, and civil monetary penalty laws impose criminal and civil penalties, including through civil whistleblower or qui tam actions, among other things, prohibits individuals or entities from knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

 

   

HIPAA, which, among other things, imposes criminal liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g. public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of or payment for healthcare benefits, items or services relating to healthcare matters;

 

   

HIPAA, as amended by HITECH, and its implementing regulations, which also imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without the appropriate authorization by entities subject to the law, such as health plans, healthcare clearinghouses and healthcare providers;

 

   

the federal Physician Payments Sunshine Act, created under Section 6002 of the Affordable Care Act and its implementing regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS, information related to “payments or other transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching

 

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hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members and payments or other “transfers of value” to such physician owners and their immediate family members; and

 

   

analogous local, state and foreign laws and regulations, including: state anti-kickback and false claims laws which may apply to our business practices, including, but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by state governmental and non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government; local, state and foreign laws that require drug manufacturers to track gifts and other remuneration and items of value provided to healthcare professionals and entities and file reports relating to pricing and marketing information and/or register their pharmaceutical sales representatives; and local, state and foreign laws that govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our internal operations and business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Recent healthcare reform legislation has also strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement of the federal Anti-Kickback Statute, such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim that includes items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we may be subject to penalties, including without limitation, significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, integrity obligations, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings, and the curtailment or restructuring of our operations. If any physicians or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Moreover, we expect there will continue to be federal, state, local and foreign laws and regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to healthcare fraud abuse laws or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain.

We may form strategic alliances in the future, and we may not realize the benefits of such alliances.*

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for any future drug candidates and programs because our research and development pipeline may be insufficient, our drug candidates and programs may be deemed to be at too early a stage of development for collaborative effort and third parties may not view our drug candidates and programs as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our drug candidates could also delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the market.

 

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Our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaboration partners may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of fraud or other misconduct by our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaboration partners, including intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, provide accurate information to the FDA or comparable foreign regulatory authorities, comply with manufacturing standards we have established, comply with federal and state data privacy and security, fraud and abuse and other healthcare laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use or misrepresentation of information obtained in the course of clinical trials or creating fraudulent data in our pre-clinical studies or clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct for our directors, officers and employees, but it is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, results of operations, financial condition and cash flows from future prospects, including the imposition of significant fines or other sanctions.

We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully than, we do.*

The development and commercialization of new drug products is highly competitive. We will face competition with respect to any future product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing or may develop our future product candidates for. Some of these competitive products and therapies may be based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

More established companies may have a competitive advantage over us due to their greater size, cash flows and institutional experience. Compared to us, many of our competitors may have significantly greater financial, technical and human resources.

As a result of these factors, our competitors may obtain regulatory approval of their products before we do, which will limit our ability to develop or commercialize any of our future product candidates. In addition, many companies are developing new therapeutics, and we cannot predict what the standard of care will be as our product candidates progress through clinical development.

We believe that our ability to successfully compete will depend on, among other things:

 

   

the efficacy and safety profile of our future product candidates, including relative to marketed products and product candidates in development by third parties;

 

   

the time it takes for any of our future product candidates to complete clinical development and receive marketing approval;

 

   

the ability to commercialize future product candidates that receive regulatory approval;

 

   

whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;

 

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the ability to establish, maintain and protect intellectual property rights related to our product candidates;

 

   

the ability to manufacture commercial quantities of any future product candidates that receive regulatory approval; and

 

   

acceptance of our future product candidates that receive regulatory approval by physicians and other healthcare providers.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of rosiptor and any future product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. Product

liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any product candidates or products that we may develop;

 

   

termination of clinical trial sites or entire trial programs;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial participants;

 

   

significant costs to defend the related litigation;

 

   

substantial monetary awards to trial subjects or patients;

 

   

loss of revenue;

 

   

diversion of management and scientific resources from our business operations; and

 

   

the inability to commercialize our product candidates.

We currently have product liability insurance coverage, which is limited to $10 million per occurrence and $10 million in the aggregate. This coverage may not be adequate to cover all liabilities that we may incur. Insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our future product candidates, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

We have recently reduced the size of our organization, and we may encounter difficulties in managing this development and restructuring, which could disrupt our operations. In addition, we may not achieve anticipated benefits and savings from the reduction.*

In July 2018, we announced a restructuring plan to reduce operating costs and better align our workforce with the needs of the business following the June 27, 2018 announcement that our Phase 3 Leadership 301 clinical trial evaluating once-daily, oral rosiptor for the treatment of IC/BPS failed to meet its primary endpoint. Under this plan, we reduced our workforce by 30 employees (approximately 53% of total employees) and closed our office in San Bruno, California. The workforce reduction will result in the loss of longer-term employees, the loss of institutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities across the organization, all of which could adversely affect our operations. The restructuring and possible additional cost containment measures may yield unintended consequences, such as attrition beyond our intended workforce reduction and reduced employee morale. In addition, we may not achieve anticipated benefits from the workforce reduction. Due to our limited resources, we may not be able to effectively manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our infrastructure and operations, risks that we may not be able to comply with legal and regulatory requirements, and loss of employees and reduced productivity among remaining employees. If our management is unable to effectively manage this transition and workforce reduction and additional cost containment measures, our expenses may be more than expected and we may not be able to implement our business strategy. As a result, our future financial performance and our ability to commercialize our product candidates successfully would be negatively affected.

 

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Our future success depends on our ability to attract, retain and motivate qualified personnel.*

We may not be able to attract or retain qualified managerial, operational, sales, marketing, scientific and financial personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses and given the announcement of the restructuring of our workforce. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

We are highly dependent on the development, regulatory, commercialization and business development expertise of our executive officers. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. Replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel. Many of the other pharmaceutical companies that we compete with for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. Further, we do not maintain “key person” insurance for any of our executives or other employees. Our failure to retain key personnel could impede the achievement of our research, development and commercialization objectives.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, results of operations, financial condition and cash flows and future prospects.*

While we currently have no specific plans to acquire any other businesses, we may, in the future, make acquisitions of, or investments in, companies that we believe have products or capabilities that are a strategic or commercial fit with our future product candidates and business or otherwise offer opportunities for our company. In connection with these acquisitions or investments, we may:

 

   

issue stock that would dilute our stockholders’ percentage of ownership;

 

   

incur debt and assume liabilities; and

 

   

incur amortization expenses related to intangible assets or incur large and immediate write-offs.

We may not be able to complete acquisitions on favorable terms, if at all. If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive position or that it will be viewed positively by customers, financial markets or investors. Furthermore, future acquisitions could pose numerous additional risks to our operations, including:

 

   

problems integrating the purchased business, products or technologies;

 

   

increases to our expenses;

 

   

the failure to discover undisclosed liabilities of the acquired asset or company;

 

   

diversion of management’s attention from their day-to-day responsibilities;

 

   

harm to our operating results or financial condition;

 

   

entrance into markets in which we have limited or no prior experience; and

 

   

potential loss of key employees, particularly those of the acquired entity.

We may not be able to complete any acquisitions or effectively integrate the operations, products or personnel gained through any such acquisition.

Our business and operations would suffer in the event of computer system failures or security breaches.*

In the ordinary course of our business, we collect, store and transmit confidential information, including intellectual property, proprietary business information and personal information. Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyberattacks, natural disasters, fire, terrorism, war and telecommunication and electrical failures. Cyberattacks are increasing in their frequency, sophistication and intensity. Cyberattacks could include the deployment of harmful malware, denial-of-service attacks, social engineering and other means to affect service

 

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reliability and threaten the confidentiality, integrity and availability of information. Significant disruptions of our information technology systems or security breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to us. If such disruptions were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our future product candidates could be delayed.

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

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce our product candidates. Our ability to obtain clinical supplies of product candidates could be disrupted, if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. The ultimate impact on us, our significant suppliers and our general infrastructure of being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster. Further, any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our business, results of operations, financial condition and cash flows from future prospects.

Risks Related to Our Dependence on Third Parties

We rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, this could substantially harm our business because we may not be able to obtain regulatory approval for or commercialize our future product candidates in a timely manner or at all.*

We have extensively relied upon, and plan to continue to extensively rely upon, third-party CROs and other consultants to monitor and manage data for our ongoing preclinical and clinical programs. We rely on these parties for execution of our preclinical studies and clinical trials, and we control only some aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies and clinical trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We also rely on third parties to assist in conducting our preclinical studies in accordance with Good Laboratory Practices, or GLP, and the Animal Welfare Act requirements. We and our CROs are required to comply with federal regulations and current Good Clinical Practices, or GCP, which are international standards meant to protect the rights and health of patients that are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs or consultants fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements. In addition, our clinical trials must be conducted with product produced under cGMP requirements. Failure to comply with these regulations may require us to repeat preclinical studies and clinical trials, which would delay the regulatory approval process.

Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to

 

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obtain regulatory approval for or successfully commercialize any future product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely affected. Though we carefully manage our relationships with our CROs and consultants, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, results of operations, financial condition and cash flows and future prospects.

If our relationships with CROs terminate, our drug development efforts could be delayed.

We rely on third-party vendors and CROs for preclinical studies and clinical trials related to our drug development efforts. Switching or adding additional CROs would involve additional cost and requires management time and focus. Our CROs have the right to terminate their agreements with us in the event of an uncured material breach. In addition, some of our CROs have an ability to terminate their respective agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated. If any of our relationships with our third-party CROs terminate, we could experience a significant delay in identifying, qualifying and managing performance of a comparable third-party service provider, which could adversely affect our development programs. In addition, there is a natural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the original provider. We may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms.

We have no experience manufacturing our product candidates on a large clinical or commercial scale and have no manufacturing facility. As a result, we are dependent on third-party manufacturers, as well as on third parties for our supply chain, and if we experience problems with any third parties, or the actual demand for our future product candidates exceed our forecasts, the manufacture of adequate supplies of our future product candidates or products could be delayed.*

We do not own or operate facilities for the manufacture of our product candidates. We currently have no plans to build our own manufacturing facilities for clinical or commercial operations. We have in the past relied on contract manufacturing organizations, or CMOs, for the chemical manufacture of active pharmaceutical ingredient of rosiptor and for the production of final product formulation and packaging for clinical trials, and expect to rely on CMOs for any future product candidate we are able to advance into clinical development. Although alternative third-party suppliers with the necessary manufacturing and regulatory expertise and facilities exist, it could be expensive and take a significant amount of time to arrange for alternative suppliers should we commence clinical development of any future product candidate. We may encounter technical difficulties or delays in the transfer of manufacturing on a commercial scale to third-party manufacturers. We may be unable to enter into agreements for commercial supply with third-party manufacturers, or may be unable to do so on acceptable terms. If we are unable to arrange for alternative third-party manufacturing sources, or to do so on commercially reasonable terms or in a timely manner, we may not be able to complete development of any product candidates, or market or distribute them.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control, including a failure to synthesize and manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications, and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP and similar foreign standards. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates and could

 

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cause us to incur higher costs and prevent us from commercializing our product candidates successfully. In addition, such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of outside supplies of the product candidate, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention of products, refusal to permit the import or export of products, injunction, or imposing civil and criminal penalties.

Any significant disruption in our supplier relationships could harm our business. Any significant delay in the supply of a product candidate or its key materials for an ongoing clinical trial could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these key materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates. If our CMOs cannot manufacture sufficient quantity to meet the demand for our product candidates after regulatory approval, there would be a shortage in supply which would negatively impact our revenue from the sale of our product candidates. It may take several years to establish an alternative source of supply for our product candidates and to have any such new source approved by the FDA.

We may not be successful in establishing and maintaining collaborations that leverage our capabilities in pursuit of developing and commercializing our product candidates.*

For rosiptor and any of our future product, we plan to evaluate the merits of entering into collaboration arrangements with third parties, including leading biotechnology companies or non-governmental organizations. In May 2018, we entered into a collaboration agreement with Astellas, pursuant to which we granted Astellas an exclusive, royalty-bearing license to use, research, develop, manufacture and commercialize rosiptor, and related compounds for all human diseases and conditions in Japan and certain other countries in the Asia-Pacific region, including major markets such as Taiwan, Indonesia, Malaysia, South Korea, and Australia, but excluding China and India. We expect to selectively pursue collaboration arrangements with third parties that have particular technology, expertise or resources for the development or commercialization of our product candidates or for accessing particular markets. We face, and will continue to face, significant competition in seeking appropriate partners for our product candidates. If we are unable to identify partners whose capabilities complement and integrate well with ours and reach collaboration arrangements with such partners on a timely basis, on acceptable terms or at all, or if the arrangements we establish are unproductive for us, we may fail to meet our business objectives for the particular product candidate. Our ability to enter into such arrangements with respect to products in development that are subject to licenses may be limited by the terms of those licenses.

Any collaboration that we have entered into, such as our agreement with Astellas, or may consider entering into, may not be successful and the success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborative partners. It is likely that our collaborative partners will have significant discretion in determining the efforts and resources that they will apply to these collaborations.

The risks that we are subject to in any of our collaborations include, among others:

 

   

our collaborative partners may not commit adequate resources to the development, marketing and distribution of any collaboration products, limiting our potential revenues from these products;

 

   

our collaborative partners may experience financial difficulties and may therefore be unable to meet their commitments to us;

 

   

our collaborative partners may pursue a competing product candidate developed either independently or in collaboration with others, including our competitors; and

 

   

our collaborative partners may terminate our relationship.

The failure of any of our current or future collaboration partners to perform as expected could place us at a competitive disadvantage and adversely affect us financially, including delay and increased costs of development, loss of market opportunities, lower than expected revenues and impairment of the value of the related product candidate. Collaborations are a critical part of our business strategy, and any inability on our part to establish and successfully maintain such arrangements on terms favorable to us or to work successfully with our collaborative partners could have an adverse effect on our operations and financial performance.

 

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Risks Related to Intellectual Property

If we are unable to obtain or protect intellectual property rights, our competitive position could be harmed.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Our commercial success will depend in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. Where we have the right to do so under our license agreements, we seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patents, including those patent rights licensed to us by third parties, are highly uncertain.

The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States. The rights already granted under any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

With respect to patent rights, we do not know whether any of the pending patent applications for any of our discovered or licensed compounds will result in the issuance of patents that protect our technology or products, or if any of our issued patents will effectively prevent others from commercializing competitive technologies and products. Our pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require us or our future potential licensor(s) to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that we own or have licensed from third parties may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in the loss of patent protection, the narrowing of claims in such patents or the invalidity or unenforceability of such patents, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection for our technology and products. Protecting against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult and may in some cases not be possible. In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.

We could be required to incur significant expenses to strengthen our intellectual property rights, and our intellectual property rights may be inadequate to protect our competitive position.

The patent prosecution process is expensive and time-consuming, and we or our future potential licensors may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our future potential licensors will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Further, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we are prosecuting patents. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the expiration of the patent. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and these foreign laws may

 

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also be subject to change. For example, methods of treatment and manufacturing processes may not be patentable in certain jurisdictions. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

Our patent applications and the enforcement or defense of our issued patents may be impacted by the application of or changes in U.S. and foreign standards.

The standards that the U.S. Patent and Trademark Office, or the USPTO, and foreign patent offices use to grant patents are not always applied predictably or uniformly and can change. Consequently, our pending patent applications may not be allowed and, if allowed, may not contain the type and extent of patent claims that will be adequate to conduct our business as planned. Additionally, any issued patents we currently own or obtain in the future may have a shorter patent term than expected or may not contain claims that will permit us to stop competitors from using our technology or similar technology or from copying our product candidates. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. In addition, changes to patent laws in the United States or other countries may be applied retroactively to affect the validation enforceability, or term of our patent. For example, the U.S. Supreme Court has recently modified some legal standards applied by the USPTO in examination of U.S. patent applications, which may decrease the likelihood that we will be able to obtain patents and may increase the likelihood of challenges to patents we obtain or license. In addition, changes to the U.S. patent system have come into force under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, which was signed into law in September 2011. The Leahy-Smith Act included a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the USPTO, and may become involved in opposition, derivation, reexamination, inter-partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.

While we cannot predict with certainty the impact the Leahy-Smith Act or any potential future changes to the U.S. or foreign patent systems will have on the operation of our business, the Leahy-Smith Act and such future changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

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

Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our future potential licensors fail to maintain the patents and patent applications covering our future product candidates, our competitive position would be adversely affected.

We may be subject to claims by third parties claiming ownership of what we regard as our own intellectual property.

Many of our employees, including our senior management, were previously employed at universities or at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, including members of our senior management, executed proprietary rights, non-disclosure and non-competition agreements, in connection with such previous employment. Although we try to ensure that our employees do not use the

 

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proprietary information or know-how of others in their work for us, we may be subject to claims that we, or these employees, have used or disclosed confidential information or intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. We are not aware of any threatened or pending claims related to these matters or concerning the agreements with our senior management, but in the future litigation may be necessary to defend against such claims. In addition, third parties may from time to time make claims over what we regard as our intellectual property, or we may get into disputes with licensors or licensees of our intellectual property rights over the interpretation of the license terms. Our licensors may have the right to terminate their license agreements with us or pursue damages or other legal remedies. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, CMOs, consultants, advisors and other third parties. We also generally enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

Although we expect all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.

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

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

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it

 

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difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful.

The requirements for patentability may differ in certain countries, particularly developing countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In India, unlike the United States, there is no link between regulatory approval of a drug and its patent status. Furthermore, generic or biosimilar drug manufacturers or other competitors may challenge the scope, validity or enforceability of our or our licensors’ or collaborators’ patents, requiring us or our licensors or collaborators to engage in complex, lengthy and costly litigation or other proceedings. Generic or biosimilar drug manufacturers may develop, seek approval for, and launch biosimilar versions of our products. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors or collaborators may have limited remedies if patents are infringed or if we or our licensors or collaborators are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our and our licensors’ or collaborators’ efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.

Intellectual property rights do not necessarily address all potential threats to any competitive advantage we may have.*

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

 

   

Others may be able to make compounds that are the same as or similar to our future product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed.

 

   

We or any of our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed.

 

   

We or any of our licensors or strategic partners might not have been the first to file patent applications covering certain of our inventions.

 

   

Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

 

   

It is possible that our pending patent applications will not lead to issued patents.

 

   

Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

   

Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

 

   

We may not develop additional proprietary technologies that are patentable.

 

   

The patents of others may have an adverse effect on our business.

Risks Related to Ownership of Our Common Stock

Our stock price has been and will likely continue to be volatile and may decline regardless of our operating performance, resulting in substantial losses for investors.*

The trading price of our common stock has been, and is likely to continue to be, volatile for the foreseeable future. For example, in the year ended December 31, 2017, our common stock’s sales price on The Nasdaq Global Market ranged from a low of $10.02 to a high of $19.97, and on June 27, following announcement of our Leadership 301 results, the closing price of a share of our common stock was $2.34. The trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, these factors include:

 

   

the success of competitive products or technologies;

 

   

regulatory actions with respect to our products or our competitors’ products;

 

   

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

 

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

 

   

results of clinical trials, including both safety and efficacy, of any of our future product candidates or those of our competitors;

 

   

regulatory or legal developments in the United States and other countries;

 

   

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

   

the recruitment or departure of key personnel;

 

   

the level of expenses related to any of our future product candidates or clinical development programs;

 

   

the results of our efforts to in-license or acquire additional product candidates or products;

 

   

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

   

variations in our financial results or those of companies that are perceived to be similar to us;

 

   

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

 

   

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

announcement or expectation of additional financing efforts;

 

   

sales of our common stock by us, our insiders or our other stockholders;

 

   

changes in the structure of healthcare payment systems;

 

   

market conditions in the pharmaceutical and biotechnology sectors; and

 

   

general economic, industry and market conditions.

In addition, the stock market in general, and pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of these risks or any of a broad range of other risks, including those described in this “Risk Factors” section and elsewhere in this report, could have a dramatic and material adverse impact on the market price of our common stock.

We may be subject to securities litigation, which is expensive and could divert management attention.*

The trading price of our common stock has been and will continue to be volatile. For example, on June 26, 2018, the closing price of our common stock on The Nasdaq Global Market was $15.31, and on June 27, 2018, following our announcement of negative results from our Phase 3 Leadership clinical trial in IC/BPS, the closing price was $2.34. Similarly, on August 6, 2015, the closing price of our common stock on The Nasdaq Global Market was $1.79 and on August 7, 2015, following our announcement of positive results from secondary endpoints in our Phase 2 Leadership 201 clinical trial in IC/BPS, the closing price was $10.42 and increased to $22.13 on August 14, 2015. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our principal stockholders, directors and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates together beneficially own a majority of our outstanding voting stock. In particular, based on information available to us, entities affiliated with Baker Bros. Advisors LP, or the Baker Entities, which together are our largest stockholders, collectively beneficially owned approximately 46.5% of our common stock as of June 30, 2018. These stockholders are able to determine the outcome of all matters requiring stockholder approval. For example, these stockholders are able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

 

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We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we have taken advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors and adversely affect the market price of our common stock or make it more difficult to raise capital as and when we need it.

We are an “emerging growth company” as that term is used in the JOBS Act, and we are taking advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and exemptions from any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. We have taken and currently intend to take advantage of some, but not all, of the reduced regulatory and reporting requirements that are available to us under the JOBS Act, so long as we qualify as an “emerging growth company.” For example, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain circumstances could be for up to five years.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our business, results of operations, financial condition and cash flows and future prospects may be materially and adversely affected.

If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our business, results of operations, financial condition and cash flows and future prospects, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures and that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.

Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we fail to identify and to remediate any significant deficiencies or material weaknesses that may be identified, or encounter problems or delays in the implementation of internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

 

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Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.

We have incurred and will incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

As a public company, we have incurred and will incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growth company.” We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and Nasdaq Stock Market. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have substantially increased our legal and financial compliance costs and made some activities more time-consuming and costly. The increased costs will increase our consolidated net loss. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.*

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

We have in the past and may in the future grant rights to some of our stockholders that require us to register the resale of our common stock or other securities on behalf of these stockholders and/or facilitate public offerings of our securities held by these stockholders, including in connection with potential future acquisition or capital-raising transactions. For example, in connection with our public offering of common stock on September 19, 2016, we entered into a registration rights agreement with the Baker Entities that together, based on information available to us, collectively beneficially owned approximately 45.1% of our common stock as of September 19, 2016. Under the registration rights agreement, we agree that, if at any time and from time to time after December 19, 2016, the Baker Entities demand that we register their shares of our common stock for resale under the Securities Act, we would be obligated to effect such registration. On January 6, 2017, pursuant to the registration rights agreement, we registered for resale, from time to time, up to 10,536,092 shares of our common stock held by the Baker Entities. Our registration obligations under this registration rights agreement cover all shares now held or hereafter acquired by the Baker Entities, would be in effect for up to ten years, and would include our obligation to facilitate certain underwritten public offerings of our common stock by the Baker Entities in the future. If the Baker Entities or any other holders of registration rights with respect to our common stock, by exercising their registration and/or underwriting rights or otherwise, sell a large number of our shares, or the market perceives that the Baker Entities or

 

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such holders intend to sell a large number of our shares, this could adversely affect the market price of our common stock. We have registered all currently reserved shares of common stock that we may issue under our equity compensation plans and intend to register in the future any additional reserved or issued shares of common stock. These registered shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates. We have also filed registration statements covering the sale of up to $250.0 million and $124.6 million (remaining following the sale of $75.4 million of common stock in September 2016) of any combination of our common stock, preferred stock, debt securities or warrants and may conduct one or more sales of securities pursuant to such registration statement, from time to time.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To raise capital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These future issuances of common stock or common stock-related securities, including the exercise of outstanding options and any additional shares issued in connection with acquisitions, if any, may result in material dilution to our stockholders. New investors could also gain rights, preferences and privileges senior to those of holders of our common stock.

Pursuant to our 2014 Equity Incentive Plan, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and other employees and service providers, including officers, employees and service providers of our subsidiaries and affiliates. Future option grants and issuances of common stock under our 2014 Equity Incentive Plan may have an adverse effect on the market price of our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation, or certificate of incorporation, and amended and restated bylaws, or bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. These include provisions that:

 

   

permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;

 

   

provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

   

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

 

   

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder’s notice;

 

   

not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and

 

   

provide that special meetings of our stockholders may be called only by the board of directors or by such person or persons requested by a majority of the board of directors to call such meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, or our business. If one or more of the securities or industry analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

On August 7, 2018, our Board of Directors, on the recommendation of our Compensation Committee and based on input from the Committee’s independent compensation advisors, approved certain amendments to the employment agreements of our executive officers

Pursuant to amendments, the requirement for executive officers to mitigate the loss of employment following a covered termination in order to receive severance was removed. In addition, the amount of base salary and benefits that Kamran Alam and Lloyd Mackenzie will receive if terminated without cause and absent a change of control was increased from six to nine months. Except as modified by these amendments, all other terms of the employment agreements with our executive officers remain in full force and effect.

The foregoing summary of the amendments is not intended to be complete and is qualified in its entirety by reference to the full text of the amendments, to be filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.

 

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Item 6.

Exhibits

 

Number

 

Description

    3.1(1)   Amended and Restated Certificate of Incorporation of Aquinox Pharmaceuticals, Inc.
    3.2(2)   Amended and Restated Bylaws of Aquinox Pharmaceuticals, Inc.
    4.1(3)   Specimen Common Stock Certificate of the Aquinox Pharmaceuticals, Inc.
    4.2(4)   Registration Rights Agreement, dated September  19, 2016, by and between Aquinox Pharmaceuticals, Inc. and the persons listed on Schedule A attached thereto.
  10.1 †   Exclusive License and Collaboration Agreement by and between Aquinox Pharmaceuticals (Canada), Inc. and Astellas US LLC, effective as of May 9, 2018.
  31.1+   Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
  31.2+   Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
  32.1+   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS+   XBRL Instance Document
101.SCH+   XBRL Taxonomy Extension Schema Document.
101.CAL+   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF+   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB+   XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE+   XBRL Taxonomy Extension Presentation Linkbase Document.

 

+

Filed herewith.

Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934.

(1)

Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 12, 2014 (File No. 001-36327) and incorporated herein by reference.

(2)

Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-193615), filed with the Securities and Exchange Commission on February 28, 2014 and incorporated herein by reference.

(3)

Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the Securities and Exchange Commission on May 13, 2014 (File No. 001-36327) and incorporated herein by reference.

(4)

Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2016 (File No. 001-36327) and incorporated herein by reference.

 

51


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      Aquinox Pharmaceuticals, Inc.
      (Registrant)
Date: August 8, 2018      

/s/ David J. Main

     

David J. Main

President and Chief Executive Officer

(Principal Executive Officer)

Date: August 8, 2018      

/s/ Kamran Alam

     

Kamran Alam

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

52

EX-10.1

Exhibit 10.1

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXECUTION VERSION

CONFIDENTIAL

 

 

EXCLUSIVE LICENSE AND COLLABORATION AGREEMENT

by and between

AQUINOX PHARMACEUTICALS (CANADA), INC.

and

ASTELLAS US LLC

 

 

 


Table of Contents

 

              Page  
ARTICLE I DEFINITIONS      1  
ARTICLE II LICENSES; [***]      16  
  2.1    License Grants to Astellas      16  
  2.2    Sublicensing by Astellas      17  
  2.3    Aquinox Retained Rights      18  
  2.4    Licenses to Aquinox      18  
  2.5    Astellas Retained Rights      19  
  2.6    [***] Technology      19  
  2.7    No Implied License      19  
  2.8    Astellas Covenants.      19  
  2.9    Aquinox Covenants.      20  
  2.10    Existing Intellectual Property      20  
  2.11    New Intellectual Property.      20  
  2.12    Rights in Bankruptcy      21  
  2.13    Trademark Licenses.      21  
  2.14    [***].      22  
  2.15    [***].      22  
ARTICLE III GOVERNANCE      23  
  3.1    JSC; Formation and Purpose      23  
  3.2    Membership and Procedures.      23  
  3.3    Decision-Making.      24  
  3.4    Expenses      25  
  3.5    Alliance Managers      25  
  3.6    Discontinuation of the JSC      26  
ARTICLE IV DEVELOPMENT      26  
  4.1    General.      26  
  4.2    Preclinical Development.      27  
  4.3    Clinical Development.      27  
  4.4    Certain Clinical Trials for the Initial Product      28  
  4.5   

Review of Protocol Synopsis

     28  

 

-i-

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


Table of Contents

(continued)

 

              Page
  4.6    Development in the Retained Territory    29
  4.7    Transfer of Data Relating to the Initial Product.    29
  4.8    Other Data Generated by Either Party after the Effective Date.    30
  4.9    Ownership of Data    30
  4.10    Performance and Diligence.    30
  4.11    Records, Reports and Information    31
ARTICLE V REGULATORY MATTERS    31
  5.1    Generally.    31
  5.2    Regulatory Activities in the Licensed Territory    32
  5.3    Astellas Regulatory Data and Regulatory Approvals.    32
  5.4    Regulatory Costs    33
  5.5    Astellas Regulatory Filings    33
  5.6    Rights of Reference    33
  5.7    Safety; Adverse Event Reporting.    33
ARTICLE VI COMMERCIALIZATION    34
  6.1    Overview and Diligence    34
  6.2    Commercialization Plan    34
  6.3    Pricing.    34
  6.4    Reports    35
  6.5    Communications    35
  6.6    Approval for Certain Marketing Activities    35
  6.7    Marketing and Promotional Literature    35
  6.8    Marketing and Sales in the Retained Territory    36
  6.9    Labeling    36
  6.10    Selection of Product Trademark    36
ARTICLE VII MANUFACTURING AND SUPPLY    36
  7.1    Manufacturing Coordinators    36
  7.2    Joint Manufacturing Plan.    36
  7.3    Aquinox Supply to Astellas.    37
  7.4    Technology Transfer.    38

 

-ii-

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


Table of Contents

(continued)

 

                Page  
    7.5      [***].      38  
    7.6      [***]      39  

ARTICLE VIII MEDICAL AFFAIRS

     39  
    8.1      Generally      39  
    8.2      Joint Medical Affairs Plan      39  
    8.3      Approval for Certain Medical Affairs Activities      39  
    8.4      Reports      40  
    8.5      Phase 4 Trials      40  
    8.6      Investigator-Initiated Studies      40  

ARTICLE IX FINANCIAL TERMS

     40  
    9.1      Upfront Payment      40  
    9.2      Reimbursements      40  
    9.3      Milestone Payments.      40  
    9.4      Running Royalties.      42  
    9.5      Royalty Payments and Reports      43  
    9.6      Adjustments to Payment of Royalty.      44  
    9.7      Foreign Exchange      45  
    9.8      Late Payments      45  
    9.9      Taxes      45  
    9.10      Records; Audits      46  
    9.11      Financial Contacts      46  

ARTICLE X INTELLECTUAL PROPERTY

     46  
    10.1      Ownership of Collaboration Inventions      47  
    10.2      Disclosure of Collaboration Inventions      47  
    10.3      Right to Practice Joint Inventions      47  
    10.4      Prosecution of Patents.      47  
    10.5      Patent Term Extensions in the Licensed Territory      49  
    10.6      Infringement of Patents by Third Parties.      49  
    10.7      Infringement of Third Party Rights.      51  
    10.8      Patent Marking      52  
    10.9      Patent Oppositions and Other Proceedings.      52  

 

-iii-

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


Table of Contents

(continued)

 

                Page  

ARTICLE XI CONFIDENTIALITY

     53  
    11.1      Nondisclosure      53  
    11.2      Authorized Disclosure      53  
    11.3      Publications.      54  
    11.4      Publicity.      55  

ARTICLE XII REPRESENTATIONS, WARRANTIES, & COVENANTS

     56  
    12.1      Mutual Representations and Warranties      56  
    12.2      Aquinox Representation and Warranty      57  
    12.3      Astellas Representation, Warranty and Covenant      57  
    12.4      Limitation on Warranties; No Implied Warranties      57  

ARTICLE XIII INDEMNIFICATION AND INSURANCE

     58  
    13.1      Indemnification by Aquinox      58  
    13.2      Indemnification by Astellas      58  
    13.3      Indemnification Procedures      58  
    13.4      Non-Exclusive Remedy      59  
    13.5      Limitation of Liability      59  
    13.6      Insurance      59  

ARTICLE XIV TERM AND TERMINATION

     59  
    14.1      Term      59  
    14.2      Early Termination.      59  
    14.3      Termination for Breach      60  
    14.4      Aquinox Rights upon Termination of the Agreement      60  
    14.5      Survival      61  

ARTICLE XV DISPUTE RESOLUTION

     61  
    15.1      Disputes      61  
    15.2      Negotiation by Executive Officers      61  
    15.3      Binding Arbitration      62  
    15.4      Expedited Arbitration      63  
    15.5      Patent and Trademark Dispute Resolution      63  

 

-iv-

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


Table of Contents

(continued)

 

                Page  

ARTICLE XVI OTHER PROVISIONS

     63  
    16.1      Governing Law      63  
    16.2      Performance Through Affiliates      63  
    16.3      Force Majeure      63  
    16.4      Assignment.      64  
    16.5      Severability      64  
    16.6      Notices      64  
    16.7      Time of the Essence      65  
    16.8      Entire Agreement; Amendments      65  
    16.9      Relationship of the Parties      65  
    16.10      Waiver      66  
    16.11      Third Party Beneficiaries      66  
    16.12      Further Assurances      66  
    16.13      Counterparts      66  
    16.14      Interpretation      66  

 

EXHIBITS

  
  Exhibit 1 – [***]   
  Exhibit 2 – [***]   
  Exhibit 3 – Chemical Structure of Rosiptor   
  Exhibit 4 – [***]   
  Exhibit 5 – [***]   
  Exhibit 6 – List of Aquinox Patents   
  Exhibit 7 – Expedited Arbitration Procedures   

 

-v-

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

EXCLUSIVE LICENSE AND COLLABORATION AGREEMENT

This EXCLUSIVE LICENSE AND COLLABORATION AGREEMENT (this “Agreement”) effective as of May     , 2018 (the “Effective Date”), is by and between Aquinox Pharmaceuticals (Canada) Inc., a corporation organized and existing under the laws of Canada, with an address at 450-887 Great Northern Way, Vancouver, B.C., Canada V5T 4T5 (“Aquinox”) and ASTELLAS US LLC, a company organized and existing under the laws of Illinois, with an address at 1 Astellas Way, Northbrook, Illinois 60062, U.S.A. (“Astellas”). Aquinox and Astellas may be referred to herein each as a “Party” and collectively as the “Parties”.

RECITALS

WHEREAS, Aquinox is currently conducting clinical development for its proprietary compound known as Rosiptor (also known as AQX-1125), for the treatment of interstitial cystitis/bladder pain syndrome (“IC/BPS”);

WHEREAS, Astellas is a pharmaceutical company with experience in developing and commercializing pharmaceutical products all over the world;

WHEREAS, Astellas wishes to obtain exclusive rights to seek regulatory approval for, market and sell rosiptor and related compounds in the Licensed Territory, as more fully described below, and Aquinox wishes to grant such rights to Astellas as set forth herein.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 “Acquiree” has the meaning set forth in Section 16.4.2.

1.2 “[***]” and “[***]” have the respective meanings set forth in Section 2.14.2.

1.3 “Adverse Event” means any adverse medical occurrence in a patient or clinical investigation subject to whom a Product is administered and which could but does not necessarily have a causal relationship with such Compound, including any unfavorable and unintended sign (including an abnormal laboratory finding, for example), symptom, or disease temporally associated with the administration of such Compound, whether or not considered related to Compound administration.

1.4 “[***]” has the meaning set forth in Section 9.6.1.2.

1.5 “Affiliate”, with respect to a Person, means an individual, trust, business trust, joint venture, partnership, corporation, association, or other legal entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such Person. For purposes of this definition, “control” and, with correlative meanings, the terms “controlled by” and “under common control with” means (a) the possession, directly or indirectly,

 

1

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

of the power to direct the management or policies of a legal entity, whether through the ownership of voting securities or by contract relating to voting rights or corporate governance, or (b) the ownership, directly or indirectly, of fifty percent (50%) or more of the voting securities or other ownership interest of a legal entity; provided, that if local law restricts foreign ownership, control will be established by direct or indirect ownership of the maximum ownership percentage that may, under such local law, be owned by foreign interests.

1.6 “Alliance Manager” has the meaning set forth in Section 3.5

1.7 “Applicable [***]” has the meaning set forth in Section 1.84 (Definition of “[***]”).

1.8 “Applicable Laws” means any federal, state, local, national, and supra-national laws, statutes, rules, and/or regulations, including any rules, regulations, guidance, guidelines, or requirements of Regulatory Authorities, national securities exchanges, or securities listing organizations, that may be in effect from time to time during the Term and apply to a particular activity hereunder and including laws, regulations, and guidelines governing the import, export, Development, Manufacture, Commercialization of, or Medical Affairs activities relating to, any Product in or for the applicable jurisdiction.

1.9 “Aquinox [***]” means, with respect to the applicable [***], and [***] on a [***], (a) if Aquinox or its Affiliate [***] or the applicable [***] in such [***] (or any [***] therefor), the [***], in each case [***] to the [***]; and (b) if a [***] Aquinox or its Affiliate [***], as applicable, for the [***]; provided in each case that there shall be [***]. Aquinox [***] shall be [***].

1.10 “Aquinox Collaboration Inventions” means all Collaboration Inventions made by or on behalf of Aquinox and relating to the development, manufacture, use or sale of the Compound or the Products, including Aquinox’s interest in the Joint Inventions, but excluding any Collaboration Invention claimed in an issued Aquinox Collaboration Patent.

1.11 “Aquinox Collaboration Patents” means all Collaboration Patents Covering a Collaboration Invention made by or on behalf of Aquinox, which Collaboration Invention relates to the development, manufacture, use or sale of the Compound or the Products, including Aquinox’s interest in the Joint Patents.

1.12 “Aquinox Group” has the meaning set forth in Section 13.1.

1.13 “Aquinox Housemark” means any trademark or trade name, including registrations and applications therefor, owned or Controlled by Aquinox covering Aquinox’s corporate name and/or company logo.

1.14 “Aquinox Indemnitees” has the meaning set forth in Section 13.2.

 

2

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.15 “Aquinox Know-How” means all Know-How owned or Controlled by Aquinox or its Affiliates as of the Effective Date or during the Term which are [***] for the development, manufacture or use of a Compound or a Product (excluding any such Know-How claimed in an issued Aquinox Patent), including Aquinox’s interest in the Joint Inventions.

1.16 “Aquinox Licensed Territory Preclinical Study” has the meaning set forth in Section 2.3.3.

1.17 “Aquinox Material Adverse Effect” has the meaning set forth in Exhibit 7.

1.18 “Aquinox Partner” and “Aquinox Partner Agreement” have the respective meanings set forth in Section 4.8.2.

1.19 “Aquinox Patents” means all Patents owned or Controlled by Aquinox or its Affiliates [***], including Aquinox’s interest in the Joint Patents; provided that Aquinox Patents and Joint Priority Patents in the Licensed Territory for which Step-In rights are exercised by Astellas in accordance with Section 10.4.5 shall be excluded from Aquinox Patents thereafter.

1.20 “Aquinox-Prosecuted Patents” has the meaning set forth in Section 10.4.2.

1.21 “Aquinox Technology” means the Aquinox Patents and the Aquinox Know-How. For the avoidance of doubt, all Aquinox Collaboration Inventions (including Aquinox’s rights to any Joint Inventions) and Aquinox Collaboration Patents shall be included within the Aquinox Technology.

1.22 “[***]” means the [***] set forth in Exhibit 1.

1.23 “[***]”, “[***]”, “[***]”, “[***]” and “[***]” have the respective meanings set forth in Section 2.14.1.

1.24 “Astellas [***]” means, with respect to the applicable [***], and [***] on a [***], (a) if Astellas or its Affiliate [***] or the applicable [***] in such [***] (or any [***] therefor), the [***], in each case [***] to the [***]; and (b) if a [***] Aquinox [***] Astellas or its Affiliate [***], as applicable, for the [***]; provided in each case that there shall be [***]. Astellas [***] shall be [***].

1.25 “Astellas Collaboration Inventions” means all Collaboration Inventions made by or on behalf of Astellas and relating to the development, manufacture, use or sale of the Compound or the Products, including Astellas’ interest in the Joint Inventions, but excluding any Collaboration Invention claimed in an issued Astellas Collaboration Patent.

 

3

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.26 “Astellas Collaboration Patents” means all Collaboration Patents Covering a Collaboration Invention made by or on behalf of Astellas, which Collaboration Invention relating to the development, manufacture, use or sale of the Compound or the Products, including Astellas’ interest in the Joint Patents.

1.27 “Astellas Collaboration Technology” means the Astellas Collaboration Patents and the Astellas Collaboration Inventions.

1.28 “Astellas Group” has the meaning set forth in Section 13.2.

1.29 “Astellas Indemnitees” has the meaning set forth in Section 13.1.

1.30 “Astellas Know-How” means all Know-How owned or controlled by Astellas or its Affiliate during the Term (a) which is [***] for the development, manufacture or use of a Compound or a Product, and (b) which is [***] during the Term for development, manufacture or commercialization of a Compound or Product for the Licensed Territory, excluding any Know-How claimed in an issued Astellas Patent and the Astellas Collaboration Inventions.

1.31 “Astellas Material Adverse Effect” has the meaning set forth in Exhibit 7.

1.32 “Astellas Patents” means all Patents owned or Controlled by Astellas or its Affiliate [***].

1.33 “Astellas Retained Territory Pharmacology Study” has the meaning set forth in Section 4.3.2.

1.34 “Astellas Retained Territory Preclinical Study” has the meaning set forth in Section 4.2.2.

1.35 “Astellas Retained Territory Study” means an Astellas Retained Territory Pharmacology Study or Astellas Retained Territory Preclinical Study, as applicable.

1.36 “Astellas Technology” means the Astellas Patents and Astellas Know-How.

1.37 “Astellas Withholding Tax Action” has the meaning set forth in Section 9.9.5.

1.38 “[***]” and “[***]” have the respective meanings set forth in Section 9.6.1.1.

1.39 “Business Day” means a day that is not a Saturday, Sunday, or a day on which banking institutions in Tokyo, Japan, or San Francisco, California, U.S.A., are required by law to remain closed.

1.40 “Calendar Quarter” means each successive period of three (3) consecutive calendar months ending on March 31, June 30, September 30, or December 31; provided, however that (a) the first Calendar Quarter of the Term shall extend from the Effective Date to the last day of the Calendar Quarter in which the Effective Date falls; and (b) the last Calendar Quarter of the Term shall end upon the expiration or termination of this Agreement.

 

4

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.41 “Calendar Year” means each successive period of twelve (12) months commencing on January 1 and ending on December 31; provided however, that (a) the first Calendar Year of the Term shall extend from the Effective Date to the last day of the Calendar Year in which the Effective Date falls; and (b) the last Calendar Year of the Term shall end upon the expiration or termination of this Agreement.

1.42 Challenge, Challenge Notice, Challenged Party and Challenging Party have the respective meanings set forth in Exhibit 7.

1.43 “Claims” has the meaning set forth in Section 13.1.

1.44 “Clinically Relevant Pro-Drug Form” means a pro-drug which (a) is designed to overcome pharmacokinetic barriers to delivery of a parent compound, (b) is an inactive or less active form of the parent compound; and (c) is converted back to the parent compound after the pharmacokinetic barrier is overcome.

1.45 “CMO” means a contract manufacturing organization.

1.46 “Collaboration Invention” means any new Know-How developed or acquired pursuant to this Agreement during the Term by or on behalf of either Party or the Parties jointly, or derived by or on behalf of a Party through use of the other Party’s Confidential Information.

1.47 “Collaboration Patent” means any Patent that claims or covers a Collaboration Invention.

1.48 “Combination Product” has the meaning set forth in Section 1.112 (Definition of Net Sales).

1.49 “[***]” has the meaning set forth in Section 7.3.5.

1.50 “Commercialization” means any and all activities undertaken before and after obtaining Regulatory Approval relating specifically to the pre-launch, launch, promotion, marketing, sale, and distribution (including importing, exporting, transporting, customs clearance, warehousing, invoicing, handling, and delivering the Product to customers) of the Product, including: (a) strategic marketing, sales force detailing, advertising, and market and product support within the Field; and (b) all customer support, invoicing and sales activities within the Field; but excluding in all cases Medical Affairs Activities. “Commercialize” means to engage in Commercialization activities.

1.51 “Commercialization Plan” has the meaning set forth in Section 6.2.

1.52 “Commercially Reasonable Efforts” means, with respect to a Party in the performance of its obligations hereunder in relation to Products, the application by or on behalf of such Party of a level of efforts that a similarly-situated pharmaceutical or biotechnology company, as the case may be, would apply to such activities in relation to a similar pharmaceutical product

 

5

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

owned by it or to which it has exclusive rights, which product is at a similar stage in its development or product life and is of similar market potential and strategic value (in each case as compared to the Product) taking into account efficacy, safety, expected labeling, the competitiveness of alternative products in the marketplace sold by Third Parties, the patent and other proprietary position of the product, the likelihood of regulatory approval given the regulatory structure involved, the expected and actual profitability of the product including the royalties payable to licensors, and other relevant factors, based on conditions then prevailing. “Commercially Reasonable Efforts” shall require that such Party: (a) assign responsibility for such obligations to qualified personnel, set annual goals and objectives for carrying out such obligations, and monitor and hold personnel accountable for progress with respect to such goals and objectives; (b) set and seek to achieve specific objectives for carrying out such obligations; and (c) make and implement decisions and allocate resources (including budgets) designed to diligently and in good faith advance progress with respect to such objectives, subject to the preceding sentence. For clarity, Astellas’ ceasing the Development of a Product in a country shall not be deemed to be the use of Commercially Reasonable Efforts in such country.

1.53 “Compound” means (a) Rosiptor or (b) [***].

1.54 “Confidential Information” means all information of a confidential or proprietary nature disclosed by a Party to the other Party under this Agreement, including any such information related to any scientific, clinical, engineering, manufacturing, marketing, financial, or personnel matters relating to a Party, or related to a Party’s present or future products, sales, suppliers, customers, employees, investors, business plans, Know-How, regulatory filings, data, compounds, research projects, work in progress, future developments or business, in all such cases whether disclosed in oral, written, graphic or electronic form, and whether or not specifically marked as confidential or proprietary, where under the circumstances in which such disclosure was made or given the nature of information disclosed, a reasonable person would consider such information confidential; provided, however, that in any event, Confidential Information excludes any information that the receiving Party can show through competent evidence: (a) is known by receiving Party at the time of disclosure, and not through a prior disclosure by or on behalf of the disclosing Party; (b) is or becomes properly in the public domain through no fault of the receiving Party; (c) is subsequently rightfully disclosed to the receiving Party by a Third Party who is not directly or indirectly under an obligation of confidentiality to the disclosing Party; or (d) is developed by the receiving Party independently of, and without reference to or use of, the information received from the disclosing Party. The terms and conditions of this Agreement and confidential information disclosed by either Party directly or through its Affiliates or other representatives to the other Party pursuant to the Confidentiality Agreement shall be deemed as Confidential Information hereunder.

1.55 “Confidentiality Agreement” means that certain Mutual Confidential Disclosure and Standstill Agreement between Aquinox Pharmaceuticals, Inc., the parent company of Aquinox, and Astellas Pharma Inc., the parent company of Astellas, effective as of August 10, 2016, as amended.

 

6

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.56 “Control” means with respect to any Know-How, Patent, or other intellectual property right, possession of the right, whether directly or indirectly, and whether by ownership, license, or otherwise, to grant a license, sublicense, or other right to or under, such Know-How, Patent, or other intellectual property right as provided for herein without violating the terms of any agreement or other arrangements with any Third Party at the time when such license, sublicense, or other right is first granted hereunder, subject to Section 2.11.

1.57 “Cover” means, with respect to a Patent and a product, such Patent would (absent a license thereunder or ownership thereof) be infringed by the manufacture, use or sale of such product, provided, however, that in determining whether a claim of a pending Patent application would be infringed, it shall be treated as if issued in the form then currently being prosecuted. Cognates of the word “Cover” shall have correlative meanings.

1.58 “CREATE Act” has the meaning set forth in Section 10.4.8.

1.59 “CTD Database” means clinical trial disclosure database, including ClinicalTrials.gov (https://clinicaltrials.gov/) which is managed by U.S. National Library of Medicine, and EudraCT (European Clinical Trials Database) (https://eudract.ema.europa.eu/) which is managed by EMA.

1.60 “Data” means any and all scientific, technical, test, marketing, or sales data pertaining to any Product that is generated by or on behalf of Aquinox or its Affiliates, or Astellas, its Affiliates, and Sublicensees, including research data, clinical pharmacology data, pre-clinical data, clinical data, clinical study reports, or data pertaining to an IND or an MAA with respect to any Product.

1.61 “Development” means all development activities for the Product that are directed to obtaining Regulatory Approval(s) of the Product, including all non-clinical, preclinical, and clinical testing and studies of the Product; toxicology, pharmacokinetic, and pharmacological studies; statistical analyses; assay development; protocol design and development; the preparation, filing, and prosecution of any IND or MAA for the Product; development activities directed to label expansion and/or obtaining Regulatory Approval for one or more additional indications following initial Regulatory Approval; development activities conducted after receipt of Regulatory Approval; and all regulatory affairs related to any of the foregoing. “Develop” and “Developing” have correlative meanings.

1.62 “Development Costs” means, with respect to any Development activities, all external costs incurred by or on behalf of either Party, as applicable, that are reasonably and directly allocable to the conduct of such activities and shall consist of out-of-pocket costs actually incurred by each Party, including costs of Product or any comparator drug used in such activities, but specifically excluding overhead of each Party. For clarity, Development Costs exclude FTE Costs.

1.63 “Development Plan” means the Joint Preclinical Development Plan or Joint Clinical Development Plan, as applicable.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.64 “Drug Product” means, for a given Product, bulk unlabeled product (i.e., not in final packaging or labeled for the final market) comprising (a) the applicable Compound in its final dosage form for such Product and (b) the applicable delivery device, if any.

1.65 “EMA” means the European Medicines Agency or any successor agency thereto.

1.66 “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and the rules, regulations, and schedules promulgated thereunder.

1.67 “Exchange Rate” means the thirty (30) day rolling average of exchange rates computed as published by OANDA.com “The Currency Site” under the heading FxHistory: historical currency exchange rates” at www.OANDA.com/convert/fxhistory.

1.68 “Executive Officers” means the Chief Executive Officer of Aquinox and any senior executive of Astellas who reports directly to the Chief Executive Officer of Astellas.

1.69 “Expert” has the meaning set forth in Exhibit 7.

1.70 “FDA” means the United States Food and Drug Administration or any successor agency thereto.

1.71 “Field” means the prevention, diagnosis and/or treatment of all human diseases and conditions.

1.72 “First Commercial Sale” means the first commercial sale under this Agreement by Astellas, its Affiliates, or its Sublicensees of any Product to an end user or prescriber for use, consumption, or resale in the Licensed Territory after obtaining Regulatory Approval for such Product. For the avoidance of doubt, sales of Products to an Affiliate or Sublicensee of Astellas shall not constitute a First Commercial Sale unless such Affiliate or Sublicensee is an end user or prescriber of the Product.

1.73 “[***]” has the meaning set forth in the 4th item of the column in Section 9.3.1.

1.74 “[***]” has the meaning set forth in 6th item of the column in Section 9.3.1.

1.75 “[***]” has the meaning set forth in Section 9.3.1.

1.76 “Indemnified Party” has the meaning set forth in Section 13.3.

1.77 “Fiscal Quarter” means each successive period of three (3) consecutive calendar months ending on June 30, September 30, December 31, or March 31; provided, however that (a) the first Fiscal Quarter of the Term shall extend from the Effective Date to the last day of the Fiscal Quarter in which the Effective Date falls; and (b) the last Fiscal Quarter of the Term shall end upon the expiration or termination of this Agreement.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.78 “Fiscal Year” means Astellas’ fiscal year, which runs from April 1 to March 31.

1.79 “FTE means eighteen hundred (1,800) hours of work per full Fiscal Year (or equivalent pro-rata portion thereof for a period less than twelve (12) months).

1.80 “FTE Cost” means, for any period, the FTE Rate multiplied by the number of FTEs in such period.

1.81 “FTE Rate” means a rate of [***] per FTE per Fiscal Year (pro-rated for the period beginning on the Effective Date and ending at the end of the first Fiscal Year). Such rate shall be adjusted annually, with each annual adjustment effective as of April 1 of each Fiscal Year (with the first such annual adjustment to be made as of April 1, 2019) to correspond with the total percentage change in the Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average, 1982-84 = 100, calculated by the U.S. Bureau of Labor Statistics over the twelve (12)-month period preceding each such January 1.

1.82 “GAAP” means generally accepted accounting principles applicable to a Party in a particular country (e.g., Japanese Accounting Standards, IFRS, or U.S. Generally Accepted Accounting Principles) as consistently applied throughout the applicable periods indicated herein by or on behalf of the relevant Party.

1.83 “Generic Product” means, with respect to a Product in a particular country, any pharmaceutical product that (a) contains a Compound; (b) is approved by the Regulatory Authority in such country as a substitutable generic for such Product (for an indication for which such Product obtained Regulatory Approval from the applicable Regulatory Authority in such country) on an expedited or abbreviated basis in a manner that relied on or incorporated data submitted by Astellas or its Affiliate or Sublicensee in connection with the Regulatory Approval for such Product in such country; and (c) is sold in such country by a Third Party that is not a Sublicensee and did not purchase such product in a chain of distribution that included any of Astellas or its Affiliates or Sublicensees.

1.84 “[***]” means [***] in the Licensed Territory, [***] for such Product ([***]), where “[***]” means the [***] (a) Aquinox [***] for such Product (or a [***]) in [***] (as reasonably demonstrated by Aquinox), or (b) Astellas [***] for such Product in [***], in each case as determined in accordance with Sections [***]. For clarity, a [***] Astellas or its Affiliates or Sublicensees [***] the Product shall be [***], regardless of whether such [***] as defined in this Agreement. A Product will be deemed to be [***] Product if both [***] where the [***] Product has at least the [***]. If the [***] will be made on a [***].

1.85 “Health Canada” means Canadian Health Canada or any successor agency thereto.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.86 “IFRS” means International Financial Reporting Standards developed and maintained by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).

1.87 “IND” means an investigational new drug application filed with the FDA pursuant to 21 CFR 312.20, a clinical trial notification filed with the PMDA, or a corresponding filing required for the clinical testing in humans of a pharmaceutical product.

1.88 “Indemnified Party” has the meaning set forth in Section 13.3.

1.89 “Indemnifying Party” has the meaning set forth in Section 13.3.

1.90 “Initial Product” means the oral formulation of Rosiptor that (a) is being Developed by Aquinox as of the Effective Date for the first Regulatory Approval in the Retained Territory for the Primary Indication or (b) will be Developed by Astellas following the Effective Date for the first Regulatory Approval in the Licensed Territory for the Primary Indication.

1.91 “Issued Claim” has the meaning set forth in Section [***].

1.92 “Joint Clinical Development Plan” has the meaning set forth in Section 4.3.1.

1.93 “Joint Development Plan” means the Joint Preclinical Development Plan or Joint Clinical Development Plan, as applicable.

1.94 “Joint Invention” means a Collaboration Invention created, generated, conceived of or reduced to practice jointly by or on behalf the Parties (or their respective Affiliates, agents or contractors).

1.95 “Joint Manufacturing Plan” has the meaning set forth in Section 7.2

1.96 “Joint Patent” means a Patent that Covers a Joint Invention.

1.97 “Joint Priority Patent” means a Joint Patent that claims priority to any Aquinox Patent existing as of the Effective Date.

1.98 “Joint Preclinical Development Plan” has the meaning set forth in Section 4.2.1.

1.99 “JPY” means Japanese yen.

1.100 “JSC” has the meaning set forth in Section 3.1.

1.101 “[***]” means any of the materials set forth in Exhibit 2.

1.102 “Know-How” means any non-public knowledge, experience, know-how, technology, information, and Data, trade secrets, formulas and formulations, processes, techniques, unpatented inventions, methods, discoveries, specifications, formulations, compositions, materials, ideas, and developments, test procedures, and results, together with all documents and files embodying the foregoing, but excluding any issued Patents to the extent claiming any of the foregoing.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.103 “LEADERSHIP 301 Study” means the clinical study of Rosiptor being conducted by Aquinox as of the Effective Date under the protocol titled “The Leadership 301 Trial: A 12 week, randomized, multi-center, double-blind, place-controlled, 3-arm, parallel group, phase 3 trial to evaluate the efficacy and safety of two doses of AQX-1125 targeting the SHIP1 pathway in subjects with Interstitial Cystitis/Bladder Pain Syndrome followed by an extension period”.

1.104 “Licensed Territory” means Japan and the Other APAC Countries.

1.105 “MAA” means a Marketing Authorization Application or equivalent application, and all amendments and supplements thereto, filed with the applicable Regulatory Authority.

1.106 “Manufacture” and “Manufacturing” mean activities directed to manufacturing, processing, filling, finishing, packaging, labeling, stability testing, quality control, quality assurance testing and release, post-marketing validation testing, inventory control and management, storing and transporting any Product, including oversight and management of vendors therefor.

1.107 “Manufacturing Coordinator” has the meaning set forth in Section 7.1.

1.108 “Manufacturing Cost” means, with respect to a particular Compound, intermediate (including [***]) or Product (whether as active pharmaceutical ingredient, Drug Product or finished form) supplied by Aquinox pursuant to Section 7.3 or [***]: (a) (i) if Aquinox or its Affiliate Manufactures the applicable Compound, intermediate (including a Key Material) or Product, [***]; or (ii) if a Third Party Manufactures such Compound, intermediate (including a Key Material) or Product, the [***] of such Compound, intermediate (including [***]) or Product [***]; and (b) in each case, the external costs of insurance and transportation (including custom duties, tariffs, sales taxes, excise taxes and other governmental charges) for such Compound, intermediate (including [***]) or Product and FTE Costs directly attributable to the Manufacture of such Product or [***]; provided in each case that there shall be no double-counting of any cost. Manufacturing Cost shall be calculated in a manner consistent with GAAP, consistently applied.

1.109 “Manufacturing Responsibility Trigger” has the meaning set forth in Section 7.3.1.

1.110 “Medical Affairs Activities” means: (a) the coordination of medical education and medical information requests and field based medical liaisons in the Territory with respect to Products commercially launched in the Territory (including, symposia or similar events and medical advisory boards); and (b) those clinical studies conducted in or for the Territory after Regulatory Approval of a Product has been obtained which are neither intended nor designed to support a Regulatory Filing including medical affairs studies, post marketing studies, and investigator and physician-initiated studies.

1.111 “[***] Astellas Technology” means any Astellas Technology which is related to the [***] a Compound or Product, including [***] ([***] any such Know-How to the extent [***] a Compound or Product other than a [***] such Compound or Product that [***] as of the Effective Date).

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.112 “Net Sales” means with respect to any Product, the gross amounts invoiced by Astellas or its Affiliates or Sublicensees to any Third Party for sales of Products in the Licensed Territory, less the following deductions, to the extent such deductions are actually paid, incurred, or otherwise taken, and are reasonable and customary:

(a) credits, refunds, or allowances to Third Party customers for spoiled, damaged, rejected, recalled, outdated, and reasonably returned Product;

(b) discounts, including cash, volume, quantity, and other trade discounts, charge-back payments, and rebates and allowances actually granted, incurred, or allowed in the ordinary course of business, as well as government-required discounts and allowances (including government rebates and other price reductions), and other reductions, concessions, and allowances that effectively reduce the selling price to Astellas or its Affiliates or Sublicensees;

(c) transportation charges, freight, postage, and insurance (but only insurance related to protecting the particular shipment against physical loss or damage) if shown separately in the invoice; and

(d) sales, use, or excise Taxes and import/export duties or tariffs and similar governmental charges due or incurred in connection with the sales of such Product, if shown separately in the invoice.

Components of Net Sales shall be determined in the ordinary course of business in accordance with GAAP, consistently applied. For purposes of determining when a sale of any Product occurs for purposes of calculating Net Sales, the sale will be deemed to occur on the date of Astellas’ shipment of the Product to the customer or wholesaler. No deductions will be permitted for commissions paid to individuals or agents, nor for the cost of collections. For purposes of determining Net Sales, a “sale” shall not include transfers or dispositions, at no cost or below cost, of Products for charitable, pre-clinical, clinical, or regulatory purposes, including for purposes of analytical testing, or for promotional samples or free goods. Amounts invoiced by Astellas or its Affiliates or its Sublicensees for the sale of Products to or among such Affiliates or Sublicensees for resale shall not be included in the computation of Net Sales hereunder.

In the event that Astellas sells a Product (a) to a Third Party in a bona fide arm’s length transaction, for material consideration, in whole or in part, other than cash (but excluding, for the avoidance of doubt, consideration in the form of non-financial legal terms and conditions incident to sale), (b) to a Third Party in other than a bona fide arm’s length transaction, or (c) with discounts of Products that are disproportional to the discounts of other products sold by Astellas in conjunction with such Products, the Net Sales price for such Product shall be deemed to be the standard invoice price then being invoiced by Astellas in an arm’s length transaction with similar customers in the Territory. In the event that Astellas includes one or more Products as part of a bundle of products, the price for such Product shall be deemed to be the standard invoice price for such Product when sold separately and not as part of a bundle of products.

If a Product either is sold in the form of a combination product containing both a Compound and one or more active ingredient(s) as separate molecular entity(ies) that are not Compounds (a

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

Combination Product”), the Net Sales of such Product for the purpose of calculating royalties and sales-based milestones owed under this Agreement for sales of such Product, shall be determined as follows with respect to the country of sale: first, Astellas shall determine the actual Net Sales of such Combination Product (using the above provisions) in such country and then such amount shall be multiplied by the fraction A/(A+B), where A is the invoice price of such Product in such country, if sold separately, and B is the total invoice price of other active ingredient(s) in such Combination Product in such country if sold separately. If any other active ingredient in such Combination Product is not sold separately in such country, Net Sales shall be calculated by multiplying actual Net Sales of such Combination Product by a fraction A/C where A is the invoice price of such Product in such country if sold separately, and C is the invoice price of such Combination Product in such country. If neither such Product nor any other active ingredient in such Combination Product is sold separately in such country, the adjustment to Net Sales for such country shall be determined by the Parties in good faith to reasonably reflect the fair market value of the contribution of such Product in such Combination Product to the total fair market value of such Product.

1.113 “NHI” means the national health insurance system in Japan, or its successor system.

1.114 “[***]” means the [***] determined in accordance with Section 9.6.1.1, as may be adjusted pursuant to Section 9.6.1.2.

1.115 “[***]” shall mean the [***] which is outlined in the [***] for the applicable Product.

1.116 “[***] Astellas Technology” means [***] Astellas Technology [***] the [***] Astellas Technology.

1.117 “Other APAC Countries” means Taiwan, South Korea, [***] Indonesia, [***] Malaysia, [***] Australia [***].

1.118 “[***]” means the [***] other than the [***].

1.119 “Patents” means (a) pending patent applications, issued patents, utility models and designs; (b) reissues, substitutions, confirmations, registrations, validations, re-examinations, additions, continuations, continued prosecution applications, continuations-in-part, or divisions of or to any patents, patent applications, utility models or designs; and (c) the equivalent or counterpart of the foregoing.

1.120 “Person” means any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, limited liability partnership, unincorporated organization, government (or any agency or political subdivision thereof) or other legal entity or organization.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.121 “Phase 1 Clinical Trial” means a human clinical trial performed in accordance with the Applicable Laws in the Territory that provides for the first introduction of a Product into humans for the purpose of determining human tolerability, metabolism, biomarker, absorption, elimination and other pharmacological action.

1.122 “Phase 2 Clinical Trial” means a human clinical trial performed in accordance with the Applicable Laws in patients with a particular disease or condition which is designed to assess the safety, initial measures of efficacy, and tolerability of a Product given its intended use and to initially explore its efficacy for such disease or condition.

1.123 “Phase 2b Clinical Trial” means a human clinical trial performed in accordance with the Applicable Laws in patients with a particular disease or condition which is designed to assess the safety, dose ranging and efficacy of a pharmaceutical product to confirm clinical efficacy of a drug and determine the therapeutic dose range and may include such a clinical trial intended to be a Pivotal Trial. Any Phase 2 Clinical Trial of a Product in an indication that is the second Phase 2 Clinical Trial of such Product in such indication shall be deemed to be a Phase 2b Clinical Trial.

1.124 “Phase 3 Clinical Trial” means a large-scale human clinical trial, which may be a Pivotal Trial, performed in accordance with the Applicable Laws and conducted in subjects with a particular disease or condition which is designed in a controlled fashion to confirm the efficacy and safety of a Product given its intended use and to define warnings, precautions, and adverse events that are associated with Product in the dosage range intended to be prescribed.

1.125 “Pivotal Trial” means a clinical trial that is intended to be a basis of Regulatory Approval by the applicable Regulatory Authority and to provide an adequate basis for physician labeling, as described in 21 C.F.R. 312.21(c), as amended from time to time, or the corresponding regulations in jurisdictions other than the United States.

1.126 “Plan” means a Joint Preclinical Development Plan, Joint Clinical Development Plan, Joint Manufacturing Plan, Joint Medical Affairs Plan or Commercialization Plan, as applicable.

1.127 “PMDA” means the Japanese Pharmaceuticals and Medical Devices Agency, or any successor agency thereto.

1.128 “Pricing Approval” means the approval, agreement, determination or governmental decision establishing the cumulative price for the Product to be paid by the applicable insurance provider and the individual end-consumer or patient.

1.129 “Primary Indication” means the prevention, diagnosis and/or treatment of IC/BPS, [***] in human.

1.130 “Product” means any pharmaceutical product consisting of or containing a Compound(s) in any dosage form or formulation or mode of administration alone or in combination with one or more other therapeutically active ingredients.

1.131 “Product Infringement” has the meaning set forth in Section 10.6.2.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.132 “Product Trademark” means trademark (including domain name), tradename, servicemark, symbol mark (device), catchphrase, etc. for use in connection with Commercialization of Product, but excluding all Aquinox Housemarks.

1.133 “Regulatory Approval” means any approval, product and establishment license, registration, or authorization, including pricing approvals and reimbursement approvals, of any Regulatory Authority required for the manufacture, use, storage, import, transport, or Commercialization of a Product in accordance with Applicable Laws, including Pricing Approval.

1.134 “Regulatory Authority” means any applicable government regulatory authority involved in granting approvals for the manufacture, Commercialization, reimbursement, and/or pricing of a Compound or Product.

1.135 “Regulatory Exclusivity” means any exclusive marketing rights or data exclusivity rights conferred by any Regulatory Authority with respect to a pharmaceutical product other than Patents, including orphan drug exclusivity, new chemical entity exclusivity, data exclusivity, or pediatric exclusivity.

1.136 “Regulatory Filings” means all documentation, correspondence, submissions, and notifications submitted to or received from a Regulatory Authority that are necessary or reasonably useful in order to Develop or Commercialize the Product in the Field. For the avoidance of doubt, Regulatory Filings include, with respect to each Product, all INDs, MAAs, Regulatory Approvals, and amendments and supplements of any of the foregoing, as well as the contents of any minutes from meetings (whether in person or by audio conference or videoconference) and any material written communications with a Regulatory Authority.

1.137 “Responding Party” has the meaning set forth in Section 11.3.1.

1.138 “Retained Territory” means the Territory other than the Licensed Territory.

1.139 “Rosiptor” means the compound having the chemical structure set forth in Exhibit 3.

1.140 “Royalty Term” has the meaning set forth in Section 9.4.4.

1.141 “SEC” has the meaning set forth in Section 11.4.3.

1.142 “Specified Countries” means Japan, South Korea, Taiwan and Australia.

1.143 “Step-In Rights” has the meaning set forth in Section 10.4.5.

1.144 “Sublicensee” means either a Third Party or an Affiliate of Astellas, in each case which is granted a sublicense by Astellas to any of the Aquinox Technology pursuant to Section 2.2.

1.145 “Submitting Party” has the meaning set forth in Section 11.3.1.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

1.146 “Tax” or “Taxes” means (a) any taxes, assessments, fees, including income, profits, gross receipts, net proceeds, sales, alternative or add on minimum, ad valorem, turnover, property, personal property (tangible and intangible), environmental, stamp, leasing, lease, user, duty, franchise, capital stock, transfer, registration, license, withholding, social security (or similar), unemployment, disability, payroll, employment, social contributions, fuel, excess profits, occupational, premium, windfall profit, severance, estimated, or other charge of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not and (b) any liability for the payment of any amounts of the type described in clause (a) as a result of the operation of law or any express obligation to indemnify any other person.

1.147 “Tax Residence Certificate” has the meaning set forth in Section 9.9.3.

1.148 “Technology Transfer Completion” and “Technology Transfer Plan” have the respective meanings set forth in Section 7.4.

1.149 “Term” has the meaning set forth in Section 14.1.

1.150 “Territory” means all countries in the world.

1.151 “Third Party” means a Person other than Astellas, Aquinox, or their respective Affiliates.

1.152 “Third Party Offer” has the meaning set forth in Section 2.14.1.

1.153 “Third Party Partner” means one or more Third Party licensees or joint venturers, to whom Aquinox grants rights for development and commercialization of the Product in the Aquinox Territory.

1.154 “Trademark License” has the meaning set forth in Section 2.13.1.

1.155 “Valid Claim” means: (a) a claim of an issued and unexpired Patent included within the Aquinox Patents, which has not been permanently revoked or declared unenforceable or invalid by an unreversed and unappealable or unreversed and unappealed decision of a court or other appropriate body of competent jurisdiction; or (b) a claim of a pending patent application included within the Aquinox Patents, which claim has not been abandoned or finally disallowed without the possibility of appeal or refiling of such application, provided that no more than [***] years has passed from the filing date of such patent application and provided further that upon the issuance of a claim that has been pending for more than [***] years, such claim shall again be deemed to be a Valid Claim; and, in each case of case (a) and (b) that Covers a Product.

ARTICLE II

LICENSES; [***]

2.1 License Grants to Astellas. Subject to the terms and conditions of this Agreement, Aquinox hereby grants to Astellas:

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

2.1.1 an exclusive (even as to Aquinox and its Affiliates, subject to Aquinox’s retained rights described below) royalty-bearing license, with the right to sublicense in accordance with Section 2.2, under the Aquinox Technology, solely to:

2.1.1.1 use, research, Develop, Commercialize, import, export and otherwise exploit the Compounds and Products in the Field in the Licensed Territory; and

2.1.1.2 subject to Section 7.5, Manufacture and have Manufactured the Compounds and Products in the Licensed Territory solely:

(a) for use and sale in the Field in the Licensed Territory, and

(b) to conduct Astellas Retained Territory Studies;

2.1.2 subject to Section 7.5, a non-exclusive, royalty-bearing license under the Aquinox Technology, with the right to sublicense in accordance with Section 2.2, to Manufacture and have Manufactured Compounds and Products in the Retained Territory solely:

2.1.2.1 for use and sale in the Field in the Licensed Territory, and

2.1.2.2 to conduct Astellas Retained Territory Studies; and

2.1.3 a non-exclusive, royalty-bearing license under the Aquinox Technology, with the right to sublicense in accordance with Section 2.2, to use, import and export the Compounds and Products in the Retained Territory solely to conduct Astellas Retained Territory Studies.

2.2 Sublicensing by Astellas. Subject to the terms and conditions of this Agreement, Astellas shall have the right to sublicense the rights granted to it under Section 2.1 to:

2.2.1 any of its Affiliates with prior written notice to Aquinox; provided that (a) such Affiliate agrees in writing to comply with the terms and conditions of this Agreement that are applicable to such Affiliate’s activities under such sublicense; and (b) Astellas remains fully liable for the performance of such Affiliate in accordance with this Agreement. Any sublicense granted by Astellas to one of its Affiliates shall terminate if such entity is no longer an Affiliate of Astellas and Aquinox’s approval is not obtained for the continuation of such sublicense in accordance with subsection 2.2.2 below; and

2.2.2 Third Parties with prior written notice to Aquinox, provided that (a) such Sublicensee agrees in writing to comply with the term and conditions of this Agreement that are applicable to such Sublicensee’s activities under such sublicense; and (b) Astellas remains fully liable for the performance of such Sublicensee in accordance with this Agreement.

Astellas will provide Aquinox with a copy of each agreement pursuant to which a sublicense is granted pursuant to this Section 2.2.2, from which Astellas may redact any terms unrelated to this Agreement.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

2.3 Aquinox Retained Rights. Aquinox hereby expressly retains, for itself and its Affiliates and licensees:

2.3.1 the rights under the Aquinox Technology to exercise its rights and perform its obligations under this Agreement, whether directly or through one or more Affiliates or licensees (other than Astellas) or subcontractors;

2.3.2 the rights to Manufacture and have Manufacture the Compounds and Products in the Licensed Territory solely for use and sale in the Retained Territory;

2.3.3 the rights to conduct one or more preclinical studies for the Compounds and Products in the Licensed Territory solely for use in the Retained Territory, [***] (each such [***] study, an “Aquinox Licensed Territory Preclinical Study”). For clarity, such [***]. Such Aquinox Licensed Territory Preclinical Study shall be added to the applicable Joint Preclinical Development Plan [***]; and

2.3.4 all rights to practice, and to grant licenses, under the Aquinox Technology outside of the scope of the licenses granted in Section 2.1, and the exclusive right to practice the Aquinox Patents and Aquinox Know-How worldwide with respect to compounds and products other than the Compounds and Products.

2.4 Licenses to Aquinox. Astellas hereby grants to Aquinox, subject to the terms and conditions of this Agreement:

2.4.1 an exclusive (even as to Astellas and its Affiliates, subject to Astellas’ retained rights described below), fully paid-up license, with the right to sublicense, under the Astellas Collaboration Technology solely to:

2.4.1.1 use, research, Develop, Commercialize, import, export and otherwise exploit the Compounds and the Products in the Retained Territory; and

2.4.1.2 Manufacture and have Manufactured the Compounds and Products in the Retained Territory solely:

(a) for use and sale in the Retained Territory, and

(b) to conduct Aquinox Licensed Territory Preclinical Studies;

2.4.2 a non-exclusive, fully paid-up license under the Astellas Collaboration Technology, with the right to sublicense, to Manufacture and have Manufactured Compounds and Products in the Licensed Territory solely:

2.4.2.1 for use and sale in the Field in the Retained Territory, and

2.4.2.2 to conduct Aquinox Licensed Territory Preclinical Studies; and

 

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2.4.3 a non-exclusive fully paid-up license, with the right to sublicense, under the Astellas Collaboration Technology and the Necessary Astellas Technology to use, import and export the Compounds and Products in the Licensed Territory solely to conduct Aquinox Licensed Territory Preclinical Studies;

2.4.4 a non-exclusive fully paid-up license, with the right to sublicense, under the Necessary Astellas Technology to Manufacture and have Manufactured Compounds and Products in the Licensed Territory solely:

2.4.4.1 for use and sale in the Retained Territory, and

2.4.4.2 to conduct Aquinox Licensed Territory Preclinical Studies.

2.5 Astellas Retained Rights. Astellas hereby expressly retains, for itself and its Affiliates and licensees:

2.5.1 the rights under the Astellas Collaboration Technology to exercise its rights and perform its obligations under this Agreement, whether directly or through one or more Affiliates or licensees (other than Aquinox) or subcontractors;

2.5.2 subject to Section 7.5, the rights to Manufacture and have Manufacture the Compounds and Products in the Retained Territory solely for use and sale in the Licensed Territory; and

2.5.3 subject to Section 4.2.2., the rights to conduct Astellas Retained Territory Studies in the Retained Territory.

2.6 [***] Technology. Upon [***] request, [***] shall discuss in good faith mutually agreeable terms upon which [***] would grant to [***] a license under the [***] solely to [***], in each case in or for the [***].

2.7 No Implied License. Neither Party grants to the other Party any rights or licenses in or to any intellectual property, whether by implication, estoppel, or otherwise, other than the license rights that are expressly granted under this Agreement.

2.8 Astellas Covenants.

2.8.1 Astellas covenants that, during the Term, it will not practice any Aquinox Technology outside the scope of the licenses expressly granted by Section 2.1. All Know-How and materials disclosed or provided under this Agreement by or on behalf of Aquinox shall be used by Astellas solely for the purposes of exercising the licenses and rights expressly granted herein.

2.8.2 Astellas covenants that, during the Term, it will not and will cause its Affiliates and Sublicensees not to (a) Develop any Product in the Retained Territory, except as expressly permitted hereunder, (b) Commercialize any Product in the Retained Territory, or (c) knowingly assist any Third Party in undertaking any activity described in subclause (a) or (b) above.

 

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2.9 Aquinox Covenants.

2.9.1 Aquinox hereby covenants that, during the Term, it will not practice any Astellas Technology or Astellas Collaboration Technology that is outside the scope of the license expressly granted by Section 2.4. All Know-How or materials disclosed or provided under this Agreement by or on behalf of Astellas shall be used by Aquinox solely for the purposes of exercising the licenses and rights expressly granted herein.

2.9.2 Aquinox covenants that, during the Term, it will not and will cause its Affiliates and Sublicensees not to (a) Develop any Product in the Licensed Territory, except as expressly permitted hereunder, (b) Commercialize any Product in the Licensed Territory, or (c) knowingly assist any Third Party in undertaking any activity described in subclause (a) or (b) above.

2.10 Existing Intellectual Property. Each Party shall be solely responsible for any and all amounts due to any Third Party under any agreement entered into by and between such Party or its Affiliates and such Third Party prior to the Effective Date relating to such Party’s and its Affiliates’ intellectual property.

2.11 New Intellectual Property.

2.11.1 Any intellectual property acquired or licensed by a Party following the Effective Date and during the Term that would be subject to a license set forth above and for which the Party granting such license under this Agreement (or any of its Affiliates) would be obligated to pay a Third Party due to the other Party’s use of such intellectual property or the use of which would be subject to terms and conditions additional to those set forth in this Agreement shall only be included in such license if such other Party agrees in writing to pay such amounts due to such Third Party (with any amounts due such Third Party due to the activities of both Parties to be shared on a pro rata basis based on the contribution of each Party’s activities to such payments, for example, as a proportion of sales in the respective territories) and/or comply with such terms and conditions, as applicable. The Party acquiring or licensing such intellectual property shall notify the other Party in writing within [***] days of acquiring or licensing such intellectual property, which notice shall specify the applicable terms and conditions, including any payments therefor. With respect to any payments that are not territory specific (e.g., milestone payments that are payable upon the first product to achieve the applicable milestone event), the Party providing such notice shall propose an equitable allocation of such payments and the Parties will discuss in good faith the rationale of including the new intellectual property rights in the licenses hereunder and the proposed payment allocation. For clarity, this Section 2.11.1 [***].

2.11.2 Should either Party identify during the Term any intellectual property of a Third Party that is necessary or useful for the manufacture, use or sale of a Compound or Product, such Party promptly shall notify the JSC thereof. [***] shall have [***] such intellectual property; provided that (a) [***] shall provide [***] a reasonable [***] on the [***] applicable to [***] to the [***] thereof, and (b) the [***] that are applicable [***] Territory shall be [***] that are applicable [***] Territory.

 

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2.12 Rights in Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by either Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to “intellectual property” as defined under Section 101 of the U.S. Bankruptcy Code. The Parties agree that each Party, as licensee of rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code or any comparable foreign law.

2.13 Trademark Licenses.

2.13.1 Aquinox hereby grants to Astellas an exclusive (even as to Aquinox) license to use the Aquinox Housemarks solely in connection with Astellas’ exercise of the license granted to it pursuant to Section 2.1.1 above, including the limited right to sublicense to Sublicensees as set forth in Section 2.2. Astellas will use the Aquinox Housemarks (a) solely in the manner specified in this Agreement in connection with Products and not for any other goods or services, and (b) only in the form and manner as reasonably prescribed in writing to Astellas in advance from time to time by Aquinox (provided, however, that Astellas shall have a reasonable period of time to modify any of its promotional, marketing, regulatory, or other practices, including in light of Applicable Laws, as may be reasonably necessary to comply with any such form and manner prescriptions or any changes thereto). Without limiting the foregoing, any use by Astellas of a Aquinox Housemark for a Product should be accompanied by a trademark notice that states that such Aquinox Housemark is a trademark (or a registered trademark, if applicable) of Aquinox. Any use by Astellas of the Aquinox Housemarks, and Aquinox’s maintenance of the Aquinox Housemarks, shall be in compliance with all Applicable Laws, including those relating to the licensing of trademarks, in the Licensed Territory. Astellas and Aquinox agree to promptly correct any failure to comply with this Section 2.13.1. For the avoidance of doubt, Astellas shall have no responsibility or obligation for (and Aquinox shall be solely responsible for) the filing, maintenance, registration, prosecution, and enforcement of the Aquinox Housemarks, which shall be at Aquinox’s sole cost and expense.

2.13.2 Astellas acknowledges Aquinox’s ownership of all right, title, and interest in and to the Aquinox Housemarks, and agrees that it will do nothing inconsistent with such ownership, that all use of the Aquinox Housemarks by Astellas will inure to the benefit of and be on behalf of Aquinox, and that any goodwill associated with the use of any Aquinox Housemark by Astellas will inure to the benefit of Aquinox. Astellas agrees that nothing in this Agreement will give Astellas any right, title, or interest in the Aquinox Housemarks other than the right to use the Aquinox Housemarks in accordance with this Agreement. Anything in this Agreement to the contrary notwithstanding, if by virtue of Astellas’ use of the Aquinox Housemarks, Astellas acquires any equity, title, or other rights in or to the Aquinox Housemarks, Astellas hereby agrees all such equity, title, or other rights in or to the Aquinox Housemark belong to Aquinox upon creation of the value, and Astellas agrees to and hereby does assign and transfer any such Aquinox Housemark rights to Aquinox. Astellas agrees not to use or file any application to register any trademark or trade name that is confusingly similar to any Aquinox Housemark.

 

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2.14 [***].

2.14.1 [***]. Aquinox [***] Astellas [***] in the Licensed Territory [***] for the [***], as follows: If [***] determines to [***] or if, [***] to such [***] Aquinox [***] in the Licensed Territory [***], then [***] shall provide written notice thereof and reasonably [***] (including the [***]) to [***] (the “[***]”). If, within [***] Business Days following [***] receipt of the [***], or [***] Business Days following [***] receipt of the [***] in the case of a [***] (each, the “[***]”), [***] provides [***] with written notice that [***] wishes to [***], then for [***] days following [***] receipt of the [***], or [***] days following [***] receipt of the [***] in the case of a [***] (each, the “[***]”), the Parties shall [***]. Neither Party shall [***] as are [***] to such Party [***]. If [***] does not [***] with the [***], or if [***] with the [***] and the Parties have [***] into a [***] for the [***] by [***], then [***] obligations and [***] with respect to [***].

2.14.2 [***]. Aquinox [***] Astellas [***] the Effective Date and [***] (the “[***]”, provided that either Party may [***] the other Party) [***] one or more [***] Compounds and Products [***] Territory other than the [***]. At [***] written request, the Parties shall [***] for such [***] Territory [***] and reasonably detailed [***] of the Products, and [***] shall have [***] and [***] shall have [***] under this Section 2.13.2.

2.15 [***].

2.15.1 [***]. During the Term, [***] shall [***], and shall cause its Affiliates and its licensees [***]

 

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in the Field [***] the Compounds [***] for which [***]. “[***]” means a [***] which has not been [***] of a [***]. For clarity, this Section 2.15.1 shall not apply with respect to any [***] with respect to which [***] pursuant to Section [***].

2.15.2 [***]. During the Term, [***] shall [***], and shall cause its Affiliates and its licensees [***] in the Territory [***].

ARTICLE III

GOVERNANCE

3.1 JSC; Formation and Purpose. Within thirty (30) days of the Effective Date, the Parties will establish a joint steering committee (the “JSC”) to provide strategic oversight and facilitate communication with respect to the Development, and Commercialization of Products under this Agreement. Except as otherwise provided herein, the role of the JSC will be to:

3.1.1 coordinate the management and implementation of the Parties’ Development, Commercialization and Medical Affairs activities under this Agreement;

3.1.2 review, coordinate, discuss, and approve the overall strategy for seeking Regulatory Approval of the Products in the Field in the Territory;

3.1.3 review and oversee the Joint Development Plans, including any amendments or revisions thereto;

3.1.4 review, approve and oversee the Joint Manufacturing Plan and Joint Medical Affairs Plan, and in each case, any amendments or revisions thereto;

3.1.5 review and coordinate forecasting of Astellas’ expected requirements for Compounds and Products under the Joint Manufacturing Plan;

3.1.6 create and oversee any subcommittees or working groups as the JSC may deem appropriate;

3.1.7 address any issues expressly delegated to the JSC under this Agreement; and

3.1.8 consult and coordinate with respect to Product Development and Commercialization in the Retained Territory.

3.2 Membership and Procedures.

 

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3.2.1 Membership. Promptly after the Effective Date, each Party’s Executive Officer will designate [***] representatives with appropriate expertise to serve as members of the JSC. The Parties may elect to vary the number of representatives that serve on the JSC, provided that in all cases the JSC maintains an equal number of representatives from each Party. Each Party, through its Executive Officer, may replace its representatives on the JSC at any time upon written notice to the other Party.

3.2.2 Chairperson; Minutes. One member of the JSC will serve as the chairperson, by itself or its designated person, who will be responsible for organizing meetings, preparing and circulating an agenda in advance of each meeting, and preparing minutes of each meeting. Each JSC representative shall review and approve such minutes in writing; provided that if a representative does not object to the accuracy of such minutes within [***] days after the circulation of such minutes, such minutes shall be deemed approved by such representative. Aquinox will appoint the chairperson for an initial [***] term and thereafter the Parties will alternate in appointing the chairperson for [***] terms.

3.2.3 Meetings. Until the first MAA for Product is approved in the Licensed Territory, the JSC will hold meetings on a [***] basis. Thereafter, the JSC will hold meetings at least [***] (i.e., approximately every [***] months), or more frequently as the Parties may agree. Meetings of the JSC shall be effective only if at least one (1) representative of each Party is present or participating. The JSC may meet (a) in person at either Party’s facilities or at such locations as the Parties may otherwise agree, (b) by audio or video teleconference or (c) by e-mail (solely in the case of ad-hoc JSC meetings), provided that at least [***] per Calendar Year shall be held in person with the location to alternate between Aquinox’s and Astellas’ offices, with the first such meeting to be held at Aquinox’s offices. With the prior consent of the other Party’s representatives (such consent not to be unreasonably withheld or delayed), each Party may invite non-members to participate in the discussions and meetings of the JSC, provided that such participants shall have no vote and shall be subject to the confidentiality provisions set forth in Article XI. Additional meetings of the JSC may also be held with the consent of each Party, or as required under this Agreement, and neither Party will unreasonably withhold, delay or condition its consent to hold such an additional meeting.

3.2.4 Limitation of Authority. The JSC and its subcommittees will have only such powers as are specifically delegated to it hereunder and will not be a substitute for the rights of the Parties. Without limiting the generality of the foregoing, neither the JSC nor any of its subcommittees will have any power to amend this Agreement, waive compliance with any obligation hereunder or determine whether any breach hereunder has occurred. For clarity, the JSC does not have the authority to commit Aquinox to conduct or complete any activity of Aquinox or its Affiliates or licensees set forth in any Plan, which activities are included for informational purposes only. Aquinox shall only have diligence obligations (which shall be limited to the use of Commercially Reasonable Efforts) for those activities that are expressly agreed in writing as being subject to such diligence obligations by its Executive Officer or his or her designee.

3.3 Decision-Making.

3.3.1 The JSC will make good faith efforts to make all decisions on matters before it by consensus. Subject to the terms of this Section 3.3, actions to be taken by the JSC shall be

 

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taken only following a unanimous vote, with each Party’s representatives collectively having one (1) vote. If the JSC fails to reach unanimous consent on a particular matter within [***] days of such request), then either Party may submit such matter for resolution to the Executive Officers pursuant to Section 15.2.

3.3.2 If the JSC is unable to reach a decision by unanimous vote pursuant to Section 3.3.1 and the Executive Officers cannot unanimously agree on such matter within [***] days of such matter being submitted to them pursuant to Section 3.3.1 (or, if such matter is urgent, within [***] days of such request), then the Party listed below shall have the final say on the following matters:

3.3.2.1 [***]; and

3.3.2.2 [***]

3.3.3 Any dispute under Section 3.3.2.1 or 3.3.2.2 as to whether a Party’s decision would have a “material adverse effect” as described in such Section shall be subject to Section 15.4.

3.3.4 Neither Party shall have the right to use its deciding vote under Section 3.3.2 to require the other Party to undertake activities or costs other than those that have been expressly agreed to in writing by such Party.

3.4 Expenses. Each Party will be responsible for all of its own travel and other costs and expenses for its respective members, designees, and non-member invitees to attend meetings of, and otherwise participate on, the JSC and any subcommittees or working groups.

3.5 Alliance Managers. Promptly after the Effective Date, each Party shall appoint an individual who shall be an employee of such Party having appropriate qualification and experience to act as the alliance manager for such Party (the “Alliance Manager”). Each Alliance Manager shall be responsible for coordinating and managing processes and interfacing between the Parties on a day-to-day basis throughout the Term. The Alliance Manager will ensure communication to the JSC of all relevant matters raised at any joint subcommittees or working groups. Each Alliance Manager shall be permitted to attend meetings of the JSC as a non-voting participant. The Alliance Managers shall be the primary contact for the Parties regarding the activities contemplated by this Agreement and shall facilitate all such activities hereunder. Each Party may replace its Alliance

 

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Manager with an alternative representative at any time with prior written notice to the other Party. Any Alliance Manager may designate a substitute to temporarily perform the functions of that Alliance Manager. Each Alliance Manager shall be charged with creating and maintaining a collaborative work environment within the JSC and its subcommittees. Each Party will be responsible for all of its own costs with respect to its Alliance Manager.

3.6 Discontinuation of the JSC. The activities to be performed by the JSC shall solely relate to governance under this Agreement, and are not intended to be or involve the delivery of services. The JSC shall continue to exist until (a) the Parties mutually agree to disband the JSC, or (b) Aquinox provides written notice to Astellas of its intention to disband and no longer participate in the JSC. Once the Parties mutually agree or Aquinox has provided written notice to disband the JSC, the JSC shall have no further obligations under this Agreement and, thereafter, each Party shall designate a contact person for the exchange of information under this Agreement or such exchange of information shall be made through the Alliance Managers, and decisions of the JSC shall be decisions as between the Parties, subject to the other terms and conditions of this Agreement. In the event the JSC is disbanded as provided above, any decisions that are designated under this Agreement as being subject to the review or approval of the JSC shall be subject to the review and approval of the Parties directly.

ARTICLE IV

DEVELOPMENT

4.1 General.

4.1.1 Astellas shall use Commercially Reasonable Efforts to Develop the Compounds and Products and obtain Regulatory Approval for the Products in each country in the Field in the Licensed Territory, including the Initial Product for the Primary Indication. Without limiting the generality of the foregoing, Astellas shall use Commercially Reasonable Efforts to conduct its activities under and in accordance with the Development Plans.

4.1.2 Astellas shall provide regular updates to the JSC regarding the Development of Compounds and Products in the Licensed Territory. Aquinox shall provide regular updates to the JSC regarding the Development of Compounds and Products in the Retained Territory, subject to its obligations to its licensees with respect to Data other than safety Data.

4.1.3 If Aquinox reasonably and in good faith believes that Astellas is not using Commercially Reasonable Efforts, taken as a whole, to Develop a particular Product in a Specified Country, then Aquinox may provide Astellas written notice thereof. Within [***] Business Days of Astellas’ receipt of such notice, Astellas shall provide to Aquinox documentation demonstrating Astellas’ use of Commercially Reasonable Efforts with respect to such Product in accordance with Section 1.52 (a), (b) and (c) (Definition of Commercially Reasonable Efforts). Astellas shall also provide such additional information regarding such Development as Aquinox may reasonably request, including the opportunity to speak with senior personnel responsible for such Development of such Product. If requested in writing by Aquinox, within [***] Business Days of such request, a JSC meeting shall be held in person or by videoconference to discuss such documentation and to answer questions or concerns reasonably posed by Aquinox regarding such Development. For clarity, Aquinox’s exercise of its rights under this Section 4.1.3 shall not waive any right or remedy of Aquinox hereunder, including under Section 14.3, or any obligation of Astellas hereunder.

 

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4.2 Preclinical Development.

4.2.1 All material activities that are required for the preclinical Development of a Product for Licensed Territory shall be conducted pursuant to a “Joint Preclinical Development Plan”, containing: (a) with respect to Astellas, anticipated timelines, strategy and specific commitments of Astellas to preclinically Develop such Product in or for the Licensed Territory, which activities Astellas shall use Commercially Reasonable Efforts to conduct; and (b) with respect to Aquinox and subject to Aquinox’s obligations to its licensees in the Retained Territory, anticipated timelines and strategy of Aquinox to preclinically Develop such Product in or for the Retained Territory (which information shall be provided solely for purposes of facilitating coordination between the Parties, except as set forth in Section 3.2.4). The Parties shall jointly prepare a draft Joint Preclinical Development Plan (subject to subclause (b) above) for each Product Developed hereunder, including the Initial Product, and submit it to the JSC for review.

4.2.2 If Astellas reasonably decides that a preclinical study of a Product will be necessary solely for Regulatory Approval in the Licensed Territory, Astellas may conduct such preclinical study at its sole expense by itself or through its Affiliates or subcontractors in the Territory, [***] (each such [***] study, an “Astellas Retained Territory Preclinical Study”). For clarity, such [***]. Such study shall be added to the Joint Preclinical Development Plan [***].

4.2.3 Each Party shall report on the planning, status and results of its activities under each Joint Preclinical Development Plan through the JSC and/or any applicable subcommittee or working group established the JSC.

4.2.4 With respect to the Initial Product, Astellas shall be responsible for costs incurred under the Joint Preclinical Development Plan that solely relate to obtaining Regulatory Approval in the Licensed Territory, and Aquinox shall be responsible for [***] costs incurred under the Joint Preclinical Development Plan. With respect to any Product other than the Initial Product, the Parties shall agree in writing on the sharing of costs, if any, under the applicable Joint Preclinical Development Plan.

4.3 Clinical Development.

4.3.1 All material activities that are required for the clinical Development of a Product for the Licensed Territory shall be conducted pursuant to a “Joint Clinical Development Plan”, containing: (a) with respect to Astellas, anticipated timelines, strategy and specific commitments of Astellas to clinically Develop such Product in or for the Licensed Territory, which activities Astellas shall use Commercially Reasonable Efforts to conduct; and (b) with respect to Aquinox and subject to Aquinox’s obligations to its licensees in the Retained Territory, anticipated timelines and strategy of Aquinox to clinically Develop such Product in or for the Retained

 

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Territory (which information shall be provided solely for purposes of facilitating coordination between the Parties, except as set forth in Sections 3.2.4 and 4.4). For each Product Developed hereunder, including the Initial Product, the Parties shall jointly prepare a draft Joint Clinical Development Plan (subject to subclause (b) above) and submit it to the JSC for review.

4.3.2 Except as expressly agreed otherwise in writing, Aquinox (and its Affiliates and licensees) shall have the sole right to conduct clinical trials of the Products in the Retained Territory and Astellas (and its Affiliates and sublicensees) shall have the sole right to conduct clinical trials of the Products in the Licensed Territory.

4.3.3 Astellas may conduct, at its sole expense, one or more pharmacology studies for the Products in the Retained Territory, under Aquinox’s IND unless the Parties agree otherwise in writing, solely for regulatory use in the Licensed Territory, [***] (each such [***] study, an “Astellas Retained Territory Pharmacology Study”). For clarity, [***]. Such Astellas Retained Territory Pharmacology Study shall be added to the applicable Joint Clinical Development Plan [***].

4.3.4 Aquinox shall bear the costs of any clinical studies and other Development activities for a Product that are necessary solely for the Regulatory Approval in the Retained Territory. Except as set forth in Section 4.4, Astellas shall bear the costs of any clinical trials or other Development activities for a Product that are necessary solely for the Regulatory Approval of such Product in the Licensed Territory.

4.3.5 With respect to any clinical studies and other Development activities other than those as set forth in Section 4.3.4, Astellas be responsible for operational and administrative matters for sites in the Licensed Territory, at Astellas’ expense, and Aquinox shall be responsible for operational and administrative matters for sites in the Retained Territory, at Aquinox’s expense. The Parties shall share the Development Costs for managing global operations of cross-territory clinical studies for a Product as they shall agree in writing prior to the initiation of such activities for such Product. The Parties shall determine such expense sharing [***].

4.4 Certain Clinical Trials for the Initial Product. Aquinox shall use Commercially Reasonable Efforts to complete, at its expense, the following studies with respect to the Initial Product, in each case as identified more specifically in the Joint Clinical Development Plan for the Initial Product:

4.4.1 the on-going Phase 1 Clinical Trial of the Initial Product with Japanese population that is currently being conducted in the United States; and

4.4.2 the LEADERSHIP301 Study.

4.5 Review of Protocol Synopsis .

 

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4.5.1 Astellas shall provide Aquinox directly, or through the JSC, with a reasonable opportunity (at least [***] Business Days prior to the planned initiation of the applicable non-clinical study and at least [***] Business Days prior to the planned initiation of the applicable clinical trial) to review and comment upon a draft protocol synopsis in English for each of the non-clinical studies and clinical trials of Products occurring within the Licensed Territory and conducted by or on behalf of Astellas or its Affiliates or Sublicensees. Aquinox shall provide its comments on the protocol synopsis, if any, within [***] Business Days following the day of receipt, and Astellas shall discuss any comments with Aquinox in good faith. Astellas shall promptly provide to Aquinox the final protocol synopsis in English. Except as set forth in Section 4.5.3, review of draft protocols by Aquinox is not required, and Astellas shall share full protocols (which are not required to be in English unless filed in English) promptly after finalization.

4.5.2 Aquinox shall provide Astellas directly, or through the JSC, with a reasonable opportunity (at least [***] Business Days prior to the planned initiation of the applicable non-clinical study and at least [***] Business Days prior to the planned initiation of the applicable clinical trial) to review and comment upon a draft protocol synopsis for each of the non-clinical studies and clinical trials of Products occurring within the United States, Europe and/or Canada and conducted by or on behalf of Aquinox or its Affiliates. Astellas shall provide its comments, if any, on the protocol synopsis within [***] Business Days following the day of receipt, and Aquinox shall discuss any comments with Astellas in good faith. Aquinox shall promptly provide to Astellas the final protocol synopsis. Except as set forth in Section 4.5.3, review of draft protocols by Astellas is not required, and Aquinox shall share full protocols (in the language filed) promptly after finalization.

4.5.3 Each Party that has the right to receive and review a protocol synopsis under this Section 4.5 shall have the right to receive and review the full protocol to which such synopsis applies if such Party determines in good faith that such review is reasonably necessary. Any such protocol shall be provided in English with reasonable time for translation following such Party’s request therefor.

4.6 Development in the Retained Territory. As between the Parties, and except as provided in Section 4.4, Aquinox shall be solely responsible and shall have sole discretion and control (at Aquinox’s sole cost and expense) for all preclinical, clinical, and other Development and Commercialization activities (including regulatory activities) with respect to Products in the Retained Territory and, as between the Parties, the results of such activities shall be the sole property of Aquinox.

4.7 Transfer of Data Relating to the Initial Product.

4.7.1 Data Generated as of the Effective Date. Promptly after the Effective Date, Aquinox shall make electronically available (with Astellas’ ability to download and print out), copies of all Regulatory Filings owned or submitted by Aquinox in the Territory and in existence as of the Effective Date that have been filed with the FDA, EMA or Health Canada. Astellas shall have the right to use and reference any and all such Regulatory Filings and Data to obtain and maintain Regulatory Approval for the Products and otherwise Commercialize the Products in the Territory in accordance with the terms of this Agreement.

 

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EXECUTION VERSION

CONFIDENTIAL

 

4.7.2 Data Resulting from Existing Studies. On a [***] basis during the Term, and subject to Applicable Laws and good scientific practice, Aquinox shall provide to Astellas, to the extent not already provided and at no additional cost to Astellas, copies of all Data generated by or on behalf of Aquinox with respect to and in the course of conducting the ongoing studies set forth in Section 4.4.1 (including all study reports analyzing such Data). Final study reports shall be provided promptly following finalization. Astellas shall have the right to use and reference any and all such Data to obtain and maintain Regulatory Approval for the Products and otherwise Commercialize the Products in the Territory in accordance with the terms of this Agreement.

4.8 Other Data Generated by Either Party after the Effective Date.

4.8.1 On a [***] basis during the Term, and subject to Applicable Laws and good scientific practice, each Party shall provide to the other Party, to the extent not already provided and at no additional cost to such other Party, electronic access (with the other Party’s ability to download and print out) to all Data generated by or on behalf of the Party with respect to and in the course of conducting studies with respect to the Products (including all study reports analyzing such Data), which are necessary or reasonably useful for such other Party to obtain or maintain Regulatory Approval of such Products in its respective territory. Subject to Section 4.8.2, such other Party and its Affiliates and (sub)licensees shall have the right to use and reference any and all such Data to obtain and maintain Regulatory Approval for the Products and otherwise Commercialize the Products in its respective territory in accordance with the terms of this Agreement and, with respect to any Data.

4.8.2 Subject to Section 2.14.2, Astellas acknowledges that Aquinox may, in its sole discretion, enter into one or more agreements with Third Parties and grant such Third Parties a license to Develop and/or Commercialize the Products in the Retained Territory (each such Third Party, an “Aquinox Partner” and each such agreement, an “Aquinox Partner Agreement”). If Aquinox enters into an Aquinox Partner Agreement, then Aquinox’s obligation to share the safety Data related to the Products generated by such Aquinox Partner for Astellas’ use in the Licensed Territory in accordance with this Agreement shall be stipulated in such Aquinox Partner Agreement. Aquinox shall use reasonable efforts to include in each Aquinox Partner Agreement the right for Astellas to use in the Licensed Territory efficacy Data for Products generated by such Aquinox Partner, provided that if such right is not included in a particular Aquinox Partner Agreement, then Aquinox shall not share with Astellas any of such Aquinox Partner’s efficacy Data and shall not share with such Aquinox Partner any efficacy Data generated by Astellas under this Agreement until such time, if any, that such Aquinox Partner’s efficacy Data can be shared with Astellas.

4.9 Ownership of Data. As between the Parties, the Party generating any Data shall own such Data, subject to the licenses and other rights granted by such Party to the other Party under this Agreement with respect to the use of or access to such Data.

4.10 Performance and Diligence.

4.10.1 Astellas shall use Commercially Reasonable Efforts to Develop, and to prepare and file the MAA (and any amendment thereto) for and seek and maintain Regulatory

 

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CONFIDENTIAL

 

Approval for, the Products in the Licensed Territory, and, without limiting the generality of the foregoing, in each of the Specified Countries. Astellas shall give Aquinox written notice within [***] Business Days following any determination by Astellas to cease Development of any Product in any Specified Country, which notice shall be deemed to be a notice of termination of this Agreement pursuant to Section 14.2.1.2 with respect to such Product in such Specified Country.

4.10.2 Each Party shall perform its Development activities relating to the Compounds and Products in accordance with all Applicable Laws.

4.10.3 Astellas may not conduct any Development activities with respect to any Product that are not set forth in a Development Plan approved by the JSC, or that are inconsistent with this Agreement, without Aquinox’s prior written consent.

4.11 Records, Reports and Information.

4.11.1 Each Party shall maintain complete, current and accurate records of all work conducted by it under each Development Plan, and all Data resulting from such work. Such records shall fully and properly reflect all work done and results achieved in the performance of such Development Plan in good scientific manner appropriate for regulatory purposes. Each Party shall document all preclinical studies and clinical trials in formal written study reports according to applicable national and international guidelines (e.g., ICH, GCP, GLP, and GMP). Each Party shall have the right to review and such records maintained by the other Party at reasonable times, upon written request.

4.11.2 Each Party shall provide to the other Party, to the extent not already provided and at no additional cost to such other Party, electronic access (with the other Party’s ability to download and print out) (a) investigator’s brochures for the Products and updates thereto and (b) upon such other Party’s written request and solely to the extent it is commercially reasonable for such Party to provide such electronic access, those records maintained by the other Party pursuant to Section 4.11.1 that are necessary for regulatory purposes in the other Party’s territory or in connection with a technology transfer of Section 7.4.

4.11.3 Each Party shall present reports and any material updates of investigators’ brochure in English at the JSC meetings on its Development and regulatory activities with respect to the Product, including without limitation any significant formal or informal meetings between such Party and the Regulatory Authority in its Territory, at a level of detail to be agreed by the JSC; provided, however, that any such presentation shall include at least a summary of the resulting Data for, all preclinical studies and all clinical trials conducted by such Party with the Product, subject to Aquinox’s obligations to its licensees.

ARTICLE V

REGULATORY MATTERS

5.1 Generally.

5.1.1 The Parties shall discuss the regulatory strategy for the Products in the Territory through the JSC in order to identify any material risk, value and impact on regulatory assessment, labeling, pricing and reimbursement in markets throughout the Territory. The Parties

 

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EXECUTION VERSION

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shall seek to agree on a global registration strategy in the Territory for each Product for consistency of content and labeling, and optimal filing timelines (parallel and staggered) for markets throughout the Territory.

5.1.2 Astellas shall be the IND holder in the Licensed Territory and shall have responsibility for, and shall use Commercially Reasonable Efforts to conduct, all regulatory activities relating to the Compounds and Products within the Licensed Territory at its own cost, supported by Aquinox as reasonably requested by Astellas and at Astellas’ expense. Astellas shall promptly provide to Aquinox any and all correspondence and filings with PMDA and other Regulatory Authorities in the Licensed Territory. Astellas shall not be obligated to translate Regulatory Filings in the Licensed Territory into English.

5.1.3 Aquinox shall be responsible for all regulatory activities relating to the Compounds and Products within the Retained Territory at its own cost, supported by Astellas as reasonably requested by Aquinox and at Aquinox’s expense, and shall update the JSC with respect to such activities. Aquinox shall promptly provide to Astellas any and all Regulatory Filings with FDA, EMA or Health Canada, subject to any obligations to any Aquinox Partner.

5.2 Regulatory Activities in the Licensed Territory. Astellas, at its sole cost and expense and in accordance with, the terms and conditions of this Agreement and the requirements of all Applicable Laws will use Commercially Reasonable Efforts to take all actions necessary to prepare and file all Regulatory Filings with respect to the Products required to obtain Regulatory Approval for the Products in the Licensed Territory. Without limiting the applicability of the foregoing and the remainder of this ARTICLE V, Astellas, through the JSC, will keep Aquinox reasonably informed of all material events and developments occurring in the course of obtaining Regulatory Approval in the Licensed Territory, including meetings with Regulatory Authorities in the Licensed Territory relating to the Products.

5.3 Astellas Regulatory Data and Regulatory Approvals.

5.3.1 Regulatory Filings.

5.3.1.1 Review. The JSC shall create a subcommittee or working group to coordinate communication and the exchange of information between the Parties with respect to Regulatory Filings to be prepared and submitted by or for Astellas in the Licensed Territory; and without limiting the foregoing, Astellas shall provide Aquinox with summaries, overviews, or excerpts (in English) of all Regulatory Filings sufficiently in advance of filing thereof to permit Aquinox to review and comment thereon, and Astellas shall discuss such comments with Aquinox in good faith. Astellas may submit any MAA in the Licensed Territory without consent from Aquinox, subject to the preceding sentence.

5.3.1.2 Accelerated Reporting. In the event that Applicable Laws require either Party to report information related to any Regulatory Activity in its respective territory on an accelerated basis such that such Party is unable to comply with Section 5.3.1, such Party will nonetheless provide to the other Party a prompt and detailed description of the event that triggered the accelerated reporting obligation as soon as reasonably practicable, but in no event later than [***] Business Days after the reporting Party obtains actual knowledge of such triggering event.

 

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5.3.1.3 Copies. Subject to Applicable Laws, Astellas shall provide to Aquinox : (a) electronic copies of each Regulatory Filing as submitted to Regulatory Authorities promptly following such submission, and summaries of such filing (which are not required to be in English unless filed in English); (b) summaries (in English) of written communications to Astellas (or its Affiliate or Sublicensee) from any Regulatory Authority relating to the Compounds or Products, promptly following receipt thereof; and (c) a brief statement (in English) of any material changes in the final Regulatory Filings from the summaries previously provided by Astellas to Aquinox.

5.3.2 Regulatory Meetings. Each Party will provide the other Party (through the JSC) with advance notice of any formal, scheduled meetings with any Regulatory Authority in its respective territory (including any meetings related to the final positioning of labeling and safety claims within the original and subsequent regulatory submissions), and provide a brief description of the topics to be presented or discussed at each such meeting, in English. Promptly following such meeting, the Party participating in such meeting shall provide to the other Party the minutes of such meeting, in English. Aquinox will consider in good faith any request from Astellas to participate in meetings regarding the Products with the FDA, EMA or Health Canada, provided that the final decision regarding such participation will be at Aquinox’s sole discretion.

5.3.3 Holder of Regulatory Filings. Astellas will hold title to all Regulatory Filings (including MAAs) and Regulatory Approvals with respect to the Products in the Licensed Territory, except as may be required in connection with Aquinox’s exercise of its rights hereunder with respect to (a) any Aquinox Licensed Territory Preclinical Study or (b) the manufacturing of Compounds and Products; provided, however, that, Astellas shall file for and obtain Regulatory Filings and Regulatory Approvals in such manner as may be required under Applicable Laws in the Licensed Territory to allow for the expeditious transfer thereof to Aquinox or Aquinox’s designee pursuant to Section 14.4.1 upon certain terminations of this Agreement.

5.4 Regulatory Costs. Astellas shall be responsible for all costs and expenses of preparing, maintaining, formatting, and filing Regulatory Filings for Products in the Licensed Territory and for maintaining Regulatory Approval for Products in the Licensed Territory.

5.5 Astellas Regulatory Filings. Astellas shall not file any Regulatory Filings for Products outside of the Licensed Territory.

5.6 Rights of Reference. Subject to Section 4.8.2, each Party hereby grants, at no cost, to the other Party and the other Party’s Affiliates and (sub)licensees the right to use, cross-reference, file or incorporate by reference all Regulatory Filings pertaining to a Product submitted by or on behalf of such granting Party. The receiving Party and its Affiliates and (sub)licensees may use such rights of reference for the purpose of seeking, obtaining and maintaining Regulatory Approval and Commercializing Product in its respective territory and otherwise performing its rights and obligations under this Agreement.

5.7 Safety; Adverse Event Reporting.

 

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EXECUTION VERSION

CONFIDENTIAL

 

5.7.1 Pharmacovigilance; Global Safety Database. Aquinox shall establish and maintain at Aquinox’s sole cost and expense the global drug safety database for the Products. Astellas shall have the right to access Data from the global drug safety database as necessary in order for Astellas to comply with Applicable Laws in the Licensed Territory. Astellas shall be responsible at its sole cost and expense for (a) collection of Data for the Products during Development and Commercialization as required by Applicable Laws, (b) reporting of Data during Development and Commercialization, including reportable Adverse Events, to the applicable Regulatory Authorities as required by Applicable Laws and (c) providing a completed CIOMS (in English) to Aquinox for entry into the global safety database in accordance with procedures to be agreed in the pharmacovigilance agreement to be entered into pursuant to Section 5.7.2. Both Parties expressly acknowledge that information exchanged between the Parties pursuant to this Section 5.7, can and will be shared with Regulatory Authorities and any Affiliates, Sublicensees and Aquinox Partners engaged in Development and Commercialization activities for the Products in the Retained Territory or the Licensed Territory.

5.7.2 Safety Agreement. Within [***] days following the Effective Date, or other such period as the Parties may agree, the Parties shall endeavor to begin negotiations regarding a mutually acceptable pharmacovigilance agreement. The Parties agree that the pharmacovigilance agreement shall set forth the Parties’ respective obligations regarding pharmacovigilance, including the exchange of Data, as applicable.

ARTICLE VI

COMMERCIALIZATION

6.1 Overview and Diligence. Subject to, and in accordance with, the terms and conditions of this Agreement and all Applicable Laws, Astellas, at its expense, will be solely responsible for Commercializing the Product(s) in the Licensed Territory. Astellas shall use Commercially Reasonable Efforts to Commercialize the Product(s) in each indication that receives Regulatory Approval in the Licensed Territory in the country in which such Regulatory Approval was granted, and shall achieve the First Commercial Sale in the Licensed Territory within [***] days of obtaining Regulatory Approval for such Product in the Licensed Territory.

6.2 Commercialization Plan. Without limiting the generality of the other provisions in this ARTICLE VI, Astellas will prepare and submit to the JSC a plan containing the strategy, activities and timeline for marketing and selling the Products in the Licensed Territory (as updated pursuant to this Section 6.2, the “Commercialization Plan”). Astellas will submit a proposed draft of the Commercialization Plan for the Licensed Territory to the JSC for review and discussion by the JSC no later than [***] months prior to the anticipated date of the First Commercial Sale of the first Product in the Licensed Territory and [***] months prior to the anticipated date of the first commercial sale of any other Product in the Licensed Territory. Astellas will deliver to the JSC an update of the relevant sections of the Commercialization Plan on an annual basis during the Term. Updates to the Commercialization Plan will reflect, among other things, each new indication in the Field for which the Product has received Regulatory Approval. Astellas will be solely responsible for all decisions regarding the day-to-day conduct of Commercialization within the Licensed Territory.

6.3 Pricing.

 

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6.3.1 Astellas shall be responsible, at its own expense, for seeking Pricing Approval in the Licensed Territory. Astellas shall keep Aquinox informed on an ongoing basis of Astellas’ strategy for seeking, and the results it obtains in seeking, Pricing Approval, including, without limitation, the results of any material discussion or other communication with relevant Governmental Authorities regarding Pricing Approval, via regular reports to the JSC no less frequently than quarterly for Japan and annually for other countries in the Licensed Territory.

6.3.2 Subject to Section 6.3.3, Astellas shall have the sole right to make all decisions regarding the pricing of the Product in the Licensed Territory. Notwithstanding anything in this Agreement express or implied to the contrary, Aquinox shall not have any right to direct, control, or approve Astellas’ decision regarding the pricing of Products for the Licensed Territory. Astellas shall update, through the JSC, Aquinox with respect to such pricing matters, provided that the provision to Aquinox of pricing data shall be for informational purposes only.

6.3.3 In the event Astellas sells a Product in a “bundle” with one or more other products or services at a discount to any Third Party for sale of Products, Astellas shall not disproportionately discount the Product relative to the other products or services composing such bundle.

6.4 Reports. Astellas shall update the JSC at the JSC’s regularly-scheduled meetings regarding Astellas’ significant Commercialization activities (such as promotion campaign) with Products in the Licensed Territory. In addition, Astellas shall present written reports to the JSC annually, summarizing Astellas’ significant Commercialization activities with respect to Products in the Licensed Territory pursuant to this Agreement and including a forecast for the following year’s sales of the Product in the Licensed Territory. Such reports shall cover subject matter at a level of detail reasonably sufficient to enable Aquinox to determine Astellas’ compliance with its diligence obligations pursuant to this ARTICLE VI.

6.5 Communications. To the extent permitted by Applicable Laws, and subject to Section 6.3, the Parties shall seek to coordinate their communications relating to the Commercialization of the Products in their respective territories.

6.6 Approval for Certain Marketing Activities. To the extent that any marketing by Astellas for Commercialization of the Products in the Licensed Territory relate to or require activities outside of the Licensed Territory, the JSC shall be responsible for coordinating and approving such marketing activities.

6.7 Marketing and Promotional Literature. Astellas shall prepare all marketing and promotional literature related to Products for use in the Licensed Territory in accordance with Applicable Laws. If the JSC determines that Aquinox shall be presented and described as the Party who developed the Product in certain marketing and promotional literature in certain countries in the Licensed Territory, Aquinox will be presented and described as the Party who developed the Product, as provided for in Section 6.9, in a manner to be determined by the JSC on, by way of example, all labels, packaging, packaging inserts, and promotional literature related to the Product, in each case to the extent permitted by Applicable Laws.

 

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6.8 Marketing and Sales in the Retained Territory. Beginning approximately [***] prior to the first commercial sale of a Product in the Retained Territory, Aquinox, through the JSC, shall keep Astellas reasonably informed of all material activities and developments with respect to the marketing and sale of Products in the Retained Territory.

6.9 Labeling. Subject to, and in accordance with, Applicable Laws and JSC’s decision, Astellas shall identify Aquinox as the licensor or manufacturer of the Products using the Aquinox Housemarks designated by Aquinox for such use in certain promotional materials for the Products in the Licensed Territory where such identification is appropriate, in a manner approved in advance in writing by the JSC, and in accordance with (and subject to) the license set forth in Section 2.13.1.

6.10 Selection of Product Trademark. Astellas shall be responsible for the selection, registration, maintenance and defense of all Product Trademarks for use in connection with commercialization of Product in the Field in the Licensed Territory. Astellas shall own all Product Trademarks. For clarity, nothing in this Section grants Astellas any rights under or to any trademark, tradename, servicemark or logo owned or Controlled by Aquinox, its Affiliates or its licensees, or any registration or application therefor. If Astellas wishes to use one or more Aquinox trademarks that are specific to a Product for use with such Product in the Licensed Territory, the Parties shall negotiate in good faith an agreement to grant Astellas an exclusive, sub-licensable, royalty-bearing license to such trademark(s) for use with such Product in the Licensed Territory on reasonable and customary terms.

ARTICLE VII

MANUFACTURING AND SUPPLY

7.1 Manufacturing Coordinators. Each Party shall designate one (1) qualified and experienced supply chain professional to serve as that Party’s primary contact and coordinator regarding the supply of Products within this Agreement (a “Manufacturing Coordinator”). Each Party may replace its Manufacturing Coordinator with an alternative representative at any time with prior written notice to the other Party. The Manufacturing Coordinators shall be responsible for facilitating information exchange and discussion between the Parties regarding the supply of Products under this Agreement, including the [***] and [***]. Each Manufacturing Coordinator shall be subject to the authority of the JSC. Each Party will be responsible for all of its own costs with respect to its Manufacturing Coordinator.

7.2 Joint Manufacturing Plan.

7.2.1 Until the Technology Transfer Completion, the Parties shall collaborate with respect to the CMC activities, manufacturing and supply of Compound and Product for the Licensed Territory (excluding manufacturing and supply for commercial use for the Licensed Territory) under a “Joint Manufacturing Plan”, which shall set forth anticipated timelines, budget, CMC-related development such as formulation, analytical and process development, and scale-up, stability, packaging and shipping studies and related regulatory activities, strategy, and specific commitments of each Party. The Joint Manufacturing Plan shall also include the anticipated quantities for use in conducting all (pre-)clinical trials to be conducted by Astellas in the Licensed Territory, and activities relating to manufacturing technology transfer.

 

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7.2.2 The Manufacturing Coordinators shall be responsible for drafting the Joint Manufacturing Plan for approval by the JSC. Any material amendment of the Joint Manufacturing Plan, including (a) changes of the latest JSC-approved manufacturing plans or CMC studies, which (i) require additional budget that is not pre-approved by either Party and/or (ii) lead to any delay in timeline and (b) additional manufacturing plans and/or additional CMC studies which are not approved by the JSC, will be discussed and approved by JSC in accordance with ARTICLE II. The Manufacturing Coordinators of each Party shall provide updates to JSC regarding such Party’s activities under the Joint Manufacturing Plan. [***] shall [***] with respect to [***] relating to Compounds and Products [***] Territory under the Joint Manufacturing Plan, and [***] shall [***] with respect to [***] relating to Compounds and Products [***] Territory under the Joint Manufacturing Plan, as further described under ARTICLE II.

7.3 Aquinox Supply to Astellas.

7.3.1 Until the occurrence of the Manufacturing Responsibility Trigger, (a) Aquinox shall be responsible for supplying to Astellas the Compound and/or the Product from its CMO and Astellas shall purchase from Aquinox, the quantities of Compound and/or the Product pre-agreed by the Parties under the Joint Manufacturing Plan [***]; and (b) the external costs for Manufacturing development for the Products (including process, formulation, analytical and method development) under the Joint Manufacturing Plan will be shared [***], but shall exclude any costs for any activities solely required for the Retained Territory or the Licensed Territory. Astellas shall not be required to contribute to any such external costs that are not pre-agreed by Astellas. “Manufacturing Responsibility Trigger” means the date of the Technology Transfer Completion, [***] Commercially Reasonable Efforts [***] for supply [***] receives such [***].

7.3.2 With respect to Compound, Product or [***], and notwithstanding Section [***] with respect to such Compound or Product [***] Third Party [***] Third Party.

7.3.3 Until the Technology Transfer Completion, the Parties shall, through JSC, develop and adopt guidelines to be followed by the Parties [***] Compound and Products for the Licensed Territory to ensure appropriate [***]. Such guidelines shall [***] the Effective Date.

7.3.4 Within [***] days following the Effective Date, the Parties shall enter into a supply agreement for Products to be used for the preclinical and clinical Development of the Initial Product in accordance with this Section 7.3, including such other terms as are reasonable and customary. For clarity, Aquinox shall not be required to supply Astellas with Initial Product in any form that Aquinox does not Manufacture or have Manufactured for its own account.

 

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7.3.5 If Astellas wishes Aquinox to provide commercial supply of a Compound (or any intermediates) or Product (as active pharmaceutical ingredient), including use for Medical Affairs Activities under the Joint Medical Affairs Plan, the Parties shall negotiate a commercial supply agreement therefor on reasonable and customary terms (a “Commercial Supply Agreement”).

7.4 Technology Transfer.

7.4.1 The Parties shall discuss in good faith the feasibility of a manufacturing technology transfer for the Compounds and Products from Aquinox to Astellas following the Effective Date. During the Term, if Astellas desires to take responsibility to manufacture the Compound and/or the Product for the Licensed Territory, or if Aquinox provides Astellas with at least [***] months (unless otherwise agreed by the Parties) prior notice that it wishes Astellas to accept such technology transfer then Aquinox shall use commercially reasonable efforts to complete such technology transfer in accordance with a schedule to be agreed in writing in good faith by the Parties (the completion of such transfer, the “Technology Transfer Completion”). The plan for such technology transfer (the “Technology Transfer Plan”) shall include (i) the transfer of all process know-how and the materials in the Control of Aquinox at the time of such technology transfer pertaining to the Manufacture of Compounds, intermediates and Products, in each case, that is actually being used by or on behalf of Aquinox to Manufacture Compounds, intermediates and Products; (ii) the timeline and process for Astellas’ selection and determination of CMO; and (iii) initial engagement with CMOs at Astellas’ sole discretion for the purpose of technology transfer. The efforts for such technology transfer under the Technology Transfer Plan shall continue until [***]. Aquinox shall reasonably assist to implement the technology transfer to Astellas or its designee, and Astellas shall reimburse the reasonable costs [***] incurred by Aquinox for such technical transfer.

7.4.2 During the period during which the Technology Transfer Plan is conducted and following the Technology Transfer Completion, and subject to Section 7.5, Astellas shall conduct, at its own cost, any CMC development for regulatory approval for sale of the Products in the Licensed Territory (including formulation, cost of goods reduction, stability studies and process validation) and manufacturing and supply of the Compounds and the Products for the Licensed Territory, and Aquinox shall conduct, at its own cost, CMC development, manufacturing and supply of the Compounds and the Products solely for the Retained Territory.

7.5 [***].

7.5.1 During the period during which the Technology Transfer Plan is being conducted and following the Technology Transfer Completion, Astellas shall have the right to elect CMOs, at its sole discretion, for CMC activities, manufacturing and supply of the Compounds or Products for use in the Licensed Territory. [***] manufacturing of Compound [***], subject to Section [***]. Aquinox shall be responsible for [***] and Astellas shall [***].

 

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The Parties shall [***].

7.5.2 Notwithstanding the foregoing, [***] months prior written notice (which shall [***] to the extent [***] can reasonably [***] reasonably [***]), transfer to [***] one or more [***] and shall [***] required for such [***]. In such event, each Party agrees that during the Term it shall [***] any Third Party for any [***] that would [***] other Party [***] such Third Party [***] Compounds and Products.

7.6 [***]. The Manufacturing Coordinators shall [***] set forth in Exhibit [***] so that [***] Manufacture Compounds (including intermediates) and Products for use or sale in the Licensed Territory. [***] shall use Commercially Reasonable Efforts to [***] so that [***] days following the Effective Date. Each such [***] shall be subject to the [***] the applicable [***].

ARTICLE VIII

MEDICAL AFFAIRS

8.1 Generally. Astellas shall have the sole right to conduct Medical Affairs Activities in the Licensed Territory for the Products in the Field, at its expense. Aquinox shall have the sole right to conduct Medical Affairs Activities in the Retained Territory for the Products in the Field, at its expense. Each Party shall conduct its Medical Affairs Activities in accordance with all Applicable Laws.

8.2 Joint Medical Affairs Plan. The Parties, through JSC, shall collaborate with respect to the Medical Affairs Activities in support of the Products in the Field in the Territory. The JSC will review and discuss a joint medical affairs plan and its amendments (“Joint Medical Affairs Plan”) under which the Parties shall decide (a) whether and when to initiate or discontinue any joint voluntary Phase 4 studies for the Products and, if applicable, the sharing of costs relating thereto, and (b) review, discuss, and coordinate the Parties’ scientific presentation and publication strategy relating to the Products in the Field in the Territory. The JSC shall approve those portions of the Joint Medical Affairs Plan which relate to global activities, but shall only review, and shall not approve, those portions of the Joint Medical Affairs Plan which relate only to activities specifically for the Licensed Territory or the Retained Territory.

8.3 Approval for Certain Medical Affairs Activities. To the extent that any Medical Affairs Activities by Astellas for the Products in the Licensed Territory relate to or require activities outside of the Licensed Territory, including without limitation, the education of medical practitioners and caregivers outside the Licensed Territory, the JSC shall be responsible for coordinating and approving such activities. Except as required or permitted by Applicable Law, Astellas acknowledges that it cannot conduct an investigation or initiate a post-marketing clinical study that is not specifically related to any indication in the Field included on the label or in the package insert for Products.

 

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EXECUTION VERSION

CONFIDENTIAL

 

8.4 Reports. Astellas shall update the JSC at the JSC’s regularly-scheduled meetings regarding Astellas’ significant Medical Affairs Activities for Products in the Licensed Territory. In addition, Astellas shall present written reports to the JSC twice per Calendar Year, summarizing Astellas’ significant Medical Affairs Activities with respect to Products in the Licensed Territory pursuant to this Agreement and including a plan for the following year’s Medical Affairs Activities for the Products in the Licensed Territory.

8.5 Phase 4 Trials. With respect to any phase 4 clinical trials of Products, Astellas be responsible for operational and administrative matters for sites in the Licensed Territory, at Astellas’ expense, and Aquinox shall be responsible for operational and administrative matters for sites in the Retained Territory, at Aquinox’s expense. The Parties shall share the Development Costs for managing global operations of cross-territory phase 4 clinical trials for a Product as they shall agree in writing prior to the initiation of such activities for such Product. The Parties shall determine such expense sharing [***].

8.6 Investigator-Initiated Studies. Astellas has the first right to enter into a collaboration agreement for investigator and physician-initiated studies in the Licensed Territory with a Third Party. Astellas shall supply study materials to such Third Party at its own expense.

ARTICLE IX

FINANCIAL TERMS

9.1 Upfront Payment. Within [***] Business Days after the Effective Date, as a material inducement to Aquinox entering into this Agreement, Astellas shall pay to Aquinox a non-refundable, non-creditable, upfront payment of twenty-five million U.S. dollars (US$25,000,000).

9.2 Reimbursements. To the extent that either Party incurs costs that are subject to reimbursement by the other Party hereunder, the Party incurring such costs shall provide such other Party an invoice therefor accompanied by reasonable, customary documentation, and such other Party shall pay a such undisputed invoice within [***] days following its receipt thereof. If the Party receiving such invoice disputes any portion thereof in good faith, then it shall give the invoicing Party written notice of such dispute and pay the undisputed portions of such invoice and the Parties shall promptly seek to resolve the disputed portions.

9.3 Milestone Payments.

9.3.1 Development and Regulatory Milestones. Astellas shall pay to Aquinox the one-time, non-refundable, non-creditable payments set forth in the table below within [***] days of the first achievement by a Product of the applicable milestone event (whether by Astellas or its Affiliate or Sublicensee). For the avoidance of doubt, each of the following milestone payments shall be payable only once regardless of the number of times achieved by one or more Products.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

 

Milestone Event

   Milestone Payment

[***]

   [***]

[***]

   [***]

[***]

   [***]

[***]

   [***]

[***]

   [***]

[***]

   [***]

[***]

   [***]

If at the time of the achievement of a milestone for the Primary Indication (including if the first Regulatory Approval in Japan is for the Primary Indication), Astellas has not made payment for one or more prior milestones for the Primary Indication, Astellas shall make the payment for such prior milestone(s) together with the payment for the achieved milestone, irrespective of whether such prior milestone had actually been achieved. With respect to milestones [***] and [***], (a) if at the time of the achievement of milestone [***], Astellas has not made payment for milestone [***], Astellas shall make the payment for milestone [***] together with the payment for milestone [***], and (b) if at the time of the first [***], Astellas has not made payment for either or both of milestones [***] and [***], Astellas shall make the payment for such prior milestone(s), in each case, irrespective of whether such prior milestone(s) had actually been achieved. With respect to milestones [***] and [***], (i) if at the time of the achievement of milestone [***], Astellas has not made payment for milestone [***], Astellas shall make the payment for milestone [***] together with the payment for milestone [***], and (ii) if at the time of the first [***] (excluding the [***]), Astellas has not made payment for either or both of milestones [***] and [***], Astellas shall make the payment for such prior milestone(s), in each case, irrespective of whether such prior milestone(s) had actually been achieved.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

9.3.2 Sales Milestones. Astellas shall pay to Aquinox the additional one-time, non-refundable, non-creditable payments set forth in the table below within [***] days of the end of the Fiscal Year in which the applicable sales milestone event is first achieved by Astellas, its Affiliates, and Sublicensees. If both sales milestone events are achieved in the same Fiscal Year, then Astellas shall pay to Aquinox both milestone payments. For the avoidance of doubt, each of the following milestone payments shall be payable only once regardless of the number of times such milestone is achieved.

 

Sales Milestone Event

   Sales Milestone Payment

[***]

   [***]

[***]

   [***]

9.4 Running Royalties.

9.4.1 Royalty. In consideration of the grant of rights set forth herein, Astellas shall pay to Aquinox on a Product by Product basis, an amount equal to the applicable Gross Profit multiplied by the applicable Royalty Rate for such Product, on a Fiscal Quarter basis.

9.4.2 “Royalty Rate” means:

9.4.2.1 In all countries in the Licensed Territory other than Japan: [***]

9.4.2.2 In Japan, with respect to a Product:

(a) [***]

(b) [***]

(c) [***]

(d) [***]

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

(e) [***]

     [***]

     [***]

9.4.3 Reduction for Generic Product. In case that a Third Party commercially sells a Generic Product with respect to such Product in the Licensed Territory and such Generic Product has a volume market share of greater than [***] in such country, the applicable Royalty Rate set forth in Section 9.4.2 with respect to such Product and such country shall be reduced by [***] which shall be rounded to the nearest tenth (10th) of a percent in accordance with the example shown in Section 9.4.2 above. [***]

9.4.4 Royalty Term. Royalties shall be paid on a Product-by-Product and country-by country basis until the later of: (a) ten (10) years from the First Commercial Sale in such country; (b) expiration of the last to expire Valid Claim in such country; or (c) expiration of Regulatory Exclusivity in such country with respect to such Product (with respect to each Product and country, the “Royalty Term”).

9.5 Royalty Payments and Reports.

9.5.1 Generally.

9.5.1.1 Astellas shall calculate all amounts payable to Aquinox pursuant to Section 9.4 at the end of each Fiscal Quarter, which amounts shall be converted to U.S. dollars at such time, in accordance with Section 9.7.

9.5.1.2 At least two (2) weeks prior to the start of each Fiscal Year, the Parties shall agree on a [***], which shall be used during such Fiscal Year for [***] during such Fiscal Year, subject to [***] Fiscal Year in accordance with Section [***].

9.5.1.3 For each Fiscal Quarter, Astellas shall provide the report and payment set forth in Section 9.5.2 based on Astellas’ good faith estimates for such Fiscal Quarter, subject to recalculation following the end of the Fiscal Year in accordance with Section 9.6.2.

9.5.2 Payment and Report. Astellas shall pay such converted Dollar amount within sixty (60) days after the end of each Fiscal Quarter. Each payment of royalties shall be accompanied by a written report showing, on a consolidated basis in reasonably specific detail and on a country-by-country basis, (a) Net Sales, [***] of Products sold by Astellas, its Affiliates and its Sublicensees in the Licensed Territory during the corresponding

 

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EXECUTION VERSION

CONFIDENTIAL

 

Fiscal Quarter including a description of the credits and offsets deducted on a Product by Product and country by country basis to calculate Net Sales [***]; (b) the royalties payable in U.S. dollars, if any, which shall have accrued hereunder based upon such Net Sales of Products (including the calculation of any reduction under Section 9.4.3); (c) the withholding taxes, if any, required by law to be deducted in respect of such royalties; (d) the dates of the First Commercial Sale of each Product in each country in the Territory, if it has occurred during the corresponding Fiscal Quarter; (e) with respect to sales in Japan, [***] and applicable royalty rate under Section 9.4.2.2; and (f) an itemized calculation of the Exchange Rate used in determining the royalty amount expressed in U.S. dollars.

9.5.3 Preliminary Report. In addition, Astellas shall, within [***] days after the end of each Fiscal Quarter, provide to Aquinox a preliminary report setting forth Astellas’ good faith estimate of the information described in Sections 9.5.2(a) through (f) for such Fiscal Quarter based Astellas’ preliminary financials for such Fiscal Quarter.

9.6 Adjustments to Payment of Royalty.

9.6.1 [***].

9.6.1.1 The “[***]” for a Product means the [***] for such Product [***] based on the [***] of such Product (the “[***]”).

9.6.1.2 If the [***] more than [***] for a Product, then the Parties shall agree in writing on [***] such Product [***], including the [***] for each Product shall be [***] each Fiscal Year [***] First Commercial Sale for such Product [***] occurs. If Astellas [***], then the Parties shall [***] Third Party, provided that [***] in writing in advance ([***]). Based upon [***], the Parties shall [***]. An example of such [***] is provided in [***].

9.6.1.3 If, in any Calendar Year, the [***] for such Product, then the [***] for such Product for such Calendar Year [***] for such Product.

9.6.2 Determination of [***]. Within [***] days after the end of each Fiscal Year, the Parties shall [***] for each Product for each Fiscal Quarter during such Fiscal Year based on the [***] such Fiscal Quarter and the [***] such Product for such Fiscal Year [***], the

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

CONFIDENTIAL

 

applicable Royalty Rate as determined in accordance with Sections 9.4 based on the applicable [***] in accordance with Section [***]. If the [***] for such Product for such Fiscal Year [***] Fiscal Year [***], then Astellas shall [***] Fiscal Quarter in the [***] Fiscal Year. If the [***] for such Product for such Fiscal Year [***] for such Fiscal Year, Astellas shall [***] Fiscal Quarter in the following Fiscal Year.

9.7 Foreign Exchange. The rate of exchange to be used in computing the amount of currency equivalent in U.S. dollars owed to a Party under this Agreement shall be the Exchange Rate.

9.8 Late Payments. If Aquinox does not receive payment of any sum due to it on or before the due date, simple interest shall thereafter accrue on the sum due to Aquinox until the date of payment at the per annum rate of [***] over the then-current prime rate quoted by Citibank in New York City, NY, U.S.A. or the maximum rate allowable by Applicable Laws, whichever is lower.

9.9 Taxes.

9.9.1 Cooperation and Coordination. The Parties acknowledge and agree to cooperate in order to appropriately calculate, consistently with Applicable Laws, taxes payable with respect to their collaborative efforts under this Agreement and any appropriate reductions, credits, or deductions that may lawfully reduce otherwise applicable taxes.

9.9.2 Payment of Tax. A Party receiving a payment pursuant to this Agreement shall pay any and all taxes levied on such payment except as provided in this Section 9.9. If Applicable Laws require that taxes be deducted and withheld from a payment made pursuant to this Agreement, the remitting Party shall (a) deduct those taxes from the payment; (b) pay the taxes to the proper taxing authority; and (c) send evidence of the obligation together with proof of payment to the other Party within [***] days following that payment Notwithstanding the foregoing, the Parties acknowledge and agree that (i) as of the date of this Agreement and under Applicable Laws, no withholding tax will be applicable to payments made to Aquinox pursuant to this Agreement provided Aquinox provides Astellas with an appropriate completed IRS withholding form (for example, Form W-8BEN-E) claiming the benefits of the United States-Canada Income Tax Convention and (ii) Astellas will not withhold any tax from payments payable to Aquinox pursuant to this Agreement unless required to withhold as a result of a change in Applicable Laws after the date hereof. The Party making any payment pursuant to this Agreement shall be responsible for stamp, transfer, sales, use, value added or similar taxes imposed on such payments.

9.9.3 Tax Residence Certificate. A Party (including any entity to which this Agreement may be assigned, as permitted under Section 16.4) receiving a payment pursuant to this ARTICLE IX shall provide the remitting Party appropriate certification from relevant revenue authorities (if applicable) that such Party is a tax resident of that jurisdiction (a “Tax Residence Certificate”), if such receiving Party is required to submit a Tax Residence Certificate in order to claim the benefits of an income tax treaty to which that jurisdiction is a party. Upon the receipt thereof, any deduction and withholding of taxes shall be made at the appropriate treaty tax rate.

 

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EXECUTION VERSION

CONFIDENTIAL

 

9.9.4 Assessment. Either Party may, at its own expense, protest any assessment, proposed assessment, or other claim by any Governmental Authority for any additional amount of taxes, interest or penalties or seek a refund of such amounts paid if permitted to do so by Applicable Laws. The Parties shall cooperate with each other in any protest by providing records and such additional information as may reasonably be necessary for a Party to pursue such protest.

9.9.5 Withholding Taxes Resulting From Astellas Action. If Astellas (or Astellas’ assignees or successors) is required to make a payment to Aquinox subject to a deduction or withholding of tax, and if such deduction or withholding of tax obligation arises as a result of any action taken by Astellas or its Affiliates or successors, including without limitation an assignment of this Agreement as permitted under Section 16.4, a change in the tax residency of Astellas, or the payments arise or are deemed to arise through a branch of Astellas and such action has the effect of increasing the amount of tax deducted or withheld (each, an “Astellas Withholding Tax Action”), then notwithstanding anything to the contrary herein, the payment by Astellas (in respect of which such deduction or withholding of tax is required to be made) shall be increased by the amount necessary to ensure that Aquinox receives an amount equal to the same amount that it would have received had no Astellas Withholding Tax Action occurred.

9.10 Records; Audits. Astellas and its Affiliates and Sublicensees will maintain complete and accurate records in sufficient detail to permit Aquinox to confirm the accuracy of the calculation of royalty payments under this Agreement. Upon reasonable prior notice, such records shall be available during regular business hours for a period of [***] years from the creation of individual records for examination at Aquinox’s expense, and not more often than once each Calendar Year, by an independent certified public accountant selected by Aquinox and reasonably acceptable to Astellas, for the sole purpose of verifying the accuracy of the financial reports furnished by Astellas pursuant to this Agreement. At Aquinox’s request, an Aquinox employee may accompany and assist such auditor. Any such auditor (and employee, if applicable) shall not disclose Astellas’ Confidential Information, except to the extent such disclosure is necessary to verify the accuracy of the financial reports furnished by Astellas or the amount of payments due by Astellas under this Agreement. Any amounts shown to be owed but unpaid shall be paid within [***] days from the accountant’s report, plus interest (as set forth in Section 9.7) from the original due date. Any amounts shown to have been overpaid shall be refunded within [***] days from the account’s report. Aquinox shall bear the full cost of such audit unless such audit discloses an underpayment of the amount actually owed during the applicable Calendar Year of more than [***], in which case Astellas shall bear the full cost of such audit.

9.11 Financial Contacts. Each Party shall identify in writing to the other Party a financial contact who shall be the point of contact for such Party for the matters set forth in this Article 9 and who will coordinate in good faith with respect to such matters. Each Party may change its financial contact by written notice to the other Party.

ARTICLE X

INTELLECTUAL PROPERTY

 

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EXECUTION VERSION

CONFIDENTIAL

 

10.1 Ownership of Collaboration Inventions. As between the Parties, Aquinox will solely own all Collaboration Inventions that are conceived, made, or generated solely by the employees or consultants of Aquinox or its Affiliates, and Astellas will solely own all Collaboration Inventions that are conceived, made, or generated solely by the employees or consultants of Astellas or its Affiliates. The Parties shall jointly own all Joint Inventions. Inventorship shall be determined in accordance with U.S. patent laws.

10.2 Disclosure of Collaboration Inventions. Each Party shall promptly disclose to the other Party any invention disclosures, or other similar documents, submitted to it by its employees, agents, or independent contractors describing inventions that are Collaboration Inventions, and all information relating to such inventions.

10.3 Right to Practice Joint Inventions. Except to the extent either Party is restricted by the express terms of this Agreement, each Party shall have the right to practice and exploit such Joint Inventions and Joint Patents, with full rights to license its interest therein in the Territory and without any duty of accounting to or any duty to seek consent from the other Party. Upon the reasonable request of either Party, the other Party shall execute documents that evidence or confirm the requesting Party’s right to engage in such activities.

10.4 Prosecution of Patents.

10.4.1 Definition of Prosecution. As used herein, “prosecution” of Patents shall include, without limitation, all communication and other interaction with any patent office or patent authority having jurisdiction over a Patent application throughout the world in connection with pre-grant proceedings. Post-grant proceedings shall be governed by Sections 10.5 and 10.9.

10.4.2 Aquinox Patents and Joint Priority Patents. Except as otherwise provided in Section 10.4.5, Aquinox shall have the sole right and authority to prepare, file, prosecute, and maintain the Aquinox Patents (excluding the Joint Patents) and the Joint Priority Patents (collectively, the “Aquinox-Prosecuted Patents”) on a worldwide basis. Aquinox shall bear all costs of preparation, filing, prosecution, and maintenance of Aquinox-Prosecuted Patents. Aquinox shall provide Astellas a reasonable opportunity to review and comment on such efforts regarding such Aquinox-Prosecuted Patents Covering any Product in the Licensed Territory, including by providing Astellas with a copy of material communications from any patent authority regarding such Aquinox-Prosecuted Patent, and by providing drafts of any material filings or responses to be made to such patent authorities reasonably in advance of submitting such filings or responses, and shall consider Astellas’ comments in good faith.

10.4.3 Astellas Collaboration Patents. Except as otherwise provided in Section 10.4.5, Astellas shall have the sole right and authority to prepare, file, prosecute, and maintain the Astellas Collaboration Patents (excluding the Joint Patents) on a worldwide basis at its own expense. Astellas shall provide Aquinox a reasonable opportunity to review and comment on such efforts regarding such Astellas Collaboration Patents Covering any Product in the Territory, including by providing Aquinox with a copy of material communications from any patent authority regarding such Astellas Collaboration Patents, and by providing drafts of any material filings or responses to be made to such patent authorities reasonably in advance of submitting such filings or responses, and shall consider Aquinox’s comments in good faith.

 

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EXECUTION VERSION

CONFIDENTIAL

 

10.4.4 Joint Patents. Except as otherwise provided in Section 10.4.5, Aquinox shall have the sole right and authority to prepare, file, prosecute, and maintain the Joint Patents in the Retained Territory at its sole cost, and Astellas shall have the sole right and authority to prepare, file, prosecute, and maintain the Joint Patents (excluding the Joint Priority Patents) in the Licensed Territory at its sole cost, provided that the Parties shall share equally any such costs that are not attributable to any particular territory, including, but not limited to, the costs for filing an international application under the Patent Cooperation Treaty. The Parties shall reasonably cooperate with respect to the preparation, filing, prosecution and maintenance of such Joint Patents. The Party with the right to prosecute such a Joint Patent as set forth above shall provide the other Party with a reasonable opportunity to review and comment on such efforts regarding such Joint Patents, including by providing such other Party with a copy of material communications from any patent authority regarding such Joint Patents, and by providing drafts of any material filings or responses to be made to such patent authorities reasonably in advance of submitting such filings or responses, and shall consider such other Party’s comments in good faith.

10.4.5 Option to Prosecute and Maintain Patent Rights. Either Party may cease prosecution and/or maintenance of any Patent that such Party is responsible for prosecuting and maintain pursuant to this Section 10.4 on a country-by-country basis by providing the other Party written notice reasonably in advance of such due date. If the responsible Party elects to cease prosecution or maintenance of the relevant Patent in a country, the other Party, shall have the right, but not the obligation, at its sole discretion and cost, to continue prosecution or maintenance of such Patent and in such country (“Step-In Rights”), provided that Astellas may only exercise its Step-In Rights with respect to Aquinox Patents and Joint Priority Patents in the Licensed Territory. If the other Party elects to continue prosecution or maintenance or elects to file additional applications following the responsible Party’s election to cease prosecution or maintenance pursuant to this Section 10.4, the responsible Party shall transfer the applicable patent files to such other Party or its designee and execute such documents and perform such acts at the responsible Party’s expense as may be reasonably necessary to allow the other Party to initiate or continue such filing, prosecution or maintenance at the other Party’s sole expense.

10.4.6 Cooperation. Each Party shall provide the other Party all reasonable assistance and cooperation in the Patent prosecution efforts provided above in this Section 10.4, including providing any necessary powers of attorney and executing any other required documents or instruments for such prosecution, as well as further actions as set forth below:

10.4.7 Confidentiality. All communications between the Parties relating to the preparation, filing, prosecution, or maintenance of the Aquinox Patents and Astellas Collaboration Patents, or any Joint Patents, including copies of any draft or final documents or any communications received from or sent to patent offices or patenting authorities with respect to such Patents, shall be considered Confidential Information and subject to the confidentiality provisions of ARTICLE XI.

10.4.8 CREATE Act. The Parties acknowledge that Collaboration Inventions may be generated with different assigning entities which, during the course of U.S. patent prosecution, may benefit from use of the CREATE Act of 2004 (70 Fed. Reg. 177(54259-54267) as amended by the Leahy-Smith America Invents Act of 2011 (35 U.S.C. §§102(b)(2)(c) and 102(c)) (the CREATE Act). For the purposes of the benefit of the CREATE Act, the Parties deem this

 

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EXECUTION VERSION

CONFIDENTIAL

 

Agreement and/or the written memorialization of transactions contemplated hereunder, such as pertaining to the Development of the Compounds and Products, to constitute a qualifying written Joint Research Agreement.

10.5 Patent Term Extensions in the Licensed Territory. On a country-by-country and Product-by-Product basis, Astellas shall have the right, at its sole discretion, to apply for patent term extension in the Licensed Territory for any Patent Covering the manufacture, use or sale of such Product in such country, and will act with reasonable promptness in light of the development stage of Products to apply for any such patent term extension. Astellas shall keep Aquinox apprised of its plans regarding any such patent term extensions through the JSC and the Joint Clinical Development Plan. Aquinox shall cooperate reasonably with Astellas in making such filings or actions, for example and without limitation, making available all required regulatory Data and information and executing any required authorizations to apply for such patent term extension. All expenses incurred in connection with activities of each Party with respect to the Patent(s) for which Astellas seeks patent term extensions pursuant to this Section 10.5.1 shall be borne by Astellas. If Astellas receives patent term extension for an Astellas Patent or solely-owned Astellas Collaboration Patent instead of an Aquinox Patent, then, for purposes of Section 9.4.4(b), the last to expire Valid Claim will not be deemed to have expired until such date as it would have expired had the Aquinox Patent containing such Valid Claim received such patent term extension, provided that the foregoing shall not apply if Astellas can reasonably demonstrate that such Valid Claim would not have provided material exclusivity for the applicable Product in the applicable country if extended.

10.6 Infringement of Patents by Third Parties.

10.6.1 Notification. Each Party shall promptly notify the other Party in writing of any existing or threatened infringement of the Aquinox Patents, Astellas Patents, Astellas Collaboration Patents, or Joint Patents, in the Territory of which it becomes aware, and shall provide all evidence in such Party’s possession demonstrating such infringement.

10.6.2 Notice of Infringement. If a Third Party infringes any Aquinox Patent, Astellas Collaboration Patent or Joint Patent in the Territory by making, using, importing, exporting, offering for sale, or selling a Product (a “Product Infringement”), each Party shall share with the other Party all information available to it regarding such alleged infringement.

10.6.3 Enforcement.

10.6.3.1 Astellas shall have the first right, but not the obligation, to bring an appropriate suit or other action against any Person engaged in Product Infringement in the Licensed Territory, subject to the remainder of this Section 10.6.3. Astellas shall have a period of ninety (90) days (as may be extended by Astellas’ reasonable request) after the first notice under Section 10.6.2 to elect to enforce such Aquinox Patent, Astellas Collaboration Patent or Joint Patent in the Licensed Territory against such Product Infringement. If Astellas does not so elect, then Astellas shall so notify Aquinox in writing, and Aquinox shall have the right, but not the obligation, to commence a suit or take action to enforce the applicable Patent against such Third Party perpetrating such Product Infringement in the Licensed Territory.

 

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[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.


EXECUTION VERSION

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10.6.3.2 Aquinox shall have a period of [***] days (as may be extended by Aquinox’s reasonable request) after the first notice under Section 10.6.2 to elect to enforce such Joint Patent or Astellas Collaboration Patent in the Retained Territory against such Product Infringement. If Aquinox does not so elect, then Aquinox shall so notify Astellas in writing, and Astellas shall have the right, but not the obligation, to commence a suit or take action to enforce the applicable Joint Patent or Astellas Collaboration Patent against such Third Party perpetrating such Product Infringement in the Retained Territory. Aquinox shall have no obligation, and Astellas shall have no right, to enforce the Aquinox Patents (other than the Joint Patents, as set forth above) in the Retained Territory.

10.6.3.3 Each Party shall provide to the Party enforcing any such rights under this Section 10.6.3 reasonable assistance in such enforcement, at such enforcing Party’s request and expense, subject to the limitations in Sections 10.6.3.4 and 10.6.3.5, including joining such action as a party plaintiff if required by Applicable Law to pursue such action. The enforcing Party shall keep the other Party regularly informed of the status and progress of such enforcement efforts, shall reasonably consider the other Party’s comments on any such efforts, and shall seek consent of the other Party in any material aspects of such enforcement including, without limitation, determination of litigation strategy and the filing of important papers to the competent court, which consent shall not be unreasonably withheld, conditioned, or delayed. The Party bringing the action shall have final decision-making authority with respect to such action, subject to Section 10.6.4.

10.6.3.4 Each Party shall bear all of its own internal costs incurred in connection with its activities under this Section 10.6.3, subject to reimbursement as set forth in Section 10.6.3.6.

10.6.3.5 The Party not bringing an action with respect to Product Infringement under this Section 10.6.3 shall be entitled to separate representation in such matter by counsel of its own choice and at its own expense, but such Party shall at all times cooperate fully with the Party bringing such action.

10.6.3.6 Any recovery shall be allocated first pro rata to the reimbursement of any expenses incurred by the Parties in such litigation (including reasonable expenses of outside counsel), and then (a) if Astellas was the Party bringing the suit, Astellas shall retain any remaining recovery, which, solely with respect to Product Infringement of an Aquinox Patent or Joint Patent shall be treated as Net Sales [***] for purposes of Sections 9.3.2 and 9.4, respectively, and (b) if Aquinox was the Party bringing the suit, Aquinox shall retain any remaining recovery.

10.6.4 Settlement. Astellas shall not settle any claim, suit or action that it brought under this Section 10.6 involving Aquinox Patents (including Joint Patents) without the prior written consent of Aquinox, which consent shall not be unreasonably withheld, conditioned, or delayed. Aquinox shall not settle any claim, suit, or action that it brought under this Section 10.6 involving Astellas Collaboration Patents or Joint Patents without the prior written consent of Astellas, which consent shall not be unreasonably withheld, conditioned, or delayed. Nothing in this ARTICLE X shall require Aquinox to consent to any settlement that is reasonably anticipated by Aquinox to have a materially adverse impact upon any Aquinox Patent in the Retained Territory or the manufacture, use or sale of any Product in the Retained Territory. Nothing in this ARTICLE

 

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X shall require Astellas to consent to any settlement that is reasonably anticipated by Astellas to have a materially adverse impact upon any Astellas Collaboration Patent in the Licensed Territory or the manufacture, use or sale of any Product in the Licensed Territory.

10.7 Infringement of Third Party Rights.

10.7.1 Notice; Astellas First Right in the Licensed Territory. If either Party becomes aware that the manufacture, sale, or use of a Product in the Territory results in, or may result in, any claim, suit, or proceeding by a Third Party alleging patent infringement by either Party (or its Affiliates or (sub)licensees), such Party will promptly notify the other Party thereof in writing. Subject to Section 10.7.2, Astellas will have the first right, but not the obligation, to defend and control the defense of any such claim, suit or proceeding in the Licensed Territory at its own expense, using counsel of its own choice. Aquinox may participate in any such claim, suit or proceeding with counsel of its choice at its own expense. If Astellas elects (in a written communication submitted to Aquinox within a reasonable amount of time after notice of the alleged patent infringement) not to defend or control the defense of, or otherwise fails to initiate and maintain the defense of, any such claim, suit or proceeding, within such time period so that Aquinox is not prejudiced by any delays, Aquinox may conduct and control the defense of any such claim, suit or proceeding at its own expense. Each Party will keep the other Party reasonably informed of all material developments in connection with any such claim, suit, or proceeding. Each Party agrees to provide the other Party with copies of all pleadings filed in such action and to allow the other Party reasonable opportunity to participate in the defense of the claims. If Astellas is controlling the defense of any such claim, suit or proceeding, Astellas agrees to provide at Aquinox’s expense English translations, or summaries thereof, of all pleadings, discovery-requests, and key documents filed with the court reasonably promptly.

10.7.2 Possible Claims in the Other Partys Territory.

10.7.2.1 Regardless of whether Aquinox elects to participate as a party in the claim, suit or proceeding, Astellas further agrees that, in the event the claim, suit or preceding under Section 10.7.1 is brought by a Third Party that is pursuing or has threatened in writing to the knowledge of Astellas to pursue similar claims outside the Licensed Territory against Aquinox, its Affiliates, agents or marketing or development partners and such claim is related to any Product, including any form or formulation thereof, Astellas shall: (a) provide to Aquinox at Aquinox’s expense English translation drafts of all official papers or other statements (whether written or oral) prior to their submission to the court in the lawsuit, in sufficient time to allow Aquinox to review, consider and substantively comment thereon; (b) reasonably consider taking action to incorporate Aquinox’s comments on all such official papers and statements, (c) not take positions in its defense that are inconsistent or at odds with positions that Aquinox is taking in defense, or anticipated defense, of related claims outside the Licensed Territory, to the extent such positions have been communicated to Astellas; (d) allow Aquinox the opportunity to participate in preparation of witnesses or other participants in the claim, suit or proceeding; (e) not settle any such claim, suit or proceeding without Aquinox’s prior consent, which consent shall not be unreasonably withheld or delayed, and (f) enter into a reasonable and customary joint defense agreement with Aquinox, upon Aquinox’s request.

 

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10.7.2.2 Regardless of whether Astellas elects to participate as a party in the claim, suit or proceeding, Aquinox further agrees that, in the event the claim, suit or preceding under Section 10.7.1 is brought by a Third Party that is pursuing or has threatened in writing to the knowledge of Aquinox to pursue similar claims outside the Retained Territory against Astellas, its Affiliates, agents or marketing or development partners and such claim is related to any Product, including any form or formulation thereof, Aquinox shall: (a) provide to Astellas at Astellas’ expense English translation drafts of all official papers or other statements (whether written or oral) prior to their submission to the court in the lawsuit, in sufficient time to allow Astellas to review, consider and substantively comment thereon; (b) reasonably consider taking action to incorporate Astellas’ comments on all such official papers and statements, (c) discuss in good faith with Astellas any proposed position that Aquinox wishes to take in its defense that is inconsistent or at odds with positions that Astellas is taking in defense, or anticipated defense, of related claims outside the Retained Territory, to the extent such positions have been communicated to Aquinox; (d) allow Astellas the opportunity to participate in preparation of witnesses or other participants in the claim, suit or proceeding; and (e) enter into a reasonable and customary joint defense agreement with Astellas, upon Astellas’ request.

10.8 Patent Marking. Astellas shall not be required to mark such Products unless such markings or such notices would materially impact recoveries of damages or equitable remedies available under Applicable Law with respect to infringements of patents in the Licensed Territory.

10.9 Patent Oppositions and Other Proceedings.

10.9.1 Challenges to Third-Party Patent Rights. If either Party desires to bring an opposition, action for declaratory judgment, nullity action, invalidation action, interference, declaration for non-infringement, reexamination, or other attack upon the validity, title, or enforceability of a Patent owned or controlled by a Third Party and having one or more claims that covers a Product, or the manufacture, use, sale, offer for sale, or importation of a Product, in each case in the Territory, (except insofar as such action is a counterclaim to or defense of, or accompanies a defense of, a Third Party’s claim or assertion of infringement under Section 10.7, in which case the provisions of Section 10.7 shall govern), such Party shall so notify the other Party and the Parties shall promptly confer to determine whether to bring such action or the manner in which to settle such action. Aquinox shall have the exclusive right, but not the obligation, to bring at its own expense and in its sole control such action in the Retained Territory and Astellas shall have the exclusive right, but not the obligation, to bring at its own expense and in its sole control such action in the Licensed Territory. If Astellas does not bring such an action in the Territory, within [***] days of notification thereof pursuant to this Section 10.9.1 (or earlier, if required by the nature of the proceeding), then Aquinox shall have the right, but not the obligation, to bring, at Aquinox’s sole expense, such action. The Party not bringing an action under this Section 10.9.1 shall be entitled to separate representation in such proceeding by counsel of its own choice and at its own expense, and shall cooperate fully with the Party bringing such action at the request and expense of the Party bringing such action. Any awards or amounts received in bringing any such action shall be allocated between the Parties as provided in Section 10.6.2.6.

10.9.2 Parties’ Patent Rights. If a Aquinox Patent, Astellas Collaboration Patent or Joint Patent becomes the subject of any proceeding commenced by a Third Party within the

 

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Territory in connection with an opposition, reexamination request, action for declaratory judgment, nullity action, invalidation action, interference, or other attack upon the validity, title, or enforceability thereof (except insofar as such action is a counterclaim to or defense of, or accompanies a defense of, an action for infringement against a Third Party under Section 10.6, in which case the provisions of Section 10.6 shall govern), then the Party responsible for filing, preparing, prosecuting, and maintaining such Patent as set forth in Section 10.4 shall control such defense, provided, however, that the costs associated with such defense shall be borne by the controlling Party. The controlling Party shall permit the non-controlling Party to participate in the proceeding to the extent permissible under Applicable Law, and to be represented by its own counsel in such proceeding, at the non-controlling Party’s expense. If either Party decides that it does not wish to defend against such action, then the other Party shall have a backup right to assume defense of such Third-Party action at its own expense. Any awards or amounts received in defending any such Third-Party action shall be allocated between the Parties as provided in Section 10.6.3.6.

ARTICLE XI

CONFIDENTIALITY

11.1 Nondisclosure. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties, during the Term and for [***] years following the end of the Term, the receiving Party shall keep confidential and shall not publish or otherwise disclose and shall not use for any purpose other than as expressly provided for in this Agreement any Confidential Information of the other Party, and both Parties shall keep confidential and, subject to Sections 11.2, 11.3, and 11.4, shall not publish or otherwise disclose the terms of this Agreement. Each Party may use the other Party’s Confidential Information solely to the extent required to accomplish the purposes of this Agreement, including exercising such Party’s rights or performing its obligations under this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own (but no less than reasonable care) to ensure that its employees, agents, consultants, contractors, and other representatives do not disclose or make any unauthorized use of the Confidential Information of the other Party. Each Party will promptly notify the other Party upon discovery of any unauthorized use or disclosure of the Confidential Information of the other Party.

11.2 Authorized Disclosure. The receiving Party may disclose Confidential Information belonging to the disclosing Party only to the extent such disclosure is reasonably necessary in the following instances:

11.2.1 filing or prosecuting Patents as permitted by this Agreement, provided that Astellas may not use any Aquinox Confidential Information in connection with the prosecution or enforcement of any Patent Controlled by Astellas unless such Patent is an Astellas Collaboration Patent subject to a license to Aquinox hereunder;

11.2.2 filing Regulatory Filings in order to obtain or maintain Regulatory Approvals;

11.2.3 prosecuting or defending litigation, including responding to a subpoena in a Third Party litigation;

 

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11.2.4 complying with Applicable Laws or regulations (including regulations promulgated by securities exchanges) or court or administrative orders;

11.2.5 to its Affiliates, sublicensees or prospective sublicensees, Third Party Partners, subcontractors or prospective subcontractors, payors, consultants, agents, and advisors on a “need-to-know” basis in order for the receiving Party to exercise its rights or fulfill its obligations under this Agreement, each of whom prior to disclosure must be bound by obligations of confidentiality and restrictions on use of such Confidential Information that are no less restrictive than those set forth in this ARTICLE XI; provided, however, that, in each of the above situations, the receiving Party shall remain responsible for any failure by any Third Party who receives Confidential Information pursuant to this Section 11.2 to treat such Confidential Information as required under this ARTICLE XI; or

11.2.6 to bona fide potential and actual investors, acquirors, merger partners, licensees, and other financial or commercial partners solely for the purpose of evaluating or carrying out an actual or potential investment, acquisition, or collaboration, in each case under written obligations of confidentiality and non-use at least as stringent as those herein, provided that the confidentiality term therefor shall not be less than [***] years.

11.2.7 Notwithstanding the foregoing, in the event a Party is required to make a disclosure of the other Party’s Confidential Information pursuant to Sections 11.2.2 through 11.2.4, it will, except where impracticable, give reasonable advance notice to the other Party of such disclosure, reasonably consider the comments of the other Party with respect to limiting such disclosure, and use efforts to secure confidential treatment of such Confidential Information at least as diligent as such Party would use to protect its own confidential information, but in no event less than reasonable efforts. In any event, the Parties agree to take all reasonable action to avoid the non-confidential disclosure of Confidential Information hereunder. Any information disclosed pursuant to Sections 11.2.2 through 11.2.4 shall remain the Confidential Information of the disclosing Party and subject to the restrictions set forth in this Agreement, including the foregoing provisions of this ARTICLE XI.

11.3 Publications.

11.3.1 Prior to public disclosure or submission for publication of a proposed publication describing the results of any scientific or clinical activity relating to, in the case of Astellas, a Product, or in the case of Aquinox, any Development activity conducted under a Development Plan, the Party disclosing or submitting such proposed publication (the Submitting Party) shall send the other party (the Responding Party) a copy of the proposed publication to be submitted at least [***] days prior to the submission and shall allow the Responding Party a reasonable time period (but no less than [***] Business Days, or [***] Business Days for an abstract, from the date of the Responding Party’s receipt) in which to determine whether the proposed publication contains subject matter for which patent protection should be sought (prior to publication of such proposed publication) for the purpose of protecting an invention, or whether the proposed publication contains the Confidential Information of the Responding Party. Following the expiration of the applicable time period for review, the Submitting Party shall be free to submit such proposed publication for publication or otherwise disclose to the public such scientific or clinical results, subject to the procedures set forth in Section

 

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11.3.2. Any publication by Astellas relating this Agreement shall be in compliance with Astellas’ Global Publication Policy dated April 29, 2016, as may be amended from time to time, and other applicable Astellas publication policies. Aquinox shall reasonably consider complying with the Astellas Publication Policy at Astellas’ request for a particular publication. Notwithstanding the foregoing, if such public disclosure or submission is for registration clinical data to CTD Database, the Responding Party’s review time shall be no less than [***] Business Days, or [***] Business Days for an abstract, from the date of the Responding Party’s receipt of the proposed disclosure or submission.

11.3.2 If the Responding Party believes that the subject matter of the proposed publication or other disclosure contains Confidential Information or a patentable invention of the Responding Party, then prior to the expiration of the applicable time period for review, the Responding Party shall notify the Submitting Party in writing of its determination that such proposed publication or other disclosure, as applicable, contains such information or subject matter for which patent protection should be sought. Upon receipt of such written notice from the Responding Party, the Submitting Party shall delay public disclosure of such information or submission of the proposed publication for an additional period of [***] days (or such other time period mutually agreed by the Parties in writing) to permit preparation and filing of a patent application on the disclosed subject matter. The Submitting Party shall thereafter be free to publish or disclose such information, except that the Submitting Party may not disclose any Confidential Information of the Responding Party in violation of Section 11.1.

11.4 Publicity.

11.4.1 The Parties agree that the material terms of this Agreement are deemed to be the Confidential Information of both Parties, subject to the special authorized disclosure provisions set forth below in this Section 11.4 and in Section 11.2. The Parties have agreed to make a joint public announcement in English of the execution of this Agreement within one (1) Business Day after the Effective Date. Astellas shall be permitted to make a public announcement in Japanese of the execution of this Agreement substantially in the form and with the content of the English press release.

11.4.2 After release of such initial press release, if either Party desires to make a public announcement concerning the material terms of this Agreement, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval (except as otherwise provided herein), such approval not to be unreasonably withheld or delayed. A Party commenting on such a proposed press release shall provide its comments, if any, within [***] Business Days after receiving the press release for review, or such shorter period as may be required in exigent circumstances. Where required by Applicable Law or by the regulations of the applicable securities exchange upon which a Party may be listed, such Party shall have the right to make a press release announcing the achievement of each milestone under this Agreement as it is achieved, the achievements of Regulatory Approvals in the Territory as they occur, and other material events occurring pursuant to this Agreement, subject only to the review procedure set forth in the preceding sentence. In relation to Astellas’ review of such an announcement, Astellas may make specific, reasonable comments on such proposed press release within the prescribed time for commentary, but shall not withhold its consent to disclosure of the information that the relevant milestone has been achieved and

 

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triggered a payment hereunder or is otherwise required to be disclosed by Applicable Laws or the rules of an applicable securities exchange. Neither Party shall be required to seek the permission of the other Party to repeat any information regarding the terms of this Agreement that has already been publicly disclosed by such Party, or by the other Party, in accordance with this Section 11.4.2, provided such information continues as of such time to be accurate.

11.4.3 The Parties acknowledge that Aquinox will be obligated to file a copy of this Agreement with the U.S. Securities and Exchange Commission (the “SEC”) or other applicable entity having regulatory authority over Aquinox securities or the exchange thereof, as a material agreement of Aquinox. Aquinox shall be entitled to make such a required filing, provided that it requests confidential treatment of certain commercial terms and sensitive technical terms hereof to the extent such confidential treatment is reasonably available to Aquinox, and to the extent consistent with the legal requirements governing redaction of information from material agreements that must be publicly filed. In the event of any such filing, Aquinox will provide Astellas with a copy of the Agreement marked to show provisions for which Aquinox intends to seek confidential treatment and shall reasonably consider and incorporate Astellas’ comments thereon to the extent consistent with the legal requirements governing redaction of information from material agreements that must be publicly filed. Astellas will as promptly as practical provide any such comments. Astellas recognizes that Applicable Laws and SEC policies and regulations to which Aquinox is and may become subject to may require Aquinox to publicly disclose certain terms of this Agreement that Astellas may prefer not be disclosed, and that Aquinox is in all cases entitled hereunder to make such required disclosures to the extent necessary to comply with such U.S. laws and SEC policies and regulations.

ARTICLE XII

REPRESENTATIONS, WARRANTIES, & COVENANTS

12.1 Mutual Representations and Warranties. Each Party hereby represents and warrants to the other Party that as of the Effective Date:

12.1.1 Corporate Existence and Power. It is a company or corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is incorporated, and has full corporate power and authority and the legal right to own and operate its property and assets and to carry on its business as it is now being conducted and as contemplated in this Agreement, including, without limitation, the right to grant the licenses granted by it hereunder.

12.1.2 Authority and Binding Agreement. As of the Effective Date, (a) it has the corporate power and authority and the legal right to enter into this Agreement and perform its obligations hereunder; (b) it has taken all necessary corporate action on its part required to authorize the execution and delivery of the Agreement and the performance of its obligations hereunder; and (c) this Agreement has been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, and binding obligation of such Party that is enforceable against it in accordance with its terms.

12.1.3 No Conflict; Covenant. It is not a party to any agreement that would materially prevent it from granting the rights granted to the other Party under this Agreement or

 

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performing its obligations under this Agreement. During the Term of this Agreement, each Party covenants that it will not enter into any contractually binding agreement which would in any way materially impair its ability to complete its obligations under this Agreement in a timely fashion.

12.1.4 No Debarment. In the course of the Development of Products, neither Party shall use, during the term of this Agreement, any employee or consultant who has been debarred by any Regulatory Authority, or, to such Party’s knowledge, is the subject of debarment proceedings by a Regulatory Authority.

12.2 Aquinox Representation and Warranty. Aquinox represents and warrants to Astellas that, as of the Effective Date and to Aquinox’s knowledge:

12.2.1 it has the rights under the Aquinox Technology to grant the licenses to Astellas as purported to be granted pursuant to this Agreement;

12.2.2 all Aquinox Patents that Cover Rosiptor in the Licensed Territory are listed in Exhibit 6;

12.2.3 the use or practice of the Aquinox Technology by Astellas as contemplated in this Agreement will not infringe any Patents owned or controlled by a Third Party, and Aquinox has not received any written notice from a Third Party asserting or alleging any of the foregoing;

12.2.4 Aquinox is not subject to any agreement with a Third Party that includes any restriction or limitation in favor of such Third Party with respect to Astellas’ rights to practice the Aquinox Technology and its right and ability to perform its obligations under this Agreement; and

12.2.5 [***].

12.3 Astellas Representation, Warranty and Covenant. Astellas represents and warrants to Aquinox that, as of the Effective Date, neither Astellas nor any of its Affiliates Control any Patent that Covers the manufacture, use or sale of any Product in the Territory. Astellas covenants that it will notify Aquinox within [***] days of acquiring Control of any Patent that Covers the manufacture, use or sale of any Product in the Territory (other than a Patent that is subject to Section 10.4) following the Effective Date.

12.4 Limitation on Warranties; No Implied Warranties. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, EACH PARTY MAKES NO AND EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES WITH RESPECT TO ANY SUBJECT MATTERS OF THIS AGREEMENT (INCLUDING THE COMPOUNDS, PRODUCTS AND INTELLECTUAL PROPERTY LICENSED HEREUNDER), WHETHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OR NON-MISAPPROPRIATION OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.

 

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ARTICLE XIII

INDEMNIFICATION AND INSURANCE

13.1 Indemnification by Aquinox. Subject to Section 7.3.2, Aquinox shall defend, indemnify, and hold Astellas and its Affiliates, and Astellas’ and its Affiliates’ officers, directors, employees, and agents (the “Astellas Indemnitees”) harmless from and against any and all Third Party claims, suits, proceedings, damages, expenses (including court costs and reasonable attorneys’ fees and expenses), and recoveries (collectively, “Claims”) to the extent that such Claims arise out of, are based on, or result from (a) the Development, Manufacture or Commercialization of, or the Medical Affairs activities conducted with respect to, any Product by Aquinox or its Affiliates, distributors, or licensees (other than Astellas) (the “Aquinox Group”); (b) a breach of any of Aquinox’s representations, warranties. covenants or obligations under this Agreement; or (c) the willful misconduct or negligent acts of Aquinox, its Affiliates, or the officers, directors, employees, or agents of Aquinox or its Affiliates. The foregoing indemnity obligation shall not apply to the extent that (i) the Astellas Indemnitees fail to comply with the indemnification procedures set forth in Section 13.3 and Aquinox’s defense of the relevant Claims is prejudiced by such failure, or (ii) to the extent that any Claim arises from, is based on, or results from (A) the Development, Manufacture or Commercialization of, or the Medical Affairs activities conducted with respect to, any Product by any member of the Astellas Group; (B) a breach of any of Astellas’ representations, warranties, covenants or obligations under this Agreement; or (C) the willful misconduct or negligent acts of any Astellas Indemnitee.

13.2 Indemnification by Astellas. Astellas shall defend, indemnify, and hold Aquinox, its Affiliates and Aquinox’s and its Affiliates’ officers, directors, employees, and agents (the “Aquinox Indemnitees”) harmless from and against any and all Claims to the extent that such Claims arise out of, are based on, or result from (a) the Development, Manufacture or Commercialization of, or the Medical Affairs activities conducted with respect to, any Product by Astellas or its Affiliates, or its or their Sublicensees, contractors, or distributors (the “Astellas Group”); (b) a breach of any of Astellas’ representations, warranties, covenants or obligations under this Agreement; or (c) the willful misconduct or negligent acts of any Astellas Indemnitee. The foregoing indemnity obligation shall not apply to the extent that (i) the Aquinox Indemnitees fail to comply with the indemnification procedures set forth in Section 13.3 and Astellas’ defense of the relevant Claims is prejudiced by such failure, or (ii) to the extent that any Claim arises from, is based on, or results from (A) the Development, Manufacture, or Commercialization of, or the Medical Affairs activities conducted with respect to, any Product by any member of the Aquinox Group; (ii) a breach of any of Aquinox’s representations, warranties, and obligations under this Agreement; or (iii) the willful misconduct or negligent acts of any Aquinox Indemnitee.

13.3 Indemnification Procedures. The Party claiming indemnity under this ARTICLE XIII (the “Indemnified Party”) shall give written notice to the Party from whom indemnity is being sought (the “Indemnifying Party”) promptly after learning of such Claim and shall tender the defense of such Claim to the Indemnifying Party. The Indemnified Party shall provide the Indemnifying Party with reasonable assistance, at the Indemnifying Party’s expense, in connection with the defense of the Claim for which indemnity is being sought. The Indemnified Party may participate in and monitor such defense with counsel of its own choosing at its sole expense. The Indemnifying Party shall not settle any claim without the prior written consent of the Indemnified Party, not to be unreasonably withheld, conditioned, or delayed, unless the settlement involves

 

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only the payment of money, and no admission of wrong-doing or fault by the Indemnified Party. The Indemnified Party shall not settle any such claim without the prior written consent of the Indemnifying Party.

13.4 Non-Exclusive Remedy. Neither Party shall be obligated to claim indemnification from the other Party under this Article XIII, and such injured Party retains all rights to defend itself against any such Claim and pursue in turn any claims against the other Party it may have in law or equity related to or arising from such Claim.

13.5 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE, OR INDIRECT DAMAGES ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING THE FOREGOING, NOTHING IN THIS SECTION 13.5 IS INTENDED TO OR SHALL LIMIT OR RESTRICT THE INDEMNIFICATION RIGHTS OR OBLIGATIONS OF ANY PARTY UNDER SECTION 13.1 OR 13.2, OR DAMAGES AVAILABLE FOR A PARTY’S BREACH OF CONFIDENTIALITY OBLIGATIONS IN ARTICLE XI OR RESULTING FROM GROSS NEGLIGENCE OR WILLFUL MISCONDUCT BY A PARTY.

13.6 Insurance. Each Party shall procure and maintain insurance or self-insurance, including product liability insurance, adequate to cover its obligations hereunder and which are consistent with normal business practices of prudent companies similarly situated at all times during which any Product is being clinically tested in human subjects or commercially distributed or sold by such Party. It is understood that such insurance shall not be construed to create a limit of either Party’s liability with respect to its indemnification obligations under this ARTICLE XIII. Each Party shall provide the other Party with written evidence of such insurance upon request. Each Party shall provide the other Party with written notice at least [***] days prior to the cancellation, non-renewal, or material change in such insurance or self-insurance which materially adversely affects the rights of the other Party hereunder.

ARTICLE XIV

TERM AND TERMINATION

14.1 Term. This Agreement shall become effective on the Effective Date and, unless earlier terminated pursuant to this Article XIV, shall remain in effect until the expiration of all Royalty Terms in all countries in the Territory (the “Term”). Following the expiration of each Royalty Term with respect to a Product in country, Astellas shall have a fully paid non-exclusive license under the Aquinox Know-How to make, use, sell and import such Product in such country.

14.2 Early Termination.

14.2.1 Termination for Convenience.

14.2.1.1 Astellas shall have the right to terminate this Agreement in its entirety for any or no reason upon six (6) months’ written notice to Aquinox prior to First Commercial Sale, and upon twelve (12) months’ written notice to Aquinox if after First Commercial Sale.

 

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EXECUTION VERSION

CONFIDENTIAL

 

14.2.1.2 Astellas shall have the right to terminate this Agreement upon ninety (90) days written notice to Aquinox, on a country-by-country basis, if Astellas determines that it is not commercially feasible to develop or commercialize Rosiptor or Products containing Rosiptor in such country.

14.2.2 Effect of Unilateral Termination. If Astellas terminates this Agreement pursuant to Section 14.2.1

14.2.2.1 Astellas shall not, during the notice period for such termination, take any action that could reasonably be expected to have a material adverse impact on the further Development and Commercialization of the Product; provided, however, that Astellas shall have the right to take any actions it deems reasonably necessary or appropriate to avoid any human health or safety problems;

14.2.2.2 Astellas shall be required to perform any outstanding obligations of Astellas that existed or accrued prior to the effective date of termination; and

14.2.2.3 the JSC shall coordinate the wind-down of Astellas’ efforts under this Agreement and the provisions of Section 14.4 shall apply.

14.3 Termination for Breach. Aquinox shall have the right to terminate this Agreement upon written notice to Astellas if Astellas, after receiving written notice from Aquinox identifying such material breach, by Astellas, fails to cure such breach within [***] days from the date of such notice (or within [***] days’ notice in the event such breach is solely based upon Astellas’ failure to pay any amounts due Aquinox hereunder). Astellas shall have the right to terminate this Agreement upon written notice to Aquinox if Aquinox, after receiving written notice identifying a material breach by Aquinox of its obligations under this Agreement, fails to cure such breach within [***] days from the date of such notice.

14.4 Aquinox Rights upon Termination of the Agreement. Upon the early termination of this Agreement by Astellas under Section 14.2.1, or by Aquinox under Section 14.3 due to Astellas’ material uncured breach, the following shall apply (in addition to any other rights and obligations under Section 14.2 or Section 14.3 or otherwise under this Agreement with respect to such termination); provided that in the event of a termination under Section 14.2.1.2, the following shall apply only with respect to the country(ies) to which such termination applies:

14.4.1 Regulatory Materials. To the extent permitted by Applicable Laws, Astellas shall transfer and assign to Aquinox all Regulatory Filings and Regulatory Approvals for the Products in the Licensed Territory, free and clear of any liens or encumbrances.

14.4.2 Astellas License. Astellas hereby grants to Aquinox, effective only in event of such termination, an exclusive, perpetual, irrevocable, fully paid-up license, with the right to grant multiple tiers of sublicenses, under the Necessary Astellas Technology and Astellas Collaboration Technology, to research, Develop, Manufacture, have Manufactured, use, Commercialize, import, export and otherwise exploit any Products in the Territory, which license shall be effective as of the date of such termination.

 

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EXECUTION VERSION

CONFIDENTIAL

 

14.4.3 Transition Assistance. Astellas shall provide such assistance, at Aquinox’s cost, as may be reasonably necessary to transfer or transition over a reasonable period of time to Aquinox all Astellas Know-How and Astellas Collaboration Inventions, or then-existing commercial contractual arrangements (if permitted by the terms of such contracts), that is, or are, necessary or useful for Aquinox to commence or continue Developing, conducting Manufacturing of, or Commercializing Products worldwide, to the extent Astellas is then performing or having performed such activities, including without limitation transferring, upon request of Aquinox, any agreements or arrangements with Third Party suppliers or vendors to supply or sell Products in the Licensed Territory. To the extent that any contract between Astellas and a Third Party for the supply of a Product for the Licensed Territory is not assignable to Aquinox, then Astellas shall reasonably cooperate with Aquinox, at Aquinox’s cost, to arrange to continue to obtain such supply from such entity.

14.4.4 Remaining Inventories. Aquinox shall have the right to purchase from Astellas all of the inventory of Products held by Astellas as of the effective date of termination or expiration of this Agreement at a price equal to Astellas’ Manufacturing Cost (applied mutatis mutandis) for such Product (which, for Product purchased by Astellas from Aquinox shall be the same as Aquinox’s Manufacturing Cost therefor). Aquinox shall notify Astellas whether Aquinox elects to exercise such right within [***] days after receiving notice from Astellas reporting such inventory as of the date of termination or expiration of the Agreement. If Aquinox does not exercise such right, Astellas shall have the right to sell in the Territory any such remaining inventory in accordance with Applicable Laws over a period of no greater than [***] months after the effective date of termination of this Agreement.

14.5 Survival. The following provisions shall survive any expiration or termination of this Agreement: Sections 2.2.1(b), 2.2.2(b), 2.12, 9.2, 9.5 and 9.6 (solely with respect to Product sales occurring prior to or following such expiration or termination), 9.7, 9.8, 9.9, 10.1, 10.3, 10.4.7, 14.4 and 14.5, and Articles XI, XIII, XV and XVI. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of any Party prior to such termination, relinquishment or expiration, and any and all damages or remedies arising from any breach hereunder.

ARTICLE XV

DISPUTE RESOLUTION

15.1 Disputes. The Parties recognize that disputes as to certain matters may from time to time arise during the Term which relate to either Party’s rights and/or obligations hereunder. It is the Parties’ objective to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this ARTICLE XV to resolve any controversy or claim arising out of, relating to, or in connection with any provision of this Agreement if and when a dispute arises under this Agreement.

15.2 Negotiation by Executive Officers. With respect to all disputes arising between the Parties, including, without limitation, any alleged failure to perform, or breach, of this Agreement, or any issue relating to the interpretation or application of this Agreement, or any question regarding its existence, validity or termination, if the Parties are unable to resolve such

 

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EXECUTION VERSION

CONFIDENTIAL

 

dispute within [***] days after such dispute is first identified by either Party in writing to the other Party, the Parties shall refer such dispute to the Executive Officers for attempted resolution by good faith negotiations. The Parties shall start negotiation by the Executive Officers within [***] Business Days after the receipt of such identification in writing, and attempt to resolve such dispute within [***] days after the start of such negotiation.

15.3 Binding Arbitration. If the Executive Officers are not able to resolve such dispute referred to them under Section 15.2 within such [***] day period, and subject to Section 15.4, such dispute shall be resolved through binding arbitration, which arbitration may be initiated by either Party at any time after the conclusion of such period, on the following basis:

15.3.1 The seat, or legal place, of arbitration shall be New York City, New York, USA. The language of the arbitration shall be English.

15.3.2 The arbitration shall be made in accordance with the current Rules of Arbitration of International Chamber of Commerce (ICC). The arbitration shall be conducted by a single arbitrator selected jointly by the Parties, provided that if the Parties cannot agree on a single arbitrator within [***] days of initiating arbitration proceedings under this Section 15.3 (or such longer period as the Parties may agree), then the arbitration shall be conducted by three (3) arbitrators, with one (1) arbitrator selected by each Party and the arbitrators so selected selecting the third arbitrator. Unless otherwise agreed by the Parties, each arbitrator shall have at least fifteen (15) years of experience in the subject matter of such arbitration.

15.3.3 Judgment upon the award rendered by such arbitrator(s) shall be binding on the Parties and may be entered by any court or forum having jurisdiction.

15.3.4 Either Party may apply to the arbitrator(s) for interim injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Further, either Party also may, without waiving any remedy under this Agreement, seek from any court having jurisdiction any injunctive or provisional relief necessary to protect the rights or property of such Party pending the arbitration award.

15.3.5 The arbitrator(s) shall have no authority to award punitive or any other type of damages not measured by a Party’s compensatory damages.

15.3.6 Each Party shall bear its own costs and expenses and attorneys’ fees and an equal share of the arbitrator(s)’ and any administrative fees of arbitration.

15.3.7 The existence and content of the arbitral proceedings and any rulings or award shall be kept confidential except (a) to the extent that disclosure may be required of a Party to fulfill a legal duty, protect or pursue a legal right, or enforce an award in bona fide legal proceedings before a state court or other judicial authority, or (b) with the written consent of the Parties. Notwithstanding anything to the contrary, either Party may disclose matters relating to the arbitration or the arbitral proceedings where necessary for the preparation or presentation of a claim or defense in such arbitration.

 

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EXECUTION VERSION

CONFIDENTIAL

 

15.3.8 In no event shall an arbitration be initiated after the date when commencement of a legal or equitable proceeding based on the dispute, controversy, or claim would be barred by the applicable statute of limitations.

15.4 Expedited Arbitration. Any dispute under Section 3.3.2.1 or 3.3.2.2 as to whether a Party’s decision would have a “material adverse effect” as described in such Section shall be subject to the expedited arbitration procedures set forth in Exhibit 7.

15.5 Patent and Trademark Dispute Resolution. Any dispute, controversy, or claim relating to the scope, validity, enforceability, or infringement of any patent rights covering the manufacture, use, or sale of any Product or of any trademark rights relating to any Product shall be submitted to a court of competent jurisdiction in the country or jurisdiction in which such patent or trademark rights were granted or arose.

ARTICLE XVI

OTHER PROVISIONS

16.1 Governing Law. This Agreement and all disputes arising out of or related to this Agreement or any breach hereof shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, United States, without reference to its conflicts of law principles. The Parties hereby agree to exclude the application of the United Nations Convention on Contracts for t