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EX-23.1 - EX-23.1 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex231_9.htm
EX-32.1 - EX-32.1 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex321_10.htm
EX-31.1 - EX-31.1 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex311_11.htm
EX-10.35 - EX-10.35 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex1035_842.htm
EX-31.2 - EX-31.2 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex312_7.htm
EX-32.2 - EX-32.2 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex322_6.htm
EX-10.34 - EX-10.34 - MELINTA THERAPEUTICS, INC. /NEW/cemp-ex1034_961.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

x

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

For the fiscal year ended December 31, 2015

¨

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

For the Transition Period from              to            

Commission File Number:  001-35405

 

CEMPRA, INC.

(Exact name of registrant specified in its charter)

 

Delaware

2834

45-4440364

(State or Other Jurisdiction of

Incorporation or Organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

6320 Quadrangle Drive, Suite 360

Chapel Hill, NC 27517

(Address of Principal Executive Offices)

(919) 313-6601

(Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

 

Name of Exchange on which Registered

 

Common Stock, $0.001 Par Value

Nasdaq Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

 

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

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

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

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 x    No  ¨

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

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

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

Smaller reporting company

¨

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2015, was approximately $1.2 billion. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Global Market on June 30, 2015. For purposes of making this calculation only, the registrant has defined affiliates as including only directors and executive officers and shareholders holding greater than 10% of the voting stock of the registrant as of June 30, 2015.

As of February 18, 2016 there were 48,169,733 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders are incorporated herein by reference, as indicated in Part III.

 

 

 

 


 

CEMPRA, INC.

TABLE OF CONTENTS

 

 

 

 

Page

PART I

 

 

1

 

 

 

 

Item 1.

 

Business

1

 

 

 

 

Item 1A.

 

Risk Factors

43

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

70

 

 

 

 

Item 2.

 

Properties

70

 

 

 

 

Item 3.

 

Legal Proceedings

70

 

 

 

 

Item 4.

 

Mine Safety Disclosures

70

 

 

 

 

PART II

 

 

70

 

 

 

 

Item 5.

 

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

70

 

 

 

 

Item 6.

 

Selected Financial Data

72

 

 

 

 

Item 7.

 

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

72

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

86

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

86

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

86

 

 

 

 

Item 9A.

 

Controls and Procedures

86

 

 

 

 

Item 9B.

 

Other Information

87

 

 

 

 

PART III

 

 

87

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

87

 

 

 

 

Item 11.

 

Executive Compensation

89

 

 

 

 

Item 12.

 

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

89

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

90

 

 

 

 

Item 14.

 

Principal Accounting Fees and Services

90

 

 

 

 

PART IV

 

 

90

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

90

 

 

Financial Statements

F-1

 

 

 

i


 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under “Item 1A. Risk Factors” and “Cautionary Statement” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

 

 

PART I

Item 1. Business

Summary

We are a clinical-stage pharmaceutical company focused on developing differentiated antibiotics for the acute care and community settings to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract infections and staphylococcal infections. Our lead product, solithromycin (CEM-101), is being developed in oral capsules, intravenous, or IV, and suspension formulations, for the treatment of community-acquired bacterial pneumonia, or CABP, one of the most serious infections of the respiratory tract in adults and children, as well as for the treatment of gonorrhea and other indications.  

Despite the many antibiotics available and the size of the market for antibiotics for CABP and other infections, we believe this market has significant critical needs for several reasons. First, the effectiveness of many antibiotics has declined worldwide due to bacterial resistance to the currently available antibiotics. CABP is a common disease occurring frequently after influenza, which can be especially serious in the elderly or young children. It is the most frequent cause of death from an infection. Currently, outpatient CABP is treated with a macrolide, such as azithromycin, or with a fluoroquinolone, such as levofloxacin. Macrolides have been frequently used as they target the respiratory pathogens, reach high concentrations in the lung and in macrophages at the site of infection, and have anti-inflammatory properties that contribute to the patient’s recovery.  In the last decade, azithromycin treatment failure due to resistance has led to more frequent use of fluoroquinolones, which are known to have recognized serious side effects. Yet, because of the need to treat outpatients, levofloxacin (a fluoroquinolone) use has increased. There has not been a new oral antibiotic to treat CABP in outpatients since moxifloxacin was approved, and resistance and lack of tolerability to generic antibiotics, including macrolides, have led to increased rates of hospitalization and a critical need for a safe and effective oral antibiotic for the treatment of CABP.  Finally, many of the existing antibiotics used to treat serious infections are difficult or inconvenient to administer, often requiring hospitalization for IV treatment.  Currently available intravenous antibiotics that are the standard of care, such as ceftriaxone, a third generation cephalosporin, have no oral formulations to allow discharge from the hospital on the same medication, forcing patients to switch to less favorable alternatives. Cephalosporins and fluoroquinolones that are currently used have broad spectrum activity, and eliminate essential intestinal microflora with resulting serious consequences, such as C. difficile enterocolitis. In order to practice stewardship of antibiotics, and provide the right care for CABP, we believe a new macrolide is needed.

Solithromycin is a potent new fourth generation macrolide and the first fluoroketolide in clinical development. As a macrolide, solithromycin has broad use potential against many types of infections and in many patient populations, including pediatrics and pregnancy. Solithromycin’s potency comes from its unique chemical structure, which provides greater ability to fight resistant bacteria. Increasingly, resistance is a major threat to the efficacy of currently available antibiotics, including currently approved macrolides.  Solithromycin has excellent organ and tissue distribution and intracellular activity, which allows it to reach bacteria at body sites that other antibiotics may not. Solithromycin is active against most CABP pathogens, including pneumococcal strains resistant to other macrolides. Our pre-clinical and clinical studies to date have demonstrated solithromycin’s efficacy and safety.  Solithromycin offers flexibility of dosing, whether IV, oral capsule, or oral suspension which we believe will be attractive to both physicians and patients. These attributes of solithromycin make it a possible treatment for all age groups, including pediatrics.

We have completed two Phase 3 trials for solithromycin which we believe will support our planned new drug application, or NDA, to treat CABP. On January 5, 2015, we announced positive topline results from our global, pivotal Phase 3 clinical trial of solithromycin oral capsules in the treatment of patients with CABP. On October 16, 2015, we announced positive topline results from our global, pivotal Phase 3 clinical trial of IV solithromycin progressing to oral solithromycin in the treatment of patients with CABP. The solithromycin development program was structured through the draft guidance published by and dialogue with the U.S. Food and Drug Administration, or FDA, and also meetings with the FDA. We also have received feedback from several European Union, or EU, member countries regarding our plan to submit a marketing authorization application, or MAA, to the European Medicines Agency, or EMA.

In August 2015, the FDA granted Fast Track designation for IV and oral solithromycin for the treatment of CABP.  As a result, we have begun to submit our NDA on a rolling basis as portions of the NDA become ready, rather than waiting for the entire NDA to be completed, which we believe will speed the review time of the NDA.  The FDA has designated both oral and intravenous solithromycin as Qualified Infectious Disease Products, or QIDP, for the indication of CABP. As a result of the QIDP designation, solithromycin is eligible for priority review by the FDA. Based on these factors, assuming FDA approval, we expect to be able to

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launch solithromycin for CABP in 2017. All FDA-required chemistry, non-clinical and clinical trials are complete and work is ongoing for the rolling submission of the NDA, which we expect to complete in the first half of 2016. We are preparing to file an application for oral and IV solithromycin for the treatment of CABP with the EMA, which we also expect to complete in the first half of 2016.  

Our second product is Taksta, an antibiotic known as fusidic acid, that has been used for decades outside the U.S., including Western Europe, but which has never been approved in the U.S. We are developing Taksta exclusively in the U.S. as an oral treatment of acute bacterial skin and skin structure infections, or ABSSSI, which is frequently caused by methicillin-resistant Staphylococcus aureus, or MRSA, and we are exploring its use for the long-term oral treatment of refractory bone and joint infections, including prosthetic joint infections, or PJI, caused by staphylococci, including S. aureus and MRSA. Currently, there is no optimal oral, chronic antibiotic for treating these infections. We are seeking to develop Taksta as an oral treatment for staphylococcal infections requiring chronic or long-term treatment.  We aim to replace currently available IV drugs but with the safety and convenience of oral long-term administration. Taksta successfully completed a Phase 2 clinical trial in patients with ABSSSI demonstrating a tolerability profile and efficacy comparable to linezolid (sold under the brand name Zyvox®), which is one of two oral antibiotics currently approved for the treatment of MRSA approved by the FDA.  In November 2015, we began a Phase 3 trial for the treatment of ABSSSI and expect to begin a refractory bone and joint infection study in early 2016.  In October 2013, the FDA granted orphan drug designation for fusidic acid for the treatment of PJI, which confers regulatory and economic benefits in the development process. In December 2013, PJI was classified as a very rare disease by the National Institutes of Health, or NIH. In September 2015, the FDA designated oral tablets of Taksta as a QIDP for the indication of ABSSSI.  

Overview of Solithromycin (CEM-101)

Solithromycin is a potent new fourth generation macrolide, the first fluoroketolide, that we are developing in oral capsule, IV and suspension formulations (for pediatric use) for the treatment of respiratory tract infections, including CABP, which is one of the most common serious infectious diseases of the respiratory tract and the primary cause of death from an infection, and bacterial urethritis, including gonorrhea, the second most common reportable infectious disease in the world. Solithromycin is differentiated from other antibiotics because of its broad therapeutic potential and the right spectrum of activity to target pathogenic bacteria. Broad therapeutic potential means a drug that can be used in the treatment of several disease indications, in this case, such as bacterial pneumonia, chronic obstructive pulmonary disease, or COPD, cystic fibrosis, other respiratory tract infections, infections in children, bacterial urethritis, Helicobacter gastritis, eye infections, infections in pregnancy, and others. Targeting the bacteria responsible for CABP and other respiratory infections without causing major effects on the anaerobic Gram-negative intestinal microflora is a benefit of the macrolide class.

Macrolides, as a class, have been used broadly for treating respiratory and other infections in adults and children because of their excellent safety and efficacy profile. However, resistance to the older macrolides, like azithromycin (Zithromax, Z-Pak), is increasingly common, and is as high as 48% in the U.S. and 95% in some parts of Asia, leading to the use of potent respiratory fluoroquinolones such as levofloxacin and moxifloxacin, a current oral standard of care for CABP, which have broad spectrum activity and also are associated with unacceptable side effects for the CABP indication. A new macrolide which is active against resistant strains, while maintaining the safety of older macrolides, is needed. Solithromycin has the potency and spectrum to characterize it as a fourth generation macrolide. Solithromycin owes its potency to its unique chemical structure that interacts with the bacterial ribosomes in three regions while earlier generation macrolides bind in only one or two sites on the ribosome. Therefore, bacteria must mutate at three sites on the ribosome to become resistant to solithromycin. To date, we have seen no pneumococcal resistance to solithromycin in our clinical trials, and resistance was rare in our pre-clinical studies.

Macrolide use for serious infections has generally been replaced by fluoroquinolones, despite this class having a less desirable safety and tolerability profile than macrolides. A current oral standard of care for CABP is levofloxacin or moxifloxacin, which are fluoroquinolones. As with respiratory tract pathogens, gonococcus has become resistant to macrolides, including azithromycin, a widely used macrolide, and other classes of oral antibiotics. Solithromycin could be used in monotherapy to treat CABP and also gonorrhea, chlamydia and mycoplasma infections. We believe solithromycin, with its unique chemical structure, retains and improves on the beneficial features of macrolides and can overcome the shortcomings of existing therapies.

We have undertaken two pivotal Phase 3 trials for solithromycin to treat CABP.  The first was a Phase 3 trial for oral solithromycin, which was designed based on FDA guidance documents and comments from the FDA, which we initiated in December 2012 and for which we announced positive topline results on January 5, 2015.  In December 2013, we began the second Phase 3 trial to treat CABP with IV solithromycin progressing to oral solithromycin, for which we announced positive topline results on October 16, 2015. Based on the FDA draft guidelines and our discussions with the FDA we believe that these two Phase 3 trials will be sufficient to support our planned NDA for solithromycin to treat CABP. These trials are randomized, double-blinded studies using a respiratory fluoroquinolone, moxifloxacin (Avelox), for which we had to show non-inferiority for efficacy and acceptable safety and tolerability. Moxifloxacin was selected as the comparator because it is administered at the same dose, 400 mg once a day worldwide, while levofloxacin, the respiratory fluoroquinolone used in our Phase 2 trial, is used at 750 mg once daily in the U.S. and 500 mg

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twice daily in the rest of the world. Being a global study, the same dose was required to be used in our Phase 3 trials. Non-inferiority for efficacy means solithromycin will have to prove it is statistically as effective as a comparator drug within a pre-defined margin.

On January 5, 2015, we announced positive topline results from our global, pivotal Phase 3 clinical trial of solithromycin oral capsules in the treatment of patients with CABP. In the intent-to-treat, or ITT, population (which was all randomized patients), solithromycin met the primary objective of statistical non-inferiority (10% non-inferiority margin) of the early clinical response at 72 (-12/+36) hours after initiation of therapy compared to moxifloxacin. Solithromycin also met the secondary objectives of non-inferiority in clinical success at the short term follow up, or SFU, visit, 5-10 days after the end of therapy, both in the ITT and clinically evaluable populations. The point estimates for the primary endpoint of early clinical response were 78.2% for solithromycin and 77.9% for moxifloxacin. The 95% confidence interval for the treatment difference had lower and upper bounds of -5.5% and 6.1%, respectively. The results were similar in the combined total patient population, however, initial sub-groups analysis by age, indicate that the difference in efficacy point estimates became larger with increases in patient age and favored solithromycin in the ITT early clinical response groups. The results for the secondary efficacy endpoints supported results from the primary endpoint.

This Phase 3 trial was an active-controlled, global, multi-center trial that enrolled 860 adult patients with moderate to moderately severe CABP (pneumonia of PORT Class II, III and IVa severity classification). Enrollment of PORT Class II pneumonia patients was limited to 50% of the study population. Patients were randomized to receive either oral solithromycin, as an 800 mg loading dose followed by 400 mg once daily for a total of five days, while oral moxifloxacin was dosed at 400 mg once daily for seven days. The primary objective was demonstration of non-inferiority of early clinical response at 72 (-12/+36) hours, as specified by FDA guidance, defined as having improvement in at least two of the following four symptoms (without worsening of any); cough, shortness of breath, chest pain and sputum production in the ITT population. The study was designed to provide 90% power to demonstrate non-inferiority in early clinical response rate for solithromycin versus moxifloxacin utilizing a 10% non-inferiority margin. Secondary endpoints included the clinical success rate at the short term follow up visit 5 to 10 days following the last dose of study drug in the ITT and clinically evaluable populations, the microbial ITT population, and a comparison of safety and tolerability of solithromycin compared to moxifloxacin.  

In this clinical trial, serious adverse events, or SAEs, occurred with equal frequency in both arms (<7% of patients) and no SAEs were considered study drug related. The most frequently reported adverse events for solithromycin were headache (4.5%, versus 2.5% with moxifloxacin), diarrhea (4.2%, versus 6.5% with moxifloxacin), nausea (3.5%, versus 3.9% with moxifloxacin), emesis (2.4%, versus 2.3% with moxifloxacin) and dizziness (2.1%, versus 1.6% with moxifloxacin). No other treatment emergent adverse events occurred, in either arm, with 2.0% incidence or greater. C. difficile associated diarrhea was diagnosed in two patients, both of whom received moxifloxacin. Asymptomatic, reversible ALT elevation was observed in both treatment arms. Grade 3 ALT elevation (>3-8×the upper limit of normal [ULN]) occurred in 2.1% of moxifloxacin patients and 4.6% of solithromycin patients and Grade 4 ALT elevation (>8×ULN) occurred in 1.2% of moxifloxacin patients and 0.5% of solithromycin patients. No patient in either arm of the study had treatment-emergent concomitant ALT and bilirubin elevation meeting Hy’s Law criteria.

On October 16, 2015, we announced positive topline results from our global, pivotal Phase 3 clinical trial of IV solithromycin progressing to oral solithromycin in the treatment of adult patients with CABP. The trial enrolled globally 863 patients with moderate to moderately severe CABP (pneumonia of PORT Class II, III and IV severity classification). Enrollment of PORT Class II pneumonia patients was limited to 25% of the study population and 25% of the population were PORT IV patients. Patients were randomized to receive either intravenous solithromycin or moxifloxacin at a daily dose of 400 mg once each day for seven days with the ability for the physician to switch to oral solithromycin or oral moxifloxacin, when pre-defined switch criteria were met, to complete the seven-day course of therapy.  When switching to oral solithromycin, the first day of the switch was a loading dose of 800 mg followed by a 400 mg dose once a day for the remainder of the seven day course. Patients randomized to moxifloxacin could be switched to 400 mg oral moxifloxacin once a day for the remainder of the seven-day course of treatment. The primary objective was demonstration of non-inferiority of early clinical response at 72 (-12/+36) hours, as specified by FDA guidance, defined as having improvement in at least two of the following four symptoms (without worsening of any) in the intention-to-treat, or ITT, population: cough, shortness of breath, chest pain and sputum production. The study was designed to provide 90% power to demonstrate non-inferiority in early clinical response rate for solithromycin versus moxifloxacin utilizing a 10% non-inferiority, or NI, margin. Secondary endpoints included the clinical success rate at the short term follow up visit five to 10 days following the last dose of study drug in the ITT and clinically evaluable populations, and a comparison of safety and tolerability of solithromycin compared to moxifloxacin. The pooled mITT population from both the oral and IV trials was also a co-primary endpoint for the oral Phase 3 trial and a secondary endpoint for the IV Phase 3 trial.

In the IV to oral clinical trial, solithromycin met all pre-defined endpoints for the FDA. In the ITT population (all randomized patients), solithromycin met the FDA primary objective of statistical NI (10% non-inferiority margin) compared to moxifloxacin at early clinical response (ECR, 72 [-12/+36]) hours after initiation of therapy). The point estimates for the primary endpoint of early clinical response were 79.3% for solithromycin and 79.7% for moxifloxacin. The 95% confidence interval for the treatment difference had lower and upper bounds of -6.1% and 5.2%, respectively.

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Solithromycin also met the objective of statistical NI compared to moxifloxacin at ECR in the mITT population (those patients with an etiologic diagnosis of the cause of CABP) from the pooled data from both Phase 3 studies. The point estimates were 77.2% for solithromycin and 78.9% for moxifloxacin with lower and upper bounds of the 95% confidence interval for the treatment difference of -7.4% and 4.2%.

Solithromycin also met the secondary endpoint of NI compared to moxifloxacin in the mITT population at the ECR time point from the IV to oral trial alone. The point estimates for this endpoint were 80.3% for solithromycin and 79.1% for moxifloxacin with lower and upper bounds of the 95% confidence interval for the treatment difference of -8.1% and 10.6%.

Additional secondary endpoints evaluated solithromycin at the short-term follow-up visit (SFU) five to 10 days after therapy in both the ITT and clinically evaluable, or CE, populations. Clinical success rates as determined by investigators at the SFU visit were high for both the solithromycin and moxifloxacin groups in the ITT population with point estimates of 84.6% and 88.6%, respectively. Clinical success rates were also high in the CE-SFU population for both the solithromycin and moxifloxacin groups, with point estimates of 86.4% and 92.8%, respectively. This CE outcome was skewed in favor of moxifloxacin by a blinded drug distribution delay which led to discontinuation of study drug, not related to safety or efficacy, in solithromycin patients only. Censoring these five patients, all of which fell on the solithromycin side, results in point estimates for CE population success at the SFU visit of 87.6% for solithromycin patients.

The primary endpoint for the EMA was NI in the ITT-SFU and the CE-SFU populations limited to patients with PORT III/IV CABP at the SFU time point assessment of clinical success. Solithromycin was non-inferior to moxifloxacin in the ITT-SFU population. Also, solithromycin would be NI to moxifloxacin in the CE-SFU population, after censoring those patients from the CE population who had early discontinuation of blinded study drug due to drug distributions issues.

In the IV to oral solithromycin clinical trial, serious adverse events, or SAEs, occurred with comparable frequency in both arms (<7% of patients) and only three SAEs (two solithromycin, one moxifloxacin) were considered study drug related, all of which were allergic reactions and occurred during the first IV dose. The mean (median) duration of IV therapy was similar between treatment arms, with 3.7 days (3 days) for solithromycin recipients and 4.0 days (3 days) for moxifloxacin recipients, with comparable numbers of patients receiving 7 days of IV study drug in both study groups (22.0% solithromycin, 25.6% moxifloxacin).  The most frequently reported adverse events for solithromycin were infusion-related events, a well-known class effect of intravenous macrolide antibiotics, which occurred in 31.3% of solithromycin recipients and 5.4% of moxifloxacin recipients, the majority (over 80%) of which were mild and well tolerated.  Study discontinuation due to infusion-related events occurred in 10 patients who received solithromycin and one patient who received moxifloxacin.  Non-infusion related adverse events leading to study drug discontinuation occurred in 3.5% of solithromycin patients and 3.8% of moxifloxacin patients.  Cardiac adverse events and allergic adverse events were the most common reasons for discontinuation of moxifloxacin.

Non-infusion related adverse events occurred with similar frequency between treatment arms (34.5%, versus 32.9% with moxifloxacin), with the most frequently reported being diarrhea (4.4%, versus 5.9% with moxifloxacin), headache (3.5%, versus 4.2% with moxifloxacin), nausea (3.2%, versus 1.6% with moxifloxacin), hypokalemia (2.5%, versus 2.1% with moxifloxacin), dizziness (2.5%, versus 1.2% with moxifloxacin), insomnia (2.1%, versus 1.2% with moxifloxacin), and hypertension (1.4% versus 2.3% with moxifloxacin). No other treatment-emergent adverse events occurred, in either arm, with 2.0% incidence or greater. C. difficile-associated diarrhea was diagnosed in one moxifloxacin recipient. Asymptomatic, reversible ALT elevation, a well-known class effect of macrolides, was observed in both treatment arms. Grade 3 ALT elevation (>3-8×ULN) occurred in 3.4% of moxifloxacin patients and 8.2% of solithromycin patients and Grade 4 ALT elevation (>8×ULN) occurred in 0.5% of moxifloxacin patients and 0.7% of solithromycin patients. The ALT elevations observed on the solithromycin arm generally peaked at Day 4 and declined with continued dosing through Day 7.  One patient who received moxifloxacin had treatment-emergent concomitant ALT and bilirubin elevation meeting Hy’s Law criteria.  One solithromycin patient met Hy’s Law criteria at baseline prior to exposure to solithromycin, but improved over the 7-day course of treatment. There were no concomitant ALT and bilirubin increases related to solithromycin administration and therefore no patient met Hy’s Law criteria post-baseline.

While we observed data from our earlier Phase 1 clinical studies indicating that solithromycin may increase heart rates in healthy volunteers, this was not observed in the oral Phase 3 trial. Instead, for patients presenting with CABP (typically, with some combination of older age, fever, hypoxia, anemia and anxiety), the central tendency for heart rate response in solithromycin recipients is a decline over time coinciding with clinical improvement in cardiopulmonary status on therapy. In the oral Phase 3 trial, mean heart rate declined by 9, 8 and 12.7 beats per minute, or bpm, among solithromycin recipients at Days 2, 4, and 5 of therapy, versus mean declines of 13.9, 14, and 20 bpm among moxifloxacin recipients.  In the IV to oral Phase 3 trial, with most patients treated as inpatients, a larger and more robust set of heart rate data were captured.  The mean heart rate declines were nearly identical (less than 2 bpm) between treatment arms, declining by 5.5, 8.3, 10.6, 11.5, 12.7 bpm among solithromycin recipients at Day 1 (4 hours post-infusion), Day 2, Day 3, Day 4, and Day 7 (+2 days), versus mean declines of 5.7, 8.3, 11.1, 13.3, 14.5 bpm among moxifloxacin recipients.  

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Solithromycin’s spectrum of activity includes most of the pathogens involved in CABP and has demonstrated potent activity in vitro and in animal models of infection, in our Phase 2 trial with oral solithromycin to treat CABP as a monotherapy, our Phase 3 trial for oral solithromycin as a treatment for CABP, and in our recently completed Phase 3 trial to treat CABP with IV solithromycin progressing to oral solithromycin. Solithromycin is intended for both intravenous and oral administration, to allow patients started on IV therapy to be switched to oral therapy when appropriate, which could lead to earlier discharge from the hospital.  The FDA has designated both oral and intravenous solithromycin as QIDPs for the indication of CABP. The QIDPs designation is expected to enable us to benefit from certain incentives for the development of new antibiotics, including priority review, and a five-year extension of NCE exclusivity.

The second indication we are pursuing for solithromycin is uncomplicated urethritis, or gonorrhea. We expect to submit the results of this study in a supplemental NDA after FDA approval for CABP, should it be received. Given the high prevalence of gonorrhea in this country and increasing resistance of the pathogen to recommended antibiotics, the FDA has designated oral solithromycin as a QIDP for the treatment of uncomplicated gonococcal infections. The current standard of treatment for bacterial urethritis/gonorrhea requires combination therapy including both an intramuscular injection of ceftriaxone and oral azithromycin (1000 mg). There is no oral formulation of ceftriaxone.  Gonococcal resistance to azithromycin is now too high to allow it to be used in monotherapy for the oral treatment of gonorrhea. Until recently, oral cefixime (Suprax) had been recommended as an alternative for treatment of patients as well as for treatment of their potentially infected partners. However, as of August 2012, the Centers for Disease Control, or CDC, no longer recommends cefixime for the treatment of gonorrhea, which leaves no oral treatment option. In our Phase 2 open-label study completed in 2013 in men and women with suspected gonococcal infection, microbiological eradication of gonococci was achieved in 100% of all evaluable patients at all body sites.  In August of 2014, we initiated a Phase 3 clinical trial, called Solitaire-U, of a single 1000 mg dose of oral solithromycin in patients with uncomplicated gonorrhea and chlamydia infections compared with intramuscular ceftriaxone plus oral azithromycin.  We recently completed our original planned 250 evaluable patient enrollment, with patients from two sites in Australia and one in the U.S.  The majority of enrolled patients were men who have sex with men.  In December 2015, the National Institute of Allergy and Infectious Disease, or NIAID, agreed to fund an expansion of the trial to include 60 women and children under a cooperative research and development agreement, or CRADA, in order to achieve greater balance in the study population.  A protocol amendment has been submitted to the FDA which allows for enrollment of these additional patients and we expect enrollment of the additional patients to begin in the first half of 2016 and continue into 2017. We believe this expansion is favorable and could allow us to have a broad label for men, women and adolescent children. Since patent term extension is granted upon approval of the first indication and the commercial potential of solithromycin for CABP is expected to be significantly larger than gonorrhea, we intend to seek approval for gonorrhea only after solithromycin is approved for CABP.

In May 2013, we entered into an agreement with the Biomedical Advanced Research Development Authority of the U.S. Department of Health and Human Services, or BARDA, for the evaluation and development of solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia. BARDA is funding the development of solithromycin suspension formulation for pediatric use in CABP.  This is the first new antibiotic being developed as a suspension for pediatric use for respiratory tract infections in over 20 years.  We have tested safety and pharmacokinetic evaluations have been completed in adolescent children with oral capsules in a Phase 1a trial. We are currently testing oral capsules, IV, and oral suspension in 64-96 pediatric patients ranging from newborns to 17 years old with suspected or confirmed bacterial infections in a Phase 1b trial.  The Phase 1b trial is open-label and the primary endpoint will be to determine safety and pharmacokinetics in the pediatric population. As cohorts are completed in the Phase 1b trial, the Phase 2/3 trial can be initiated in the age group and formation where the testing has been completed. We have finalized the Phase 2/3 protocol for the pivotal global pediatric study that is expected to begin in the first quarter of 2016.  The pediatric study plan to obtain regulatory approval was submitted and accepted by the FDA and a pediatric investigation plan has been accepted by the EMA.  There is an urgent need for a new oral and intravenous antibiotic for use in pediatric infections. Ongoing with this program, and included in the BARDA funding, is the optimization of the commercial pediatric suspension product.

BARDA also funded studies in non-human primates to test the efficacy of solithromycin in treating bioterror pathogens such as tularemia and anthrax. Successful pilot studies were conducted in 2014 with inhalation exposure in non-human primates in which it was demonstrated that solithromycin was effective in treating both of these infections.

Infections in pregnancy are difficult to treat because of the nature of the infecting pathogens, such as Group B beta hemolytic streptococci and Ureaplasma and the safety required to treat infections in this delicate patient population. These infections can cause neonatal sepsis and also preterm birth.  All pregnant women are screened for Group B beta hemolytic streptococci infections and, if not penicillin-allergic, can be treated with penicillin successfully. In penicillin-allergic patients there is no viable option today because of resistance to azithromycin. In patients infected with Ureaplasma, penicillin is not effective and azithromycin has been the drug of choice. Recently resistance to azithromycin has increased and there is no optimal treatment option for these infections. In addition, drugs that penetrate the amniotic fluid and placenta in sufficient levels are important to fight infection and azithromycin does not penetrate well into the fetus or the amniotic fluid, which decreases its efficacy in treating the infection. Consequently, there is a need for a safe and effective antibiotic that can be administered maternally but reach effective concentrations in fetal blood so that the infection at these sites can be effectively treated. Therefore, pregnant women could be an additional patient population for

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solithromycin. BARDA funded the Segment III toxicology study that was completed successfully and these results could allow solithromycin to be tested in pregnancy.

We have global rights (other than the Association of South East Asian Nations, or ASEAN, countries, which are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand and Vietnam) to solithromycin. We have licensed solithromycin to Toyama Chemical Co., Ltd., or Toyama, for development and commercialization in Japan while retaining the rights to the rest of the world. Toyama successfully completed a Phase 1 trial in healthy Japanese volunteers and also a Phase 1 trial to measure solithromycin levels in the upper respiratory tract. Toyama is enrolling patients in a Phase 2 trial in CABP after having met with the Japanese regulators in August 2014. Toyama and we are sharing the results of our respective development activities.

Overview of Taksta

Taksta is an antibiotic that we are developing exclusively in the U.S. for ABSSSI and we are exploring its use for the long-term oral treatment for refractory bone and joint infections, including prosthetic joint infections as well as skin and skin structure infections which are frequently caused by staphylococci, including S. aureus, MRSA, coagulase negative staphylococci and other Gram-positive bacteria. Taksta is a novel and proprietary dosing regimen of fusidic acid, which is an approved antibiotic that has been sold by Leo Laboratories, Ltd. primarily for staphylococcal infections, including skin, soft tissue and bone infections, for several decades in Europe and other locations outside the U.S. and has a long-established safety and efficacy profile. Fusidic acid, however, has never been approved for use in the U.S.

We believe Taksta has the potential to be used in hospital and community settings on both a short-term and chronic basis. Since bone and joint infections are primarily treated with a combination of IV and oral drugs, we believe that Taksta would enable out-patient treatment of many patients who would otherwise require hospitalization and/or intravenous therapy, which we also believe would provide pharmacoeconomic advantages, be well received by doctors and be more convenient for patients.

In May 2013, we were issued a patent for our proprietary dosing regimen which has been shown with pharmacodynamics experiments to limit resistance development. Further, fusidic acid is eligible for market exclusivity under the Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-Waxman Act. In October 2013, the FDA designated Taksta as an orphan drug for the treatment of prosthetic joint infections, which will provide seven years of market exclusivity if Taksta is approved by the FDA for such treatment.  We will work to have orphan drug designation granted for Taksta for refractory bone and joint infections, which would provide the same additional two years of market exclusivity if Taksta is approved by the FDA for such treatment.  In December 2013, PJI was classified as a very rare disease by the NIH.

In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid, a leading FDA-approved oral treatment for MRSA. Like ABSSSI, bone and joint infections, including prosthetic joint infections, are often caused by staphylococci, including MRSA. In December 2012, we initiated a Phase 2 trial of Taksta for treatment of primarily staphylococcal infections of infected prosthetic joint infections, hip and knee joints. Based on the results of the 14 patients enrolled in this study, we concluded that the fusidic acid in combination with rifampin was generally comparable to intravenous standard of care antibiotics.   

In December 2014, we met with the FDA to review the study design and dosing of the pivotal Phase 3 trial in PJI patients who have failed in therapy and cannot tolerate another surgery.  Based on that meeting and subsequent discussions with the FDA, our plan involves testing Taksta for long-term suppressive therapy of refractory bone and joint infections, including PJI, in a single arm trial. Also based on FDA discussions, we plan to conduct a Phase 3 trial for the treatment of ABSSSI. The ABSSSI trial was initiated in November 2015 and the refractory bone and joint study is expected to begin in early 2016.  At the completion of the ABSSSI trial and the refractory bone and joint infection study, we will discuss with the FDA to determine if we have adequate data to support approval for both indications or if a second ABSSSI study is needed. The need for additional trials may be negated if Congress passes the 21st Century Cures Act, which contains a limited population antibacterial drug approval pathway designed to streamline the approval process for approval of rare diseases.

Our Earlier Stage Pipeline Programs

Our earlier stage programs include developing other uses for solithromycin and Taksta, as well as the development of analogs from our macrolide platform for non-infectious disease programs.  

Solithromycin.  We are evaluating the effects of solithromycin in a proof-of-principle study in patients with NASH.  NASH is a progressive form of non-alcoholic fatty liver disease, or NAFLD, where accumulation of excessive fat (steatosis) coexists with liver cell injury, inflammation and fibrosis, which eventually leads to cirrhosis and hepatocellular carcinoma. To date, no single therapy has been approved for treating NAFLD/NASH. Solithromycin is well tolerated in patients with mild to severe hepatic impairment and no significant differences in safety, compared to healthy controls, are noted. Solithromycin has been demonstrated to have potent anti-

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inflammatory properties in addition to its antibacterial properties; as a result, we evaluated solithromycin in a diabetic mouse model of NASH-HCC to investigate its potential effects on this liver disease, and in the study solithromycin demonstrated potential anti-NASH and anti-hyperglycemic effects. In September 2015, we initiated an exploratory single arm Phase 2 trial for solithromycin to explore the effects of treating patients with NASH for which we expect to complete enrollment by the end of 2016.

Older macrolides, because of their anti-inflammatory properties, are used to treat COPD to lower the dose of steroids. Solithromycin has demonstrated anti-inflammatory properties and in September 2015, we initiated a Phase 2 trial in COPD patients to test its anti-inflammatory capabilities for which we expect to complete enrollment by the end of 2016.

In the future we may pursue secondary indications for solithromycin to treat other infections in cystic fibrosis patients, Helicobacter gastritis, malaria, tuberculosis, and eye infections.  An ophthalmic solution has been made that we are currently testing in in vitro and animal models. Solithromycin has also been demonstrated to have in vitro activity against enterococci, including vancomycin-resistant enterococci.

Other Research Programs. Shortly after our inception, we entered into a collaborative research and development and license agreement with Optimer Pharmaceuticals, Inc., or Optimer, which was acquired by Cubist Pharmaceuticals, Inc. in October 2013, which was in turn acquired by Merck in January 2015. The license agreement gives us exclusive access to a library of over 500 macrolide compounds, which we have further expanded through our own discovery efforts. Macrolides are complex structures which can be chemically modified to eliminate their antibacterial activities. We have developed our own proprietary macrolide compounds which we intend to use to develop drugs with no antibiotic effect and replace use of older macrolides in inflammatory conditions and other indications such as diabetic gastroparesis. Several compounds have been identified through our screening programs that could potentially address therapeutic needs in the areas of inflammation, diabetic gastroparesis and cancer.

We are conducting early drug discovery studies for the use of macrolides in treating diabetic gastroparesis, which is related to a lack of neural response in the gastrointestinal tract of diabetic patients, and gastroesophageal reflux disease, or GERD, both likely to be helped by addressing motilin function. Motilin is a naturally occurring peptide that causes the stomach to contract to initiate the migratory motor complex that empties the stomach. Erythromycin and related antibiotics have known activity as motilin agonists. Through our discovery program, we have identified compounds that are active in the motilin receptor binding assay, as well as in rabbit duodenal strip contraction assays. These compounds are being optimized chemically for pharmacokinetic properties and oral bioavailability.

The Limitations Associated with Antibiotics

The widespread use of antibiotics has led to development of resistant strains of bacteria, which limits the effectiveness of existing drugs. This led the World Health Organization to state in 2010 that antibiotic resistance is one of the three greatest threats to human health. The CDC estimates that more than 70% of U.S. hospital infections are resistant to at least one of the antibiotics most commonly used to treat them. The CDC also estimates that each year more than 2,000,000 people are sickened with antibiotic-resistant infections, with at least 23,000 dying as a result. Antibiotic-resistant infections also increase the costs to the U.S. healthcare system.

Antibiotic resistance is primarily caused by genetic mutations in bacteria selected by exposure to antibiotics where the drug does not kill all of the bacteria. In addition to mutated bacteria being resistant to the drug used for treatment, many bacterial strains can also be cross-resistant, meaning that the use of a particular treatment to address one kind of bacteria can result in resistance to other kinds of bacteria as well as to other antibiotics. As a result, the effectiveness of many antibiotics has declined, limiting physicians’ options to treat serious infections and creating a global health issue. For example, it is estimated that in the U.S. approximately 44% of pneumococci, the primary pathogen involved in respiratory tract infections, are resistant to azithromycin and other macrolides commonly used to treat them. In addition, no new antibiotic has been developed for pediatric use in over 20 years and this population also is showing growing resistance to currently available antibiotics. Resistance also is growing to antibiotics currently used to treat infections in pregnant women.  Antibiotic resistance has a significant impact on mortality and morbidity and contributes heavily to health care system costs worldwide.

In addition to resistance issues, current antibiotic therapies also have other limitations, including serious side effects. These side effects may include: severe allergic reaction, decreased blood pressure, nausea and vomiting, suppression of platelets, pain and inflammation at the site of injection, muscle, renal and oto toxicities, optic and peripheral neuropathies and headaches. Some of these side effects may be significant enough to require that therapy be discontinued or not used. As a result, some treatments require clinicians to closely monitor patients’ blood levels and other parameters, increasing the expense and inconvenience of treatment.

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Further, many of the existing antibiotics used to treat serious infections are difficult or inconvenient to administer. Many drugs are given twice daily for seven to 14 days or more and patients can be hospitalized for much or all of this period or require in-home IV therapy. While IV treatment can deliver the drug more rapidly and in a larger dose than is possible orally, once a patient is stabilized, a switch to oral treatment allows for more convenient and cost-effective out-patient treatment. We believe that there is a need for new antibiotics that have improved potency and pharmacokinetics, effectiveness against resistant bacterial strains, improved side effect profiles and more flexible administration formulations.

Recognizing the seriousness of growing antibiotic resistance, in July 2012, Congress passed the GAIN Act to provide economic incentives to promote the development of antibiotics designed to treat specific qualified infections disease pathogens identified by the FDA.  Among the pathogens that the FDA has identified as qualified infectious disease pathogens are MRSA, vancomycin-resistant Staphylococcus aureus and vancomycin-resistant Enterococcus. The incentives will be granted for an antibiotic that is designated by the FDA as a qualified infectious disease product, or QIDP.   QIDP designation provides certain incentives for the development of new antibiotics, including priority review, and a five year extension of new chemical entity exclusivity.  Pursuant to the GAIN Act, in 2013, the FDA designated each of the oral and IV formulations of solithromycin as a QIDP for the indication of CABP, which was designated a qualified infectious disease pathogen by the FDA in 2013. In 2014, the FDA designated oral solithromycin as a QIDP for the treatment of uncomplicated gonococcal infections, which were designated as a qualified infectious disease pathogen by the FDA in 2014.

Solithromycin

Overview

We are developing solithromycin, a fourth generation macrolide and the first fluoroketolide, to treat multiple infectious diseases in multiple patient populations.  We are initially developing solithromycin for respiratory tract infections, including CABP, and also for treating other infections, including bacterial urethritis. Traditionally, macrolides have been among the most commonly prescribed drugs for respiratory tract infections because of their combination of spectrum of activity, safety for use in adult and pediatric patients, tissue distribution and activity against intracellular pathogens, pharmacokinetics allowing use in oral and IV formulations, and anti-inflammatory properties. However, the effectiveness of macrolides for treating serious respiratory tract infections such as CABP has declined due to resistance issues related to earlier generations of macrolides. We believe our clinical and pre-clinical results suggest that solithromycin retains and improves on the benefits of, and overcomes the shortcomings of, earlier generation macrolides.

We also believe that solithromycin can be used as a monotherapy to treat CABP, due to its potency and planned availability in IV and oral formulations.

Solithromycin Market Opportunity

We are developing solithromycin in both oral (including a suspension formulation) and IV formulations initially as a treatment for CABP, which is a respiratory tract bacterial infection acquired outside of a hospital setting. Respiratory tract infections can range from severe diseases such as pneumonia (CABP), to similar infections of the respiratory tract such as pharyngitis (which is usually referred to as strep throat), bronchitis, chronic sinusitis and middle ear infections (which are especially common in children). CABP is one of the most common serious infectious diseases of the respiratory tract and is the most frequent cause of death due to bacterial infections in the U.S. There are 1.6 million fatal cases of pneumococcal disease annually worldwide which is more than the deaths caused annually by breast or prostate cancer. There are approximately five to six million cases of CABP in the U.S. every year, approximately one million of which require hospitalization. Typical bacteria that cause CABP include Streptococcus pneumoniae, Haemophilus influenzae, Moraxella catarrhalis and Staphylococcus aureus. These four bacteria account for approximately 85% of CABP cases. Other organisms, called atypical bacteria, may be involved in CABP and include Legionella pneumophila, S. aureus, Chlamydophila pneumoniae and Mycoplasma pneuomoniae.

Many respiratory tract infections, including CABP, involve multiple bacteria. The routine diagnostic tests available to a physician can only identify a pathogen in 10% to 25% of cases and that diagnosis can take several days. Since infections can be serious and potentially life threatening, physicians cannot delay treatment while waiting for the results of these diagnostic tests to identify the pathogens involved in the disease. As a result, physicians seek to begin treatment with the antibiotic or combination of antibiotics that has the broadest activity against the bacteria thought to be causing the infection.

CABP and other respiratory tract infections can be treated with numerous classes of antibiotics, including macrolides, tetracyclines, fluoroquinolones, penicillins and cephalosporins. Each class has a different mechanism of action and resulting spectrum of activity. Each class, however, whether used alone or in combination, has limitations that can impede the treatment of CABP infections. Historically, macrolides have been among the most commonly prescribed drugs for respiratory tract infections because of their broad spectrum of activity and relative safety. Azithromycin, a second generation macrolide which is sold as Zithromax and Z-PAK and as a generic, is the most widely prescribed macrolide with total U.S. prescriptions of 50 million in 2013, according to IMS New Prescription Audit.  

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In recent years, the effectiveness of earlier generation macrolides, including azithromycin, to treat serious infections such as CABP has declined due to resistance issues. The most recently approved macrolide, telithromycin (Ketek), has seen limited use because of serious side effects. For these reasons, fluoroquinolones, such as levofloxacin, now are commonly used for serious CABP infections. Although levofloxacin is efficacious, it has serious side effects including C. difficile enterocolitis, tendonitis, hepatotoxicity and central nervous system effects. Beta-lactams, such as cephalosporins, which are commonly used in CABP, also have limitations, including limited coverage against several important bacteria such as Legionella and Mycoplasma. In addition, the newer cephalosporins can only be administered intravenously, which is a disadvantage if the patient does not need to be hospitalized or needs to move to oral therapy to enable treatment on an out-patient basis. The American Thoracic Society, or ATS, and the Infectious Diseases Society of America, or IDSA, recommend a macrolide together with a beta-lactam (such as a cephalosporin) to treat CABP; the macrolide is added to cover atypical bacteria. Alternatively, ATS and IDSA recommend physicians treat CABP with fluoroquinolones. The recommended combination of a macrolide with a beta-lactam has been shown to enhance survival; when a macrolide is not used, an increase in mortality has been shown.

We believe that the initial market acceptance of Ketek, which, according to IMS Health, in 2005, its first full year after FDA approval, generated 3.4 million prescriptions and $193 million in sales in the U.S., demonstrates the potential for a new macrolide therapy. However, soon after its U.S. approval in 2004, Ketek was found to cause reversible visual disturbances, loss of consciousness, exacerbate myasthenia gravis (a neurological disorder characterized by improper muscle regulation) and cause liver toxicity resulting in liver failure. Ketek was withdrawn in 2007 for use in all infections other than CABP, and as a result, the large market predicted for Ketek has not developed. While Ketek is a macrolide, solithromycin has a different chemical structure from Ketek, and therefore we believe is not likely to have the safety issues associated with Ketek. Our research, which was published in a peer-reviewed article in Antimicrobial Agents and Chemotherapy, suggests that pyridine, a chemical component of Ketek, is the agent that causes liver toxicity and other problems associated with Ketek. Solithromycin and older generation macrolides, including azithromycin and clarithromycin, do not have a pyridine component and have a safety profile distinct from that associated with Ketek. We believe that solithromycin has the potential to be more successful than older macrolides because of the activity against resistant pathogens and potency demonstrated in our Phase 3 trials for CABP and demonstrated to date in our ongoing Phase 3 trial for gonorrhea, which confirm the efficacy and safety profile demonstrated in our previous trials.

As a result of the limitations of current therapies for CABP, we believe there is an opportunity to introduce the fourth generation macrolide that is more potent and effective against bacteria that are resistant to older generations of macrolides, while retaining the traditional safety and anti-inflammatory properties that macrolides are known to exhibit. To date, our Phase 1, Phase 2 and Phase 3 clinical trials of solithromycin to treat CABP have demonstrated that solithromycin is potent and effective against resistant bacteria and is well tolerated. We also believe that developing IV and oral formulations will provide flexibility to physicians to treat patients according to the severity of their disease and transition some patients from IV to oral, enabling them to leave the hospital sooner. If approved by the FDA, solithromycin would be the first macrolide approved with both IV and oral capsule and suspension formulations since azithromycin was approved more than 20 years ago.

Further, we believe that the designation by the FDA of solithromycin as a QIDP for the treatment of CABP provides us with advantages in its development, namely priority review, and a five year extension of new chemical entity (NCE) exclusivity.  

In addition to CABP, there is a large public health need for a new and effective oral treatment for treating bacterial urethritis. Resistance has emerged to cefixime, which was the only remaining oral therapy for gonococci infections, such as bacterial urethritis. Our Phase 2 trial conducted in 2013 demonstrated that solithromycin is active against most bacterial pathogens known to be involved in bacterial urethritis including gonococci, chlamydia and mycoplasma. The CDC has identified N. gonorrheae as one of the three pathogens that pose an immediate public health threat that require urgent and aggressive action.  In addition, the CDC and key opinion leaders have expressed the need for an oral antibiotic as a replacement for cefixime because of resistance development. The development of solithromycin for bacterial urethritis would present an additional market opportunity for solithromycin and all of the patient data gathered in any trials would also contribute to the safety data base for CABP development. The FDA has indicated to us that a single Phase 3 trial for solithromycin in bacterial urethritis could be sufficient for approval.  In 2014, the FDA designated solithromycin as a QIDP for the treatment of uncomplicated gonococcal infections, which would provide us with the same development advantages discussed above for solithromycin as a treatment for CABP.

We also believe that solithromycin, because of its safety and tolerability as a macrolide, as well as its excellent tissue distribution and intracellular activity, may be effective in the treatment of infections in special populations, including pediatric and pregnant patients.

Key Attributes of Solithromycin

We believe the following key attributes of solithromycin will make it a safe and effective treatment for CABP and bacterial urethritis/gonorrhea as well as other infectious diseases and in many patient populations, including pediatrics and pregnancy.

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Solithromycin has demonstrated a favorable safety and tolerability profile. Solithromycin has been evaluated in over 1,600 subjects in our Phase 1, Phase 2 and Phase 3 clinical trials and has been shown to be safe and well tolerated. In the Phase 2 trial, there were fewer adverse events compared to levofloxacin, none of which required the patient to prematurely discontinue treatment with solithromycin, and no serious adverse events determined by the investigator to be related to solithromycin. In the Phase 3 trial for oral solithromycin, serious adverse effects, or SAEs, occurred with equal frequency in both the solithromycin and moxifloxacin arms (<7% of patients) and no SAEs were considered study drug related. In this trial, the overall safety and tolerability profile of solithromycin was comparable to that of moxifloxacin, although more patients receiving moxifloxacin had Grade 4 ALT elevation (>8×ULN) (1.2% versus 0.5% among solithromycin recipients), and more patients receiving moxifloxacin had documented C. difficile-associated diarrhea/colitis (n=2, versus 0 with solithromycin). In the IV to oral solithromycin Phase 3 clinical trial, SAEs occurred with comparable frequency in both arms (<7% of patients) and only three SAEs (two solithromycin, one moxifloxacin) were considered study drug related, all of which were allergic reactions and occurred during the first IV dose. The most frequently reported adverse events for solithromycin were infusion-related events, a well-known class effect of intravenous macrolide antibiotics, which occurred in 31.3% of solithromycin recipients and 5.4% of moxifloxacin recipients, the majority (over 80%) of which were mild and well tolerated.  Grade 3 ALT elevation (>3-8×ULN) occurred in 3.4% of moxifloxacin patients and 8.2% of solithromycin patients and Grade 4 ALT elevation (>8×ULN) occurred in 0.5% of moxifloxacin patients and 0.7% of solithromycin patients. The ALT elevations observed on the solithromycin arm generally peaked at Day 4 and declined with continued dosing through Day 7.  One patient who received moxifloxacin had treatment emergent concomitant ALT and bilirubin elevation meeting Hy’s Law criteria.  One solithromycin patient met Hy’s Law criteria at baseline prior to exposure to solithromycin, but improved over the 7-day course of treatment. There were no concomitant ALT and bilirubin increases related to solithromycin administration and therefore no Hy’s Law criteria was met for hepatotoxicity.  The mean heart rate declines were nearly identical (less than 2 bpm) between treatment arms, declining by 5.5, 8.3, 10.6, 11.5, 12.7 bpm among solithromycin recipients at Day 1 (4 hours post-infusion), Day 2, Day 3, Day 4, and Day 7 (+2 days), versus mean declines of 5.7, 8.3, 11.1, 13.3, 14.5 bpm among moxifloxacin recipients. Safety and tolerability also were demonstrated in our Phase 2 trial for bacterial urethritis as well as in our study in patients with mild to severe chronic liver disease. We have completed Phase 1a studies in adolescent children as part of the pediatric development program funded by BARDA.  In this study solithromycin demonstrated the same safety and pharmacokinetics as demonstrated in our adult programs. We believe that solithromycin’s safety and tolerability profile will allow it to be used in many patient populations, including pediatrics and pregnancy.

Solithromycin has demonstrated comparable efficacy to the current standard of care for CABP and non-inferiority compared to another widely used treatment for CABP. In our Phase 2 trial in 132 CABP patients comparing the oral formulation of solithromycin to levofloxacin, solithromycin successfully demonstrated efficacy comparable to levofloxacin. In addition, solithromycin was highly effective in our Phase 2 trial of bacterial urethritis. In our two Phase 3 CABP trials which enrolled 860 CABP patients each, solithromycin met the primary objective of statistical non-inferiority compared to moxifloxacin.

Solithromycin is potent against a broad range of bacteria and has excellent tissue distribution and intracellular activity. In pre-clinical studies, solithromycin was shown to be generally eight to 16 times more potent against respiratory tract bacteria in vitro than azithromycin as well as retains activity against azithromycin resistant strains. These pre-clinical studies also showed that solithromycin is potent against many bacteria that are resistant to levofloxacin and other fluoroquinolones. In addition to respiratory tract infections, solithromycin is active against bacteria causing other types of infections such as urethritis, malaria, and tuberculosis. Solithromycin has demonstrated activity against bacterial strains that are not susceptible to older generations of macrolides. In pre-clinical studies, solithromycin has demonstrated a longer post-antibiotic effect, meaning that after exposure to solithromycin, bacteria take longer to regrow than after exposure to other macrolides, supporting the potential for once-daily dosing. Solithromycin has also demonstrated excellent organ and tissue distribution and intracellular activity, addressing not only bacteria located in the blood but also in organs and cells in which they multiply. Bacteria therefore cannot escape from the action of the drug. As a result of its potency, spectrum of activity and pharmacokinetic and pharmacodynamic properties, we believe that solithromycin could eventually be used as a monotherapy for the treatment of CABP.

Solithromycin has a greater ability to fight resistant bacteria and to overcome resistance development due to its chemical structure. Solithromycin has a unique structure that binds to bacterial ribosomes in three sites while earlier generation macrolides have only one or two binding sites. Therefore, bacteria must mutate at three sites on the ribosome to become resistant to solithromycin. To date, we have seen no resistance to solithromycin in our clinical trials, and resistance was rare in our pre-clinical studies.

Solithromycin has the potential for IV, oral and suspension formulations. We are developing oral (including suspension) and IV formulations to allow patients with severe CABP to be treated in both hospital and out-patient settings. Providing both the IV and oral formulations will enable IV-to-oral step-down therapy. We believe this would be more convenient and cost-effective for patients and provide pharmacoeconomic advantages to health care systems. The suspension formulation would be used to treat bacterial infections in the pediatric population as well as elderly patients who may be unable to swallow a capsule.

Solithromycin has improved anti-inflammatory qualities. In CABP and other bacterial infections, the body’s immune response to the bacteria results in inflammation and tissue damage, which worsens symptoms. In addition to their antibacterial effects,

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macrolides also have anti-inflammatory properties which help patients feel better earlier. Our pre-clinical data suggest that solithromycin could have significantly greater anti-inflammatory properties than azithromycin and clarithromycin, which are used to treat patients with cystic fibrosis, or CF, and COPD, primarily for their anti-inflammatory properties.  In September 2015, we initiated a Phase 2 study in COPD patients to determine the anti-inflammatory effects of solithromycin in this patient group.

Clinical Data

Phase 3 IV to Oral CABP Trial.  We successfully completed our global, pivotal Phase 3 clinical trial of IV solithromycin progressing to oral solithromycin in the treatment of patients with CABP. The trial enrolled globally 863 patients with moderate to moderately severe CABP (pneumonia of PORT Class II, III and IV severity classification). Enrollment of PORT Class II pneumonia patients was limited to 25% of the study population and 25% of the population was PORT IV patients. Patients were randomized to receive either intravenous solithromycin or moxifloxacin at a daily dose of 400 mg once each day for seven days with the ability for the physician to switch to oral solithromycin or oral moxifloxacin, when pre-defined switch criteria were met, to complete the seven day course of therapy.  When switching to oral solithromycin, the first day of the switch was a loading dose of 800 mg followed by a 400 mg dose once a day for the remainder of the seven day course. The comparator moxifloxacin did not have a loading dose according to label, and was switched to oral 400 mg moxifloxacin once a day for the remainder of the seven-day course of treatment. The primary objective was demonstration of non-inferiority of early clinical response at 72 (-12/+36) hours, as specified by FDA guidance, defined as having improvement in at least two of the following four symptoms (without worsening of any) in the intention-to-treat, or ITT, population: cough, shortness of breath, chest pain and sputum production. The study was designed to provide 90% power to demonstrate non-inferiority in early clinical response rate for solithromycin versus moxifloxacin utilizing a 10% non-inferiority, or NI, margin. Secondary endpoints included the clinical success rate at the short term follow up visit five to 10 days following the last dose of study drug in the ITT and clinically evaluable populations, and a comparison of safety and tolerability of solithromycin compared to moxifloxacin. The pooled mITT population from both the oral and IV trials was also a co-primary endpoint for the oral Phase 3 trial and a secondary endpoint for the IV Phase 3 trial.

In the IV to oral clinical trial, solithromycin met the endpoint for the FDA. In the ITT population (all randomized patients), solithromycin met the FDA primary objective of statistical NI (10% non-inferiority margin) compared to moxifloxacin at the early clinical response (ECR, 72 [-12/+36]) hours after initiation of therapy). The point estimates for the primary endpoint of early clinical response were 79.3% for solithromycin and 79.7% for moxifloxacin. The 95% confidence interval for the treatment difference had lower and upper bounds of -6.1% and 5.2%, respectively.

Solithromycin also met the objective of statistical NI compared to moxifloxacin at the ECR in the mITT population (those patients with an etiologic diagnosis of the cause of CABP) from the pooled data from both Phase 3 studies. The point estimates were 77.2% for solithromycin and 78.9% for moxifloxacin with lower and upper bounds of the 95% confidence interval for the treatment difference of -7.4% and 4.2%.

Solithromycin also met the secondary endpoint of NI compared to moxifloxacin in the mITT population at the ECR time point from the IV to oral trial alone. The point estimates for this endpoint were 80.3% for solithromycin and 79.1% for moxifloxacin with lower and upper bounds of the 95% confidence interval for the treatment difference of -8.1% and 10.6%.

Additional secondary endpoints evaluated solithromycin at the short term follow up visit (SFU) five to 10 days after therapy in both the ITT and clinically evaluable, or CE, populations. Clinical success rates as determined by investigators at the SFU visit were high for both the solithromycin and moxifloxacin groups in the ITT population with point estimates of 84.6% and 88.6%, respectively. Clinical success rates were also high in the CE-SFU population for both the solithromycin and moxifloxacin groups, with point estimates of 86.4% and 92.8%, respectively. This CE outcome was skewed in favor of moxifloxacin by a blinded drug distribution delay which led to discontinuation of study drug, not related to safety or efficacy, in solithromycin patients only. Censoring these five patients, all of which fell on the solithromycin side, results in point estimates for CE population success at the SFU visit of 87.6% for solithromycin patients.

The primary endpoints for the EMA were NI in the investigator assessment of clinical success rates at the SFU time point in the ITT-SFU and the CE-SFU populations, limited to patients with PORT III/IV CABP. Solithromycin was NI to moxifloxacin in the ITT-SFU population. As well, solithromycin would be NI to moxifloxacin in the CE-SFU population, after censoring those patients from the CE population who had early discontinuation of blinded study drug due to supply issues.

In the IV to oral solithromycin clinical trial, serious adverse events, or SAEs, occurred with comparable frequency in both arms (<7% of patients) and only three SAEs (two solithromycin, one moxifloxacin) were considered study drug related, all of which were allergic reactions and occurred during the first IV dose. The mean (median) duration of IV therapy was similar between treatment arms, with 3.7 days (3 days) for solithromycin recipients and 4.0 days (3 days) for moxifloxacin recipients, with comparable numbers of patients receiving the total 7 days of study drug in both study groups (22.0% solithromycin, 25.6% moxifloxacin).  The most frequently reported adverse events for solithromycin were infusion-related events, a well-known class effect of intravenous macrolide

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antibiotics, which occurred in 31.3% of solithromycin recipients and 5.4% of moxifloxacin recipients, the majority (over 80%) of which were mild and well tolerated.  Study discontinuation due to infusion-related events occurred in 10 patients who received solithromycin and one patient who received moxifloxacin.  Non-infusion related adverse events leading to study drug discontinuation occurred in 3.5% of solithromycin patients and 3.8% of moxifloxacin patients.  Cardiac adverse events and allergic adverse events were the most common reasons for discontinuation of moxifloxacin.

Non-infusion related adverse events occurred with similar frequency between treatment arms (34.5%, versus 32.9% with moxifloxacin), with the most frequently reported being diarrhea (4.4%, versus 5.9% with moxifloxacin), headache (3.5%, versus 4.2% with moxifloxacin), nausea (3.2%, versus 1.6% with moxifloxacin), hypokalemia (2.5%, versus 2.1% with moxifloxacin), dizziness (2.5%, versus 1.2% with moxifloxacin), insomnia (2.1%, versus 1.2% with moxifloxacin), and hypertension (1.4%, versus 2.3% with moxifloxacin). No other treatment-emergent adverse events occurred, in either arm, with 2.0% incidence or greater. C. difficile-associated diarrhea was diagnosed in one moxifloxacin recipient. Asymptomatic, reversible ALT elevation, a well-known class effect of macrolides, was observed in both treatment arms. Grade 3 ALT elevation (>3-8×ULN) occurred in 3.4% of moxifloxacin patients and 8.2% of solithromycin patients and Grade 4 ALT elevation (>8×ULN) occurred in 0.5% of moxifloxacin patients and 0.7% of solithromycin patients. The ALT elevations observed on the solithromycin arm generally peaked at Day 4 and declined with continued dosing through Day 7.  One patient who received moxifloxacin had treatment-emergent concomitant ALT and bilirubin elevation meeting Hy’s Law criteria.  One solithromycin patient met Hy’s Law criteria at baseline prior to exposure to solithromycin, but improved over the 7 day course of treatment. There were no concomitant ALT and bilirubin increases related to solithromycin administration and therefore no patient met Hy’s Law criteria post-baseline

Phase 3 Oral CABP Trial. We successfully completed our global, pivotal Phase 3 clinical trial of solithromycin oral capsules in the treatment of patients with CABP. This Phase 3 trial was a double-blind, active-controlled global, multi-center trial that enrolled 860 adult patients with moderate to moderately severe CABP (pneumonia of PORT Class II, III and IVa severity classification).  This would be pneumonia severity scores of 51-105. Enrollment of PORT Class II pneumonia patients was limited to 50% of the study population. Patients were randomized to receive either oral solithromycin, as an 800 mg loading dose followed by 400 mg once daily for a total of five days, while oral moxifloxacin was dosed at 400 mg once daily for seven days. The primary objective was demonstration of non-inferiority of early clinical response at 72 (-12/+36) hours, as specified by FDA guidance, defined as having improvement in at least two of the following four symptoms (without worsening of any); cough, shortness of breath, chest pain and sputum production in the ITT population. The study was designed to provide 90% power to demonstrate non-inferiority in early clinical response rate for solithromycin versus moxifloxacin utilizing a 10% non-inferiority margin. Secondary endpoints included the clinical success rate at the short term follow up visit 5 to 10 days following the last dose of study drug in the ITT and clinically evaluable populations, and importantly, a comparison of safety and tolerability of solithromycin compared to moxifloxacin.  

In the ITT population (which was all randomized patients), solithromycin met the primary objective of statistical non-inferiority (10% non-inferiority margin) of the early clinical response at 72 (-12/+36) hours after initiation of therapy compared to moxifloxacin. Solithromycin also met the secondary objectives of non-inferiority in clinical success at the short term follow up, or SFU, visit, 5-10 days after the end of therapy, both in the ITT and clinically evaluable populations. The point estimates for the primary endpoint of early clinical response were 78.2% for solithromycin and 77.9% for moxifloxacin. The 95% confidence interval for the treatment difference had lower and upper bounds of -5.5% and 6.1%, respectively. The results were similar in the combined total patient population, however, initial sub-groups analysis by age, indicate that the difference in point estimates became larger with increasing age and favored solithromycin in the ITT early clinical response groups. The results for the secondary efficacy endpoints supported results from the primary endpoint.

SAEs occurred with equal frequency in both arms (<7% of patients) and no SAEs were considered study drug related. The most frequently reported adverse events for solithromycin were headache (4.5%, versus 2.5% with moxifloxacin), diarrhea (4.2%, versus 6.5% with moxifloxacin), nausea (3.5%, versus 3.9% with moxifloxacin), emesis (2.4%, versus 2.3% with moxifloxacin) and dizziness (2.1% versus 1.6% with moxifloxacin). No other treatment-emergent adverse events occurred, in either arm, with 2.0% incidence or greater. C. difficile-associated diarrhea was diagnosed in two patients, both of whom received moxifloxacin. Asymptomatic, reversible ALT elevation was observed in both treatment arms. Grade 3 ALT elevation (>3-8×ULN) occurred in 2.1% of moxifloxacin patients and 4.6% of solithromycin patients and Grade 4 ALT elevation (>8×ULN) occurred in 1.2% of moxifloxacin patients and 0.5% of solithromycin patients. No patient in either arm of the study had treatment emergent concomitant ALT and bilirubin elevation meeting Hy’s Law criteria.

Phase 2 Oral CABP Trial. We successfully completed a Phase 2 trial of the oral formulation of solithromycin in the third quarter of 2011. The trial was a randomized, double-blinded, multi-center study to evaluate the efficacy and safety of oral solithromycin compared to oral levofloxacin in 132 patients with CABP. Levofloxacin, which is a respiratory fluoroquinolone, is the current standard of care and widely prescribed for the treatment of CABP. Patients were randomized to receive solithromycin or levofloxacin for five days. Solithromycin patients received once-daily dosing of 800 mg on Day 1 and 400 mg on Days 2 through 5. Patients randomized to levofloxacin treatment received the standard dosing regimen of 750 mg per day for five days. The trial compared clinical success rates and safety and tolerability parameters for solithromycin and levofloxacin. The primary outcome

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measure was continued improvement or complete resolution of baseline signs and symptoms in the intent to treat, or ITT, and the clinically evaluable, or CE, populations at the Test of Cure, or TOC, visit, which was completed five to 10 days after the last dose of the drug.

Outcomes were assessed for several populations within the study. The ITT population consisted of all randomized patients, among whom 85.6% were in the CE group. To be clinically evaluable, key inclusion and exclusion criteria had to be validated, confounding antibiotics for other infections could not have been administered, and key visits and assessments had to have been performed. Patients for whom a microbial pathogen, or the bacteria responsible for the pneumonia, had been identified comprised the microbial-ITT, or mITT, population. Those mITT patients who were also in the CE study group constituted the microbial-evaluable or ME group. Since pneumonia can also be caused by viruses which antibiotics cannot treat, the FDA has placed emphasis on proof of clinical success in the mITT and ME groups.

Solithromycin demonstrated comparable efficacy to levofloxacin. The clinical response rate in the ITT population was 84.6% for solithromycin and 86.6% for levofloxacin. Similarly, clinical response rates for solithromycin and levofloxacin in the mITT and ME populations were well balanced (77.8% vs. 71.4% and 80.0% vs. 76.9%, respectively).  

In the CE population, the numerical success rate was higher in the levofloxacin arm (93.1%), with broadly overlapping confidence intervals versus 83.0% in the solithromycin arm. This in large part is due to exclusion of a larger number of failure patients from the levofloxacin arm and exclusion of treatment successes from the solithromycin arm on the basis of pre-established study criteria including validation of key inclusion and exclusion criteria and the completion of key visits and assessments.

Under the proposed FDA guidance for the conduct of CABP clinical trials, drug developers will be required to assess early responses to therapy as a primary endpoint. Therefore, we assessed markers of clinical success at the Day 3 visit. A clinical response was achieved if a patient was clinically stable and had experienced an improvement in severity without worsening in any of these signs or symptoms. The early clinical response rate in the ITT population was 72.3% for solithromycin patients, and 71.6% for levofloxacin patients.

Safety was an important focus of this Phase 2 trial. In the trial, patients receiving levofloxacin reported more adverse events and severe adverse events than solithromycin patients. There were 19 patients (29.7%) in the solithromycin group with treatment emergent adverse events, or TEAE, compared with 31 patients (45.6%) in the levofloxacin group. There were no patients in the solithromycin group that discontinued the study due to a TEAE as compared to six patients (8.8%) in the levofloxacin group. The overall incidence of TEAEs was greater in the levofloxacin arm, at all degrees of severity. Notably, gastrointestinal disorders, including abdominal discomfort, nausea, and vomiting, all occurred with greater frequency among levofloxacin recipients.

In addition to TEAEs, the trial also recorded serious adverse events, which are adverse events of particular severity that, among other defining criteria, might result in hospitalization or threaten overall health or survival. There were nine patients who experienced one or more serious adverse events during the study, two solithromycin recipients and seven levofloxacin recipients. The investigator determined that both of the serious adverse events reported in solithromycin recipients were unrelated to solithromycin, while one of the seven reported in levofloxacin recipients was unrelated to levofloxacin.

Phase 1 IV Trial. The objective of our Phase 1 IV trial for solithromycin was to demonstrate safety and tolerability as well as to select the therapeutic dose after IV administration for our planned second Phase 3, IV to oral trial. We tested escalating IV doses of 25 mg, 50 mg, 100 mg, 200 mg, 400 mg, 800 mg and 1000 mg administered as single doses or 200, 400, 600 and 800 mg doses administered once daily for seven days. Patients were randomized into solithromycin and placebo arms. In the trial, the most common adverse events, or AEs, were general disorders and administration site conditions related to infusion discomfort or pain. Our Phase 1 trial also tested infusion solutions designed to minimize injection site pain. No AEs were reported in any of the studies that resulted from clinically significant changes in vital signs or ECG data. In healthy subjects who received repeat-dose IV solithromycin (200, 400, or 800 mg QD for up to seven days) in the Phase 1 study 20% had asymptomatic and reversible ALT elevations. One subject, who received three daily doses of 800 mg, had a reversible and asymptomatic Grade 4 ALT elevation without bilirubin elevation. These ALT elevations were reversible and not associated with symptoms, bilirubin elevation or cholestasis. No loss-of-consciousness or myasthenia exacerbations were observed. Among patients receiving repeated doses of 400 mg daily for up to seven days, no clinically significant systemic adverse events were observed, except injection site pain in some subjects. In addition, the desired PK profile was achieved, with clinically relevant mean peak solithromycin concentrations of 4 µg /mL. Modeling of the PK data suggest that initial intravenous dosing with 400 mg once-daily, with a switch to oral administration when clinically appropriate to the same dose as in the oral program, i.e. 800 mg loading dose and 400 mg maintenance dose, will achieve concentrations of the drug that warrant its evaluation in the treatment of moderate to severe community acquired bacterial pneumonia caused by pathogens including azithromycin-resistant pneumococcus, Legionella, Mycoplasma, Moraxella, Hemophilus influenzae, and Staphylococcus aureus , including methicillin susceptible and community-acquired methicillin-resistant Staphylococcus aureus, all of which are infections that could require elevated concentrations of antibiotics. Based on this study, we selected a therapeutic dose of 400 mg administered

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intravenously once daily for up to seven days for our Phase 3 IV-to-oral trial with the option of stepping down to oral treatment of solithromycin when appropriate as decided by the physician based on decreased symptoms.

Phase 1 Oral Trials. In earlier Phase 1 oral trials beginning in 2008 and continuing into 2011, 159 subjects were exposed to solithromycin. The Phase 1 trials were designed to examine the safety of solithromycin and the properties of the drug when absorbed into the bloodstream. There were no clinically relevant changes in patient laboratory values, including liver enzymes. There were very limited gastrointestinal adverse events and no dose-limiting nausea or vomiting, a common side effect of macrolides. Absorption of solithromycin into the bloodstream after oral administration was not affected by food, meaning solithromycin may be taken with or without food.

The results from our first Phase 1 dose escalation study demonstrated that doses of solithromycin from 200 mg to 600 mg had a favorable safety profile and were well tolerated in healthy subjects and that the compound’s pharmacokinetic profile was supportive of once-daily dosing. In this study, solithromycin was administered orally once-daily for seven days at 200 mg, 400 mg and 600 mg. The bioavailability of solithromycin was calculated to be 67% whereas azithromycin’s bioavailability is 38% as reported in its package insert. The concentration of solithromycin was measured in the plasma on Day 1 and Day 7. The compound showed moderate accumulation over the seven days of dosing, indicating that a loading dose regimen followed by a maintenance dose would be suitable, as has been noted with macrolides like azithromycin in the past. These blood levels were subjected to a sophisticated computer model based on efficacy studies in mouse models, which led to identifying a loading dose of 800 mg with a maintenance dose of 400 mg as the therapeutic dose. At these doses solithromycin is expected to be clinically effective against 99.99% of pneumococci with a minimum inhibitory concentration, or MIC, of 2 µg/ml or less, while no pneumococcal strains with an MIC of >1 µg /ml have been identified in any of the surveillance programs. Mild, clinically insignificant gastrointestinal side effects were the most common adverse events observed in each dose group. Importantly, there were no clinically significant adverse events.

In CABP, the lung is the target organ where pathogens replicate. Therefore, in the first quarter of 2010, we conducted a Phase 1 pharmacokinetic study of solithromycin in 31 healthy human volunteers to measure the concentration of solithromycin in the epithelial lining fluid, or ELF, and in alveolar macrophages, or AM, compared to the concentration in plasma. After five days of dosing (400 mg per day, without loading), we performed bronchoalveolar lavage (BAL), a medical procedure to collect fluid and cells in the lung. BAL analysis was performed in groups of six at 3, 6, 9, 12 or 24 hours following the last solithromycin dose on Day 5, and solithromycin concentrations were measured in each of the ELF, AM, and plasma. The concentration of solithromycin in ELF was 10 times that of plasma and in AM it was 100 times that of plasma. As shown in Table 1, solithromycin’s drug levels are higher than those achieved by azithromycin and solithromycin reaches the site of infection at concentration levels several fold in excess of the levels necessary to kill the relevant bacteria according to our pre-clinical studies. Higher drug levels also inhibit bacterial regrowth and resistance development during intervals between dosages.

Table 1: Solithromycin Oral Phase 1 Results: Pulmonary Levels of Solithromycin and Azithromycin at Time of BAL.

 

Antibiotic

 

Dose

 

Plasma Cmax
(µg/mL)

 

ELF Cmax
(µg/mL)

 

AM Cmax
(µg/mL)

 

Solithromycin

400 mg qd/5 d

0.7

7.6

102

Azithromycin(1)

500 mg qd/1 d; 250 mg qd/4 d

0.1

2.2

  57

 

(1)

Zithromax Prescribing Information with loading dose of 500 mg on Day 1 followed by 250 mg daily for four days, Foulds, et.al., 1990.

We also conducted three drug-drug interaction (DDI) studies in 2010 and 2011 in which solithromycin was co-administered with rifampin, midazolam or ketoconazole to test its effects on these drugs. These studies have been successfully concluded and the data confirm that solithromycin’s interactions with CYP3A4, an enzyme in the liver that metabolizes a number of drugs, are consistent with older macrolides’ interactions with CYP3A4. In addition, in 2015, we determined interaction with digoxin a P-glycoprotein substrate. As expected, solithromycin did show some interaction although less than that reported for the generic macrolide, clarithromycin. This concludes all the DDI studies we believe are required for the NDA and MAA.

Thorough QT (TQT) Study.  Macrolides are known to cause QT prolongation that may be associated with risk of arrhythmia. In 2013, the U.S. drug label for azithromycin, the most commonly prescribed macrolide antibiotic in the U.S., was updated to include a warning of possible QTc prolongation and the risk for sudden death. This label change followed publication of a study that suggested a higher risk of cardiovascular death in persons treated with a 5-day course of azithromycin compared to persons treated with amoxicillin, ciprofloxacin, or no drug. We conducted a TQT study of solithromycin, the top line results of which demonstrated no QT effects at single intravenous (IV) doses of 800 mg infused over 40 minutes (achieving a geometric mean Cmax of 5.7 µg/mL).  In our solithromycin TQT study, 48 subjects were enrolled in a three-way randomized dosing sequence cross-over design to receive 800 mg of IV solithromycin infused over 40 minutes to obtain maximal cardiac exposure (Cmax), 400 mg of oral moxifloxacin, which was used as the positive control along with IV physiologic saline to maintain study blinding, or IV physiologic saline as the negative

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control. There was a seven-day washout period between dosing intervals. Data were collected continuously for 25 hours, starting one hour before dosing, using 12-lead ECG Holter monitors. Electrocardiograms were analyzed by a core laboratory. The study’s assay sensitivity was confirmed by the observation of QTc prolongation following dosing with moxifloxacin. The study thereby constitutes a solidly negative TQT study as defined by the ICH E14 guidance. In the same study, a small increase in heart rate was noted with Solithromycin at the supratherapeutic exposures achieved in this study had no significant effect on the QT interval.

Hepatic Insufficiency Phase 1 Study. In 2013, we conducted a safety and pharmacokinetic study of oral solithromycin in subjects with chronic liver disease. The study demonstrated that no dosage adjustment is needed when administering solithromycin to patients with mild, moderate, or severe hepatic impairment.  Solithromycin was well tolerated in this population and no significant differences in safety, compared to healthy controls, were noted.  The most commonly reported adverse effects were mild diarrhea and mild headache.

Renal Insufficiency Phase 1 Study. In 2015, we conducted a safety and pharmcokinetic study of oral solithromycin in moderate and severe renal insufficiency. The study demonstrated higher blood levels in patients with severe renal insufficiency. Based on our results in the Phase 3 trials as well as our computer modeling studies, we believe either no dose adjustment will be needed in mild and moderate renal insufficiency patients but some dose adjustment will be needed in the severely renal impaired patients.

Phase 2 Trial in Gonorrhea. Emerging resistance to available therapies, including oral and intramuscular cephalosporins and azithromycin, has resulted in an urgent medical need for new therapies for gonorrhea. Solithromycin, a new fourth generation macrolide with three ribosomal binding sites, has greater in vitro potency against gonococci than azithromycin and is active against most azithromycin- and cephalosporin-resistant strains. In our Phase 2 trial in patients with suspected gonococcal infection, microbiological eradication of gonococci was achieved in 100% of all evaluable patients.  In addition to detecting the gonococcus, we also diagnosed Chlamydia trachomatis and Mycoplasma genitalium, an atypical bacteria that can sterility in young girls as well as other ill effects. In most cases when diagnosed, solithromycin was effective against these pathogens also.  Current treatment of bacterial urethritis includes two drugs: ceftriaxone administered intramuscularly and oral azithromycin. Azithromycin at 1000 mg dose that is recommended is not well tolerated. Solithromycin was generally well-tolerated, with mild gastrointestinal AEs, the most common of which was mild diarrhea followed by mild nausea.  Solithromycin could be used as a monotherapy that would cover gonorrhea and chlamydia, rather than the current treatment with two drugs, replacing the need for intramuscular injection of ceftriaxone.

Pediatric trials. Pediatric clinical trials funded by BARDA were initiated as a Phase 1a trial by enrolling adolescents with suspected or confirmed bacterial infections who received solithromycin capsules (12 mg/kg on Day 1 [up to 800 mg], 6 mg/kg daily on Days 2-5 [up to 400 mg]). The safety and pharmacokinetics were similar to that noted in adults. A suspension formulation has been developed and a Phase 1b study using the suspension, capsules and intravenous formulations is enrolling 64-96 pediatric patients aged newborn to 17 years with suspected or confirmed bacterial infections. The study is open label and the primary endpoint will be to determine safety and pharmacokinetics in the pediatric population. Ongoing with this program, and included in the BARDA funding, is the optimization of the commercial pediatric suspension product for which we have finalized the Phase 2/3 protocol for the pivotal global pediatric study that is expected to begin in the first quarter of 2016.  

Pre-Clinical Data. Our pre-clinical studies support four of the key attributes of solithromycin: potency against a broad range of bacteria, potential to have a low incidence of resistance, intracellular activity and anti-inflammatory qualities associated with macrolides.

Potency. We have extensively studied solithromycin’s in vitro activity and potency against a variety of respiratory and non-respiratory bacteria. solithromycin was tested against clinical isolates including pneumococci, Haemophilus, Legionella, Moraxella, Chlamydia, Neisseria, beta-hemolytic streptococci, Mycoplasma, S. aureus (including MRSA), coagulase negative staphylococci, enterococci and many other bacteria. These studies found that solithromycin exhibited two to four times greater potency compared to Ketek, and superior potency compared to other macrolides against most bacteria causing CABP. In another study, solithromycin demonstrated superior activity against several serotypes of Legionella pneumophila compared to other macrolides, particularly erythromycin and azithromycin, which are commonly used to treat Legionellosis. Legionella are atypical bacteria and are not susceptible to penicillins and cephalosporins commonly used to treat CABP, but are susceptible to fluoroquinolones such as levofloxacin. The results of these studies are presented in Table 2 below. Potency against a panel of bacterial strains is measured by MIC90, which refers to the concentration needed to inhibit the growth of 90% of a panel of bacterial strains isolated from patients. A lower MIC90 indicates greater potency against a particular bacterium.

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Table 2. Solithromycin Pre-Clinical Data: Solithromycin in vitro Activity Against CABP Bacteria.

 

Organism

(# strains tested)

 

Solithromycin
MIC90 (µg/ml)

 

Azithromycin
MIC90 (µg/ml)

 

Levofloxacin
MIC90 (µg/ml)

 

    Amox/Clav    
MIC90  (µg/ml)

 

Streptococcus pneumoniae (150)

0.25

>16

1.0

>8

Streptococcus pyogenes (100)

0.03

>16

1.0

0.25

Hemophilus influenzae (100)

2

2

0.12

2.0

Legionella pneumophila (30)

0.015

2

0.5

NE

Mycoplasma pneumoniae (36)

0.000125

0.0005

0.5

NE

Chlamydophila pneumoniae (10)

0.25

0.125

NT

NE

 

NE = Not effective, as the target of these antibiotics do not exist in these pathogens.

NT = Not tested.

Resistance. Solithromycin was tested against pneumococcal strains that have become resistant to older macrolides as a result of mutations called erm(B), mef(A), a combination of erm(B) with mef(A), and L4 mutations. As shown by the in vitro potency data in Table 3 below, solithromycin was active against all tested pneumococcal strains that are resistant to older macrolides.

Table 3. Solithromycin Pre-Clinical Data: MIC50 and MIC90 Values (µg/ml) of Pneumococci with Defined Macrolide-Resistant Mechanism.

 

Drug

 

erm(B)
(54)

 

mef(A) (51)

 

erm(B) +
mef(A) (31)

 

L4 mutations
(27)

 

MIC50

 

MIC90

 

MIC50

 

MIC90

 

MIC50

 

MIC90

 

MIC50

 

MIC90

 

Solithromycin

0.03

0.5

0.03

0.125

0.125

0.25

0.06

0.125

azithromycin

>64

>64

4

8

>64

>64

>64

>64

telithromycin

0.06

1

0.125

0.25

0.5

1

0.125

0.25

clindamycin

>64

>64

0.06

0.06

0.06

>64

0.06

0.125

amox/clav

0.5

8

0.125

2

2

8

4

8

levofloxacin

1

2

1

2

1

16

1

2

penicillin G

1

4

0.125

4

2

4

4

16

 

The ability to become resistant to solithromycin was analyzed by exposing eight pneumococcal bacterial strains from the above study to solithromycin. Only one strain which was already resistant to the older macrolides and were erm and mef strains developed a high-level resistance to solithromycin and only after 18 passes. This suggests that selection of resistant strains would be infrequent and additional mutations are necessary for resistance to develop to solithromycin.

We also tested a number of Group A beta-hemolytic streptococci that have become resistant to older macrolides. The data indicate that solithromycin is active against these organisms, which have different mechanisms of resistance, including erm(B), mef(A) and erm(A). The frequency of resistance was low at <10-10, but importantly there was no cross-resistance with these organisms once they had become resistant to older macrolides. Solithromycin is active against all these resistant strains. While the strains are resistant to older generations of macrolides, no strains resistant to solithromycin could be isolated after 50 transfers in a growth medium containing solithromycin.

We have continued to study global susceptibility and resistance patterns against relevant pathogens in CABP and tested solithromycin against pathogens collected in 2011 from respiratory tract infections. Solithromycin displayed coverage against 100.0% of S. pneumoniae strains (1,713 strains collected from the U.S., Europe, Latin America and Asia Pacific) at £1 µg/mL (a level which is achievable in the plasma and tissues). The MIC90 against S. pneumoniae was 0.12 µg/mL in these studies. The macrolide resistance rate has continued to increase and in the most recent 2014 surveillance study, 48% of pneumococci collected from U.S. patients were resistant to the older macrolides like azithromycin.  Activity of solithromycin against other respiratory tract associated pathogens, such as H. influenzae and M. catarrhalis, was stable in our continued surveillance years (2008-2014). We believe this confirms that solithromycin could be a promising antibiotic for treatment of bacterial pathogens causing respiratory tract and other infections.

Intracellular Activity. Bacteria that cause infections can be inside cells or in tissue. During treatment if the antibiotic does not penetrate into tissues and cells, the bacteria can escape the effect of the antibiotic. Consequently, it is important that antibiotics be distributed from the blood to the tissues and intracellularly. Macrolides have been known to be effective against intracellular bacteria, which is one of their advantages. Solithromycin accumulates to concentrations that are several times higher than azithromycin, as shown below in Figure 1a, and the intracellular drug is potent against intracellular bacteria and is more active than azithromycin in killing intracellular pathogens such as Legionella pneumophila as shown in Figure 1b.

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Figure 1a: Concentration after Exposure of Macrophages to Azithromycin and Solithromycin in Macrophages

Figure 1b: Killing of Legionella Located Intracellularly by Azithromycin and Solithromycin

 

 

Anti-Inflammatory Properties. We conducted studies comparing solithromycin’s anti-inflammatory properties to older macrolides. Solithromycin was more effective than the older macrolides in decreasing the production of cytokines, which are cell-signaling molecules involved in the process of inflammation. Reduction of cytokine activity would be expected to reduce inflammation and resulting tissue damage. Thus, solithromycin is expected to be effective in eradicating the infecting bacteria and reducing the inflammation resulting from the infection, which should result in a faster recovery. Older generation macrolides have also been used in the treatment of diseases like late-stage COPD and CF because of their anti-inflammatory properties. Our pre-clinical data suggest solithromycin could also be used in the treatment of these diseases. In September 2015, we initiated a Phase 2 trial in COPD patients to test its anti-inflammatory capabilities for which we expect to complete enrollment by the end of 2016.

We plan to evaluate the effects of solithromycin in a proof-of-principle study in patients with NASH. NASH is a progressive form of non-alcoholic fatty liver disease, or NAFLD, where accumulation of excessive fat (steatosis) coexists with liver cell injury, inflammation and fibrosis, which eventually leads to cirrhosis and hepatocellular carcinoma. To date, no single therapy has been approved for treating NAFLD/NASH. Solithromycin is well tolerated in patients with mild to severe hepatic impairment and no significant differences in safety, compared to healthy controls, are noted. As a result of its anti-inflammatory properties, we evaluated solithromycin in a diabetic mouse model of NASH-HCC to investigate its potential effects on this liver disease, and in the study solithromycin demonstrated potential anti-NASH and anti-hyperglycemic effects. In September 2015, we initiated an exploratory single arm Phase 2 trial for solithromycin to explore effects for treating patients with NASH for which we expect to complete enrollment by the end of 2016.

In addition, investigators at the University of North Carolina, Chapel Hill, through funding from the National Institute of Allergy and Infectious Diseases, or NIAID are for studying solithromycin’s mucin inhibitory properties and ability to restore lung physiology in cystic fibrosis model systems.  

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Ongoing and Planned Clinical Trials

Solithromycin as a Treatment for CABP. We are working on pediatric studies for solithromycin in a range of indications for CABP through our agreement with BARDA. BARDA is funding the development of solithromycin in oral, IV and suspension formulations for pediatric use in CABP.  This is the first antibiotic being developed as a suspension for all pediatric age groups for respiratory tract infections in over 20 years.  The pediatric plan was submitted and accepted by the FDA and a similar plan has been submitted to the EMA.  There is an urgent need for a new antibiotic for use in pediatric infections. Together with Toyama, we made a suspension formulation that has been taste tested and demonstrated to be bioavailable in a bioavailability study in adults. We also have completed a Phase 1 study in adolescent children in the U.S.  In that study, conducted in pediatric patients age 12 to 17 years, solithromycin oral capsules were well tolerated and demonstrated a pharmacokinetic profile similar to that seen in adults.  The Phase 1b study will enroll 64-96 pediatric patients aged newborn to 17 years with suspected or confirmed bacterial infections. Patients will receive oral capsules, oral suspension or intravenous solithromycin dosed by weight once per day as add on therapy for up to 5 days. The study is open label and the primary endpoint will be to determine pharmacokinetics in the pediatric population. Safety data will also be collected. On-going with this program, as part of this funding is the optimization of the commercial pediatric suspension product and we are expected to begin the start-up activities for a global Phase 2/3 study that is expected to begin in the first quarter of 2016.

Solithromycin as a Treatment for Bacterial Urethritis. We have demonstrated that solithromycin has in vitro activity against a broad spectrum of pathogens that cause bacterial urethritis, including N. gonorrhoeae, Chlamydia trachomatis, Mycoplasma genitalium, Ureaplasma urealyticum etc. In our Phase 2 trial, we demonstrated that solithromycin is effective in treating gonococcal urethritis/cervicitis, and pharyngeal and rectal gonococcal infections. In 2013, the CDC identified N. gonorrhoeae as an urgent public health threat that requires urgent and aggressive action.   The CDC no longer recommends oral cefixime to be used in the treatment of gonorrhea and the recommended treatment is intramuscular injection of ceftriaxone, plus either azithromycin or doxycycline. Resistance to ceftriaxone has been reported. There is no oral antibiotic currently recommended for treating gonorrhea as well as for treatment of sexual partners of infected patients. This need has become a public health crisis and the WHO and U.S. government are looking for alternative treatments. In August of 2014, we initiated a Phase 3 clinical trial, called Solitaire-U, of a single 1000 mg dose of oral solithromycin in patients with uncomplicated gonorrhea and chlamydia infections compared with intramuscular ceftriaxone plus oral azithromycin. We recently completed our original planned 250 evaluable patient enrollment, with patients from two sites in Australia and one in the U.S. The majority of enrolled patients were men who have sex with men. In December 2015, the NIAID agreed to fund an expansion of the trial to include 60 women and children under a CRADA in order to achieve greater balance in the study population.  A protocol amendment has been submitted to the FDA which allows for enrollment of these additional patients and we expect enrollment of the additional patients to begin in the first half of 2016 and continue into 2017. We believe this expansion is favorable and could allow us to have a broad label for men, women and adolescent children. The FDA has asked that both gonococcus and chlamydia be monitored in our Phase 3 trial and has indicated that a single Phase 3 trial in bacterial urethritis could be sufficient for approval.  

Solithromycin in Pregnant Patients.  Infections in pregnancy are difficult to treat because of the nature of the infecting pathogens, such as Group B beta hemolytic streptococci and Ureaplasma. These infections can cause sepsis and also preterm birth. All pregnant women are screened for Group B beta hemolytic streptococci infections and, if not penicillin-allergic, can be treated with penicillin successfully. In penicillin-allergic patients there is no viable option today because of resistance to azithromycin. In patients infected with ureaplasma, penicillin is not effective and azithromycin has been the drug of choice. Recently resistance to azithromycin has increased and there is no optimal treatment option for these infections. In addition, drugs that penetrate the amniotic fluid and placenta in sufficient levels are important to fight infection and azithromycin has low penetration, which decreases its efficacy in treating the infection. Consequently, there is a need for a safe and effective antibiotic that can be administered maternally but reach effective concentrations in fetal blood so that the infection at these sites can be effectively treated. Therefore, pregnant women could be an additional patient population for solithromycin. BARDA funded a segment 3 toxicology study that was completed successfully and these results could allow solithromycin to be tested in pregnancy.

Potential Biodefense Application for Solithromycin. Solithromycin is active against bioterror threat pathogens such as B. anthracis, Yersinia pestis and Francisella tularensis. BARDA also funded studies in non-human primates to test the efficacy of solithromycin in treating bioterror pathogens such as tularemia and anthrax. Successful pilot studies were conducted in 2014 with inhalation exposure in non-human primates in which it was demonstrated that solithromycin was effective in treating both of these infections when the infection was initiated by the pulmonary route.

Taksta (Fusidic Acid)

Overview

Taksta, our fusidic acid product candidate, is an antibiotic that we are developing in the U.S. for the oral chronic treatment of refractory bone and joint infections, including PJI, which are frequently caused by staphylococci, including coagulase-negative and coagulase-positive staphlycocci and MRSA. Fusidic acid is the only member of a unique class of antibiotics, called fusidanes, and has

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a mechanism of action that differs from any other antibiotic. Fusidic acid has been approved and sold for several decades in Europe and other countries outside the U.S. and has a long-established safety and efficacy profile, but has never been approved in the U.S. We have conducted in vitro tests of Taksta’s activity against thousands of strains of S. aureus found in the U.S. and our data show that virtually all of those strains tested (99.6%) are susceptible to Taksta. In addition, we believe Taksta has the potential to be used in hospital and community settings on both a short-term and chronic basis.  In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid, the only FDA-approved oral treatment for MRSA. Like ABSSSI, bone and joint infections, including prosthetic joint infections, are often caused by staphylococci, including MRSA. In December 2012, we initiated a Phase 2 trial of Taksta for treatment of primarily staphylococcal infections of infected prosthetic joint infections, hip and knee joints. Based on the results of the 14 patients enrolled in this study, we concluded that the fusidic acid in combination with rifampin was generally comparable to intravenous standard of care antibiotics.

In December 2014, we met with the FDA to review the study design and dosing of the pivotal Phase 3 trial in PJI patients who have failed in therapy and cannot tolerate another surgery. Based on that meeting and subsequent discussions with the FDA, our plan involves testing Taksta for long-term suppressive therapy of refractory bone and joint infections, including PJI, in a single arm trial. Also based on FDA discussions, we plan to conduct a Phase 3 trial for the treatment of ABSSSI. The ABSSSI trial was initiated in November 2015 and the refractory bone and joint study is expected to begin in early 2016. At the completion of the ABSSSI trial and the refractory bone and joint infection study, we will discuss with the FDA to determine if we have adequate data to support approval for both indications or if a second ABSSSI study is needed. The need for additional trials may be negated if Congress passes the 21st Century Cures Act, which contains a limited population antibacterial drug approval pathway designed to streamline the approval process for approval of rare diseases.

Taksta Market Opportunity

According to the IDSA, MRSA infections account for approximately 60% of skin infections seen in U.S. emergency rooms. The most common treatments for prosthetic joint infection with MRSA currently are vancomycin (available as a generic) and sometimes daptomycin (sold under the brand name Cubicin®), both of which are available only as IV formulations for systemic infections. Linezolid, which is also prescribed for prosthetic joint infections, is available in both IV and oral formulations and is one of two oral antibiotics approved by the FDA for MRSA. Linezolid, however, has significant side effects, which include irreversible peripheral neuritis, or the inflammation of nerves and thrombocytopenia, or a relative decrease of platelets in blood. It is recommended that linezolid not be taken for more than 14 days without additional monitoring because of the increased possibility of these side effects. In addition, on July 26, 2011, the FDA published a drug safety communication letter regarding the use of linezolid in patients on serotonergic drugs such as SSRIs (including Prozac, Paxil and Zoloft), which are taken for depression, bipolar disease, schizophrenia and other psychiatric disorders. Given the widespread use of SSRIs and some of the other side effects associated with linezolid, we do not believe that linezolid is an option for many patients. In 2015 a second oral drug, tedizolid (Sivextro®), was approved for ABSSSI caused by susceptible Gram-positive organisms including MRSA.  Tedizolid does not have the same contraindications or drug interactions as linezolid but is only approved as a 6 day IV and/or oral treatment course.  Phase I studies conducted with tedizolid in healthy adults that were treated for 21 days showed a possible dose and duration effect on hematologic parameters beyond 6 days of treatment.  The most common adverse drug reactions in clinical trials from patients treated with tedizolid were nausea, headache, diarrhea, vomiting, and dizziness. We believe there is an opportunity to develop an oral drug that is effective against MRSA and has a safety profile that supports out-patient use, use for chronic indications and use in children.

In 2006, nearly 800,000 total knee or hip arthroplasty procedures were performed in the U.S., with an overall infection rate of approximately 1.0%. It has been predicted that the demand for knee revision surgery will double by 2015, and increase by 673% by the year 2030 as the population ages. With steadily increasing numbers of patients in the U.S. undergoing prosthetic joint surgery, we expect there will be a corresponding increase in the overall incidence of prosthetic joint infections. Prosthetic joint infections usually occur when bacteria enter the area of the prosthesis during implantation. However, they may also occur through other surgical, medical or dental procedures or by accident when the skin or mucous membrane is broken, enabling surface-level bacteria to travel to the prosthesis. S. aureus species, including MRSA, are the most commonly identified bacterial pathogens involved in prosthetic joint infections.

The methods for the treatment for PJI are variable depending on the severity of the infection and the patient’s condition. The infected prosthesis could be saved or could be replaced. The antibiotics used to treat these infections depend on the pathogens involved. Staphylococci are the most frequently identified pathogen in PJI. IDSA has recently issued guidelines for the treatment of PJI (Osmon, et al., 2013). In almost all cases intravenous vancomycin is administered for two to eight weeks, in combination with oral antibiotics such as rifampin, ciprofloxacin, levofloxacin, cefazolin, clindamycin or trimethoprim/sufamethoxazole (Bactrim).  The choice of the oral antibiotic is dependent on whether the staphylococcus is MRSA. Rifampin is commonly used with other antibiotics, such as intravenous vancomycin, as its use has been noted to have better outcome. Two-stage revision replacement of an infected prosthesis is most commonly practiced in the U.S. It has been noted that greater than 85% success could be achieved by two-stage revision versus 45% success rate if the prosthesis is retained. These results are in the U.S. where fusidic acid is not available for use.

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In the two-stage method of treatment, the infected prosthesis is removed, an antibiotic impregnated spacer is installed and the patient is then treated with IV vancomycin for four to six weeks. After that time, the antibiotic is stopped and after six weeks, the joint is cultured to determine if the infection is cleared and a new prosthesis is introduced. Thus, in the U.S., patients undergo at least two surgeries, several weeks of intravenous therapy, as well as oral antibiotics. In Europe and Australia, two-stage revision is less common and the strategy is to debride and treat with intravenous vancomycin and oral rifampin for one to four weeks followed by oral rifampin plus fusidic acid for three months to one to two years. Other oral antibiotics have been used with less success. In the U.S., the debride and retention method is less often used in PJI patients, but when used in these patients, chronic suppression is used for years with a combination of intravenous and oral antibiotics and the treatment is often a failure. According to Data Monitor, physicians indicate that safety is a significant factor for them in choosing antibiotic therapy for osteomyelitis and prosthetic joint infections because the population of patients receiving prosthetic joints tends to be older and the treatment duration is longer. As a result, we believe there is a significant opportunity for a treatment for prosthetic joint infection that is effective against staphylococci, including MRSA, and can be used safely on a long-term basis. Outside of the U.S., fusidic acid has been used successfully in combination with rifampin to achieve high cure rates in selected patients with prosthetic joint infections, without requiring replacement of the prosthesis. In a recent review of clinical experience at an Australian teaching hospital, as well as in the Swiss teaching hospital, treatment of staphylococcal prosthetic joint infection with debridement, prosthesis retention, and oral fusidic acid and rifampin therapy achieved an approximately 88% treatment success rate at one year.  Fusidic acid has also been used in other bone and join infections for long-term chronic suppressive therapy, generally in combination with rifampin.  Based on our Phase 2 trial comparing fusidic acid in combination with rifampin to vancomycin, we determined that rifampin reduced fusidic acid levels in the blood.  Consequently, we concluded that fusidic acid should be optimally dosed in monotherapy, even in bone and joint infections.  

Key Attributes of Taksta

We believe Taksta can be an effective treatment for ABSSSI and refractory bone and joint infections because of the following key attributes.

Taksta has an established safety profile outside the U.S. Fusidic acid has been approved and used in certain countries in Europe and in Australia for many years, in some countries as many as 40 years, both for short-term use in complicated skin infections as well as for long-term use in other types of infections requiring long-term therapy, such as bone and joint infections including osteomyelitis and prosthetic joint infections. Further, fusidic acid has been used in pediatric populations outside the U.S. and has been safe and well tolerated. As fusidic acid has been in clinical use outside the U.S. for several decades, a substantial body of safety data is in the public domain. Safety data from over 100 published clinical study results involving the oral administration of fusidic acid to over an aggregate of 4,000 patients demonstrated a safety profile consistent with non-U.S. approved product labeling. These data indicate significant worldwide use of fusidic acid, capture clinical experience in the public domain and characterize the safety profile of fusidic acid. The safety data from our Phase 1 and Phase 2 clinical trials are consistent with available historical data and establish that Taksta has a favorable safety and tolerability profile.

Taksta has demonstrated comparable efficacy to an FDA-approved oral treatment for MRSA. In a Phase 2 trial in 155 ABSSSI patients comparing Taksta to linezolid, the only FDA-approved oral treatment at the time. Taksta successfully demonstrated efficacy comparable to linezolid and confirmed its effectiveness against S. aureus and MRSA. Furthermore, in vitro data have demonstrated that Taksta has potent activity against more than 7,300 strains of S. aureus, including MRSA strains that are community-acquired MRSA, or CA-MRSA, hospital-acquired MRSA, or HA-MRSA, and other known types of MRSA. We have also conducted tests of Taksta’s activity against strains of S. aureus that are found in the U.S. and our data show that virtually all of those strains (99.6%) are susceptible to Taksta. As a result of Taksta’s broad range of activity against S. aureus, physicians could use Taksta to treat a patient with an infected wound, abscess or cellulitis without identifying the particular type of S. aureus causing the infection. Since fusidic acid has a unique structure and target, there is no known cross-resistance with other antibiotics.

Taksta is an oral therapy for all types of S. aureus, including MRSA. The leading treatments for bone and joint and prosthetic joint infections and ABSSSI caused by MRSA are primarily in IV formulations. Linezolid and tedizolid are currently approved for use against MRSA as oral formulations. However, use of linezolid is associated with serious side effects and cannot be used in certain patient populations without additional monitoring. Furthermore, tedizolid may cause some of the same hematologic side effects as linezolid if dosed for more than 6 days. We believe our Phase 2 trial in PJI and other clinical studies and historical data on fusidic acid demonstrate that Taksta has the potential to be a safe and effective oral treatment for refractory bone and joint infections and ABSSSI caused by MRSA. We believe Taksta would enable physicians to treat patients not otherwise needing hospitalization on an outpatient basis, thereby reducing hospitalization costs and avoiding the unnecessary introduction of resistant bacteria into the hospital setting.

Taksta has a lower incidence of resistance due to our proprietary loading dose regimen. Our in vitro studies have shown that the reason for resistance to fusidic acid that was reported to occur during oral treatment outside the U.S. is that it was not dosed optimally. In addition, published studies of resistance during oral treatment with fusidic acid outside the U.S. conclude that the frequency of resistance is related to the lack of initial potency, which has been addressed in the past by combination therapy. Our

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innovative loading dose regimen, for which we received a U.S. patent in May 2013, minimizes the development of resistance by increasing the amount of drug initially delivered to the bacteria.

Taksta can be used in patient populations not well served by current treatments. We believe Taksta could also be used for patients that are anemic, as well as patients on serotonergic drugs such as SSRIs who could be treated with an oral antibiotic, but for whom linezolid may not be a viable or convenient treatment option due to side effects and/or increased monitoring requirements. In addition, none of the antibiotics currently on the market can be used for prolonged periods of time to treat chronic staphylococcal infections due to safety concerns. We believe Taksta could fulfill the need for a safe, long-term oral therapy to treat chronic infections such as refractory bone and joint infections and osteomyelitis. Furthermore, there are few treatment options for children infected with S. aureus, especially MRSA, because in children, IV antibiotics have unpredictable blood levels and are inconvenient to dose. Fusidic acid is available in an oral formulation and has been used in pediatric populations outside the U.S. We intend to develop a pediatric formulation of Taksta to address the need for a safe and effective oral treatment of staphylococci and streptococci in children.

Clinical Data

Fusidic acid has been used outside the U.S. for approximately four decades. However, fusidic acid has never been approved in the U.S. As a result, we must demonstrate that Taksta is active against current strains of S. aureus , including MRSA, that are responsible for infections in the U.S., as well as to show that it is well tolerated at the dosing regimen that we are developing.

Clinical Trials in PJI.  We initiated, in December 2012, a Phase 2 clinical trial of Taksta for the treatment of prosthetic joint infections. In October 2013, the FDA granted orphan drug designation to Taksta for the treatment of PJI. There is no published FDA guidance for clinical trials for PJI. Further, we need to determine the impact of the orphan drug designation on our clinical development plan and the planned Phase 3 clinical trial to support an NDA.  The Phase 2 trial was an open-label, randomized controlled trial that compared intravenous standard-of-care antibiotic therapy with an oral regimen comprised of fusidic acid plus rifampin for treatment of hip or knee PJI attributed to staphylococci that was managed with two-stage exchange or debride and retain surgical treatment strategies. At the time of initial debridement or explant surgery, empiric IV-standard of care therapy was initiated. Oral antibiotic therapy was initiated post-operatively during a four day window while intravenous antibiotics were continued. Fusidic acid was administered twice daily, with an initial loading dose of 3000 mg (1500 mg BID) followed by a total daily dose (TDD) of 1800 mg (900 mg BID) thereafter, with allowed reduction to 1500 or 1200 mg TDD in case of intolerability. On the second day of oral antibiotic dosing, rifampin was added, at a dose of 450 mg BID, with allowed reduction to 300 mg BID for renal insufficiency or intolerability. If oral therapy with fusidic acid/rifampin was well tolerated and the pathogen was fusidic acid and rifampin sensitive, randomization to continued therapy with IV standard of care versus fusidic acid/rifampin was permitted. At the time of hospital discharge (Day 5-7), Day14 and Day 28 of oral antibiotic therapy, multiple blood samples were obtained from 6 of the study subjects randomized to fusidic acid/rifampin combination therapy to determine fusidic acid and rifampin plasma concentrations, using validated analytical methods. Overall, the efficacy of the fusidic acid/rifampin arm was generally comparable to that of intravenous standard of care antibiotics in the group of 14 randomized patients. Based on prior Phase 1 PK trials with fusidic acid dosing alone, fusidic acid trough concentrations of 100-200 µg/mL were expected at steady state. In our Phase 2 trial, fusidic acid levels were substantially lower, and showed progressive decline from Day 5-7 to 14-28. In one patient for whom rifampin dosing was discontinued following collection of PK blood samples on Day14, a substantial rebound of fusidic acid levels was observed. This observation and a cross-study comparison of fusidic acid exposures (with and without concomitant rifampin) suggest that rifampin reduces fusidic acid exposures by approximately 50-80%.  This circumstance can be equivalent to rifampin monotherapy, and may be associated with rapid emergence of staphylococcal rifampin resistance, as has been previously observed in clinical trials of fusidic acid/rifampin for PJI. In light of these data, we concluded the study and proposed a Phase 3 trial in bone and joint infections in which fusidic acid (alone) would be used in the loading dose and maintenance dose regimen that we used in the ABSSSI Phase 2 trial.  In December 2014, we met with the FDA to review the study design and dosing of the pivotal Phase 3 trial in PJI patients who have failed in therapy and cannot tolerate another surgery. Based on that meeting and subsequent discussions with the FDA, our plan involves testing Taksta for long-term suppressive therapy of refractory bone and joint infections, including PJI, in a single arm trial. Also based on FDA discussions, we plan to conduct a Phase 3 trial for the treatment of ABSSSI. The ABSSSI trial was initiated in November 2015 and the refractory bone and joint study is expected to begin in early 2016. At the completion of the ABSSSI trial and the refractory bone and joint infection study, we will discuss with the FDA to determine if we have adequate data to support approval for both indications or if a second ABSSSI study is needed. The need for additional trials may be negated if Congress passes the 21st Century Cures Act, which contains a limited population antibacterial drug approval pathway designed to streamline the approval process for approval of rare diseases.

We recently tested Taksta in two-stage revision treatment of PJI, as this is the standard of care in the U.S. In our Phase 2 trial, the infected joint was removed, cultured, a spacer inserted and the patients were then randomized to either intravenous vancomycin only for three to four days, followed by oral rifampin and Taksta for six weeks in the study arm or an intravenous standard of care for six weeks in the comparator arm.  The primary end-point was bacteriologic cure at 12 weeks, at the time the second prosthesis was to be introduced. The secondary end points were retention of the joint for three to six months and safety. Long-term monitoring for infection relapse or recurrence will continue for the subsequent two years. The intent of this study was to show non-inferiority to the

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standard of care for efficacy and to show that two oral drugs can replace an intravenous drug for four to six weeks of treatment.  We also have a compassionate use program for those PJI patients where two-stage revision is not possible or necessary. Such a study would replicate the use of fusidic acid overseas and could provide even greater pharmacoeconomic advantages.

We began the open-label Phase 2 trial of Taksta in patients with prosthetic joint infections in December 2012.  Based on discussions with the FDA, we revised the protocol to clarify interpretation of end points and expedite trial enrollment. There is no FDA guidance for developing antibiotics for treating PJI, and we designed the Phase 2 trial with a clear endpoint that compares vancomycin, which is the standard of care, to oral fusidic acid and rifampin.  We concluded the trial because we believe we met our primary objectives of the Phase 2 trial, namely safety and efficacy, to determine the study design and dose of our ongoing Phase 3 trial.

Phase 2 Clinical Trial in ABSSSI. We have successfully completed a Phase 2 clinical trial in ABSSSI, comparing Taksta to linezolid, which is the only oral antibiotic approved by the FDA for treating MRSA infections. The trial demonstrated that our Taksta loading dose regimen has a favorable safety and tolerability profile with efficacy comparable to linezolid. In this study, patients were stratified by the type of infection, such as wounds and cellulitis, and, through the first 127 patients, were randomized in a 1:1:1 ratio to receive a Taksta non-loading regimen (Taksta 600 mg twice per day which is similar to the dose practically used in the E.U.), a Taksta loading dose regimen (Taksta 1500 mg twice per day on Day 1, followed by 600 mg twice per day), or linezolid (600 mg twice per day, which is the standard approved dose), each administered for 10-14 days. After interim analysis of the initial 127 patients demonstrated comparable safety and tolerability of the two Taksta regimens, the Taksta non-loading dose regimen was dropped in favor of the Taksta loading dose regimen, which was shown to have a lower resistance profile in in vitro models, and the remaining patients were randomized in a 1:1 ratio to receive the Taksta loading dose regimen or the linezolid regimen. A total of 155 patients received either the Taksta loading dose regimen or linezolid. The loading dose followed by maintenance dose strategy was designed to ensure a higher concentration of Taksta in the bloodstream at the beginning of the treatment period to rapidly reduce the bacterial population load in an infection, thus limiting resistance development, and to then allow a reduced dose to maintain steady state levels of Taksta in the bloodstream, which increases tolerability.

The results from the Phase 2 trial demonstrated a clinical cure rate comparable to linezolid as described in Table 4 below. The clinical success rates for the Taksta loading dose regimen were comparable to those for the linezolid regimen in the ITT, mITT, CE and ME populations. Respective clinical success rates at the TOC in Taksta loading dose and linezolid treatment groups in the ITT population were 85.9% and 94.8%; in the mITT population, they were 88.1%, and 93.1%; in the CE population, they were 92.3% and 98.5%; and in the ME population, they were 96.0% and 98.0%. Importantly, in patients with documented S. aureus infection at baseline, clinical success rates were 95.8% and 97.9%, and with MRSA 96.8% and 100.0%, in the ME population in the Taksta loading dose and linezolid groups, respectively.

Table 4. Taksta Phase 2 Results: Clinical Response at the TOC.

 

 

Treatment Group

 

Taksta

 

Linezolid

 

Population

 

No. of patients

 

Success rate, %
(95% CI)

 

No. of patients

 

Success rate, %
(95% CI)

 

Intent-to-treat (ITT)

67/78

85.9

(76.2-92.7)

73/77

94.8

(87.2-98.6)

Microbiological intent-to-treat (mITT)

52/59

88.1

(79.9-95.1)

54/58

93.1

(83.3-98.1)

Clinically evaluable (CE)

60/65

92.3

(83.0-97.5)

67/68

98.5

(92.1-100)

Microbiologically evaluable (ME)

48/50

96.0

(86.3-99.5)

48/49

98.0

(89.2-100)

S. aureus (ME)

46/48

95.8

(85.8-99.5)

47/48

97.9

(88.9-100)

MRSA (ME)

30/31

96.8

(83.3-99.9)

37/37

100.0

(90.5-100)

S. pyogenes (ME)*

1/1

100.0

2/2

100.0

Streptococcus agalactaie (ME)*

1/2

50.0

0

N/A

Beta-hemolytic streptococcus, other (ME)*

1/1

100.0

0

N/A

 

(*)

Types of beta-hemolytic streptococci.

In August 2010, the FDA published new guidance regarding assessment of outcomes for ABSSSI clinical trials, with an emphasis on assessment of the early response to therapy in the ITT population. Following this guidance, 87.2% of study subjects randomized to the Taksta loading dose arm achieved an early response (defined as both cessation of spread of lesion and absence of

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fever on treatment Day 3, in patients not otherwise considered a treatment failure) compared to 90.9% of the linezolid subjects, as shown in Table 5 below.

Table 5. Taksta Phase 2 Results: Early Clinical Response (Day 3 Visit) in the ITT Population.

 

 

Taksta
Loading Dose
(No. of patients, N=78)
n (%)

 

Linezolid
(No. of patients, N=77)
n (%)

 

Success

68 (87.2)

70 (90.9)

95% Confidence Interval

77.7-93.7

82.2-96.3

Failure

10 (12.8)

7 (9.1)

Reason for Failure

 

 

Increase in lesion length or width only

6 (7.7)

7 (9.1)

Febrile only

0 (0.0)

0 (0.0)

Both increase in lesion length or width and febrile

0 (0.0)

0 (0.0 )

Missing lesion data only

0 (0.0)

0 (0.0)

Missing temperature data only

0 (0.0)

0 (0.0)

Missing both lesion size and temperature data

2 (2.6)

0 (0.0)

Clinical failure on or prior to Day 3 Visit

2 (2.6)

0 (0.0)

 

The results of the trial demonstrated Taksta has a favorable safety and tolerability profile with data comparable to linezolid as shown in Table 6 below. Since the study was blinded, we were required to exclude any patient taking SSRIs, who would have required additional monitoring if administered linezolid. Adverse events were reported in 61.5% of patients in the Taksta loading dose group and in 63.6% of patients in the linezolid group. There were no clinically relevant differences between treatment groups in the types or frequency of adverse events, including gastrointestinal events. Notably, the frequency and intensity of nausea and/or vomiting were similar in the Taksta loading dose and the linezolid treatment groups. There were more nervous system adverse events reported for linezolid (16.9% vs. 10.3%) than for Taksta, the majority of which were headaches.

Table 6. Taksta Phase 2 Results: Adverse Events.

 

Event

Taksta
Loading Dose
(No. of patients, N=78)
n (%)

 

Linezolid
(No. of patients, N=77)
n (%)

 

Any adverse event

48 (61.5)

49 (63.6)

Serious adverse event

3 (3.8)

0 (0.0)

Discontinued treatment due to adverse event

3 (3.8)

0 (0.0)

Adverse event

 

 

Gastrointestinal disorders

31 (39.7)

32 (41.6)

General disorders and administration site condition

5 (6.4)

4 (5.2)

Infections and infestations

8 (10.3)

10 (13.0)

Injury, poisonings, and procedural complications

5 (6.4)

0 (0.0)

Metabolism and nutrition disorders

5 (6.4)

5 (6.5)

Nervous system disorders

8 (10.3)

13 (16.9)

Respiratory, thoracic, and mediastinal disorders

5 (6.4)

2 (2.6)

Skin and subcutaneous tissue disorders

7 (9.0)

13 (16.9)

 

Three patients in the Taksta loading dose group had at least one serious adverse event (Herpes simplex, a serious kidney infection, and head injury and back pain) none of which were considered by the investigator to be related to the study medication. Three patients in the Taksta group discontinued the study medication due to adverse events (nausea and chills; blister and maculopapular rash; and nausea, vomiting and anorexia).

Phase 1 Results. We previously completed Phase 1 single dose, multi-dose and loading dose trials with Taksta between 2007 and 2009. These trials were randomized, double-blinded, placebo-controlled, dose-escalation studies to determine the pharmacokinetics and tolerability of single and multiple doses of Taksta. The effect of food on oral bioavailability was measured and food did not have a significant effect on the oral bioavailability, meaning Taksta can be taken with or without food. There were few adverse events and all were mild in severity. No serious adverse events were seen at the 1650 mg dose. Based on these data, loading dose regimens followed by maintenance dose regimens were considered safe and well tolerated up to a combination of 1650 mg/825 mg of Taksta.

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The pharmacokinetics, or PK, of Taksta were investigated in three Phase 1 trials. The first trial of 28 subjects evaluated the relative bioavailability of Taksta 250 mg tablets compared to Fucidin® tablets, the marketed product in Europe, which contains the same API as Taksta but is a different sized tablet, manufactured with different components and dosed differently. This trial also compared the PK of a single oral dose of Taksta 500 mg in the fed versus fasted states. The second trial assessed the PK of multiple oral doses of Taksta 500 mg (2 × 250 mg) administered three times a day for 4.5 consecutive days in 24 healthy subjects. The third trial evaluated the PK of single, multiple, and loading dose regimens of Taksta administered to healthy subjects.

In each trial, Taksta was shown to be generally safe and well tolerated. These trials showed that Taksta had a long plasma half-life and therefore the drug accumulates in the blood over time when administered at the same high dose daily, as evidenced by Taksta showing higher PK after the dose in the second and subsequent periods as compared to the first period. The results of the trial led to the design of the loading dose which would provide high drug levels on Day 1 followed by a steady concentration of Taksta of approximately 80 mcg/ml, which is well over 10 times the MIC90, or the concentration level needed to inhibit 90% of staphylococci and streptococci, the two organisms most frequently found in skin infections.

Pre-Clinical Data

We evaluated the in vitro activity of Taksta against prevalent community-acquired, hospital-acquired, and epidemic clones including strains non-susceptible to anti-MRSA agents. We have conducted tests of Taksta’s activity against strains of S. aureus that are found in the U.S. and our data show that virtually all of those strains (99.6%) are susceptible to Taksta. A collection of 56 MRSA strains from the Network on Antimicrobial Resistance in Staphylococcus aureus, or NARSA, and Eurofins Medinet repositories were tested for susceptibility to Taksta and comparators by broth microdilution, a method of testing susceptibility using a semi-solid or liquid growth medium to conduct dilutions in small volumes, in accordance with current Clinical and Laboratory Standards Institute, or CLSI, guidelines. Isolates included those with rare resistance phenotypes, linezolid and daptomycin non-susceptible isolates and isolates from prevalent community, hospital, and epidemic clones. Against the selected resistant MRSA, Taksta had an MIC range of 0.06-8 µg/mL with an MIC50 and MIC90 of 0.12 µg/mL. With the exception of one vancomycin intermediate Staphylococcus aureus, or VISA, isolate (with an MIC of 1 µg/mL), two daptomycin non-susceptible isolates (with MICs of 4 µg/mL), and one linezolid non-susceptible isolate (with an MIC of 8 µg/mL), Taksta’s MICs were 0.06-0.12 µg/mL against MRSA with rare but emerging resistance phenotypes. Against a subset of 10 community, 10 hospital, and five epidemic clones, Taksta’s MICs were 0.06-0.12 µg/mL. Taksta had potent in vitro activity against MRSA non-susceptible to currently approved antibiotics vancomycin, linezolid, and daptomycin. Taksta was also active against USA100 and USA300 MRSA clones of MRSA most likely to be encountered clinically in the U.S. today. Based on its potency and activity, these results highlight the potential of Taksta for the treatment of MRSA in the U.S.

We have continued to determine in vitro activity of Taksta against recent strains S. aureus including MRSA collected in the U.S. The activity of Taksta against S. aureus was stable over several surveyed years (2008-2015). These studies have shown that Taksta inhibits 99.7% of S. aureus isolates (and 99.8% of methicillin-resistant Staphylococcus aureus (MRSA) isolates) at a minimum inhibitory concentration (MIC) ≤ 1μg/mL. Only a few S. aureus strains (<1%) displaying elevated Taksta MIC values (>1 µg/mL) were detected in the U.S., which likely carried acquired genes fusB and fusC that confer low level resistance (MIC, 2-8 µg/mL). These genes are usually part of plasmids that can be co-selected by other antimicrobial agents due to the presence of additional resistance genes. These results continue to demonstrate that Taksta could be a valuable alternative for the treatment of staphylococcal infections in the U.S. since the population has not been previously exposed to fusidic acid and resistance is rarely observed among endemic S. aureus. Furthermore, low S. aureus resistance rates of fusidic acid in Europe are encouraging and suggest that after many years of clinical use, fusidic acid is still a reliable option for the treatment of serious staphylococcal infections.

As required by FDA regulations, we conducted pre-clinical animal studies of Taksta to determine its absorption. The studies indicated that Taksta was not very well absorbed and has a short half-life in animals, resulting in minimum exposure levels which limited the ability to test Taksta in animal models. All pre-clinical tests were benign and indicated no safety or tolerability issues. However, because fusidic acid has been used for several decades in humans outside the U.S. and there is sufficient human clinical trial data for Taksta, we believe that this animal absorption data will not adversely impact our development efforts for Taksta at the FDA.

Compassionate Use Data. We have treated one patient with severe chronic osteomyelitis under a single-patient compassionate use (expanded access) protocol with Taksta. This patient had been treated unsuccessfully with many approved antibiotics over a period of two years and was scheduled for a leg amputation. After being treated with Taksta, the patient recovered and the large leg lesion healed; the patient was treated with Taksta for approximately two years.  In Canada, where fusidic acid tablets are available, a single patient with S. aureus infected prosthetic joints in both elbows following severe rheumatoid arthritis had failed on all possible oral medications and was scheduled for amputation of one arm. After treatment with higher doses than recommended in Canada and similar to our loading dose regimen, the arm was saved from amputation and the patient has continued on fusidic acid therapy for over four years to date.  These results, while encouraging, are preliminary, from a small number of patients and of limited value because they were not obtained in a controlled clinical trial. Furthermore, these results may not be predictive of our future trial results, including the results of our planned Phase 3 trial regarding refractory bone and joint infections.  To date, we have enrolled additional

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patients diagnosed with chronic MRSA bone and joint infections under our expanded access protocol.  These patients have been receiving Taksta chronically for several months.

Published Ex-U.S. studies of Sodium Fusidate in the Treatment of Bone and Joint Infections. Fusidic acid has been used for more than three decades for treatment of bone and joint infections in Europe and Australia. Atkins and Gottlieb [Atkins 1999] reviewed published experience with fusidic acid in the treatment of bone and joint infections, citing its utility in the treatment of acute and chronic osteomyelitis, vertebral infection, septic arthritis, and prosthetic and other device related infections. The authors considered achievement of effective bone and joint fusidic acid concentrations a key factor in its historical efficacy in the treatment of these conditions.

We used several European and Australian studies as the basis for our Phase 2 study design for Taksta for the treatment of prosthetic joint infections. The study was published in 2007 by the European Society of Clinical Microbiology and Infectious Diseases. Between 1998 and 2003, 20 patients in St. Vincent’s Hospital, a teaching hospital in Melbourne, Australia, were treated for staphylococcal prosthetic joint infection with debridement, prosthesis retention, and IV antibiotic followed by oral fusidic acid and rifampin. Of the patients, 13 had hip joint replacements and seven had knee joint replacements. The median duration of IV treatment was 12 days, the median duration of hospitalization was 20 days and the median duration of oral treatment was 12 months. Two patients reported nausea that was severe enough to require a change of treatment. Two patients reported transient nausea, but continued treatment. No hepatotoxicity was reported. There was no evidence of treatment failure for 18 patients and 16 patients retained their original prosthesis without any evidence of infection after 26 months of follow-up. The cumulative success of treatment after one year was approximately 88%. In a retrospective study of patients with MRSA orthopedic device-related infection in Geneva University Hospitals between 2000-2008, of 41 patients with a median follow up of 391 days, 18 patients experienced treatment failure, involving MRSA persistence or recurrence (Ferry et al., 2010) while none of the 12 patients who received a rifampin-fusidic acid combination therapy followed by intravenous vancomycin and oral rifampin therapy experienced treatment failure.

Lautenbach et al. [1975] measured serum and bone fusidic acid concentrations (by agar plate diffusion methods using a susceptible bacterial strain) in 36 patients with chronic osteomyelitis during the course of therapy; bone concentrations of active drug ranged from 1 to 15 µg/g, measured at approximately nine hours after last oral dose (in most cases, 20 to 40 mg/kg/day, divided TID). Hierholzer et al. [1966, 1974] measured bone and soft tissue concentrations at three to six hours after last oral dose (500 mg TID dosing for at least five days) in a series of patients with osteomyelitis and found fusidic acid concentrations of 2 to 15 µg/g in bone and 4 to 17 µg/g in soft tissue. A second group of patients studied by the same group were administered fusidic acid (500 mg TID, orally) for five to thirteen days prior to surgery for non-infected bone disease; concentrations of fusidic acid in bone were on average up to two times higher than those observed in patients with osteomyelitis, and mean concentrations ranged from 46% to 94% of those observed in serum. Chater, et al. [1972] reported fusidic acid concentrations in bone and serum from seven adult patients treated with 500 mg TID oral fusidic acid for osteomyelitis; concentrations of fusidic acid in bone were similar to those described above, and ranged from 4% to 72% of serum concentrations, with consistently higher soft tissue concentrations (ranging from 20% to >100% of serum concentrations). In summary, oral fusidic acid dosing was found to achieve drug concentrations at the infected bone and joint site that were associated with effective treatment of osteomyelitis across a number of studies.

Rifampin has emerged as a critical antibiotic in the treatment of prosthetic joint infection, attributed to its unique ability to penetrate and disperse biofilms on prosthetic material. In a landmark study, Zimmerli and colleagues [Zimmerli 1998] demonstrated the important role of rifampin in the effective treatment of prosthetic joint infection when used in combination with initial IV therapy (vancomycin or flucloxacillin) and follow-on oral antibiotic therapy (ciprofloxacin). In that trial, patients with stable implants and a short duration of infection were effectively treated with the debride and retain strategy, with success in 100% of evaluable patients who received a three to six month course of ciprofloxacin/rifampin therapy. There were no MRSA infections in the study population. Drancourt et al. [1997] demonstrated equivalent efficacy of oral fusidic acid/rifampin to oral ofloxacin/rifampin in a randomized trial of therapy in prosthetic joint infection cases treated with the debride and retain strategy. In a third report of clinical experience with fusidic acid plus rifampin for orthopedic device related infection (comprised principally of joint prostheses and internal fixation devices), Ferry et al. [2010] reported clinical success in 12 of 12 patients.  Based on our Phase 2 trial comparing fusidic acid in combination with rifampin, we determined that rifampin reduced fusidic acid levels in the blood.  Consequently, we concluded that fusidic acid should be optimally dosed in monotherapy, even in bone and join infections.

Ongoing and Planned Clinical Trials

We submitted a proposed Phase 3 trial protocol for Taksta to the FDA in early 2014 and met with the FDA in December 2014 in a Type C meeting. Based on that meeting, our plan involves testing Taksta for long-term suppressive therapy of refractory bone and joint infections, including PJI, in a single arm trial. Also based on FDA discussions, we plan to conduct a Phase 3 trial for the treatment of ABSSSI. The ABSSSI trial was initiated in November 2015 and the refractory bone and joint study is expected to begin in early 2016. At the completion of the ABSSSI trial and the refractory bone and joint infection study, we will discuss with the FDA to determine if we have adequate data to support approval for both indications or if a second ABSSSI study is needed. The need for

25


 

additional trials may be negated if Congress passes the 21st Century Cures Act, which contains a limited population antibacterial drug approval pathway designed to streamline the approval process for approval of rare diseases.

Earlier Stage Pipeline Programs

Our earlier stage programs include developing other uses for solithromycin and Taksta, as well as the development of newly discovered compounds as antibiotics and for the treatment of other diseases.

Solithromycin. We plan to evaluate the effects of solithromycin in a proof-of-principle study in patients with NASH. NASH is a progressive form of non-alcoholic fatty liver disease, or NAFLD, where accumulation of excessive fat (steatosis) coexists with liver cell injury, inflammation and fibrosis, which eventually leads to cirrhosis and hepatocellular carcinoma. To date, no single therapy has been approved for treating NAFLD/NASH. Solithromycin is well tolerated in patients with mild to severe hepatic impairment and no significant differences in safety, compared to healthy controls, are noted. Solithromycin has been demonstrated to have potent anti-inflammatory properties in addition to its antibacterial properties; as a result, we evaluated solithromycin in a diabetic mouse model of NASH-HCC to investigate its potential effects on this liver disease, and in the study solithromycin demonstrated potential anti-NASH and anti-hyperglycemic effects. In September 2015, we initiated an exploratory single arm Phase 2 trial for solithromycin to test its anti-inflammatory effects in patients with NASH for which we expect to complete enrollment by the end of 2016.

Older macrolides, because of their anti-inflammatory properties, are used to treat COPD to lower the dose of steroids. Solithromycin has demonstrated anti-inflammatory properties and in September 2015, we initiated a Phase 2 trial in COPD patients to test its anti-inflammatory capabilities for which we expect to complete enrollment by the end of 2016.

In CF, the second most common bacteria that infects the lung is S. aureus, against which solithromycin has demonstrated activity. In addition, our pre-clinical work suggests that solithromycin is likely to have greater anti-inflammatory properties than azithromycin, which is commonly used in CF patients for its anti-inflammatory properties.

Taksta. Given the historical use of fusidic acid and its safety profile, we believe Taksta can also address osteomyelitis and infections related to CF, all of which tend to require long-term or chronic treatment, as well as ABSSSI that generally requires seven to 14 days of treatment. Fusidic acid is used in certain countries in Europe to treat S. aureus infections in CF patients and is active against 40 S. aureus strains isolated from CF clinics in the U.S. All S. aureus strains were susceptible to fusidic acid. A CF patient has been treated under our compassionate use program for approximately eight months with some demonstrated symptomatic relief.

Other Research Programs. Shortly after our inception, we entered into a collaborative research and development and license agreement with Optimer Pharmaceuticals, Inc., or Optimer, which was acquired by Cubist Pharmaceuticals, Inc. in October 2013, which was in turn acquired by Merck in January 2015. The license agreement gives us exclusive access to a library of over 500 macrolide compounds, which we have further expanded through our own discovery efforts. Macrolides are complex structures which can be chemically modified to eliminate their antibacterial activities. We intend to use our proprietary macrolide technology platform to develop drugs with no antibiotic effect and replace off-label use of older macrolides in inflammatory conditions and other indications such as diabetic gastroparesis. Several compounds have been identified through our screening programs that could potentially address therapeutic needs in the areas of inflammation, diabetic gastroparesis and cancer.

We are conducting pre-clinical studies for the use of macrolides in treating diabetic gastroparesis, which is related to a lack of neural response in the gastrointestinal tract of diabetic patients, and gastroesophageal reflux disease, or GERD, both likely to be helped by addressing motilin function. Motilin is a naturally occurring peptide that causes the stomach to contract to initiate the migratory motor complex that empties the stomach.  Erythromycin and related antibiotics have known activity as motilin agonists. Through our discovery program, we have selected a lead candidate that is active in the motilin receptor binding assay, functional assays using cloned human motilin receptor in mammalian cells, as well as in rabbit duodenal strip contraction assays. These compounds have been optimized for pharmacokinetic properties and oral bioavailability.

Our Commercialization Strategy

We will pursue commercialization strategies intended to maximize the value of each product. We plan to develop our product candidates through late-stage clinical studies and, assuming approval, either sell our products directly through our own sales force, which we would need to assemble, or through partnerships, which we would need to negotiate with pharmaceutical companies with strong commercialization capabilities. If solithromycin is approved for CABP, we plan to commercialize it ourselves in the U.S. and find a commercial partner in Europe and other regions. We may pursue this same approach for any other approved products.

Solithromycin. Assuming FDA approval, we plan to sell solithromycin in the U.S. through our own specialty sales and marketing teams that will focus on the continuum of care for CABP focused in the outpatient setting primarily on emergency rooms, urgent care centers, outpatient clinics and other high CABP antibiotic prescribing physician offices and in the hospital focused

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primarily on key academic medical centers and teaching hospitals with significant influence in a given geography. During 2015, we have been engaged in activities related to the planned commercial launch of solithromycin as a treatment for CABP in the U.S. Currently, we expect to build an antibiotic specialty sales force of between 200 and 300 representatives to be able to address the high prescribing centers we have identified as our primary target. According to data we have generated, these high prescribers represent approximately 4% of the prescribers writing prescriptions for azithromycin and levofloxacin to treat CABP, and are responsible for approximately 40% of such prescriptions annually. Our market data also shows that approximately 80% of CABP retail prescriptions are for either azithromycin or levofloxacin. Currently, we expect pricing of solithromycin to be in the hundreds of dollars, similar to pricing used in previous antibiotics that were widely adopted in the outpatient setting.

We believe solithromycin represents an attractive commercialization opportunity outside the U.S. and we plan to seek commercial partners in selected regions as appropriate. To that end, in May 2013, we entered into a license agreement with Toyama whereby we licensed to Toyama the exclusive right to make, use and sell any product in Japan that incorporates solithromycin as its sole API for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Under this agreement, Toyama is to initiate certain clinical trials, obtain regulatory approval and launch and commercialize approved licensed products in Japan. While we licensed the rights to solithromycin in Japan to Toyama, we retain the rights to make and sell it elsewhere in the world. Toyama also has a nonexclusive license in Japan and certain other countries to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. In addition, Toyama has granted us certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

The Toyama license is part of our global development program.  We will receive all data and information developed by Toyama in all clinical trials and other studies required in Japan. This will add to our data base, and we expect will be beneficial as we seek approval for solithromycin in markets outside of the U.S. and Japan. While we licensed the rights to solithromycin in Japan to Toyama, we retain the rights to make and sell it elsewhere in the world.

We also plan to conduct the necessary trials to establish the utility of solithromycin for the treatment of a broader variety of respiratory and other infections including sinusitis, bronchitis and other forms of pneumonia, and plan to align our commercial strategy with the product life cycle plan accordingly.

Taksta. The initial market for Taksta is intended to be in the treatment of ABSSSI and possibly refractory bone and joint infections, including prosthetic joint infections. Patients with ABSSSI, bone and joint infections and prosthetic joint infections are generally admitted to the hospital to begin antibiotic treatment. Patients are administered intravenous antibiotics for several weeks with few or no options for switching to oral antibiotics. Both markets could also be addressed by the same sales force we plan to build to sell solithromycin.  

Competition

Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. Many of our potential competitors have substantially greater financial, technical and human resources than we do and significantly more experience in the discovery, development and regulatory approvals of products, and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval for drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render solithromycin, Taksta or any other product candidates that we have in development obsolete or non-competitive before we can recover the expenses of developing and commercializing any product candidates. We anticipate that we will face intense and increasing competition as new drugs enter the market, as advanced technologies become available and as generic forms of currently branded drugs become available. Finally, the development of new treatment methods for the diseases we are targeting could render our drugs non-competitive or obsolete.

In many cases, however, we believe that competition often will be determined by antibiotic class and any limitations of that antibiotic class in general, and the antibiotic in particular, in treating a particular disease or population.  We believe that the key competitive factors that will affect the development and commercial success of solithromycin, Taksta and any other product candidates that we develop are efficacy, safety and tolerability profile, convenience in dosing, price and reimbursement.

We anticipate that, if approved, solithromycin will compete with other antibiotics that demonstrate CABP activity. These include well established, widely prescribed drugs, including generic versions, such as azithromycin, clarithromycin, moxifloxacin, levofloxacin, linezolid and ceftriaxone. Among macrolides, azithromycin (Zithromax, Z-Pak) is the class leader, and a generic drug.  Azithromycin is available as oral tablets, lyophilized vials for intravenous and a powder for suspension, which has allowed dosing of all age groups and has been used broadly including for simple respiratory tract infections and in combination with ceftriaxone to treat

27


 

CABP.  Azithromycin and other macrolides are used broadly in COPD for their anti-inflammatory properties to lower the dose of steroids, in bacterial urethritis to treat gonorrhea and Chlamydia infections, and many other infections. Azithromycin is among the most widely used antibiotics. Ceftaroline was approved in CABP, but only the intravenous formulation is available; no oral or powder for suspension for pediatric use is available. For intravenous use in CABP, ceftaroline must be co-administered with azithromycin or another macrolide because it does not provide adequate coverage for atypical bacteria, such as Legionella or Mycoplasma.  Patients can stay in the hospital for IV therapy or be discharged on a different, lower potency second generation cephalosporin. Ceftobiprole has failed to get approval in the U.S. and is being evaluated in Europe for CABP. However, it is very similar to ceftaroline in being available for intravenous use.  Novaxel’s pleuromutilin analog was licensed to Forest Laboratories and returned to them recently. This product could potentially be developed in CABP, but could be cross resistant with the oxazolidinones and chloramphenicol, binding to the same cfr site on the bacterial ribosome, thus potentially having limited ability to fight resistance. We are not aware of any other drugs in development for CABP currently; to our knowledge, the majority in development are being developed for ABSSI and for hospital acquired pneumonia, or HAP.  Fluoroquinolones, such as levofloxacin and moxifloxacin, could be used in CABP and are available in oral and IV formulations. They are not approved for pediatric use because of safety. Levofloxacin is now generic and because of its lower potency, its use in CABP has been taken over by the branded moxifloxacin (Avelox). Fluoroquinolones are known for several undesirable effects such as tendonitis, Achilles tendon rupture, C. difficile colitis, and hepatotoxicity and central nervous system side effects. These adverse events limit the use of these drugs in CABP.  In the area of bacterial urethritis, gonococcus has become resistant to older macrolides and other drugs and only intramuscular ceftriaxone is currently available for treating these patients. A fluoroquinolone was under development for gonorrhea by Melinta Therapeutics, Inc. but has not reported a success in a Phase 2 trial yet.  Gonorrhea also has shown resistance to fluoroquinolones.  We believe that a few companies, such as Paratek Pharmaceuticals, Inc. and Nabriva Therapeutics AG are initiating the development of a new tetracycline and a new pleuromutilin analog in CABP.  Both companies initiated their Phase 3 trials in late 2015.

We anticipate that, if approved, Taksta will compete with other antibiotics that demonstrate MRSA activity. These include well established, widely prescribed drugs, including generic versions, such as vancomycin, linezolid, tedizolid, daptomycin, tigecycline and ceftaroline. Among these, intravenous vancomycin is the standard of care. There is no approved oral or intravenous antibiotic for use in PJI. Daptomycin, which is also available for intravenous use only, was tested in PJI and not shown to have an advantage over vancomycin. It is not approved for this indication, but is used in some patients who do not tolerate vancomycin IV.  Linezolid is useful for short term oral use but is not approved for PJI and is not approved for chronic oral use. Tedizolid and other oral antibiotics in development are not being tested for chronic use.

Intellectual Property

Due to the length of time and expense associated with bringing new products to market, biopharmaceutical companies have traditionally placed considerable importance on obtaining and maintaining patent protection for significant new technologies, products and processes. Solithromycin is a new chemical entity developed from the macrolide library of compounds licensed from Optimer (now owned by Merck) and is covered by a series of patents and patent applications, which claim, among other things, the composition of matter of solithromycin. The original patents covering the composition of matter for fusidic acid have expired. Our proprietary position for Taksta has two bases. For prosthetic joint infections or bone and joint infections, if Taksta is the first fusidic acid product approved by the FDA, it would be a new chemical entity, or NCE, and would receive five years of data exclusivity under the Hatch-Waxman Act, which would be increased to 10 years under the GAIN Act. Taksta was awarded orphan drug status for prosthetic joint infections, which, if approved by the FDA would extend the first exclusivity period to seven years which, together with the five years granted under the GAIN Act, would provide 12 years statutory exclusivity. In addition, we expect that Taksta would also be eligible for pediatric exclusivity.  We will work to have orphan drug status granted to Taksta for the treatment of refractory bone and joint infections, which, if granted, and Taksta is approved by the FDA for treating this indication, Taksta would receive this same protection. Our loading dose regimen, which received a U.S. patent in May 2013, provides patent protection to 2029, and we have recently filed a PCT international application directed to treating bone and joint infections.  

Our success will depend in part on our ability to protect the proprietary nature of solithromycin, Taksta and our other product candidates, technology, and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from exploiting our proprietary rights. We seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions, and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation, and in-licensing opportunities to develop and maintain our proprietary position.

We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our technology.

Most of our portfolio consists of intellectual property that we own ourselves or that we exclusively license from Optimer (now owned by Merck). The intellectual property licensed from Optimer primarily relates to solithromycin and related compounds, and to

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other macrolide and ketolide compounds. Internally, we typically develop those compounds further and refine them to determine commercial applicability.

We have applied, and are applying, for patents directed to our three main areas of focus: (1) macrolide and ketolide antibiotics, (2) fusidic acid antibiotics, and (3) macrolides and ketolides for non-antibiotic uses, both in the U.S. and, when appropriate, in other countries. As of December 31, 2015, our owned and in-licensed patent portfolio consisted of 17 issued patents in the U.S., 17 patents issued in other countries, and approximately 140 additional patent applications pending in the U.S. and worldwide.

With respect to solithromycin and a broad group of other macrolide antibiotic compounds, our U.S. patent portfolio consists of four issued U.S. patents, U.S. Patent Nos. 7,601,695, 8,012,943, 8,343,936, and 9,200,026, each entitled “Novel Antibacterial Agents,” which we exclusively license from Optimer. U.S. Patent No. 7,601,695 (US ‘695) issued on October 13, 2009 and is scheduled to expire in 2025, including a Patent Term Adjustment of 330 days under 35 U.S.C. § 154(b). U.S. Patent No. 8,012,943 (US ‘943) issued on September 6, 2011, U.S. Patent No. 8,343,936 (US‘936) issued on January 1, 2013, and U.S. Patent No. 9,200,026 (US‘026) issued on December 1, 2015. Each of US ‘943, US‘936, and US‘026 is scheduled to expire in 2024, and does not include a Patent Term Adjustment under 35 U.S.C. § 154(b). A corresponding patent issued in Canada (CA 2529817) on February 12, 2013, and another was granted in Europe (European Patent Convention EPC No. 2664331) on September 16, 2015. The granted European patent will be validated in France, Germany, Italy, Spain, and the United Kingdom, and registered in Hong Kong. The exclusively in-licensed portfolio also includes a pending continuing U.S. patent application, and divisional applications pending in Canada, Europe and Hong Kong. Prosecution is ongoing in each of those patent applications. Each of the foregoing patents and applications ultimately arise from a PCT international application filed on March 5, 2004, which claims the priority benefit of U.S. provisional applications filed on March 10, 2003, and May 6, 2003.

With respect to processes for manufacturing solithromycin and related 1,2,3-triazole-containing macrolides and ketolides, our U.S. patent portfolio includes six issued U.S. patents, which we license non-exclusively from The Scripps Research Institute (“TSRI”). U.S. Patent No. 7,375,234 (US ‘234) issued on May 20, 2008, and is scheduled to expire in 2023, including a Patent Term Adjustment of 123 days under 35 U.S.C. § 154(b). U.S. Patent No. 7,763,736 (US ‘736) issued on July 27, 2010, U.S. Patent No. 8,129,542 (US ‘542) issued on March 6, 2012, U.S. Patent No. 8,580,970 (US ‘970) issued on November 12, 2013, U.S. Patent No. 8,877,939 (US ‘939) issued on November 04, 2014, and U.S. Patent No. 9,040,716 (US ‘716) issued on May 26, 2015. Each of US ‘736, US ‘542, US ‘970, US ‘939, and US ‘716 is scheduled to expire in 2023, and does not include a Patent Term Adjustment under 35 U.S.C. § 154(b). The non-exclusively in-licensed portfolio also includes issued patents in Canada, Europe, Hong Kong, Japan, and Singapore, and a continuing patent application in the U.S. The in-licensed portfolio also includes issued patents in Australia, China and South Korea, each of which is licensed exclusively. Each of the foregoing patents and applications ultimately arise from a PCT international application filed on May 30, 2003, which claims the priority benefit of a U.S. provisional application filed on May 30, 2002.

We have filed company-owned patent applications in the U.S., Australia, Brazil, Canada, China, Europe, Hong Kong, Israel, India, Japan, Malaysia, Mexico, New Zealand, the Russian Federation, South Africa, and South Korea claiming two new crystalline forms of solithromycin. U.S. Patent Nos. 8,759,500 (US ‘500) and 8,975,386 (US ‘386), each entitled “Crystalline Forms of a Macrolide, and Uses Therefor,” issued on June 24, 2014 and March 10, 2015, respectively, and are scheduled to expire in 2031. A patent has also issued in Japan, New Zealand and South Africa, and has been granted in Europe.

We have also filed additional company-owned patent applications in the U.S., Australia, Brazil, Canada, China, Europe, Hong Kong, Israel, India, Japan, Mexico, New Zealand, the Russian Federation, Singapore, and South Korea covering solithromycin and related compounds; with the objective of increasing the breadth of solithromycin coverage, particularly in the U.S., Europe, South America, and Asia. Those applications claim pharmaceutical compositions, pharmaceutical formulations, methods for treating particular infections and other diseases, manufacturing processes, and compounds related to solithromycin. For example, we have filed patent applications in the U.S., Australia, Brazil, Canada, China, Europe, Hong Kong, Israel, India, Japan, Mexico, New Zealand, the Russian Federation, South Africa, and South Korea that claim processes for manufacturing solithromycin and related compounds from clarithromycin and/or erythromycin, and the composition of matter of various intermediates used in those processes. Patents have issued in the U.S., China, and Japan.  Those patents, and future patents issuing from pending applications have statutory expiration dates in 2028, 2031, and 2034. Solithromycin and related compounds have also been described by us in patent applications filed in the U.S., Australia, China, Europe, Japan, and South Africa, and claiming their use in (a) treating bacterial infections arising from one or more resistant bacterial strains, including bacterial strains resistant to other macrolides or ketolides, (b) biowarfare and biodefense applications, (c) treating Mycobacterium infections, including tuberculosis and Mycobacterium avium infections, (d) treating bacterial gastrointestinal diseases, and (e) treating malaria. Patents have issued in the U.S., Australia, and Japan. Those patents, and future patents issuing from pending applications have statutory expiration dates in 2029 and 2030. Most recently, we have filed U.S. provisional and PCT international applications claiming the use of solithromycin and related compounds for (a) treating eye infections, (b) treating NASH, and (c) treating diabetes. Patents have not yet issued in those applications. We have also filed patent applications in the U.S., Australia, Brazil, Canada, China, Europe, Hong Kong, India, Israel, Japan, Malaysia, Mexico, New Zealand, the Russian Federation, Singapore, South Africa, and South Korea claiming pharmaceutical compositions and pharmaceutical formulations of solithromycin and related compounds, including lyophilized forms of solithromycin, parenteral formulations of solithromycin for IV

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delivery, and inhalation formulations of solithromycin. Patents have not yet issued in those applications. Future patents issuing from those pending applications have statutory expiration dates in 2031, 2033, and 2034. aMost recently, we have filed U.S. provisional and PCT international applications claiming topical formulations of solithromycin for ocular delivery and powder oral suspension formulations for pediatric patients. Patents have not yet issued in those applications. We have also filed, or are preparing to file, U.S. and international patent applications covering solithromycin and other macrolides and ketolides for treating diseases other than infection, including inflammatory diseases, cystic fibrosis, and motilin receptor-mediated diseases to increase the breadth of coverage of other macrolides and ketolides in the U.S., Europe, and Asia.

We have engaged, and continue to engage, in research efforts to exploit the potential of the in-licensed Optimer inventions, including solithromycin and related compounds, in new therapy areas, and to discover new forms and formulations of solithromycin and related compounds. Our research efforts have indicated that solithromycin may also be useful in treating particular bacterial infections that may be considered to be generally untreatable with macrolide antibiotics, including bacterial infections arising from one or more resistant strains. In addition, alternative physical forms and alternative formulations of solithromycin and related compounds are being developed. If we are able to obtain issued patents for those forms and formulations, and the treatment methods, then we will have several years of additional coverage above and beyond the expiration of the patents covering the chemical composition of solithromycin.

With respect to fusidic acid, our U.S. patent portfolio consists of two issued U.S. patents. U.S. Patent No. 8,450,300, entitled "Fusidic Acid Dosing Regimens for Treatment of Bacterial Infections," issued on May 28, 2013, and is scheduled to expire in 2029, including a Patent Term Adjustment of 149 days under 35 U.S.C. § 154(b). U.S. Patent No. 8,247,394, entitled "Methods of Treating Urethritis and Related Infections Using Fusidic Acid," issued on August 21, 2012, and is scheduled to expire in 2031, including a Patent Term Adjustment of 267 days under 35 U.S.C. § 154(b). We are continuing a strategy to increase the breadth of our fusidic acid coverage in the U.S. and Asia, and have filed patent applications covering fusidic acid in the U.S., Canada and Japan. The fusidate sodium chemical entity itself is a compound which is no longer subject to composition of matter patents in the U.S. Therefore, our pending patent applications claim new dosing protocols and uses of fusidic acid, and new formulations and packaging. The novel loading dose regimen that has been developed to overcome pre-existing limitations on a broader, more effective use of fusidic acid in the treatment of bacterial infections, including infections not previously considered to be susceptible to fusidic acid, like urethritis. We have also filed patent applications covering new formulations of fusidic acid for direct bronchial and pulmonary delivery, and formulations and packaging of fusidic acid dosage units to overcome the storage limitations of fusidic acid.

In addition to filed patent applications claiming new dosing protocols and formulations of fusidic acid for treating infections, we plan to obtain regulatory exclusivity for the first use of fusidic acid through approval with the FDA. We are not aware of any competing applications before the FDA seeking approval for fusidic acid. Therefore, we believe that, if the FDA approves an NDA of ours for Taksta before the FDA approves an NDA or other application for fusidic acid use filed by any competitor, pursuant to amendments to Section 505 of the Food, Drug and Cosmetic Act enacted in 2008, we will have at least five years of regulatory exclusivity in the U.S. for the first approved indication for fusidic acid. We believe that the 2008 amendments will also provide us with three years of exclusivity for any additional uses.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the U.S., a patent’s term may be lengthened by Patent Term Adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent, or may be shortened if a patent is terminally disclaimed over another patent. In the U.S. and certain other countries, the patent’s term may also be lengthened by patent term extension or restoration, which compensates a patentee for administrative delays in granting a regulatory approval by the FDA, or similar agency in other countries. For a more comprehensive discussion of patent term and extensions thereto, please see “Business—Government Regulation and Product Approval.”

While we pursue patent protection and enforcement of solithromycin, fusidic acid and our other product candidates, and aspects of our technologies when appropriate, we also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, independent contractors, suppliers and collaborators. Our employment policy requires each new employee to enter into an agreement containing provisions generally prohibiting the disclosure of confidential information to anyone outside of our company and providing that any invention conceived by an employee within the scope of his or her employment duties is our exclusive property. We have a similar policy with respect to independent contractors, generally requiring independent contractors to enter into agreements containing provisions generally prohibiting the disclosure of confidential information to anyone outside of our company and providing that any invention conceived by an independent contractor within the scope of his or her services is our exclusive property with the exception of contracts with universities and colleges that may be unable to make such assignments. Furthermore, our know-how that is accessed by third parties through collaborations and research and development contracts and through our relationships with scientific consultants is generally protected through confidentiality agreements with the appropriate parties.

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Further, we seek trademark protection in the U.S. and internationally where available and when appropriate. We have a registered trademark in the U.S. for the CEMPRA mark, which we use in connection with our pharmaceutical research and development services, and which we plan to use with our proposed products. We also have filed applications at the U.S. Patent and Trademark Office for the TAKSTA, STRAFEX, and STAFREL marks. We plan to use the TAKSTA mark with our proposed sodium fusidate product. The remaining marks may be used with the sodium fusidate product or other proposed products.  Because solithromycin is being used as monotherapy in our Phase 3 trials for CABP, we selected the trial name of “Solitaire”.

Collaborations and Commercial Agreements

Optimer Pharmaceuticals, Inc. (now owned by Merck). In March 2006, we entered into a Collaborative Research and Development and License Agreement with Optimer, a biotechnology company focused on discovering, developing and commercializing innovative anti-infective products. Under this agreement, we obtained access to a library of over 500 macrolide compounds, including solithromycin. Optimer was acquired by Cubist in October 2013, which in turn was acquired by Merck in 2015.  Optimer granted us an exclusive license to these compounds in all countries of the world except ASEAN countries, with the right to sublicense, under Optimer’s patents and know-how related to certain macrolide and ketolide antibiotics and related proprietary technology. The exclusivity of our license is potentially subject to the U.S. government’s right to obtain a non-exclusive, irrevocable, royalty-free, paid-up right to practice and have practiced certain patents worldwide. As partial consideration for granting us such license, we issued shares of our common stock to Optimer. We also have an obligation to make additional payments upon achievement of specified development, regulatory and commercialization milestones. The aggregate amount of such milestone payments we may need to pay is based in part on the number of products developed under the agreement. The aggregate amount would be $27.5 million if four products are developed and gain FDA approval. Additional limited milestone payments would be due if we develop more than four products. In July 2010 and July 2012, we made $0.5 million and $1.0 million milestone payments, respectively to Optimer after our successful completion of the Phase 1 and Phase 2 trials for oral solithromycin, respectively. We are also obligated to make tiered, mid-single-digit royalty payments to Optimer based on annual net sales of licensed products outside the ASEAN countries, which royalties are subject to reduction in the event additional licenses are obtained from third parties in order to practice our rights under the agreement and/or we are required to grant a compulsory license to a third party.

The agreement also includes the grant of an exclusive license to Optimer and its affiliates, with rights of sublicense, under our patents and other intellectual property in any products covered by the agreement to permit Optimer to develop and/or commercialize such products in ASEAN countries. In consideration of such license, Optimer will pay us $1.0 million in milestone payments for the first two products that receive regulatory approval or have a first commercial sale in any ASEAN country, as well as tiered, mid-single-digit royalty payments based on net sales of such products, which royalties are subject to reduction in the event additional licenses are obtained from third parties in order to practice Optimer’s rights under the agreement and/or Optimer is required to grant a compulsory license to a third party. The agreement also included a collaborative research program, to be performed by the parties, which was completed on March 31, 2008.

The Optimer patents and know-how existing as of the effective date of the agreement and improvements thereof remain the property of Optimer. Except for such improvements, any know-how or inventions developed by Optimer pursuant to the agreement or that relate to the licensed products (except those generated by using grant monies provided by the U.S. government) vest in us subject to the license we granted to Optimer. The Optimer license provides Optimer with the initial responsibility to prosecute the Optimer patents relating to macrolide antibiotics. We will be responsible for prosecuting any patents controlled by us that relate to macrolide antibiotics other than the Optimer patents described above. We will have the first right to prosecute patents claiming joint inventions. We have the first right to control any proceeding involving alleged infringement of Optimer patents with respect to rights granted to us under the agreement and Optimer has such right regarding alleged infringement of our patents with respect to rights granted to Optimer under the agreement. Should we exercise our right to control any proceeding involving alleged infringement of Optimer patents, we will be responsible for the costs of these proceedings.

Subject to certain exceptions, on a country-by-country and product-by-product basis, a party’s rights and obligations under the agreement continue until the later of: (i) the expiration of the last to expire patent rights of a covered product in the applicable country or (ii) ten years from the first commercial sale of a covered product in the applicable country. As a result, the final expiration date of the Optimer license is indeterminable until the last such patents issue and results of potential patent extensions are known, or each of the first commercial sales are made, as applicable. Upon expiration of the agreement with respect to a particular product and country, the licenses granted in the agreement with respect to such product and country will remain in effect and convert to a perpetual, unrestricted, fully-paid, royalty-free, worldwide license. Either party may terminate the agreement (i) in the event of a material breach by the other party, subject to prior notice and the opportunity to cure, (ii) in the event the other party fails to use diligent efforts to develop and commercialize products in its respective territory, or if the other party makes a determination not to develop and commercialize at least one product under the agreement, or (iii) in the event of the other party’s bankruptcy. In the case of these terminations, the terminating party can elect that all licenses granted by the other party survive, subject to continuing royalty, payment and other obligations. Additionally, either party may terminate the agreement for any reason upon 30 days’ prior written notice, in

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which case the non-terminating party can elect that all licenses granted by the other party survive, subject to continuing royalty, payment, and other obligations.

The Scripps Research Institute. Effective June 12, 2012, we entered into a license agreement with The Scripps Research Institute, or TSRI, whereby TSRI licensed rights to the company, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalyzed ligation of azides and acetylenes. The rights licensed to us are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, we paid a one-time only, non-refundable license issue fee in the amount of $350,000 which was charged to research and development expense in the second quarter of 2012. Our rights under the agreement are subject to certain customary rights of the U.S. government that arise or result from TSRI’s receipt of research support from the U.S. government.

We are also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, we must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in connection with the achievement of such milestone. Pursuant to the terms of the Optimer Agreement, any payments made to TSRI under this license for territories subject to the Optimer Agreement can be deducted from any sales-based royalty payments due under the Optimer Agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the agreement, we are also required to pay additional fees on royalties, sublicensing and milestone payments if we, an affiliate with TSRI, or a sublicensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

The term of the license agreement (and the period during which we must pay royalties to TSRI in a particular country for a particular product) will end, on a country-by-country and product-by-product basis, at such time as no patent rights licensed from TSRI cover a particular product in the particular country.

TSRI may terminate the agreement in the event (i) we fail to cure any non-payment or default on our indemnity or insurance obligations, (ii) we declare insolvency or bankruptcy, (iii) if we are convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of any products licensed under the agreement, (iv) we fail to cure any underreporting or underpayment by a certain amount in any 12-month period, or (v) we fail to cure any default on any other obligation under the agreement.  We may terminate the agreement with or without cause upon written notice.  In the event of such termination, (i) all licenses granted to us will terminate except in the case of any sublicensee that was not the cause of the termination, is not in default on its obligations under its sublicense, and that pays any unpaid amounts owed by us under the agreement with respect to the sublicense, and (ii) we may complete any work in progress and sell any completed inventory on hand for a period of time after termination.

Toyama Chemical Co., Ltd.  On May 8, 2013, we entered into a license agreement with Toyama whereby we licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin as its sole API for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama has granted us certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

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As consideration for the execution of the license agreement, Toyama paid us an upfront payment of $10.0 million. Toyama is also obligated to pay us up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent, development and commercial milestones. The first of these milestones was achieved in the third quarter of 2014 for which we received a payment of $10.0 million from Toyama. In March 2015, we recognized a $10.0 million milestone from Toyama based on the Japan Patent Office issuing a Decision of Allowance for our patent covering certain crystal forms of solithromycin in Japan, which payment was received in April 2015. Under the terms of the license agreement, Toyama must also pay us a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances.

The term of the license agreement (and the period during which Toyama must pay royalties under the license agreement) will end, on a product-by-product basis, at the later of: (i) such time as no patent rights under the agreement cover a particular licensed product in Japan; (ii) 15 years after such product is first launched in Japan, or (iii) the first commercial sale in Japan by a third party of a generic equivalent of such licensed product.

Toyama may terminate the license agreement (i) at any time, with or without cause, upon advance notice to us, (ii) upon the occurrence of any serious adverse effect in any human clinical trial of any licensed product that would significantly impact the long term commercial viability of a licensed product in Japan, or (iii) upon our failure to obtain the issuance of certain patents or file for U.S. regulatory approvals by certain dates, or to continue certain key clinical trials. We may terminate the license agreement if Toyama or any of its sublicensees is convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of a licensed product, or upon Toyama’s failure to (i) initiate certain clinical trials in Japan by certain dates, (ii) obtain regulatory approval in Japan within a certain period of completing certain clinical trials in Japan, (iii) launch and commercialize approved licensed products in Japan within a certain period of approval, (iv) use commercially reasonable efforts to market and sell licensed products, or (v) achieve expected benchmarks for net sales of licensed products. Either party may terminate the license agreement due to the other party’s insolvency or for uncured material breach.

As part of the license agreement, Toyama and we also entered into a supply agreement, whereby we will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in Phase 1 and Phase 2 clinical trials in Japan. Pursuant to the supply agreement, Toyama will pay us for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to our costs. All API for solithromycin supplied by us to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from us at prices determined by our manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. The supply agreement will continue until the expiration or termination of the license agreement. Either party may terminate the supply agreement for an uncured material breach or in the event of insolvency of the other party, with Toyama’s right to terminate for our breach subject to certain further conditions in the case of our failure to supply API for solithromycin or clinical supply.

FUJIFILM Finechemicals Co., Ltd. On January 18, 2016, we entered into an API manufacturing and supply agreement with FUJIFILM Finechemicals Co., Ltd., or FFFC, which will provide us with solithromycin in sufficient quantities and at reasonable prices to help ensure we meet our obligation under the May 8, 2013 supply agreement with Toyama. We will use reasonable efforts to ensure that the solithromycin supplied by FFFC is for use as the active pharmaceutical ingredient in a human drug product to be used or sold in Japan.

No later than the eighth day of each calendar month, we will submit to FFFC a projection of the anticipated volume of solithromycin that we will order for the next designated period (as set forth in the agreement) (or, if earlier, the final calendar month of the current term). Several months of each forecast are binding and the remaining months are non-binding, provided that the quantity of solithromycin ordered for any month is between designated percentages of the quantity specified in the initial forecast and between designated percentages of the most recent previous forecast. We are subject to a minimum purchase obligation for a designated number of years after the successful completion of the manufacturing facility and validation studies by FFFC.

The price of each shipment of solithromycin will be equal to the total number of kilograms in such shipment multiplied by the per-kilogram transfer price as set forth in the agreement.

For the term of the agreement plus an additional five years or until the expiration of the patents identified in the agreement, FFFC is prohibited from supplying, selling or distributing solithromycin to, or enabling the manufacture of solithromycin by, any third party for any purpose. We are not precluded from developing one or more alternative or additional sources of solithromycin.

The agreement’s initial term runs until December 16, 2025. After the end of the initial term, and at the end of each year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate within a designated period of time prior to the expiration of the term, in which case the agreement will terminate at the end of such term. The parties may at any time terminate the agreement by mutual written consent. Each party has the right to terminate the

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agreement immediately if there is a product failure, the other party becomes involved in bankruptcy, insolvency or similar proceedings or materially breaches the agreement and such breach remains uncured for a period of time following notice of the breach. A violation by us of the minimum purchase obligation is considered a material breach. We have the right to terminate the agreement upon written notice if there is a supply failure. We also may terminate in the event that FFFC cannot provide us with solithromycin for more than a designated period of time. Upon termination, any unfulfilled binding portion of the forecast must be delivered by FFFC and paid for by us. We may elect to purchase the remaining inventory of FFFC’s solithromycin and any remaining raw materials.

Biomedical Advanced Research and Development Authority.  On May 24, 2013 we entered into an agreement with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services, or BARDA, for the evaluation and development of solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia.

The agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $17.7 million, and four option work segments that BARDA may request in its sole discretion. If all four option segments are requested, the cumulative value of the agreement would be approximately $58 million. Three of the options are cost plus fixed fee arrangements, while the second to last option is a cost sharing arrangement for which we would be responsible for a designated portion of the costs associated with that work segment. The estimated period of performance for the base performance segment is May 24, 2013 through February 29, 2016, which represents an extension in late April 2015 by six months from the original May 2015 date and a further extension in November 2016 by three months, both at our request to allow more time to deliver the completed work product; these extensions will not increase the cost of the work to be performed under the base performance segment nor do they change any other terms or provisions of the BARDA contract, including timeframes for the other work options. BARDA exercised the second option in November 2014.  The value of the second option work segment is approximately $16.0 million and the estimated period of performance is November 14, 2014 through November 30, 2016. If all option segments are requested, this estimated period of performance would be extended until approximately May 23, 2018.  

Activities being conducted for the base performance include, among other things, toxicology studies, pharmacokinetics and pharmacodynamics studies, safety studies, animal model efficacy studies, activities to develop a powder for suspension formulation, and select chemical synthesis activities. In the event that BARDA requests one or more of the option work segments, optional activities to be conducted would include, among other things, additional efficacy studies, Phase 1 and Phase 2/3 clinical studies, dose determination studies and filing of new drug applications. BARDA may terminate this agreement upon our uncured default in our performance of the agreement or at anytime if the contracting officer determines that it is in the government’s interest to terminate the agreement.

Manufacturing

We do not own or operate manufacturing facilities for the production of solithromycin, Taksta or other product candidates that we might develop, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, API and finished products for our pre-clinical research and clinical trials. We employ internal resources and third-party consultants to manage our manufacturing contractors.

To date, we have ordered pre-clinical and clinical supplies for solithromycin under short-term contract orders. We employ the services of Wockhardt Limited, or Wockhardt, in Mumbai, India, to produce solithromycin API and finished oral and IV product. We do not have long-term contracts for the commercial supply of solithromycin. If solithromycin is approved for treatment of CABP by the FDA, we intend to enter into agreements with third-party contract manufacturers for the commercial production of solithromycin. We believe there are a number of qualified manufacturers who could supply clinical and commercial quantities of solithromycin.

As part of our commercialization plans for the anticipated launch of solithromycin for the treatment of community acquired bacterial pneumonia, or CABP, we have been developing various supply sources for the active pharmaceutical ingredient, or API, of solithromycin. As part of this process, we have modified our arrangement with Wockhardt Limited, or Wockhardt, with whom we had entered into an API Manufacturing and Supply Agreement as of January 30, 2013, referred to as the 2013 Agreement. Under the 2013 Agreement, we were obligated to purchase from Wockhardt at least 70% of our total annual purchases of solithromycin in any year for clinical or commercial use in humans. Pursuant to the agreement, we were allowed to develop alternative sources of solithromycin for the other 30% of our annual needs. The 2013 Agreement’s initial term ran until December 31, 2019.

As part of the modification of our arrangement with Wockhardt, we have entered into a new three-year API Manufacturing and Supply Agreement, pursuant to which we will submit to Wockhardt a projection of the anticipated volume of solithromycin we will order in each of the next 12 months. The first three months of the forecast are binding and we must order between a certain range of the three-month volume projected. The remainder of our projection is nonbinding and there is no minimum order. Reasonably in advance of placing a purchase order, we will work in good faith with Wockhardt to agree in writing on the purchase price of the solithromycin to be supplied under such order. We have the right to terminate the agreement at any time after we or one of our

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licensees decides to cease clinical development or sales of solithromycin upon 90 days notice to Wockhardt. Due to the lack of any minimum purchase requirement, other than a three month supply, and due to our ability to terminate the agreement on notice, we believe that our non-cancelable obligations under this agreement are not material. The no minimum purchase requirement, negotiable purchase price and terminable upon notice terms of this agreement are similar to the terms for the other supply sources for API for solithromycin that we have developed to date.

In connection with the entry into the supply agreement with Wockhardt discussed above, we and Wockhardt mutually terminated the 2013 Agreement effective as of November 4, 2015.

On January 18, 2016, we entered into an API manufacturing and supply agreement with FFFC, which will provide us with solithromycin in sufficient quantities and at reasonable prices to help ensure we meet our obligation under the May 8, 2013 supply agreement with Toyama. No later than the eighth day of each calendar month, we will submit to FFFC a projection of the anticipated volume of solithromycin that we will order for the next designated period (as set forth in the agreement) (or, if earlier, the final calendar month of the current term). Several months of each forecast are binding and the remaining months are non-binding, provided that the quantity of solithromycin ordered for any month is between designated percentages of the quantity specified in the initial forecast and between designated percentages of the most recent previous forecast. We are subject to a minimum purchase obligation for a designated number of years after the successful completion of the manufacturing facility and validation studies by FFFC. The price of each shipment of solithromycin will be equal to the total number of kilograms in such shipment multiplied by the per-kilogram transfer price as set forth in the agreement. For the term of the agreement plus an additional five years or until the expiration of the patents identified in the agreement, FFFC is prohibited from supplying, selling or distributing solithromycin to, or enabling the manufacture of solithromycin by, any third party for any purpose. We are not precluded from developing one or more alternative or additional sources of solithromycin. The agreement’s initial term runs until December 16, 2025. After the end of the initial term, and at the end of each year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate within a designated period of time prior to the expiration of the term, in which case the agreement will terminate at the end of such term.

On January 29, 2016, our wholly owned subsidiary, Cempra Pharmaceuticals, Inc., entered into an Option and License Agreement with Macrolide Pharmaceuticals, Inc., or MP, pursuant to which MP granted us an exclusive option to license certain of MP’s patents and know-how involving macrolides, including specifically novel methods of synthesizing solithromycin (the “Compound”).  Under the agreement, we will support research at MP focused on developing a novel, cost-competitive manufacturing approach to solithromycin. The option will run until the later to occur of (i) the earlier of (a) the date that we first obtain FDA approval for any product incorporating the Compound as an active pharmaceutical ingredient, or API, or (b) January 27, 2019, or (ii) the date that is six months after the earlier of (a) MP’s satisfaction of certain milestones, or (b) our termination of MP’s obligations under the evaluation program.  Under the evaluation program called for in the agreement, MP will conduct research activities for the manufacture of the Compound, which activities we will evaluate to determine whether to exercise the option to license.

We have a long term supply arrangement with Ercros, S.A., or Ercros, in Madrid, Spain, in which Ercros agrees to exclusively supply us with fusidic acid in the U.S., and we agree to exclusively obtain our supply of fusidic acid for commercial sale from Ercros, subject to a right to develop a second source for limited supply quantities to produce fusidic acid for Taksta. The supply agreement with Ercros will continue until at least March 2029, subject to earlier termination for our uncured material breach or our bankruptcy or insolvency. In addition, the exclusivity restrictions on Ercros are subject to termination for our failure to file with the FDA an NDA for the sale of Taksta prior to December 31, 2017. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use. Fusidic acid is difficult to produce at these purity levels because of its complex fermentation process. We believe the only other manufacturer of fusidic acid with sufficient purity is Leo Laboratories, which is using its manufacturing capacity for its own needs. We have yet to identify a viable alternate source of fusidic acid but continue to research alternatives. We intend to utilize a third-party manufacturer to produce the finished dosing formulation of Taksta.

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In July 2013, we entered into a development and supply agreement with Hospira Worldwide Inc., or Hospira, whereby Hospira will assist us in the development of a reconstitutable form of solithromycin (in glass vials) for IV administration and will provide our supply of that product for development purposes. If we receive regulatory approval for such form of solithromycin, we will purchase from Hospira at least 80% of our requirements of such product for commercial sale as a human pharmaceutical product in the U.S., the European Union, Canada, Norway and Switzerland (the “Territory”). We will pay one price for clinical supplies of solithromycin and another price for commercial supplies. Beginning in 2014, Hospira may increase the price of the product for commercial use once annually by the increase in Hospira’s manufacture of the product or the annual increase of a specified inflation index. The per unit price of our commercial supply will decrease if we purchase specified volumes in a given year. Additionally, we will pay Hospira certain development fees, with specified amounts becoming payable at defined stages of the development of the product.  Each year during which we sell the product, we are required to purchase a specified minimum percentage of our forecasted amount of product required for that year. We must supply Hospira at no cost the active pharmaceutical ingredient for the product. If Hospira fails to supply a specified percentage of product, we may purchase all or a portion of our requirements of the product from an alternative supplier until Hospira remedies the supply failure.  Unless earlier terminated, the agreement will remain in effect until the end of the third year after the first commercial sale of the product in the Territory. Thereafter, the agreement will automatically renew for an indefinite period. Beginning one year after the first commercial sale of the product in the Territory, either party may terminate the agreement at will upon 24 months’ notice. Prior to the completion of the development of the product or the submission of an application for regulatory approval in the Territory, either party may terminate the development project or the agreement if such party determines the development of intravenous solithromycin under the agreement is not clinically, commercially or technically feasible.

Government Regulation and Product Approval

Government authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record keeping, promotion, advertising, distribution, marketing and export and import of products such as those we are developing. solithromycin, Taksta and any other antibiotic product candidate that we develop must be approved by the FDA through the NDA process before they may be legally marketed in the U.S.

U.S. Drug Development Process

In the U.S., the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a drug may be marketed in the U.S. generally involves the following:

 

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Completion of pre-clinical laboratory tests, animal studies and formulation studies according to good laboratory practices, or GLP, or other applicable regulations;

 

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Submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may begin;

 

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Performance of adequate and well-controlled human clinical trials according to the FDA’s current good clinical practices, or cGCP, to establish the safety and efficacy of the proposed drug for its intended use;

 

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Submission to the FDA of an NDA for a new drug;

 

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Satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the drug is produced to assess compliance with the FDA’s cGMPs to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and

 

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FDA review and approval of the NDA.

The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources and approvals are inherently uncertain.

Before testing any compounds with potential therapeutic value in humans, the drug candidate enters the pre-clinical testing stage. Pre-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. The sponsor must submit the results of the pre-clinical tests, together with manufacturing information, analytical data and any available clinical data or literature, to the FDA as part of the IND. The sponsor will also include a protocol detailing, among other things, the

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objectives of the first phase of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns or non-compliance.

Each new clinical protocol must be submitted to the IND for FDA review, and to an Institutional Review Board, or IRB, for approval. Protocols detail, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety. An IRB is charged with protecting the welfare and rights of study participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

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Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

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Phase 2. The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

 

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Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling.

Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

U.S. Review and Approval Processes

The results of product development, pre-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances.

In addition, under the Pediatric Research Equity Act of 2003, or PREA, which was reauthorized under the Food and Drug Administration Amendments Act of 2007, or FDAAA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.

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The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be re-submitted with the additional information. The re-submitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether the manufacturing controls are adequate to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. During the drug approval process, the FDA also will determine whether a risk evaluation and mitigation strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes REMS is needed and notifies the drug sponsor of this decision, the sponsor of the application must submit a proposed REMS; the FDA will not approve a marketing application without a REMS, if required.

In addition, under the FDAAA, all NCEs prior to approval are referred to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions, unless the Secretary of Health and Human Services provides in the action letter on the drug application a summary of the reasons why it was not referred. An advisory committee is a panel of experts who provide advice and recommendations when requested by the FDA on matters of importance that come before the agency. The FDA is not bound by the recommendation of an advisory committee but it generally follows such recommendations.

The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA will issue a complete response letter if the agency decides not to approve the NDA in its present form. The complete response letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require Phase 4 testing which involves post-approval clinical trials designed to further assess a drug safety and effectiveness after NDA approval and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.

Under the Orphan Drug Act, special incentives exist for companies to develop products for rare diseases or conditions, which are defined to include those diseases or conditions that affect fewer than 200,000 people in the U.S. Companies must submit their request that the FDA grant a drug orphan designation prior to submission of an NDA or biologic license application for that product. Products designated as orphan drugs are eligible for special grant funding for research and development, FDA assistance with the review of clinical trial protocols, potential tax credits for research, reduced filing fees for marketing applications, and a special seven-year period of market exclusivity after marketing approval. Orphan drug exclusivity prevents FDA approval of applications by others for the same drug and the designated orphan disease or condition. The FDA may approve a subsequent application from another entity if the FDA determines that the application is for a different drug or different use, or if the FDA determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug to meet the public’s need. A grant of an orphan designation is not a guarantee that a product will be approved. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity will prevent another entity or a similar drug from receiving approval for the same or other uses.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. Subject to certain limitations, the patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, up to a total of five years. Only one patent applicable to an approved drug is eligible for the extension. The application for such extension must be submitted

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prior to the expiration of the patent and within 60 days of the drug’s approval. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the future, we may apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications of other companies seeking to reference another company’s NDA. The FDCA provides a five-year period of non-patent data exclusivity within the U.S. to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the pre-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric exclusivity is another type of exclusivity in the U.S. Pediatric exclusivity, if granted, provides an additional six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. The current pediatric exclusivity provision was reauthorized in September 2007 as part of the FDAAA.

We believe that both solithromycin and Taksta will benefit from the marketing incentives of the GAIN Act, enacted in 2012. This legislation rewards a Qualified Infectious Disease Product with five years of additional exclusivity (added to the five years of Hatch-Waxman exclusivity) when its NDA is approved. Pursuant to the GAIN Act, in 2013, the FDA designated each of the oral and IV formulations of solithromycin as a QIDP for the indication of CABP, which was designated a qualified infections disease pathogen by the FDA in 2013.  The NDA also receives priority review, which reduces the standard 12-month review time by four months. The FDA has designated each of oral and intravenous solithromycin as a QIDP for the indication of CABP, and also has designated the oral form as a QIDP for the treatment of uncomplicated gonococcal infections.

Fusidic acid has been approved for oral use in many countries, including Western countries, outside the U.S. for more than three decades to treat ABSSSI, as well as other types of infections caused by staphylococci and ß-hemolytic streptococci, but it has never been approved in the U.S. This is because of the general lack of intellectual property protection that was available for the molecule until recently. Significant patent protection expired in the 1980’s, and antibiotics were not eligible for Hatch-Waxman Act data exclusivity, which affords a five-year period of data exclusivity upon approval of a new chemical entity, or NCE, in the U.S. In November 1997, the FDA Modernization Act, or FDAMA, repealed section 507 of the Federal, Food, Drug, and Cosmetic Act, or FDCA, under which marketing applications for antibiotics were previously approved. This law made antibiotics, like other drugs, eligible for Hatch-Waxman Act exclusivity. However, fusidate/fusidic acid was the subject of a marketing application received by FDA under Section 507 of the FDCA before November 21, 1997, the effective date of FDAMA. Antibiotics for which marketing applications were submitted before that date, even if the application was not approved, as was the case with fusidic acid, are known as “old” antibiotics. Old antibiotics were not eligible for the exclusivity provisions afforded by FDAMA. Consequently, although fusidic acid had never been approved in the U.S., as an old antibiotic, it was not eligible for the five-year NCE exclusivity. The passage of Public Law (PL) 110-379 on October 8, 2008, allowed old antibiotics such as fusidic acid to obtain five-year NCE exclusivity upon NDA approval, thereby making development of fusidic acid for the U.S. feasible. In response to our question based on unclear language in PL 110-379 regarding other exclusivities, we received notification from the FDA in January 2011 that old antibiotics such as fusidic acid would also be eligible for orphan and pediatric exclusivity. In October 2013, the FDA granted orphan drug designation for fusidic acid for the treatment of PJI. In December 2013, PJI was classified as a very rare disease by the National Institutes of Health, or NIH.   In addition, the GAIN Act extends the NCE data exclusivity period for QIDPs such as fusidic acid from five years to 10 years. Finally, our loading dose regimen, which received a U.S. patent in May 2013, provides patent protection to 2029.

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Post-Approval Requirements

Any drug product for which we receive FDA approval will be subject to continuing regulation by the FDA, including, among other things, record keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, cGMP requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems (quality or safety) occur after the product reaches the market. Later discovery of previously unknown quality, safety, or other problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.

In addition, from time to time, legislation is drafted, introduced and passed in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. For example, in September 2007, the FDAAA was enacted giving the FDA enhanced post-market authority, including the authority to require post-market studies and clinical trials, labeling changes based on new safety information and compliance with a risk evaluation and mitigation strategy. Failure to comply with any requirements under the new law may result in significant penalties. The law also authorized significant civil money penalties for the dissemination of false or misleading direct-to-consumer advertisements and allows the FDA to require companies to submit direct-to-consumer television drug advertisements for FDA review prior to public dissemination. Additionally, the law expanded the clinical trial registry so that sponsors of all clinical trials, except for Phase 1 clinical trials, are required to submit certain clinical trial information for inclusion in the clinical trial registry data bank. In addition to this legislation, the FDA regulations and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.

Other U.S. Health Care Laws and Compliance Requirements

In the U.S., our activities are subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and local governments. For example, sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provisions of the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the Veterans Health Care Act, or VHCA, drug companies are required to offer certain drugs at a reduced price to a number of federal agencies including U.S. Department of Veterans Affairs and U.S. Department of Defense, the Public Health Service and certain private Public Health Service designated entities in order to participate in other federal funding programs including Medicare and Medicaid. Recent legislative changes purport to require that discounted prices be offered for certain U.S. Department of Defense purchases for its TRICARE program via a rebate system. Participation under the VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations.

In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance

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programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities or register their sales representatives, as well as prohibiting pharmacies and other health care entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and prohibiting certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

Foreign Regulation

In addition to regulations in the U.S., we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products to the extent we choose to sell any products outside of the U.S. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

E.U. member states require both regulatory clearances by the national competent authority and a favorable ethics committee opinion prior to the commencement of a clinical trial. Under the E.U. regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, conducted by the EMA, provides for the grant of a single marketing authorization that is valid for all E.U. member states. The centralized procedure is compulsory for medicines produced by certain biotechnological processes, products with a new active substance indicated for the treatment of certain diseases such as neurodegenerative disorder or diabetes and products designated as orphan medicinal products and optional for those products which are highly innovative or for which a centralized process is in the interest of patients. The decentralized procedure of approval provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state, known as the reference member state. Under the decentralized approval procedure, an applicant submits an application, or dossier, and related materials (draft summary of product characteristics, draft labeling and package leaflet) to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether to approve the assessment report and related materials. If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all member states.

We have presented to and received feedback from several E.U. member countries regarding our plan to submit an MAA to the EMA.  As part of this, our PIP has been accepted by the EMA for the suspension formulation of solithromycin to treat CABP in pediatric patients.  

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend considerably on the availability of reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain FDA approvals. Our products may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

In 2003, the U.S. government enacted legislation providing a prescription drug benefit for Medicare recipients, which became effective at the beginning of 2006. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, to obtain payments under this program, we would be required to sell products to Medicare recipients through prescription drug plans operating pursuant to this legislation. These plans will likely negotiate discounted prices for our products. In March 2010, the Patient Protection and Affordable Care Act became law, which substantially changed the way healthcare is financed by both governmental and private insurers. We anticipate that this legislation will result in additional downward pressure on coverage and the price that we receive for any approved product. Federal, state and local governments in the U.S. continue to consider legislation to limit the growth of health care costs, including the cost of prescription drugs. Future legislation could limit payments for pharmaceuticals such as the drug candidates that we are developing.

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Different pricing and reimbursement schemes exist in other countries. In the European Community, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of our particular drug products to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

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

Corporate History and Information

We were formed as Cempra Holdings, LLC, a limited liability company under the laws of the State of Delaware, on May 16, 2008. Cempra Holdings, LLC was formed in connection with a reorganization whereby the stockholders of Cempra Pharmaceuticals, Inc., a corporation formed under the laws of the State of Delaware on November 18, 2005, exchanged their shares of Cempra Pharmaceuticals, Inc. stock for shares of Cempra Holdings, LLC, pursuant to a merger of a subsidiary of Cempra Holdings, LLC with and into Cempra Pharmaceuticals, Inc., as a result of which Cempra Pharmaceuticals, Inc. became a wholly owned subsidiary of Cempra Holdings, LLC.

On February 2, 2012, Cempra Holdings, LLC converted from a Delaware limited liability company to a Delaware corporation and was renamed Cempra, Inc. As a result of the corporate conversion, the holders of common shares of Cempra Holdings, LLC became holders of shares of common stock of Cempra, Inc. and the holders of preferred shares of Cempra Holdings, LLC became holders of shares of common stock of Cempra, Inc. Holders of options to purchase common shares of Cempra Holdings, LLC became holders of options to purchase shares of common stock of Cempra, Inc. Holders of notes convertible into preferred shares of Cempra Holdings, LLC and associated warrants exercisable for preferred shares of Cempra Holdings, LLC became holders of shares of common stock and warrants to purchase shares of common stock of Cempra, Inc.

We have two subsidiaries, Cempra Pharmaceuticals, Inc. and CEM-102 Pharmaceuticals, Inc. Our primary executive offices are located at 6320 Quadrangle Drive, Suite 360, Chapel Hill, NC 27517-8149, and our telephone number is (919) 313-6601. Our website address is http://www.cempra.com. The information contained in, or that can be accessed through, our website is not part of this report.

We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after such material is electronically filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC, but other information on our website is not incorporated into this report. The SEC maintains an Internet site that contains these reports at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Employees

As of February 18, 2016, we had 93 employees, 25 of whom hold Ph.D. or M.D. degrees. Fifty-five of our employees were engaged in research and development activities, twenty-seven were engaged in support administration, including finance, and eleven in business development and commercial activities. None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

 

 

 

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Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.

Risks Related to our Business

We are heavily dependent on the success of solithromycin and, to a lesser extent, Taksta, which are still under clinical development. The FDA and foreign regulatory approval process is lengthy, time consuming and inherently unpredictable and if we are ultimately unable to obtain regulatory approval for solithromycin or Taksta our business will be substantially harmed.

We have no products that have been approved for sale. Our near-term prospects are substantially dependent on our ability to develop and commercialize solithromycin and, to a lesser extent, Taksta. We cannot commercialize, market, or sell either product in the U.S. without FDA approval. FDA approval, if received, is at least one year away. To commercialize solithromycin outside of the U.S., we would need applicable foreign regulatory approval. The clinical development of solithromycin and Taksta is susceptible to the risk of failure inherent in any stage of drug development, including failure to achieve efficacy across a broad population of patients, the occurrence of severe adverse events and the FDA or any applicable foreign regulatory authority determining that a drug product is not approvable.

The process required to obtain approval for commercialization from the FDA and similar foreign authorities is unpredictable, and typically takes many years following the commencement of clinical trials depending on numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to obtain regulatory approval may change during the course of a product’s clinical development. We may fail to obtain regulatory approval for solithromycin, Taksta or any other product candidates for many reasons, including the following:

 

·

we may not be able to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for any indication;

 

·

the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval, and/or the FDA may require additional, expensive trials;

 

·

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

 

·

we may not be able to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

·

we may not be able to demonstrate that a product candidate is non-inferior or superior to the current standard of care, future competitive therapies in development, or over placebo in any indications for which the FDA requires a placebo-controlled trial;

 

·

the data collected from clinical trials of any product candidates that we develop may not be sufficient to support the submission of a new drug application, or NDA, or other submission or to obtain regulatory approval in the U.S. or elsewhere;

 

·

while we have a pathway for solithromycin as a treatment for CABP based on an end of Phase 2 meeting, there can be no assurance that the FDA will not change its position and require additional trials based on results;

 

·

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval;

 

·

the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;

 

·

the FDA or comparable foreign regulatory authorities may not accept data generated at our clinical trial sites;

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·

the FDA or comparable foreign regulatory authorities may fail to approve the clinical practices of the third-party clinical research organizations, or CROs, we use for clinical trials; and 

 

·

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators enter into agreements for clinical and commercial supplies.

This lengthy approval process as well as the unpredictability of future clinical trial results may prevent us from obtaining regulatory approval to market solithromycin, Taksta or any future product candidates, which would significantly harm our business, financial condition, results of operations and prospects.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive, can take many years to complete and its outcome is highly uncertain. Failure can occur at any time during the clinical trial process due to inadequate performance of a drug or inadequate adherence by patients or investigators to clinical trial protocols. Pursuant to FDA guidelines, new drugs must show non-inferiority or superiority to existing approved treatments. We have conducted our solithromycin for CABP clinical trials pursuant to proposed guidelines published by the FDA in 2011 for drugs being developed for the treatment of CABP (these guidelines were revised in 2014, which would materially alter our planned clinical development).  We believe we have completed all the clinical trials necessary to support the NDA for solithromycin for CABP and have a sufficient database of both efficacy and safety.  However, the FDA may disagree with our assessment and may require additional clinical data to support approval. Any additional trials, for whatever reason, would add to the time and cost of solithromycin’s development.

In addition, the results of pre-clinical studies and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in Phase 2 and Phase 3 clinical trials despite achieving successful results in earlier stage trials. The failure to obtain positive results in any of our Phase 2 or Phase 3 clinical trials could seriously impair the development prospects, and even prevent regulatory approval, of solithromycin or Taksta or any candidate in our existing proprietary macrolide library.

Further, regulatory approvals in foreign countries are subject to risks associated with different regulatory requirements, including clinical trial guidance, and regulatory schemes, including, for example, multiple country regulation within the European Union.  As a result, clinical trial results and other regulatory processes undertaken by us within the U.S. may not be accepted in foreign countries, which would add to the cost and time to develop our product candidates in foreign countries.

We have no experience as a company in bringing a drug to regulatory approval or to the market.

As a company, we have never obtained regulatory approval for, or commercialized, a drug. It is possible that the FDA may refuse to accept any or all of our planned NDAs for substantive review or may conclude after review of our data that our application is insufficient to obtain regulatory approval of solithromycin, Taksta or any future product candidates. If the FDA does not accept or approve any or all of our planned NDAs, it may require that we conduct additional clinical, pre-clinical or manufacturing validation studies, which may be costly, and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA required studies, approval of any NDA or application that we submit may be significantly delayed, possibly for several years, or may require us to expend more resources than we have planned or have available. Any delay in obtaining, or an inability to obtain, regulatory approvals would prevent us from commercializing solithromycin or Taksta, generating revenues and achieving and sustaining profitability. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDA we submit. If any of these outcomes occur, we may be forced to abandon our planned NDAs for either solithromycin or Taksta or both, which would materially adversely affect our business and could potentially cause us to cease operations. We face similar risks for any approval in a foreign jurisdiction.

Our estimates of the market for and commercialization of solithromycin as a treatment for CABP or for any other product candidate may be inaccurate or vary significantly over the potential market size.

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

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In addition, our estimates regarding the timing and amount of acceptance of any product candidate, and the pricing achievable for any product candidate may prove incorrect.  Further, our plans for commercialization of any product candidate may not materialize in the time or manner we anticipate. Finally, we may underestimate the demand for a product candidate, which could lead to lack of commercial quantities when needed and result in market backlash against the product candidate.  Any of these occurrences could have a material adverse effect on our plans for commercialization of and the generation of any revenue from any product candidate.  

We might not successfully differentiate solithromycin from telithromycin (Ketek®), a macrolide found to cause severe side effects.

Ketek is a macrolide antibiotic that the FDA approved in 2004 for the treatment of multi-drug resistant pneumococci and other CABP bacteria. Soon after release, however, Ketek was found to cause reversible visual disturbances, exacerbate myasthenia gravis (a neurological disorder characterized by improper muscle regulation) and cause liver failure. These effects led the FDA to require the drug label for Ketek to include a strengthened warning section regarding specific drug-related adverse events and contributed to Ketek being withdrawn in 2007 for the treatment of all infections other than CABP. Through ongoing research, we have developed multiple ways to differentiate solithromycin from Ketek. Our research suggests these side effects may be caused by the pyridine moiety, which forms a part of the structure of Ketek. We have demonstrated that pyridine inhibits the action of nicotinic acid acetylcholine receptors that could result in the side effects caused by Ketek. Solithromycin and older generation macrolides, including azithromycin and clarithromycin, that have been widely marketed do not have a pyridine component. If our research is proven to be incorrect or if solithromycin demonstrates similar side effects, the FDA might not approve solithromycin, or, if already approved, might withdraw approval, require us to conduct additional clinical trials, or require warnings on product labeling (which could limit the available market for solithromycin), any of which would significantly harm our ability to generate revenues from solithromycin.

Because of the Ketek experience, the macrolide class is likely to be carefully scrutinized by the FDA. Another ketolide, cethromycin (Restanza) being developed by Advanced Life Sciences, received a complete response letter from the FDA in 2009, and it appears that development of the drug has not continued. The FDA attributed its rejection to the company’s trial design, which enrolled patients with less severe CABP and was conducted prior to the release of the FDA’s updated trial design guidance. Also, the FDA placed a partial clinical hold on one of our Phase 1 clinical trials for oral solithromycin over concern about possible toxicity related to solithromycin, and subsequently converted the partial clinical hold into a full clinical hold in April 2010. At the time, the FDA had concerns that solithromycin, as a fluoroketolide, may have similar toxicity issues as Ketek. While we addressed the FDA’s concerns and were allowed to proceed with the trial, which we successfully completed, we believe that the clinical hold indicates the possible scrutiny that the FDA may apply to our planned NDA for solithromycin due to the Ketek experience.

Even if the FDA approves solithromycin, physicians may not be convinced that solithromycin is a safe and effective treatment for CABP and other infections. If physicians believe solithromycin demonstrates characteristics similar to Ketek, they might not prescribe solithromycin, which would negatively affect our revenues.

The results of either of our ongoing studies of the effectiveness of solithromycin as a treatment for NASH and COPD or any other study or trial involving solithromycin, if negative, could have an adverse effect on FDA and other regulatory approval of solithromycin as a treatment for CABP as well our commercialization efforts for solithromycin and market acceptance of the same.

If the results of our ongoing studies of solithromycin in NASH and COPD or in any other study or trial should be negative, it could have an adverse effect on the planned NDA and potential approval of solithromycin as a treatment for CABP, including a delay in or lack of approval.  If after approval were received, negative results in any study or trial of solithromycin could have a negative effect on our commercialization and market acceptance of solithromycin, including downward pressure on pricing.

We are building our own marketing and sales organization for solithromycin for CABP, but have no experience as a company in marketing drug products. If we are unable to successfully establish our own marketing and sales capabilities, or enter into agreements with third parties to market and sell our products after they are approved, we may not be able to generate product revenues.

We are in the process of building our U.S. sales organization for the marketing, sales and distribution of solithromycin as a treatment for CABP. Currently, we expect to need a sales force of between 200 and 300 to be able to address high prescribers but we are in the process of finalizing our analysis and might determine we need more sales representatives to be successful. In addition, we do not plan to hire the sales representatives until after FDA approval of the NDA for solithromycin. The establishment and development of our own sales force will be expensive and time consuming and could delay the planned launch of solithromycin, and we cannot be certain that we will be able to successfully develop this capability. In such event, we may seek one or more licensing partners to handle some or all of the sales and marketing of solithromycin for CABP in the U.S. In order to successfully commercialize any other products, we must develop these capabilities on our own or make arrangements with third parties for the marketing, sales and distribution of our products. There also may be certain markets within the U.S. for solithromycin for which we may seek a co-promotion arrangement. If we are not successful in building our own sales force, we may not be able to enter into

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arrangements with third parties to sell solithromycin or Taksta on favorable terms or at all. We would not have control over a third-party sales organization and would be dependent on that organization for successfully selling any of our products.  Such a third-party organization may not devote the necessary manpower, time, resources or priority to our products, which would negatively impact our results of operations.  In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize solithromycin, Taksta or any other product candidates that we develop, which would negatively impact our ability to generate product revenues. Further, whether we commercialize products on our own or rely on a third party to do so, our ability to generate revenue will be dependent on the effectiveness of the sales force. In addition, to the extent we rely on third parties to commercialize our approved products, we will likely receive less revenues than if we commercialized these products ourselves.

The commercial success of solithromycin, Taksta and any other product candidates that we develop, if approved in the future, will depend upon attaining significant market acceptance of these products among physicians and payors.

As a company, we have never commercialized a product candidate for any indication. Even if solithromycin, Taksta or any other product candidate that we develop is approved by the appropriate regulatory authorities for marketing and sale, physicians may not prescribe our approved products, which would prevent us from generating revenues or becoming profitable. Efforts to educate the medical community and third party payors on the benefits of our product candidates may require significant resources and may not be successful. If a product candidate is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. Market acceptance of solithromycin, Taksta and any other product candidates that we develop by physicians, patients and payors will depend on a number of factors, many of which are beyond our control, including:

 

·

the clinical indications for which the product is approved;

 

·

acceptance by physicians and payors of each product as a safe and effective treatment;

 

·

the cost of treatment in relation to alternative treatments, including numerous generic drug products, such as azithromycin, levofloxacin and vancomycin;

 

·

the relative convenience and ease of administration of solithromycin in the treatment of CABP and Taksta in the treatment of ABSSSI and/or refractory bone and joint infections;

 

·

the availability and efficacy of competitive drugs;

 

·

our ability to recruit and retain a sales force, if necessary;

 

·

the effectiveness of our or any third-party partner’s sales force and marketing efforts;

 

·

our ability to forecast demand and maintain sufficient supplies of our drug products;

 

·

our ability to manufacture or obtain commercial quantities of our drug products;

 

·

the strength of our sales and marketing and distribution support;

 

·

the effectiveness of our marketing and advertising campaigns;

 

·

our ability to deliver our products on a timely basis;

 

·

the extent to which bacteria develop resistance to any antibiotic product candidate that we develop, thereby limiting its efficacy in treating or managing infections;

 

·

our ability to establish and maintain pricing sufficient to realize a meaningful return on our investment;

 

·

the extent to which the product is approved for inclusion on formularies of hospitals and managed care organizations;

 

·

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

 

·

the availability of adequate reimbursement by third parties, such as insurance companies and other health care payors, and/or by government health care programs, including Medicare and Medicaid;

 

·

limitations or warnings contained in a product’s FDA-approved labeling;

 

·

prevalence and severity of adverse side effects;

 

·

adverse publicity about a product or favorable publicity about competitive products; and

 

·

potential product liability claims.

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Even if the medical community accepts that solithromycin and Taksta are safe and efficacious for their approved indications, physicians may not immediately be receptive to the use or may be slow to adopt solithromycin as an accepted treatment for CABP and Taksta as an accepted treatment for ABSSSI and/or bone and joint infections. While we believe each of solithromycin and Taksta has significant advantages, we cannot assure you that any labeling approved by the FDA will permit us to promote solithromycin and Taksta as being superior to competing products. If either or both of solithromycin or Taksta are approved but do not achieve an adequate level of acceptance by physicians and payors, we may not generate sufficient or any revenues from these products and we may not become profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of solithromycin and Taksta may require significant resources and may never be successful.

The successful commercialization of our product candidates will depend on the pricing we are able to achieve for our product candidates, both inside and outside the U.S.  

Our ability to successfully commercialize our product candidates will be dependent on whether we can obtain adequate pricing for any particular product candidate. Currently, we expect that pricing of solithromycin for CABP would be in the hundreds of dollars, similar to pricing used in previous antibiotics that were widely adopted in the outpatient setting. Pricing may be substantially dependent on our ability to obtain reimbursement from third party payors, both in the U.S. and in foreign countries.  Outside the U.S., certain countries, including a number of European Union members, set prices and reimbursement for pharmaceutical products, or medicinal products as they are commonly referred to in the E.U., with limited participation from those marketing the products. We cannot be sure that any prices and reimbursement will be acceptable to us or our strategic commercial partners. If the regulatory authorities in these foreign jurisdictions set prices or reimbursement that are not commercially attractive for us or our strategic commercial partners, our revenues from sales by us or our collaborators, and the potential profitability of our product candidates, in those countries would be negatively affected. Further, through contractual or other arrangements, the price we may be able to obtain in foreign countries may be dependent on the price we can achieve in the U.S.

Our dependence upon third parties for the manufacture and supply of solithromycin, Taksta and any future product candidates may cause delays in, or prevent us from, successfully developing and commercializing our products.

We do not currently have nor do we plan to build the infrastructure or capability internally to manufacture solithromycin or Taksta for use in the conduct of our clinical trials or for commercial supply. We have contracted with companies in India, Japan and North America to provide commercial supplies of solithromycin; we do not have any minimum purchase obligations under these agreements and we may terminate any of any of these agreements on notice. Similarly, in July 2013, we contracted with Hospira Worldwide, Inc., or Hospira (now owned by Pfizer), to provide us with clinical and commercial supplies of the intravenous form of solithromycin. Under the terms of the agreement, if Hospira fails to supply a specified percentage of product to us, we may seek an alternate supplier. We aim to have several sources of oral and IV solithromycin in several locations worldwide and to that end we are working on developing at least one additional manufacturing source in North America for IV solithromycin.  However, if any of these entities were unable to provide our needed supply of oral or intravenous solithromycin, we may not be able to negotiate an agreement with another source on acceptable terms or in a timely fashion, if at all.  

We employ the services of Ercros S.A., or Ercros, to produce Taksta’s API and intend to utilize a third-party manufacturer to produce the finished dosing formulation of Taksta. We have a long-term exclusive supply arrangement with Ercros to produce the fusidic acid used in Taksta in which Ercros agrees to exclusively supply us with fusidic acid in the U.S., and we agree to obtain our supply of fusidic acid for commercial sale exclusively from Ercros, subject to a right to develop a second source for limited supply quantities. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use. The second manufacturer is not available as a supplier to us. Fusidic acid is difficult to produce at these purity levels because of its complex fermentation process. As such, there are underlying risks associated with its manufacture, which could include cost overruns, new impurities, difficulties in scaling up or reproducing manufacturing processes and lack of timely availability of raw materials. We have yet to identify a viable second source of fusidic acid but continue to research alternatives. If Ercros cannot supply sufficient quantities of fusidic acid to make clinical supplies of Taksta, it would harm our ability to develop Taksta. We may not be able to locate a second manufacturer or, if we do, we may not be able to negotiate an agreement on favorable terms, if at all.

In addition, regulatory requirements could pose barriers to the manufacture of our API and finished product for solithromycin and Taksta. Our third-party manufacturers are required to comply with the FDA’s current good manufacturing practices, or cGMP, regulations. As a result, the facilities used by Ercros and any of our current and future manufacturers to manufacture solithromycin and Taksta must be approved by the FDA after we submit our NDA to the FDA and before approval of solithromycin and Taksta. Similar regulations apply to manufacturers of our products for use or sale in foreign countries. We do not control the manufacturing process of solithromycin or Taksta and are completely dependent on these third-party manufacturing partners for compliance with the applicable regulatory requirements for the manufacture of solithromycin and Taksta API and their finished product. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are unable to comply with the FDA’s cGMP requirements, or otherwise are not approved

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for the commercial manufacture of solithromycin or Taksta, we may need to find alternative manufacturing facilities, which would result in significant delays of up to several years in obtaining approval for solithromycin or Taksta. In addition, our manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure by any of our manufacturers to comply with applicable cGMP regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply, and criminal prosecutions, any of which could have a material adverse impact on our business, financial condition, results of operations or prospects.

Finally, we also could experience manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreement between us. If Hospira, Ercros, or any alternate supplier of API or finished drug product for solithromycin or Taksta experiences any significant difficulties in its respective manufacturing processes, does not comply with the terms of the agreement between us or does not devote sufficient time, energy and care to providing our manufacturing needs, we could experience significant interruptions in the supply of solithromycin or Taksta, which could impair our ability to supply solithromycin or Taksta at the levels required for our clinical trials and commercialization and prevent or delay their successful development and commercialization. On June 20, 2012, the FDA issued a Warning Letter to Ercros, citing cGMP violations at the Ercros facility that manufactures the API for Taksta. Although some of the alleged violations may be related to products other than fusidic acid, the FDA’s issuance of a Warning Letter signifies Agency concerns with cGMP compliance at the Ercros facility. We believe Ercros is actively working with FDA to resolve these issues. However, if Ercros is unable to satisfactorily address the FDA’s concerns in a timely manner, the FDA may take further enforcement actions that could significantly jeopardize our supply of Taksta API for use in clinical trials or later commercialization. For example, the FDA might issue an import alert, which could preclude us from importing Taksta API manufactured at the Ercros facility. Particularly in light of the unavailability of alternative suppliers for Taksta API, this could significantly impact our ability to develop and commercialize Taksta.

Similarly, one of two facilities in India at which Wockhardt Limited produces API for solithromycin was audited by the Medicines and Healthcare Products Regulatory Agency, or MHRA, the regulatory agency of Great Britain, which took issue with Wockhardt’s practices at the plant and as a result the capsules of solithromycin produced at that plant could not be imported into Europe.  We had product on hand and also have reformulated capsules, but the incident caused a several month delay in having drug available for our Phase 3 oral solithromycin trials in Europe, which, however, was planned to be in advance of the onset of flu season in Europe so the delay had minimal impact on the trial timeline.  However, similar experiences could occur with more significant impact on our development program for solithromycin.

In addition, our reliance on foreign suppliers poses risks due to possible shipping delays, import restrictions and foreign regulatory regimes.  Finally, any manufacturing facility is at risk of natural or man-made disaster, which could significantly reduce our clinical and commercial supplies of drug product.

These same risks apply to procuring comparator API or other comparator supplies needed for clinical trials in which we may compare our product candidates to currently approved drugs.

A failure to maintain optimal inventory levels to meet commercial demand for any product that may be approved, including solithromycin, could harm our reputation and subject us to financial losses.

Because accurate product planning is necessary to ensure that we maintain optimal inventory levels for any product candidate that might be approved, including solithromycin, significant differences between our estimates and judgments and future actual demand for any approved products and the shelf life of inventory may result in significant charges for excess inventory or purchase commitments in the future. If we are required to recognize charges for excess inventories, such charges could have a material adverse effect on our financial condition and results of operations. Our ability to maintain optimal inventory levels also depends on the performance of third-party contract manufacturers. If our manufacturers are unsuccessful in either obtaining raw materials, if we are unable to release inventory on a timely and consistent basis, if we fail to maintain an adequate level of product inventory, if inventory is destroyed or damaged, or if our inventory reaches its expiration date, patients might not have access to our products, sales could be lost, our reputation and brands could be harmed, and physicians may be less likely to prescribe our products in the future, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are obligated to provide Toyama with clinical and commercial supply of solithromycin at prices determined by our manufacturing costs, which could negatively impact our results of operations in the event we cannot provide those supplies on our own and have to purchase them outside of our contracted suppliers.

Pursuant to the terms of our supply agreement with Toyama, we are the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in Phase 1 and Phase 2 clinical trials in Japan. Pursuant to the supply agreement, Toyama will pay us for such clinical supply of finished product and all supplies of API for solithromycin for any purpose,

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other than the manufacture of products for commercial sale in Japan, at prices equal to our costs. All API for solithromycin supplied by us to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from us at prices determined by our manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. The supply agreement will continue until the expiration or termination of the license agreement. In the event we cannot provide Toyama’s supplies under our own contracts with manufactures, we would have to either reduce our own supply of solithromycin or purchase it outside of our contracted manufacturers, which would negatively impact our results of operations. In January 2016, we entered into an API supply agreement with Fujifilm to provide a supply source in Japan to meet our obligations under the supply agreement with Toyama, but circumstances could occur that might render this source insufficient for our purposes.

If we fail to obtain additional financing, we may not be able to complete the development and commercialization of solithromycin or Taksta.

We need substantial amounts of cash to complete the clinical development and commercialization of solithromycin and Taksta, especially the planned commercial launch of solithromycin for CABP. During the fourth quarter of 2015, we completed the second of two pivotal clinical trials for solithromycin for the treatment of CABP and began our rolling submission to the FDA of the NDA for solithromycin for the treatment of CABP in the first quarter of 2016.  In light of these milestones, during the fourth quarter of 2015 we engaged, and throughout 2016 we now expect to engage, in certain additional clinical and commercial activities, and accelerate others, including building inventory of solithromycin in preparation for commercial launch in the U.S. (which prior to approval will be expensed as research and development expense in accordance with GAAP) and supporting certain investigator-led studies of solithromycin in additional indications.  In addition, we expect that in 2016 we will begin to engage in additional sales and marketing preparation activities focused on solithromycin for the treatment of CABP, including hiring additional commercial management personnel, engaging in pricing research and other market research, and to begin building our specialty antibiotic sales force.  Based on our current assumptions, including, without limitation, the activities and initiatives described above, our estimated research and development expense in the first three quarters of 2016 is expected to be, meaningfully higher than our quarterly research and development expense in 2015. By the fourth quarter of 2016 we expect that research and development expense will decline to a level similar to 2015 levels, excluding the potential payment of any milestones tied to FDA approval.  We also expect that our general and administrative expenses will increase beginning in the first quarter of 2016 and, based on our current assumptions, will increase significantly in the second half of 2016 following the completion of the NDA submission for solithromycin for CABP. 

Based on our current assumptions, we expect that our cash and equivalents at December 31, 2015, and including the proceeds of our January 2016 common stock public financing, will enable us to fund our operating expenses and capital expenditure into the second quarter of 2017, including the completion of the NDA submission for solithromycin for CABP, the completion of our Phase 3 trial for solithromycin for the treatment of gonorrhea and the cost of preparing for and the initial launch of solithromycin in the U.S.  However, we have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect.  Moreover, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. For example, our clinical trials may encounter technical, enrollment or other issues that could cause our development costs to increase more than we expect and we may be required to conduct additional trials requested by the FDA that could increase our costs significantly. We would also need to raise additional funds sooner if we choose to initiate clinical trials more rapidly than we presently anticipate or if we elect to conduct additional trials for alternate indications. In any event, the costs to develop and launch solithromycin and to develop Taksta beyond our completed Phase 2 trial will be significant and we will need to raise additional capital to support the ongoing commercialization of solithromycin, any development for other indications for solithromycin, as well as to continue development activities to obtain regulatory approval of and to commercialize Taksta.  

We may raise additional capital from the issuance of equity and/or debt securities, collaborations with third parties, out-licensing of rights to our product candidates and other means, or a combination of any of the above. Securing additional financing, however, will require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from our day-to-day activities, which may adversely affect our management’s ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

 

·

significantly delay, scale back or discontinue the development or commercialization of solithromycin and/or Taksta;

 

·

seek collaborators for solithromycin and/or Taksta at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; and

 

·

relinquish or license, potentially on unfavorable terms, our rights to solithromycin and/or Taksta that we otherwise would seek to develop or commercialize ourselves.

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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing discovery, development and commercialization efforts, and our ability to generate revenues and achieve or sustain profitability will be substantially harmed.

Future legislation, and/or regulations and policies adopted by the FDA or other regulatory health authorities may increase the time and cost required for us to conduct and complete clinical trials for solithromycin, Taksta or other product candidates that we develop.

The FDA has established regulations, guidelines and policies to govern the drug development and approval process, as have foreign regulatory authorities. Any change in regulatory requirements due to the adoption by the FDA and/or foreign regulatory authorities of new legislation, regulations, or policies may require us to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols and/or clinical trial applications or the need for new ones, may significantly impact the cost, timing and completion of the clinical trials.

In particular, drugs being tested and/or developed for the treatment of CABP, including solithromycin, are subject to proposed guidelines published by the FDA in 2009 (with new guidelines proposed in November 2011 and again in 2014). We have conducted our clinical trials to date according to the standards established by the 2009 and 2011 proposed guidelines.  While we expected the FDA to revise the proposed guidelines for CABP, we could not delay development of solithromycin and began the Phase 3 oral trial in December 2012 and the Phase 3 IV-to-oral trial in December 2013, which was before the FDA issued revised proposed guidelines in 2014.  While the 2014 proposed guidelines did not impose any new requirements on our Phase 3 trials, the FDA could further revise the guidelines. Any new proposed guidelines may require us to conduct additional clinical trials, re-run previously completed trials to gather data at different endpoints or according to different protocols, or otherwise materially alter our planned clinical development of solithromycin. Any such regulatory change may materially increase our costs, delay the completion of our clinical trials, and otherwise impact our ability to obtain regulatory approval for our product candidate. Furthermore, the FDA’s guidance documents are not binding on the FDA. As a result, the FDA may not accept the results of clinical trials we conduct even if they were to follow the FDA’s most recent guidance.

In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process, particularly in our areas of focus, may significantly delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other requirements.

Bacteria might develop resistance to solithromycin or Taksta, which would decrease the efficacy and commercial viability of that product.

Drug resistance is primarily caused by the genetic mutation of bacteria resulting from sub-optimal exposure to antibiotics where the drug does not kill all of the bacteria. While antibiotics have been developed to treat many of the most common infections, the extent and duration of their use worldwide has resulted in new mutated strains of bacteria resistant to current treatments. We are developing solithromycin and Taksta to treat patients infected with drug-resistant bacteria. With respect to solithromycin, which is a next generation macrolide, resistance issues associated with earlier generations of macrolides have led to a decrease in their use for treating serious respiratory tract infections such as CABP. If physicians, rightly or wrongly, associate the resistance issues of earlier generation macrolides with solithromycin, physicians might not prescribe solithromycin for treating a broad range of infections. Similarly, resistance to fusidic acid has developed outside the U.S. Our  in vitro  studies have shown that the reason for resistance to the oral formulation is that it was not dosed optimally. We believe that overuse of topical formulations of fusidic acid also contributed to development of resistance outside the U.S. If Taksta is improperly dosed, or if our studies incorrectly attributed an increase in resistance to inappropriate dosing, bacteria might develop resistance to Taksta in the U.S. If these bacteria develop resistance to solithromycin or Taksta, the efficacy of these products would decline, which would negatively affect our potential to generate revenues from these products.

Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales as currently contemplated.

We may experience delays in clinical trials of our product candidates. Our planned clinical trials might not begin on time, may be interrupted or delayed once commenced, might need to be redesigned, might not enroll a sufficient number of patients or might not be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:

 

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delays in obtaining regulatory approval to commence a trial;

 

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imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;

 

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delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;

 

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

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·

delays in identifying, recruiting and training suitable clinical investigators; 

 

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delays in recruiting suitable patients to participate in a trial;

 

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delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

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

 

·

time required to add new sites;

 

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delays in obtaining sufficient supplies of clinical trial materials, including suitable active pharmaceutical ingredient, or API, whether of our product candidates or comparator drugs; or

 

·

delays resulting from negative or equivocal findings of the data safety monitoring board, or DSMB, for a trial.

We were subject to such a delay in 2008 when the FDA placed a partial clinical hold on our Phase 2 clinical trial for oral solithromycin over concern about possible toxicity related to solithromycin. The FDA converted the partial clinical hold into a full clinical hold in April 2010. At the time, the FDA had concerns that solithromycin, as a fluoroketolide, may have similar toxicity issues as Ketek. While we addressed the FDA’s concerns and were allowed to proceed with the trial, which we successfully completed, the trial was delayed by approximately 12 months. We could experience one or more such delays with other trials.

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 patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, 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. In addition, the timing of our clinical trials may be dependent on a specific disease seasonality, as, for example, were our trials for solithromycin, which were dependent on the onset, degree and timing of the CABP season, which tends to occur in the winter months in each hemisphere. We could encounter delays in our ongoing and future clinical trials of solithromycin (for indications other than CABP), Taksta or any other product if participating physician investigators encounter unresolved ethical issues associated with enrolling patients in clinical trials of solithromycin (for indications others than CABP), Taksta or any other product in lieu of prescribing approved antibiotics that have established safety and efficacy profiles. Any of these delays in completing our clinical trials could increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues.

We may be required to suspend or discontinue clinical trials due to adverse side effects or other safety risks that could preclude approval of solithromycin or Taksta or any of our future product candidates.

Our clinical trials may be suspended or terminated at any time for a number of reasons. A clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, presentation of unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of the DSMB or the IRB for a clinical trial. An IRB may also suspend or terminate our clinical trials for failure to protect patient safety or patient rights. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe the clinical trials are not being conducted in accordance with applicable regulatory requirements or present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any product candidates that we are developing, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues, if at all, from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, financial condition, results of operations and prospects significantly.

We have completed a Phase 2 clinical trial of Taksta for the treatment of ABSSSI, and we began a Phase 2 trial of Taksta for the treatment of prosthetic joint infections but there is no guarantee that the results of our planned Phase 3 trial for ABSSSI or any other trial we conduct will be consistent with the results of the Phase 2 trial or any other trials conducted to date or will demonstrate safety and efficacy to the satisfaction of the FDA.

While we have completed a Phase 2 clinical trial comparing Taksta to linezolid for the treatment of ABSSSI the results of our completed Phase 2 trial for the treatment of ABSSSI were not powered to show, and did not show, statistical non-inferiority. Comparisons to results from other reported clinical trials, including our completed Phase 2 clinical trial for the treatment of ABSSSI, can assist in evaluating the potential efficacy of Taksta for the treatment of ABSSSI and refractory bone and joint infections; however, there are many factors that affect the outcome for patients in clinical trials, some of which are not apparent in published reports, and results from different trials often cannot be reliably compared. Therefore, there is no assurance that the results of any other trials we

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conduct for Taksta in the treatment of ABSSSI or refractory bone and joint infections will demonstrate safety and efficacy comparable to the results of trials conducted to date or will be sufficient to attain FDA approval.

In December 2012, we initiated a Phase 2 clinical trial of Taksta for the treatment of prosthetic joint infections. In October 2013, the FDA granted orphan drug designation to Taksta for the treatment of PJI and we will work to have orphan drug designation granted for Taksta for refractory bone and joint infections. There is no published FDA guidance for clinical trials for PJI or for bone and joint infections. Further, we need to determine the impact of the orphan drug designation for PJI and possible designation for bone and joint infections on our clinical development plan and the Phase 2 clinical trial data to support an NDA.  In the Phase 2 PJI trial we noted that although oral fusidic acid plus rifampin had similar efficacy to intravenous vancomycin, rifampin significantly diminished the blood levels of fusidic acid. We concluded the Phase 2 trial prior to completion because we demonstrated that fusidic acid in combination with rifampin was generally comparable to intravenous standard of care antibiotics. We believe that the proper dosing of fusidic acid is without rifampin and that the loading dose and maintenance dose that we had tested in the ABSSSI Phase 2 trial was optimal for a Phase 3 refractory bone and joint infection trial. We have met with the FDA to discuss the development plan for Taksta for ABSSSI and bone and joint infections. Based on that meeting, our plan involves testing Taksta for long-term suppressive therapy of refractory bone and joint infections, including PJI. Also based on our discussions with the FDA, in November 2015, we began a Phase 3 trial for the treatment of ABSSSI and intend to begin a refractory bone and joint infection study in early 2016 to determine Taksta’s safety and efficacy. At the completion of the ABSSSI trial and the refractory bone and joint infection study, we will discuss with the FDA to determine if we have adequate data to support approval for both indications or if a second ABSSSI study is needed.  However, the FDA is not bound by our discussion and if the FDA believes that the plan is inadequate, it could delay or prevent our ability to receive regulatory approval or commercialize Taksta for the treatment of ABSSSI and refractory bone and joint infections.

Taksta is not well absorbed in animals, which could impair our ability to obtain FDA approval.

As required by FDA regulations, we conducted pre-clinical studies of Taksta to determine its level of absorption in animals. The studies indicated that Taksta is not very well absorbed and has a short half-life in animals, resulting in minimum exposure levels which limited the ability to test Taksta in animal models. Fusidic acid, the API in Taksta, has been used for several decades in humans outside the U.S. and we believe there is sufficient human clinical trial data for Taksta to overcome the lack of absorption in animal studies. Despite this human data, and while all of our pre-clinical tests were benign and indicated no safety or tolerability issues, our limited ability to test Taksta in animal models may adversely affect our ability to obtain FDA approval.

Even if the FDA approves solithromycin for the treatment of CABP and Taksta for the treatment of ABSSSI and bone and joint infections, adverse effects discovered after approval could adversely affect the market for those products.

If we obtain regulatory approval for solithromycin, Taksta or any other product candidate that we develop, and we or others later discover that our products cause adverse effects, a number of potentially significant negative consequences could result, including:

 

·

regulatory authorities may withdraw their approval of the product;

 

·

regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

 

·

we may be required to change the way the product is administered, conduct additional clinical studies, implement a risk evaluation and mitigation strategy, or REMS, or restrict the distribution of the product;

 

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we could be sued and held liable for harm caused to patients and our liability insurance may not adequately cover those claims; and

 

·

our reputation may suffer.

Any of these events could prevent us from maintaining market acceptance of the affected product candidate and could substantially increase the costs of, or prevent altogether, the commercialization of our product candidates.

We continue to have negative cash flows from operations since inception and might not be able to generate sufficient cash to service our existing indebtedness to Comerica Bank, the level of which indebtedness could have a material adverse effect on our business, financial condition, results of operations and prospects.

On July 10, 2015, we entered into a loan and security agreement with Comerica Bank, or Comerica, pursuant to which we could and did borrow $20.0 million in a term loan and, if the FDA approves our planned NDA, for solithromycin, we may also borrow, under a revolver, an aggregate amount equal to the lesser of (i) up to 75% of our eligible inventory and 80% of eligible accounts receivable or (ii) $10.0 million. If the FDA approves our planned NDA for solithromycin, we may convert the term loan to the revolver, in which event the revolver would have a maximum amount available to us of $25.0 million. Amounts borrowed under the term loan may be repaid and reborrowed at any time without penalty or premium. The term loan is interest-only through April 30, 2016, followed by an amortization period of 36 months of equal monthly payments of principal plus interest, beginning on May 1, 2016 and continuing on the same day of each month thereafter until paid in full. Amounts available to be borrowed under the revolver

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may also be repaid and reborrowed at any time without penalty or premium prior to December 31, 2017, at which time all advances under the revolver shall be immediately due and payable in full. Our ability to make payments on this indebtedness depends on our ability to generate cash in the future. We expect to experience negative cash flow for the foreseeable future as we fund our operations and capital expenditures. There can be no assurance that we will be in a position to repay this indebtedness when due or obtain extensions of the maturity date. We anticipate that we will need to secure additional funding in order for us to be able to satisfy our obligations when due. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If that additional funding involves the sale of equity securities or convertible securities, it would result in the issuance of additional shares of our capital stock, which would result in dilution to our stockholders.

Moreover, this level of debt could have important consequences to you as an investor in our securities. For example, it could:

 

·

make it more difficult for us to satisfy our obligations with respect to payments owed to our licensors;

 

·

limit our flexibility in planning for the development, clinical testing, approval and marketing of our products;

 

·

place us at a competitive disadvantage compared to any of our competitors that are less leveraged than we are;

 

·

increase our vulnerability to both general and industry-specific adverse economic conditions; and

 

·

limit our ability to obtain additional funds.

In addition, the loan is secured by substantially all of our personal property assets except our intellectual property and our stock in our subsidiaries. In the event we fail to make timely payments or breach any of our representations or other obligations in the agreement, or upon any circumstance or occurrence that has a material adverse effect on the loan collateral, our business operations, properties, assets, prospects or condition, or our ability to perform our obligations under the loan agreement, Comerica Bank can declare the loan in default. Upon an event of default, the loan principal and accrued interest would become immediately due and payable and Comerica Bank would be entitled to enforce its security interest in our assets.

The addition of further debt to our current debt levels could make it more difficult for us to repay our indebtedness and meet our other obligations and would intensify the leverage-related risks that we now face.

A substantial portion of our future revenues may be dependent upon our strategic partnerships.

Our success will depend in significant part on our ability to attract and maintain strategic partners and strategic relationships to support the development and commercialization of our product candidates. We currently expect that a substantial portion of our future revenues may be dependent upon our strategic partnership with Toyama and our ability to enter into strategic relationships in other territories. Under the license agreement we entered into in May 2013 with Toyama, Toyama has significant development and commercialization responsibilities with respect to solithromycin in Japan. If Toyama or any of our other strategic partners were to terminate their agreements with us, fail to meet their obligations or otherwise decrease their level of efforts, allocation of resources or other commitments under these agreements with us, our future revenues could be negatively impacted and the development and commercialization of product candidates could be negatively impacted and/or interrupted. In addition, if some or any of the development, regulatory and commercial milestones are not achieved or if certain net sales thresholds are not achieved, as set forth in the Toyama agreement or any agreements with other strategic partners, we will not fully realize the expected economic benefits of those agreements. Further, the achievement of certain of the milestones under our partnership agreements will depend on factors that are outside of our control and most are not expected to be achieved for several years, if at all. Any failure to successfully maintain our strategic partnership agreements could materially and adversely affect our ability to generate revenues.

Strategic partners may cease to pursue their own development of our product candidates or cease funding and other activities required by our agreements with those strategic partners for reasons beyond our control.

In May 2013, we entered into a license agreement with Toyama under which Toyama is to initiate certain clinical trials, obtain regulatory approval and launch and commercialize approved licensed products in Japan. If the results of Toyama’s studies are disappointing or inconclusive, if Toyama were to breach its obligations under the license agreement, or if Toyama decides to cease developing solithromycin for any reason, the development of solithromycin in Japan could be materially harmed, and any negative clinical results could materially harm our own development efforts for solithromycin.  In addition, the loss of milestone payments from Toyama called for under the license agreement could have a material adverse impact on our capital resources and ability to conduct our operations. These same risks will apply to any other strategic partnership into which we may enter in the future.

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We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in obtaining, or may ultimately not be able to obtain, regulatory approval for or commercialize solithromycin, Taksta or any other product candidates.

We have relied, and plan to continue to rely, on various CROs to recruit patients, monitor and manage data for our on-going clinical programs for solithromycin and Taksta, as well as for the execution of our pre-clinical and non-clinical studies. We control only certain aspects of our CROs’ activities; nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA may require us to perform additional clinical trials before deciding whether to approve our product candidates. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, to evaluate the safety and effectiveness of solithromycin and Taksta to a statistically significant degree our clinical trials will require an adequately large number of test subjects. Any clinical trial that a CRO conducts abroad on our behalf is subject to similar regulation. Accordingly, if our CROs fail to comply with these regulations or recruit a sufficient number of patients, we may have to repeat clinical trials, which would delay the regulatory approval process.

In addition, our CROs are not our employees and we cannot control whether or not they devote sufficient time and resources to our on-going clinical, non-clinical and pre-clinical programs. Our CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize solithromycin, Taksta or any other product candidates that we seek to develop. As a result, our financial results and the commercial prospects for solithromycin, Taksta or any other product candidates that we seek to develop would be harmed, our costs could increase and our ability to generate revenues could be delayed or ended.

We typically engage one or more CROs on a project-by-project basis for each study or trial. While we have developed and plan to maintain our relationships with CROs that we have previously engaged, we also expect to enter into agreements with other CROs to obtain additional resources and expertise in an attempt to accelerate our progress with regard to on-going clinical, non-clinical and pre-clinical programs and, specifically, the compilation of clinical trial data for submission with an NDA for each of solithromycin and Taksta. Switching or entering into new relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Although we try to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition, results of operations or prospects.

The timing of the milestone, support and royalty payments we are required to make to Optimer Pharmaceuticals, Inc., The Scripps Research Institute and Macrolides Pharmaceuticals, Inc. is uncertain and could adversely affect our cash flows and results of operations.

In March 2006, we entered into a Collaborative Research and Development and License Agreement with  Optimer Pharmaceuticals, Inc., or Optimer (now owned by Merck), pursuant to which we acquired an exclusive license to certain patent applications and other intellectual property related to a series of compounds, including solithromycin, to develop and commercialize licensed products outside of the Association of South East Asian Nations, or ASEAN, countries (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand and Vietnam). We have an obligation to make additional payments upon achievement of specified development, regulatory and commercialization milestones. The aggregate amount of such milestone payments we may need to pay is based in part on the number of products developed under the agreement. The aggregate amount (including our two milestone payments to date) would be $27.5 million if four products are developed and gain FDA approval. Additional limited milestone payments would be due if we develop more than four products. We will also pay tiered mid-single-digit royalties based on the amount of annual net sales of solithromycin (or related licensed compounds), if and when approved by regulatory authorities. We have already paid a $0.5 million milestone in 2010 and a $1.0 million milestone in 2012 upon completion of our discussions with the FDA for the protocol for our pivotal Phase 3 trial for oral solithromycin. Optimer can elect to receive certain milestone payments in cash or in shares of our common stock having an equivalent fair market value. The timing of our achievement of these events and corresponding milestone payments to Optimer is subject to factors relating to the clinical and regulatory development and commercialization of solithromycin (or related licensed compounds), many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek

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funds to meet these obligations on terms unfavorable to us. If we were unable to make a milestone payment, we would be in material breach of the agreement, in which event Optimer could terminate the agreement, which would result in the loss of our rights to develop and commercialize solithromycin, which would seriously harm our ability to generate revenues or achieve profitability.

We also must pay The Scripps Research Institute various milestone and annual payments, which, while significantly lower than amounts potentially due to Optimer, could become due when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us.

In January 2016, we entered into an Option and License Agreement with Macrolide Pharmaceuticals, Inc., or MP, pursuant to which MP granted us an exclusive option to license certain of MP’s patents and know-how involving macrolides, including specifically novel methods of synthesizing solithromycin (the “Compound”).  Under the agreement, we will support research at MP focused on developing a novel, cost-competitive manufacturing approach to solithromycin. Under the evaluation program called for in the agreement, MP will conduct research activities for the manufacture of the Compound, which activities we will evaluate to determine whether to exercise the option to license. For conducting the evaluation program, we will pay MP the expected reasonable, documented, direct compensation-related costs of employees and advisors necessary to conduct MP’s portion of the evaluation program in the aggregate amount of $1.5 million, which we will pay in 18 equal consecutive non-refundable, non-creditable monthly installments of $83,333, beginning with the first monthly anniversary of entry into the agreement. Further, we will pay MP up to an aggregate of $1.0 million upon the satisfaction of certain performance milestones.  The timing of the milestone payments to MP are subject to factors relating to the Compound, which are beyond our control. Further, the monthly support payments or a milestone payment, if triggered, could be due when we do not have the cash on hand to make such payment, which could require us to seek funds to meet these obligations on terms unfavorable to us. If we were unable to make a support or milestone payment, we would be in material breach of the agreement, in which event MP could terminate the agreement, which would result in the loss of our rights to the synthetic version of solithromycin, which could harm our ability to reduce production costs and develop an alternate supply of solithromycin, which could adversely affect our business and results of operations.

Our loan agreement with Comerica Bank contains covenants that impose restrictions on our operations that may adversely impact the operation of our business.

Our loan agreement with Comerica Bank contains customary restrictive covenants, including restrictions on our ability to incur additional debt, transfer or place a lien or security interest on our assets, merge with or acquire other companies, redeem any shares of our capital stock or pay cash dividends to our stockholders. These restrictions may inhibit our ability to conduct our business and to provide distributions to our stockholders. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants than the Comerica Bank loan.

If approved, solithromycin and Taksta will face significant competition from branded and generic antibiotics and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. If solithromycin or Taksta is approved, we will have competitors both in the U.S. and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies. Many of these companies have greater financial and other resources, such as larger research and development staffs and more experienced marketing and manufacturing organizations. As a result, these companies may obtain regulatory approval more rapidly and may be more effective in selling and marketing their products. They also may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make solithromycin, Taksta or any other product candidates that we develop obsolete. As a result, our competitors may succeed in commercializing antibiotics before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.

If approved, both solithromycin and Taksta will face competition from currently commercially available antibiotics, as well as any competing products that may be developed in the future. In July 2012, the United States Congress passed, and President Obama signed, the Food and Drug Administration Safety and Innovation Act, which included the Generating Antibiotic Incentives Now Act, or the GAIN Act. The GAIN Act is intended to provide incentives for the development of new, qualified infectious disease products. These incentives might result in more competition in the market for new antibiotics and might cause pharmaceutical and biotechnology companies with more resources than we have to shift their efforts towards the development of products that could be competitive with our product candidates. Existing approved products that will compete with solithromycin include azithromycin (sold under the brand name Zithromax ®  by Pfizer Inc. and available as a generic), clarithromycin (sold under the brand name Biaxin ®  by Abbott Laboratories and available as a generic), moxifloxacin (sold under the brand name Avelox ®  by Bayer AG), levofloxacin (sold under the brand name Levaquin by Johnson & Johnson and available as a generic), linezolid (sold under the brand name Zyvox by Pfizer Inc.), ceftriaxone (sold under the brand name Rocephin ®  by F. Hoffman-La Roche Ltd and available as a generic) and ceftaroline (sold under the brand name Teflaro ®  by Forest Laboratories, Inc.). There are two drugs in development to treat CABP:

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omadacycline, being developed by Paratek Pharmaceuticals, and lefamulin, being developed by Nabriva Therapeutics.  Existing approved products that will compete with Taksta include vancomycin (available as a generic), linezolid (sold under the brand name Zyvox by Pfizer Inc.), daptomycin (sold under the brand name Cubicin by Cubist Pharmaceuticals, Inc., which was acquired by Merck), quinupristin/dalfopristin (sold under the brand name Synercid ®  by Sanofi-Aventis and Monarch Pharmaceuticals, Inc.), tigecycline (sold under the brand name Tygacil®  by Pfizer Inc.), telavancin (sold under the brand name Vibativ ®  by Theravance, Inc. and Astellas Pharma, Inc.) and ceftaroline (sold under the brand name Teflaro by Forest Laboratories, Inc., now Allergan). Several antibiotics have been approved by the FDA in the last two years. Dalbavancin (Dalvance) and ceftazidime-avibactam (Avycaz) for Allergan, ceftolozane-tazobactam (Zerbaxa) and tedizolid (Sivextro) for Merck, and oritavancin (Orbactiv) for The Medicines Company. None of these approvals are for CABP. Omadacycline (Paratek Pharmaceuticals) and lefamulin (Nabriva Therapeutics) are both expected to be pursued as a possible treatment for ABSSSI and other indications. Generic antibiotics are typically sold at lower prices than branded antibiotics and are generally preferred by managed care providers of health services.

If we are unable to demonstrate the advantages of solithromycin or Taksta over competing drugs and drug candidates, we will not be able to successfully commercialize solithromycin or Taksta and our results of operations will suffer.

Reimbursement may not be available for solithromycin, Taksta or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of solithromycin, Taksta or any other product candidates that we develop will depend on reimbursement policies and may be affected by health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for solithromycin, Taksta or any other product candidates that we develop. Also, we cannot be sure that the amount of reimbursement available, if any, will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize solithromycin, Taksta or any other product candidates that we develop.

Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.  In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the U.S. The goal of PPACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what ultimate impact on federal reimbursement policies this legislation will have in general or on our business specifically, the PPACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of solithromycin or Taksta or any future products. Members of the U.S. Congress and some state legislatures had sought to overturn at least portions of the legislation including those on the mandatory purchase of insurance. However, on June 28, 2012, the United States Supreme Court upheld the constitutionality of these provisions. Members of the U.S. Congress have since proposed a number of legislative initiatives, including possible repeal of the PPACA. We cannot predict the outcome or impact of current proposals or whether new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.

The availability of numerous generic antibiotics at lower prices than branded antibiotics, such as solithromycin or Taksta if either were approved for commercial introduction, may also substantially reduce the likelihood of reimbursement for such products. We expect to experience pricing pressures in connection with the sale of solithromycin, Taksta and any other products that we develop, due to the trend toward managed health care, the increasing influence of health maintenance organizations and additional legislative proposals. If we fail to successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends in large part on our ability to attract and retain highly qualified managerial, scientific, medical and sales and marketing personnel. In order to induce valuable employees to remain with us, we have provided stock options that vest over time. The value to employees of stock options

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will be significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to counteract more lucrative offers from other companies.

Our scientific and commercial team has expertise in many different aspects of drug discovery and development and in selling and marketing antibiotics in both the inpatient and outpatient markets. We conduct our operations at our facility in Chapel Hill, North Carolina, which is part of the Research Triangle consisting of Raleigh, Durham and Chapel Hill. This region is headquarters to other biopharmaceutical companies and many academic and research institutions and, as a result, at any given time there may be a shortage of experienced scientists and medical and sales and marketing personnel. Competition for skilled personnel in our area and elsewhere in the U.S. is very intense and competition for experienced scientists may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

Despite our efforts to retain valuable employees, members of our management, scientific, medical and commercial teams may terminate their employment with us on short notice. While we have an employment agreement with our Chief Executive officer, Prabhavathi Fernandes, we do not have employment agreements with Mark W. Hahn, our Chief Financial Officer, David S. Moore, our Chief Commercial Officer, David W. Oldach, our Chief Medical Officer, or any other employee. As a result, all employees other than Dr. Fernandes are employed on an at-will basis, which means that any of these employees could leave our employment at any time, with or without notice, and may go to work for a competitor. Even though Dr. Fernandes has entered into an employment agreement with us, she could leave at any time, although she would be subject to that agreement’s non-compete provision. While our agreements with Drs. Fernandes and Oldach and Messrs. Hahn and Moore contain non-compete provisions, those provisions do not prevent any of these executives from leaving our employ. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results or financial condition. Our success also depends on our ability to continue to attract, retain and motivate highly skilled scientific and medical personnel.

Other biotechnology and pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories 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 offer. If we are unable to continue to attract and retain high quality personnel, our ability to discover, develop and commercialize drug candidates will be limited.

Whether our current product candidates are successful or not, our future growth will depend on our ability to identify, develop, acquire or in-license products and if we do not successfully identify develop, acquire or in-license additional product candidates or integrate them into our operations, we may have limited growth opportunities.

An important part of our business strategy is to continue to develop a pipeline of product candidates by developing, acquiring or in-licensing products, businesses or technologies that we believe are a strategic fit with our focus developing antibiotics to treat infectious diseases. However, these business activities may entail numerous operational and financial risks, including:

 

·

inability to successfully identity new products candidates;

 

·

difficulty or inability to secure financing to fund development activities for such development, acquisition or in-licensed products or technologies;

 

·

incurrence of substantial debt or dilutive issuances of securities to pay for development, acquisition or in-licensing of new products;

 

·

disruption of our business and diversion of our management’s time and attention;

 

·

higher than expected development, acquisition or in-license and integration costs;

 

·

exposure to unknown liabilities;

 

·

difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

·

inability to retain key employees of any acquired businesses;

 

·

difficulty in managing multiple product development programs; and

 

·

inability to successfully develop new product candidates or clinical failure of new product candidates.

We have limited resources to identify and execute the development, acquisition or in-licensing of products, businesses and technologies and integrate them into our current infrastructure. We may compete with larger pharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may

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devote resources to potential development, acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.

We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

As of February 18, 2016, we had 93 employees. As our development and commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, financial and other resources and, based on our current commercialization strategy, we expect to further expand our employee base for sales and marketing resources in preparation for the commercial launch of solithromycin. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from their day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize solithromycin, Taksta and our other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth in our organization.

Even if we obtain FDA approval of solithromycin, or any other product candidate, we may never obtain approval or commercialize our products outside of the U.S., which would limit our ability to realize their full market potential. If foreign approval is obtained, there are risks in conducting business in international markets.

In order to market solithromycin or any other products outside of the U.S., we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and require additional pre-clinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays.

In addition, our failure to obtain regulatory approval in the U.S. or any foreign country may delay or have negative effects on the process for regulatory approval in other countries. We do not have any product candidates approved for sale in the U.S. or any foreign country and we do not have experience as a company in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in a foreign country or to obtain and maintain required approvals, our potential market for solithromycin or other products will be reduced and our ability to realize the full market potential of our products will be harmed. We do not intend to commercialize Taksta outside the U.S. because of the widespread use of fusidic acid in Europe and Australia.

If approved for commercialization in a foreign country, we intend to enter into agreements with third parties to market solithromycin whenever it may be approved and wherever we have the right to market it. Consequently, we expect that we will be subject to additional risks related to entering into international business relationships, including:

 

·

potentially reduced protection for intellectual property rights;

 

·

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

·

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

·

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

·

compliance with laws for employees traveling abroad;

 

·

foreign taxes, including withholding of payroll taxes;

 

·

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues;

 

·

workforce uncertainty in countries where labor unrest is more common than in the U.S.;

 

·

production shortages resulting from any events affecting API and/or finished drug product supply or manufacturing capabilities abroad;

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·

business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires; and 

 

·

failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act.

These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with federal and state health care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care 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 of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We have incurred significant operating losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of December 31, 2015, we had an accumulated deficit of approximately $319.0 million. We have no product revenues, but do have revenue from contract research and an upfront fee paid in connection with a license agreement. We have funded our operations to date from the private sale of equity and debt, our IPO and public offerings of our common stock. We expect to incur substantial additional losses over the next few years as our commercialization, research, development, pre-clinical testing, and clinical trial activities increase, especially those related to solithromycin and Taksta, and we expect these losses to continue for a period of time after planned launch of solithromycin due to our other development programs and the time needed for market uptake of solithromycin, if any. In addition, we also expect to incur additional costs operating as a public company. The amount of future losses and when, if ever, we will achieve profitability are uncertain.

To raise additional funds to support our business operations, we may issue equity or debt securities. Debt securities could contain restrictive covenants that may adversely impact the operation of our business. The issuance of equity securities or convertible debt securities would result in dilution to our stockholders.

The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. For example, in July 2015, we entered into a loan agreement for $20.0 million with Comerica Bank that contains restrictive covenants, including restrictions on our ability to incur additional debt, transfer or place a lien or security interest on our assets, including our intellectual property, merge with or acquire other companies, redeem any shares of our capital stock or pay cash dividends to our stockholders. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants than the Comerica Bank loan. In addition, the sale of equity securities or convertible debt securities would result in the issuance of additional shares of our capital stock, which would result in dilution to our stockholders.

Our limited operating history makes it difficult to evaluate our business and prospects.

We began operations in 2006. Our operations to date have been limited to financing and staffing our company, conducting product development activities for solithromycin and Taksta, engaging in commercial launch preparation activities for solithromycin, performing research and development with respect to our proprietary macrolide library. We have not yet demonstrated an ability as a company to obtain regulatory approval for or commercialize a product candidate. Consequently, the ability to predict our future performance may not be as accurate as it could be if we had a history of successfully developing and commercializing pharmaceutical products.

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Government funding for any current or future development programs may be withheld, delayed or terminated for reasons beyond our control.

We have an agreement with BARDA pursuant to which we are pursuing the evaluation and development of solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia.  Funding for any government-sponsored or government-funded program is subject to withholding, delay or termination for reasons beyond our control.  Further, funding could be reprioritized due to national or international developments.  Epidemics, such as the recent crisis with Ebola, could cause government sponsors, including BARDA, to shift funding away from our program to address what the sponsor views as more pressing needs. BARDA also has the right to terminate its agreement with us at any time if the contracting officer determines that it is in the government’s interest to do so.

If we market any of our product candidates that receive approval in a manner that violates applicable health care laws, including laws prohibiting off-label promotion, disclosure laws or other similar laws, we may be subject to civil or criminal penalties.

Any regulatory approval of drug products is limited to those specific diseases and indications for which a product is deemed to be safe and effective by the FDA. In addition to the FDA approval required for new formulations, any new indication for an approved product also requires FDA approval. While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved by the FDA. Regulatory authorities in the United States generally do not regulate the behavior of physicians in their choice of treatments, and such off-label uses by healthcare professionals are common. Regulatory authorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. If we are not able to obtain FDA approval for any desired future indications for solithromycin, Taksta or any other product candidates that may be approved, our ability to market and sell such products will be limited and our business may be adversely affected.

In addition, in recent years, several states and localities have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, health care provider payments and other activities. Additionally, the federal government has enacted the Physician Payment Sunshine Act which requires pharmaceutical manufacturers to report annually to the Secretary of Health and Human Services payments or other transfers of value made by that entity to physicians and teaching hospitals. If any of our product candidates are approved, we will be required to report certain information with respect to such payments. We also expect to have to comply with similar reporting obligations in foreign countries. We will need to expend significant efforts to establish, maintain and enhance such reporting systems and processes in order to comply with these regulations. Failure to comply with the reporting requirements would result in significant civil monetary penalties. The Affordable Care Act also includes various provisions designed to strengthen significantly fraud and abuse enforcement, such as increased funding for enforcement efforts and the lowering of the intent requirement of the federal anti-kickback statute and criminal health care fraud statute such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it.

Risks Related to Our Industry

We are subject to extensive and costly government regulation.

Antibiotics, including those we are developing and plan to develop in the future, are subject to extensive and rigorous domestic government regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services, the U.S. Department of Justice, state and local governments and their respective foreign equivalents. The FDA regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical products. If any products we develop are tested or marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation. Government regulation substantially increases the cost and risk of researching, developing, manufacturing and selling products. Our failure to comply with these regulations could result in significant fines or the inability of our product candidates to obtain and maintain regulatory approval, which would have a materially adverse effect on our business, financial condition, results of operations and prospects.

Even if we obtain regulatory approval for solithromycin, Taksta or any of our future product candidates, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

Even if regulatory approval in the U.S. is obtained, the FDA may still 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. For example, the labeling ultimately approved for solithromycin and/or Taksta if any, may include restrictions on use. Solithromycin,

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Taksta or any of our other product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record keeping and reporting of safety and other post-market information. The holder of an approved NDA is subject to obligations to monitor and report adverse events and instances of the failure of a product to meet the specifications in the NDA. Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on ongoing clinical trials. Legal requirements have also been enacted to require disclosure of clinical trial results on publicly available databases.

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 cGMP regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, 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, requiring new warnings or other labeling changes to limit use of the drug, requiring that we conduct additional clinical trials, imposing new monitoring requirements, or requiring that we establish a REMS. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws. The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act. Sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws. If we or our third party collaborators fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·

conduct an investigation into our practices and any alleged violation of law;

 

·

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

 

·

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

 

·

suspend or withdraw regulatory approval;

 

·

suspend any ongoing clinical trials;

 

·

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

 

·

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

 

·

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

 

·

refuse to allow us to enter into supply contracts, including government contracts.

The occurrence of any event or penalty described above may force us to expend significant amounts of time and money and may significantly inhibit our ability to bring to market or continue to market our products and generate revenues. Similar regulations apply in foreign jurisdictions.

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants, and will face an even greater risk if we commercialize solithromycin or Taksta in the U.S. or other additional jurisdictions or if we engage in the clinical testing of new product candidates or commercialize any additional products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

·

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

 

·

loss of revenue;

 

·

injury to our reputation;

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·

withdrawal of clinical trial participants; 

 

·

initiation of investigations by regulators;

 

·

costs to defend the related litigation;

 

·

a diversion of management’s time and our resources;

 

·

substantial monetary awards to trial participants or patients;

 

·

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

 

·

exhaustion of any available insurance and our capital resources;

 

·

the inability to commercialize our products or product candidates; and

 

·

a decline in our stock price.

Although we maintain general liability insurance of up to $2.0 million in the aggregate and clinical trial liability insurance of $10.0 million in the aggregate for each of solithromycin and Taksta, this insurance may not fully cover potential liabilities. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, financial condition, results of operations, and prospects.

If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical, biological and radioactive materials and viruses. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations in the U.S. govern the use, manufacture, storage, handling and disposal of hazardous materials.  We may incur significant additional costs to comply with applicable laws in the future. We also cannot predict the impact on our business of new or amended environmental laws or regulations, or any changes in the way existing and future laws and regulations are interpreted or enforced. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources, and we do not carry liability insurance covering the use of hazardous materials. If we fail to comply with applicable requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs, or capital expenditures for control equipment or operational changes necessary to achieve or maintain compliance. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which adversely affect our business, financial condition, results of operations, and prospects.

Risks Related to our Intellectual Property

Our ability to pursue the development and commercialization of solithromycin depends upon the continuation of our licenses from Optimer and The Scripps Research Institute.

Our agreement with Optimer (now owned by Merck) provides us with a worldwide exclusive license to develop and sell solithromycin outside of ASEAN countries. We are obligated to use our diligent efforts to develop and commercialize products licensed from Optimer. We have other obligations to Optimer under the license related to progress reporting, payment terms and confidentiality. If we are unable to make the required milestone and royalty payments under the agreement, if we do not continue to use diligent efforts to develop and commercialize solithromycin or if we otherwise materially breach the agreement, our rights to develop and commercialize solithromycin would terminate and revert to Optimer. In addition, either we or Optimer may terminate the agreement upon the uncured material breach of the agreement or upon the other party’s bankruptcy. If our agreement with Optimer is terminated by Optimer, we would lose our rights to develop and commercialize solithromycin, which would adversely affect our business, financial condition, results of operations, and prospects.

Our agreement with The Scripps Research Institute, or TSRI, provides us with a license to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalyzed ligation of azides and acetylenes, with exclusive rights as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and non-exclusive rights in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations (which are not included in the license with TSRI). We are obligated to use commercially reasonable efforts to develop and obtain regulatory

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approvals to market and sell one or more licensed products. TSRI may terminate the agreement due to our insolvency, our conviction for a felony relating to the development, manufacture, use, marketing, distribution or sale of a licensed product, or upon an uncured breach of the agreement by us, including failure to make any required payment. If our agreement with TSRI is terminated by TSRI, we could lose our rights to synthesize and/or manufacture solithromycin under the licensed TSRI technology, which could adversely affect our business, financial condition, results of operations, and prospects.

Another party could develop a fusidic acid product and achieve FDA regulatory exclusivity in the U.S. before we do, potentially preventing our ability to commercialize Taksta.

We will rely partly on FDA regulatory exclusivity to protect our proprietary rights for Taksta, our fusidic acid product, in the U.S. Fusidic acid has been approved and sold for several decades in Europe and countries outside the U.S., but it has never been approved in the U.S. We believe this was due to the lack of regulatory exclusivity that was available for the molecule until the passage of Public Law 110-379 on October 8, 2008, which allowed old antibiotics such as fusidic acid to obtain five-year new chemical entity, or NCE, exclusivity upon NDA approval. This exclusivity will be granted to the first fusidic acid product that receives NDA approval. During the exclusivity period, for a minimum of four years the FDA will not accept an application filed by a third party that relies on any data contained in the approved NDA. Although we are not aware of another party currently developing fusidic acid for use in the U.S. for any indication, if another party were to do so and obtain NDA approval before we do, we would not be able to obtain approval for Taksta for any disease until after any period of regulatory exclusivity if our NDA relies on data contained in the previously approved NDA. In that event, we may not be able to commercialize Taksta, which would harm our ability to generate revenue and achieve profitability.

Our competitive position may be harmed if a competitor obtains orphan drug exclusivity for the treatment of prosthetic joint infections or refractory bone and joint infections before we do. Even if we were to obtain orphan drug exclusivity, a competitor could obtain approval of a different drug for the treatment of prosthetic joint infections or refractory bone and joint infections or for the same drug upon a showing that its drug is clinically superior to ours, which would harm our business.

Orphan drug designation is an important element of our competitive strategy for Taksta. The company that obtains the first FDA approval for a drug that is designated as an orphan drug for a rare disease receives a type of marketing exclusivity known as “orphan drug exclusivity.” Orphan drug exclusivity prevents FDA approval of applications by others for the same drug and the designated orphan disease or condition for seven years from the date of NDA approval. If the orphan indication is the first NDA approved for the drug, the drug is also eligible for the five-year Hatch-Waxman exclusivity for NCEs. Orphan and Hatch-Waxman exclusivities run concurrently. The FDA has designated Taksta as an orphan drug for the treatment of PJI.  We will work to have orphan drug designation granted for Taksta for refractory bone and joint infections.

The FDA may approve a subsequent application from another entity for the orphan indication of prosthetic joint infections or refractory bone and joint infections if it determines that the application is for a different drug. The FDA may also approve a subsequent application for fusidic acid for an indication other than prosthetic joint infections or refractory bone and joint infections. Orphan exclusivity does not block the same drug from being approved for another indication; however, Hatch-Waxman exclusivity could block submission for a period of at least four years after approval if the subsequent application references data in the earlier NDA.

The FDA may approve a subsequent application from another entity for the same drug for the same designated and approved orphan indication during the orphan exclusivity period if it determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug to meet the public’s need.

If we do not receive orphan exclusivity for Taksta for the treatment of prosthetic joint infections or refractory bone and joint infections, our business would be negatively affected. In addition, even if we do obtain orphan exclusivity for Taksta, the FDA may permit other companies to market other drugs for the same condition or use. In addition, the FDA may approve another fusidic acid product for prosthetic joint infections or refractory bone and joint infections during our period of orphan drug exclusivity if it can be demonstrated that the drug is clinically superior to our drug, or if we are unable to supply sufficient product to meet the public’s need. This could create a more competitive market for us.

If our efforts to protect the proprietary nature of the intellectual property related to solithromycin, Taksta, and our other product candidates are not adequate, we may not be able to compete effectively in our market.

Our commercial success will depend in part on our ability to obtain additional patents and protect our existing patent position as well as our ability to maintain adequate protection of other intellectual property for solithromycin, Taksta and any future products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. The patent positions of pharmaceutical companies are highly uncertain. The legal principles applicable to patents are in transition due to changing court precedent and legislative action and we cannot assure you that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses relating to issued patents in these fields will be sufficient in the future.

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Changes in patent laws in the U.S. such as the America Invents Act of 2011 may affect the scope, strength and enforceability of our patent rights or the nature of proceedings which may be brought by us related to our patent rights. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, solithromycin, Taksta and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

These risks include the possibility that:

 

·

the patent applications that we licensed or have filed on our own may fail to result in issued patents in the U.S. or in foreign countries;

 

·

patents issued or licensed to us or our partners may be challenged, discovered to have been issued on the basis of insufficient or incorrect information and/or held to be invalid or unenforceable;

 

·

the scope of any patent protection may be too narrow to exclude other competitors from developing or designing around these patents;

 

·

we or our licensors were not the first to make the inventions covered by each of our issued patents and pending patent applications;

 

·

we or our licensors were not the first to file patent applications for these inventions;

 

·

we may fail to comply with procedural, documentary, fee payment and other similar provisions during the patent application process, which can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights;

 

·

future product candidates may not be patentable;

 

·

others will claim rights or ownership with regard to patents and other proprietary rights which we hold or license;

 

·

delays in development, testing, clinical trials and regulatory review may reduce the period of time during which we could market our product candidates under patent protection; and

 

·

we may fail to timely apply for patents on our technologies or products.

While we apply for patents covering both our technologies and potential products, including solithromycin and Taksta, as we deem appropriate, many biopharmaceutical companies and university and research institutions already have filed patent applications or have received patents in our areas of product development. These entities’ applications, patents and other intellectual property rights may conflict with patent applications to which we have rights and could prevent us from obtaining patents or could call into question the validity of any of our patents, if issued, or could otherwise adversely affect our ability to develop, manufacture or commercialize antibiotic candidates. In addition, if third parties file patent applications in the technologies that also claim technology to which we have rights, we may have to participate in interference, derivation or other proceedings with the U.S. Patent and Trademark Office, or USPTO, or applicable foreign patent regulatory authorities, as applicable, to determine our rights in the invention, which may be time-consuming and expensive. Moreover, issued patents may be challenged during post-grant proceedings brought by a third party or the USPTO, or in foreign countries, or in the courts. These proceedings may result in loss of patent claims or adverse changes to the scope of the claims. Patent applications may also be challenged during pre-grant proceedings. If we are unsuccessful in defending any such opposition, only part of such patent would issue or the patent might not issue at all.

If we or our licensors or partners fail to obtain and maintain patent protection for our product candidates, or our proprietary technologies and their uses, companies may be dissuaded from collaborating with us. In such event, our ability to commercialize solithromycin, Taksta and our other product candidates may be threatened, we could lose our competitive advantage and the competition we face could increase, all of which could adversely affect our business, financial condition, results of operations, and prospects.

If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time consuming and could prevent us or delay us from developing or commercializing our product candidates.

Our commercial success depends, in part, on our not infringing the patents and proprietary rights of other parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and products. Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the areas of antibacterial treatment, including compounds, formulations, treatment methods and synthetic processes that may be applied towards the synthesis of antibiotics. Although no legal action has been commenced or threatened against us by a third party for infringing intellectual property rights, we cannot provide assurances that we or our partners will be free to manufacture or market our product candidates as planned, or that we or our licensors’ and partners’ patents will not be opposed or litigated by third parties.

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There is a substantial amount of litigation involving intellectual property in the biopharmaceutical industry generally. If a third party asserts that we infringe its patents or other proprietary rights, we could face a number of risks that could adversely affect our business, financial condition, results of operations, and prospects, including:

 

·

infringement and other intellectual property claims, which would be costly and time consuming to defend, whether or not we are ultimately successful, which in turn could delay the regulatory approval process, consume our capital and divert management’s attention from our business;

 

·

substantial damages for past infringement, which we may have to pay if a court determines that our products or technologies infringe a competitor’s patent or other proprietary rights;

 

·

a court prohibiting us from selling or licensing our technologies or future products unless the third party licenses its patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do;

 

·

if a license is available from a third party, we may have to pay substantial royalties or lump sum payments or grant cross licenses to our patents or other proprietary rights to obtain that license; and

 

·

redesigning our products so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.

Although we are not currently party to any legal proceedings relating to our intellectual property, in the future, third parties may file claims asserting that our technologies, processes or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or our partners or against the licensors of technology licensed to us, or whether those claims will harm our business. In addition, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. If we or our partners were to face infringement claims or challenges by third parties relating to our product candidates, an adverse outcome could subject us to significant liabilities to such third parties, and force us or our partners to curtail or cease the development of some or all of our product candidates, which could adversely affect our business, financial condition, results of operations, and prospects.

We may be required to file lawsuits or take other actions to protect or enforce our patents or the patents of our licensors, which could be expensive and time consuming.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally.

In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents, or those of our licensors, do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents, or those of our licensors, at risk of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications, or those of our licensors, at risk of not issuing. Moreover, we may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the U.S. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, if securities analysts or investors perceive public announcements of the results of hearings, motions or other interim proceedings or developments to be negative, the price of our common stock could be adversely affected. The occurrence of any of the above could adversely affect our business, financial condition, results of operations, and prospects.

The intellectual property protection for our products is dependent on third parties.

With respect to patents and patent applications relating to solithromycin or other compounds licensed from Optimer (now owned by Merck), Optimer retains rights in ASEAN countries. Generally, we do not have the right to prosecute and maintain any applications in those countries, unless Optimer elects not to file, prosecute or maintain any or all of such patent applications. Our potential future licensors also may retain the right to prosecute and maintain the patent rights that they license to us. If Optimer or other licensors fail to appropriately prosecute and maintain patent protection for any of our product candidates in those countries controlled by them, our ability to develop and commercialize those products may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products in those countries.

With respect to inventions that are jointly made by us and one of our licensors, partners or potential partners, we would need to determine, with our licensors, partners or potential partners, who would be responsible for the prosecution of patents relating to any

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joint inventions should they arise. In addition, we may be required to cede control of prosecution of our patents to partners or potential partners in order to consummate a partnering transaction. If any of our licensors or partners fails to appropriately prosecute and maintain patent protection for any of our product candidates in those countries controlled by them, our ability to develop and commercialize those products may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products in those countries.

If we are unable to protect the confidentiality of certain information, the value of our products and technology could be materially adversely affected.

We also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, independent contractors, suppliers and collaborators. We cannot, however, ensure that these protective arrangements will be honored by third parties, and we may not have adequate remedies if these arrangements are breached. In addition, enforcement of claims that a third party has illegally obtained and is using trade secrets, know-how and technological advancements is expensive, time consuming and uncertain. Non-U.S. courts are sometimes less willing than U.S. courts to protect this information. Moreover, our trade secrets, know-how and technological advancements may otherwise become known or be independently developed by competitors in a manner providing us with no practical recourse against the competing parties. If any such events were to occur, they could adversely affect our business, financial condition, results of operations, and prospects.

We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.

We have filed applications with the USPTO for marks for our two current product candidates; however, we cannot guarantee that either application will be allowed, or whether the USPTO will ultimately issue a trademark registration in respect to those applications. In addition, although we are not currently aware of any oppositions to or cancellations of our registered trademarks or pending applications, it is possible that one or more of the applications could be subject to opposition or cancellation after the marks are registered. The registrations will be subject to use and maintenance requirements. We have not yet registered all of our trademarks in all of our potential markets and there are names or symbols other than “Cempra” that may be protectable marks for which we have not sought registration. Failure to secure those registrations could adversely affect our business. We cannot assure you that opposition or cancellation proceedings will not be filed against our trademarks or that our trademarks would survive such proceedings.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Such claims may lead to material costs for us, or an inability to protect or use valuable intellectual property rights, which could adversely affect our business, financial condition, results of operations, and prospects.

Risks Related to Ownership of Our Common Stock

The trading market for our common stock may not provide our stockholders with adequate liquidity.

Prior to February 3, 2012, there had not been a public market for our common stock. Until recently, our common stock has been thinly traded. We cannot assure you that an active trading market for our common stock will be maintained. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active.

Sales of a substantial number of shares of our common stock in the public market by our stockholders could cause our stock price to decline.

Certain holders of shares of our common stock are entitled to rights with respect to the registration under the Securities Act of 1933, as amended, or the Securities Act, of shares of our common stock or shares of our common stock issuable upon the exercise of warrants held by these individuals or entities. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

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The market price of our common stock may be highly volatile, and you could lose all or part of your investment.

Our stock began trading on the Nasdaq Global Market on February 3, 2012. Between that date and February 18, 2016, it has traded between $5.26 and $46.99. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:

 

·

any delay in enrollment of our ongoing Phase 3 clinical trial for solithromycin for gonorrhea or commencement of our Phase 3 clinical trial for Taksta in ABSSSI;

 

·

adverse results or delays in clinical trials;

 

·

any delay in filing our NDAs for solithromycin or Taksta and any adverse development or perceived adverse development with respect to the FDA’s review of the NDAs, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

 

·

changes in laws or regulations applicable to our products or product candidates, including but not limited to clinical trial requirements for approvals;

 

·

unanticipated serious safety concerns related to the use of solithromycin, Taksta or any of our other product candidates;

 

·

a decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

·

the inability to obtain adequate product supply for solithromycin, Taksta or any other approved drug product, or the inability to do so at acceptable prices;

 

·

developments concerning our sources of manufacturing supply and any commercialization partners;

 

·

adverse regulatory decisions;

 

·

the introduction of new products or technologies offered by us or our competitors;

 

·

the effectiveness of our or our potential partners’ commercialization efforts;

 

·

the inability to effectively manage our growth;

 

·

our cash position and investor concerns about our need for additional financing as well as our ability to raise capital and the timing and dilutive impact of any future financing transactions;

 

·

actual or anticipated variations in quarterly operating results;

 

·

the failure to meet or exceed the estimates and projections of the investment community;

 

·

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

·

the overall performance of the U.S. equity markets and general political and economic conditions;

 

·

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

 

·

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

 

·

additions or departures of key scientific or management personnel;

 

·

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

·

sales of our common stock by our stockholders in the future;

 

·

significant lawsuits, including patent or stockholder litigation;

 

·

changes in the market valuations of similar companies;

 

·

the trading volume of our common stock;

 

·

effects of natural or man-made catastrophic events or other business interruptions; and

 

·

other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the NASDAQ Global Market and the stock of 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.

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

At January 31, 2016, our executive officers, directors and entities affiliated with certain of our directors beneficially owned approximately 19.7% of our outstanding voting common stock. Therefore, these stockholders have the ability to influence us through their ownership position. These stockholders may be able to determine the outcome of all matters requiring stockholder approval. For example, these stockholders may be 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 requirements of being a public company add to our operating costs and might strain our resources and distract our management.

We became a public company on February 2, 2012. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Global Market have imposed various requirements on public companies. While we had opted to rely on certain exemptions from these requirements provided in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, these exemptions were not available to us after December 31, 2015, and our management and other personnel will need to devote a substantial amount of time to compliance initiatives. In addition, these rules and regulations may make our activities related to legal, accounting and financial compliance more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

We only recently ceased being an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth will make our common stock less attractive to investors or otherwise negatively impact the price of our stock.

The JOBS Act contains provisions that, among other things, reduce reporting requirements for qualifying companies.  Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we previously had chosen to rely on these exemptions, and as a result, we were not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, or (iv) disclose executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation, when such disclosure requirements are effective. These exemptions expired on December 31, 2015 because we no longer satisfied the criteria to be an emerging growth company. We cannot be certain if our current scaled disclosure will make our stock less attractive to investors or negatively affect the price of our stock.

If we fail to establish and maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

SEC rules that implement Section 404 of the Sarbanes-Oxley Act require us to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. We first became subject to this requirement for our Annual Report on Form 10-K for the year ended December 31, 2013. While we have concluded that our internal control over financial reporting was effective as of December 31, 2015, there can be no assurance that we will be able to so conclude in the future or that we will not identify one or more material weaknesses in our internal controls in connection with future evaluations. Additionally, in the past we had opted to rely on the exemptions provided in the JOBS Act regarding independent auditor assessments of internal controls over financial reporting.  Beginning with the year ended December 31, 2015, when we ceased to be an “emerging growth company,” however, we now must provide our independent auditor’s assessment of our internal controls over financial reporting in each Annual Report on Form 10-K. Investors may lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory enforcement actions if (i) in the future we are unable to conclude that our internal control over financial reporting is effective, (ii) we identify material weaknesses in our internal control over financial reporting, which could result in financial statement errors which, in turn, could require us to restate our operating results or (iii) our independent auditors are unwilling or unable to provide us with an attestation report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. Any of these events could cause investors to lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to remain listed on the NASDAQ Global Market.

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We might not be able to maintain the listing of our common stock on the Nasdaq Global Market.

Our common stock began listing on the Nasdaq Global Market on February 3, 2012, under the symbol “CEMP.” We might not be able to maintain the listing standards of that exchange. If we fail to maintain the listing requirements, our common stock might trade on the Nasdaq Capital Market, or move to the OTC Bulletin Board or in the “pink sheets” maintained by Pink OTC Markets, Inc. The OTC Bulletin Board and the “pink sheets” are generally considered to be markets that are less efficient and less broad than the Nasdaq Capital Market.

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. A limited number of securities and industry analysts currently publish research on our company. If one or more of the 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 us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which might cause our stock price and trading volume to decline.

Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carry-forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We believe that, with the financing transactions that have occurred over the past three years, we may have triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards to offset U.S. federal taxable income may be subject to limitations, which potentially could result in increased future tax liability to us.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividends on our capital shares. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. In addition, under our loan and security agreement with Comerica Bank, we are prohibited from declaring or paying any cash dividends. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

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 certificate of incorporation and 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 an acquisition would benefit our stockholders, and could also make it more difficult to remove our current management. These provisions include:

 

·

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

·

limiting the removal of directors by the stockholders;

 

·

creating a staggered board of directors;

 

·

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders;

 

·

eliminating the ability of stockholders to call a special meeting of stockholders; and

 

·

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder 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, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are

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approved by the board of directors. This provision could have the effect of discouraging, delaying or preventing someone from acquiring us or merging with us, whether or not it is desired by or beneficial to our stockholders. 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.

 

 

Item 1B. Unresolved Staff Comments

None.

 

 

Item 2. Properties

We lease approximately 32,182 square feet of office space for our headquarters in Chapel Hill, North Carolina under an agreement that expires in March 2021.

 

 

Item 3. Legal Proceedings

We are not a party to any legal proceedings and we are not aware of any claims or actions pending or threatened against us. In the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business.

 

 

Item 4. Mine Safety Disclosures

Not applicable

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded under the symbol “CEMP” and is quoted on the NASDAQ Global Market. Our common stock began trading on the NASDAQ Global Market on February 3, 2012.

On February 18, 2016, the closing price for the common stock as reported on the NASDAQ Global Market was $17.60.

As of February 18, 2016, there were 17 stockholders of record, which excludes stockholders whose shares were held in nominee or street name by brokers. We believe that, when our record holders and stockholders whose shares are held in nominee or street name by brokers are combined, we have in excess of 2,000 stockholders.

Dividend Policy

We have never declared or paid any cash dividends on our common stock.  We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors our board deems relevant.

Pursuant to the terms of the Comerica Bank loan, for as long as the Comerica Bank loan is outstanding, we may not pay any cash dividends on our common stock.

Equity Compensation Plans

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this report.

Stock Performance Graph

The following performance graph shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act except as shall be expressly set forth by specific reference in such filing. The performance graph compares the performance of our common stock to the Nasdaq Biotechnology Index and the Nasdaq Composite Index. The graph covers the most recent four-year period ended December 31, 2015.

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The graph assumes that the value of the investment in our common stock and each index was $100.00 at February 6, 2012, the date our common stock first traded after our IPO, and that all dividends are reinvested.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 investment in stock or index

 

Ticker

 

February 6,

2012

 

 

December 31,

2012

 

 

December 31,

2013

 

 

December 31,

2014

 

 

December 31,

2015

 

Cempra, Inc.

 

CEMP

 

$

100.00

 

 

$

106.00

 

 

$

204.00

 

 

$

388.00

 

 

$

514.00

 

NASDAQ Biotechnology Index

 

NBI

 

$

100.00

 

 

$

114.00

 

 

$

189.00

 

 

$

254.00

 

 

$

283.00

 

NASDAQ Composite Index

 

IXIC

 

$

100.00

 

 

$

104.00

 

 

$

144.00

 

 

$

163.00

 

 

$

172.00

 

 

 

71


 

Item 6. Selected Financial Data

The consolidated statement of income data set forth below with respect to the fiscal years ended December 31, 2015, December 31, 2014, and December 31, 2013 and the consolidated balance sheet data at December 31, 2015 and December 31, 2014 are derived from the audited consolidated financial statements included in Item 8 of this Annual Report and should be read in conjunction with those financial statements and notes thereto. The consolidated statement of income data for the fiscal years ended December 31, 2012 and December 31, 2013 and the consolidated balance sheet data at December 31, 2013, December 31, 2012 and December 31, 2011 are derived from audited consolidated financial statements not included herein.

 

Condensed Consolidated Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

-

 

 

$

-

 

 

$

7,813

 

 

$

15,216

 

 

$

27,309

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

16,872

 

 

 

16,869

 

 

 

41,300

 

 

 

62,539

 

 

 

93,353

 

General and administrative

 

 

3,708

 

 

 

6,069

 

 

 

9,433

 

 

 

12,077

 

 

 

22,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

20,580

 

 

 

22,938

 

 

 

50,733

 

 

 

74,616

 

 

 

116,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(20,580

)

 

 

(22,938

)

 

 

(42,920

)

 

 

(59,400

)

 

 

(88,915

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(641

)

 

 

(1,289

)

 

 

(2,114

)

 

 

(2,249

)

 

 

(2,198

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(21,221

)

 

 

(24,227

)

 

 

(45,034

)

 

 

(61,649

)

 

 

(91,113

)

Accretion of redeemable convertible preferred shares

 

 

(3,763

)

 

 

(313

)

 

 

-

 

 

 

-

 

 

 

-

 

Net loss attributable to common shareholders

 

 

(24,984

)

 

 

(24,540

)

 

 

(45,034

)

 

 

(61,649

)

 

 

(91,113

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(47.53

)

 

$

(1.23

)

 

$

(1.53

)

 

$

(1.81

)

 

$

(2.09

)

Shares used in computation of basic and diluted loss per

   share

 

 

525,689

 

 

 

19,882,585

 

 

 

29,449,716

 

 

 

34,130,901

 

 

 

43,565,518

 

 

Condensed Consolidated Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

 

(in thousands)

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

15,602

 

 

$

70,109

 

 

$

96,503

 

 

$

99,113

 

 

$

153,765

 

Working capital

 

 

11,699

 

 

 

65,029

 

 

 

87,675

 

 

 

86,766

 

 

 

144,086

 

Total assets

 

 

16,859

 

 

 

70,738

 

 

 

99,008

 

 

 

105,311

 

 

 

162,139

 

Total debt

 

 

13,962

 

 

 

9,850

 

 

 

14,739

 

 

 

18,472

 

 

 

19,702

 

Total shareholders' equity (deficit)

 

 

(96,685

)

 

 

57,770

 

 

 

69,975

 

 

 

61,021

 

 

 

117,665

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under “Item 1A. Risk Factors.”

72


 

Overview

We are a clinical-stage pharmaceutical company focused on developing differentiated antibiotics for the acute care and community settings to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract infections and chronic staphylococcal infections. Our lead product, solithromycin (CEM-101), has completed two Phase 3 clinical trials, for which topline results were reported in January and October 2015. Additionally, we are currently enrolling a Phase 1B clinical trial for solithromycin with pediatric patients. We are developing solithromycin in oral capsules, intravenous, or IV, and suspension formulations, initially for the treatment of community acquired bacterial pneumonia, or CABP, one of the most serious infections of the respiratory tract, for which we have begun filing, on a rolling basis, a new drug application, or NDA, with the U.S. Food and Drug Administration, or FDA. We plan to file a marketing authorization application, or MAA, for oral and IV solithromycin for the treatment of CABP with the European Medicines Agency, or EMA. We expect to complete both submissions in the first half of 2016. Solithromycin is a potent new fourth generation macrolide and the first fluoroketolide in clinical development. We also are conducting a Phase 3 trial of solithromycin in uncomplicated gonorrhea.  In September 2015 we began exploring solithromycin’s anti-inflammatory properties by initiating Phase 2 studies of solithromycin treating chronic obstructive pulmonary disease, or COPD, and nonalcoholic steatohepatitis, or NASH patients. Our second program is Taksta, which we are developing exclusively in the U.S. as a long term oral treatment for acute bacterial skin and skin structure infections, or ABSSSI, and refractory bone and joint infections caused by staphylococci, including S. aureus and MRSA. Based on our discussions with the FDA in 2015, we are planning to test Taksta for long-term suppressive therapy of refractory bone and joint infections, including prosthetic joint infections, or PJI, in a single arm exploratory trial expected to begin in the first quarter of 2016 and began a Phase 3 trial for the treatment of ABSSSI in December 2015, which could lead to an NDA filing with the FDA for both indications.

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products. All of our revenue to date has been derived from (1) a government contract and (2) the receipt of proceeds under our license and supply agreements with Toyama Chemical Co., Ltd., or Toyama, a portion of which has been recognized as revenue in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP.

In May 2013, we entered into an agreement with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services, or BARDA, for the evaluation and development of solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia.

The BARDA agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $17.7 million, and four option work segments that BARDA may request in its sole discretion pursuant to the agreement. If all four option segments are requested, the cumulative value of the agreement would be approximately $58.0 million. Three of the options are cost plus fixed fee arrangements and the last option is a cost sharing arrangement for which we would be responsible for a designated portion of the costs associated with that work segment. The estimated period of performance for the base performance segment is May 2013 through February 29, 2016, which has been extended to November 2015 from the original May 2015 date at our request to allow more time to deliver the completed work product; this extension will not increase the cost of the work to be performed under the base segment nor does it change any other terms or provisions of the BARDA contract, including timeframes for the other work options.  BARDA exercised the second option in November 2014.  The value of the second option work segment is approximately $16.0 million and the estimated period of performance is November 2014 through November 2016.  If all option segments are requested, this estimated period of performance would be extended until approximately May 2018.

Under the contract, we are reimbursed and recognize revenue as allowable costs are incurred plus a portion of the fixed-fee earned.  We consider fixed-fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the work as compared to total estimated contract costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed.  Through December 31, 2015, we recognized $25.5 million in revenue under this agreement.

In May 2013, Cempra Pharmaceuticals, Inc., our wholly owned subsidiary, entered into a license agreement with Toyama, whereby we licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin as its sole active pharmaceutical ingredient, or API, for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama has granted us certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

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Following execution of the agreement, we received a $10.0 million upfront payment from Toyama. Toyama is also obligated to pay us up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent, development and commercial milestones. The first of these milestones was achieved in the third quarter of 2014 for which we received a payment of $10.0 million from Toyama.  The second $10.0 million milestone was recognized in the first quarter of 2015, based on the Japan Patent Office issuing a Decision of Allowance for our patent covering certain crystal forms of solithromycin in Japan.  Under the terms of the license agreement, Toyama must also pay us a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances. Cumulatively, through December 31, 2015, we have recognized $18.7 million in revenue under this agreement and the remainder, which is deferred, will be recognized when earned.

As part of the license agreement, we also entered into a supply agreement with Toyama, whereby we will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in its clinical trials in Japan. Pursuant to the supply agreement, Toyama will pay us for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to our costs. All API for solithromycin supplied by us to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from us at prices determined by our manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. Either party may terminate the supply agreement for uncured material breach or insolvency of the other party, with Toyama’s right to terminate for our breach subject to certain further conditions in the case of our failure to supply API for solithromycin or clinical supply, but otherwise the supply agreement will continue until the expiration or termination of the license agreement.  In January 2016, we entered into a supply agreement with FUJIFILM Finechemicals Co., Ltd., which is intended to provide us with solithromycin in sufficient quantities and at reasonable prices to ensure we meet our obligation to Toyama under the supply agreement.

In the future, we anticipate generating revenue from a combination of sales of our products, if approved, through our own sales force in the U.S. for solithromycin, and third parties elsewhere, and license fees, milestone payments and royalties in connection with strategic collaborations regarding any of our product candidates. We expect that any revenue we generate will fluctuate from quarter to quarter. If we or our strategic partners fail to complete the development of solithromycin or Taksta in a timely manner or obtain regulatory approval for them, or if we fail to develop our own sales force or find one or more strategic partners for the commercialization of approved products, our ability to generate future revenue, and our financial condition and results of operations would be materially adversely affected.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting pre-clinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

·

employee-related expenses, which include salaries, benefits and share compensation expense, for personnel in research and development functions;

 

·

fees paid to consultants and clinical research organizations, or CROs, in connection with our clinical trials, and other related clinical trial costs, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

 

·

costs related to acquiring and manufacturing clinical trial materials and the manufacture of pre-approval inventory;

 

·

costs related to compliance with regulatory requirements;

 

·

consulting fees paid to third parties related to non-clinical research and development;

 

·

research supplies; and

 

·

license fees and milestone payments related to in-licensed technologies.

Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and related clinical trial fees. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are advancing solithromycin and Taksta in parallel primarily for the treatment of CABP and uncomplicated gonorrhea (for solithromycin) and ABSSSI and refractory bone and joint infections (for Taksta) as well as for other indications. Through our pre-clinical development programs, we are seeking to develop macrolide product candidates for non-antibacterial indications. The following table sets forth costs incurred on a program-specific basis for solithromycin and Taksta, excluding personnel-related costs. Macrolide research includes costs for discovery programs. All employee-related

74


 

expenses for those employees working in research and development functions are included in “Research and development personnel cost” in the table, including salary, bonus, employee benefits and share-based compensation. We do not allocate insurance or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table.

 

 

 

Year Ended December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

 

 

(in thousands)

 

Direct research and development expense by program:

 

 

 

 

 

 

 

 

 

 

 

 

Solithromycin

 

$

34,155

 

 

$

51,319

 

 

$

73,435

 

Taksta

 

 

1,459

 

 

 

2,903

 

 

 

7,093

 

Macrolide research

 

 

61

 

 

 

258

 

 

 

317

 

Research and development personnel cost

 

 

4,887

 

 

 

6,907

 

 

 

11,485

 

Total direct research and development expense

 

 

40,562

 

 

 

61,387

 

 

 

92,330

 

Indirect research and development expense

 

 

738

 

 

 

1,152

 

 

 

1,022

 

Total research and development expense

 

$

41,300

 

 

$

62,539

 

 

$

93,352

 

 

The successful development of our clinical and pre-clinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or pre-clinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

·

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

 

·

future clinical trial results; and

 

·

the timing of regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

We have completed two pivotal trials for solithromycin, including one with oral solithromycin and one with IV solithromycin progressing to oral solithromycin. We also are conducting a Phase 3 trial for solithromycin in patients with uncomplicated gonorrhea.

We are also planning an exploratory study of Taksta for long-term suppressive therapy of refractory bone and joint infections, including PJI, and have begun a Phase 3 trial for the treatment of ABSSSI to determine Taksta’s safety and efficacy.

Based on our current assumptions, our research and development expense in the first quarter of 2016 is expected to be meaningfully higher than our research and development expense in the fourth quarter of 2015, after which we expect it will return to a level similar to research and development expense in the fourth quarter of 2015, excluding the manufacturing of commercial product in support of product launch and the potential payment of any milestones tied to FDA approval of solithromycin for CABP. In 2017, unless we add new compounds to our clinical pipeline, we expect research and development expenses to decline.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for employees in executive, operational, finance and human resources functions. Other significant general and administrative expenses include professional fees for accounting, legal, and information technology services, facilities costs, expenses associated with obtaining and maintaining patents, and costs of commercialization activities.

We expect that our general and administrative expenses will increase with the continued development of and in preparation for commercialization of our product candidates. Specifically, we anticipate general and administrative expenses to increase on a quarterly basis throughout the first half of 2016 as we further expand our commercial team, conduct market research and perform pricing studies and physician targeting analyses.  After the completion of the NDA submission for solithromycin for CABP, we expect general and administrative spending to further increase as we develop marketing programs and begin to build out our sales leadership infrastructure.  We also believe that these increases will likely include increased costs related to the hiring of additional personnel and

75


 

increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls, information technology and similar requirements applicable to public companies.

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents, as well as decreases in fair value of warrants issued in connection with the note issued to Hercules Technology Growth Capital, Inc., or Hercules, in December 2011, referred to as the December 2011 Note.

Interest expense consists of interest incurred and increases in the fair value of the warrant on the December 2011 Note which was paid in full in July 2015, and the Loan and Security Agreement (“Loan and Security Agreement”) with Comerica Bank (“Comerica”), which was entered into in July 2015.

Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements 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 financial statements. We evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation, on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements included in this report.  We believe the following accounting policies to be most critical to the judgments and estimates used in preparation of our financial statements and such policies have been reviewed and discussed with our audit committee.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

 

·

fees paid to CROs in connection with pre-clinical or clinical trials;

 

·

fees paid to investigative sites in connection with clinical trials;

 

·

milestone payments; and

 

·

unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not currently anticipate the future settlement of existing accruals to differ materially from our estimates.

Revenue Recognition

Our revenue generally consists of research related revenue under federal contracts, supply revenue and licensing revenue related to non-refundable upfront fees, milestone payments and royalties earned under license agreements. Revenue is recognized when the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

76


 

For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the fair value of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods and services are delivered, limited to the consideration that is not contingent upon future deliverables. When an arrangement is accounted for as a single unit of accounting, we determine the period over which the performance obligations will be performed and revenue recognized. Management exercises significant judgment in the determination of whether a deliverable has stand-alone value, is considered to be a separate unit of accounting, and in estimating the relative fair value of each deliverable in the arrangement.

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. Contingent-based payments the Company may receive under a license agreement will be recognized when received.

Valuation of Financial Instruments

Share-Based Compensation

In accordance with FASB ASC Topic 718, Stock Compensation, as modified or supplemented, we measure compensation cost for share-based payment awards granted to employees and non-employee directors at fair value using the Black-Scholes option-pricing model. We recognize compensation expense on a straight-line basis over the service period for awards expected to vest. Share-based compensation cost related to share-based payment awards granted to non-employees is adjusted each reporting period for changes in the fair value of our shares until the measurement date. The measurement date is generally considered to be the date when all services have been rendered or the date that options are fully vested.

 

 

We calculate the fair value of share-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions, including share price volatility, the expected life of options, risk-free interest rate and the fair value of the underlying common shares on the date of grant. In developing our assumptions, we take into account the following:

 

·

we do not have sufficient history to estimate the volatility of our common share price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, we consider characteristics such as industry, market capitalization, length of trading history, similar vesting terms and in-the-money option status. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common shares is relevant to measure expected volatility for future option grants;

 

·

we determine the risk-free interest rate by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant;

 

·

the assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future;

 

·

we determine the average expected life of options based on the mid-point between the vesting date and the contractual term; and

 

·

we estimate forfeitures based on our historical analysis of actual option forfeitures.

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Results of Operations

Comparison of Years Ended December 31, 2014 and December 31, 2015

The following table summarizes the results of our operations for each of the years ended December 31, 2014 and 2015, together with the changes in those items in dollars:

 

 

 

Year Ended December 31,

 

 

Dollar

 

 

 

2014

 

 

2015

 

 

Change

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

9,609

 

 

$

12,448

 

 

$

2,839

 

License

 

 

4,339

 

 

 

10,000

 

 

 

5,661

 

Supply

 

 

1,268

 

 

 

4,860

 

 

 

3,592

 

Total revenue

 

 

15,216

 

 

 

27,308

 

 

 

12,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

 

62,539

 

 

 

93,352

 

 

 

30,813

 

General and administrative expense (1)

 

 

12,077

 

 

 

22,871

 

 

 

10,794

 

Other income (expense), net

 

 

(2,249

)

 

 

(2,198

)

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes the following stock-based compensation expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

$

811

 

 

$

1,948

 

 

$

1,137

 

General and administrative expense

 

 

2,294

 

 

 

3,940

 

 

 

1,646

 

 

Contract revenue

For the twelve months ended December 31, 2015, contract research revenue increased $2.8 million as we had two concurrent work segments under the BARDA contract running throughout 2015, while only one segment ran through the majority of 2014.  We expect contract research revenue to continue to increase as we perform on other segments of the contract progresses.

License revenue

License revenue of $4.3 million was recognized in 2014 upon receipt of the $10.0 million development milestone payment upon the approval from the Pharmaceuticals and Medical Devices Agency (PMDA) for Phase 2 studies in Japan.   License revenue of $10.0 million was recognized in 2015 upon receipt of the development milestone payment from the Decision of Allowance issued by the Japan Patent Office for our patent covering certain crystal forms of solithromycin in Japan.

Supply revenue

For the twelve months ended December 31, 2015, we recognized $4.9 million related to payments for clinical supply of finished product and supply of API under our supply agreement with Toyama as compared to $1.3 million for the twelve months ended December 31, 2014.

Research and Development Expense

For the twelve months ended December 31, 2015, our research and development expenses increased to $93.3 million compared to $62.5 million for the twelve months ended December 31, 2014. The increase of $30.8 million is primarily related to the following:

 

·

an increase in purchases of initial quantity of solithromycin API in preparation for commercial launch of $20.8 million;

 

·

an increase in employee cost of $4.6 million primarily from increased headcount and stock compensation expense;

 

·

an increase in Toyama expenses of $3.3 million related to the purchase of API for clinical studies; and

 

·

an increase in Taksta expenses of $2.4 million primarily related to clinical trial supplies for the Phase 3 ABSSI trial;

78


 

General and Administrative Expense

For the twelve months ended December 31, 2015, our general and administrative costs increased to $22.8 million compared to $12.0 million for the twelve months ended December 31, 2014. The increase of $10.8 million is related to the following:

 

·

an increase in employee cost of $3.5 million from increased headcount and stock compensation expense;

 

·

an increase in professional services of $5.8 million primarily related to consulting fees for commercial readiness activities;

 

·

an increase in trade fees of $1.0 million; and

 

·

an increase in office expenses of $0.5 million;

Other Income (Expense), Net

Other income (expense) remained consistent for the years ended December 31, 2014 and December 31, 2015.

Comparison of Years Ended December 31, 2013 and December 31, 2014

The following table summarizes the results of our operations for each of the years ended December 31, 2013 and 2014, together with the changes in those items in dollars and as a percentage:

 

 

 

Year Ended December 31,

 

 

Dollar

 

 

 

2013

 

 

2014

 

 

Change

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

3,478

 

 

$

9,609

 

 

$

6,131

 

License

 

 

4,335

 

 

 

4,339

 

 

 

4

 

Supply

 

 

-

 

 

 

1,268

 

 

 

1,268

 

Total revenue

 

 

7,813

 

 

 

15,216

 

 

 

7,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

 

41,300

 

 

 

62,539

 

 

 

21,239

 

General and administrative expense (1)

 

 

9,433

 

 

 

12,077

 

 

 

2,644

 

Other income (expense), net

 

 

(2,115

)

 

 

(2,249

)

 

 

(134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes the following stock-based compensation expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

$

963

 

 

$

811

 

 

$

(152

)

General and administrative expense

 

 

2,249

 

 

 

2,294

 

 

 

45

 

 

Contract revenue

For the twelve months ended December 31, 2014, contract research revenue increased $6.1 million as we had a full year of revenue under our BARDA contract in 2014 compared to seven months in 2013.  We expect contract research revenue to continue to increase as the base performance segment of the BARDA contract progresses.

License revenue

License revenue of $4.3 million was recognized upon receipt of the $10.0 million development milestone payment upon the approval from the Pharmaceuticals and Medical Devices Agency (PMDA) for Phase 2 studies in Japan in August 2014.  License revenue of $4.3 million was recognized upon receipt of the $10.0 million upfront payment from the execution of the Toyama license agreement in May 2013.

Supply revenue

For the twelve months ended December 31, 2014, we have recognized $1.3 million related to payments for clinical supply of finished product and supply of API under our supply agreement with Toyama.  No supply revenue was recognized for the twelve months ended December 31, 2013.

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Research and Development Expense

For the twelve months ended December 31, 2014, our research and development expenses increased to $62.5 million compared to $41.3 million for the twelve months ended December 31, 2013. The increase of $21.2 million is primarily related to the following:

 

·

an increase in solithromycin clinical trial expenses of $9.0 million primarily related to the simultaneous conduct of the Phase 3 oral and Phase 3 IV to oral trials for CABP and the initiation of the Phase 3 uncomplicated gonorrhea trial;

 

·

an increase in Taksta clinical trial expenses of $1.4 million primarily related to the Phase 2 trial;

 

·

an increase in clinical trial supplies of $4.4 million;

 

·

an increase in pre-clinical studies of $0.3 million;

 

·

an increase in BARDA expenses of $3.8 million;

 

·

an increase in license fee expenses of $0.3 million; and

 

·

an increase in employee cost of $2.0 million primarily from increased headcount.

General and Administrative Expense

For the twelve months ended December 31, 2014, our general and administrative costs increased to $12.0 million compared to $9.4 million for the twelve months ended December 31, 2013. The increase of $2.6 million is related to increases in employee costs, franchise tax, legal and other professional service fees, and pre-commercialization service fees.

Other Income (Expense), Net

Other income (expense) remained consistent for the years ended December 31, 2013 and December 31, 2014.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through December 31, 2015, we have funded our operations primarily with $441.5 million from debt, and the sale of convertible notes, convertible preferred shares, common shares and common stock.  As of December 31, 2015, we had cash and equivalents of approximately $153.8 million.  In January 2016, we completed a public offering of 4,166,667 shares of common stock at a price of $24.00 per share resulting in net proceeds of $94.0 million after deducting underwriting discounts, commissions and expenses of approximately $6.0 million.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below:

 

 

 

Year Ended December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(32,441

)

 

$

(49,092

)

 

$

(87,849

)

Investing activities

 

 

(134

)

 

 

(52

)

 

 

(46

)

Financing activities

 

 

58,969

 

 

 

51,754

 

 

 

142,546

 

Net increase (decrease) in cash and equivalents

 

$

26,394

 

 

$

2,610

 

 

$

54,651

 

 

Operating Activities. Cash used in operating activities of $32.4 million during the year ended December 31, 2013 was primarily a result of our $45.0 million net loss, offset by changes in operating assets and liabilities of $8.5 million and non-cash items of $4.1 million.  Cash used in operating activities of $49.1 million during the year ended December 31, 2014 was primarily a result of our $61.6 million net loss, offset by changes in operating assets and liabilities of $8.7 million and non-cash items of $3.8 million.  Cash used in operating activities of $87.8 million during the year ended December 31, 2015 was primarily a result of our $91.1 million net loss and changes in operating assets and liabilities of $3.2 million offset by non-cash items of $6.5 million.

Investing Activities. Net cash used in investing activities was $134,000, $52,000 and $46,000 for the years ended December 31, 2013, 2014 and 2015, respectively, primarily related to our purchases of equipment.

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Financing Activities. Net cash provided by financing activities was $59.0 million for the year ended December 31, 2013, $51.8 million for the year ended December 31, 2014, and $142.5 million for the year ended December 31, 2015. The cash provided by financing activities of $59.0 million in the year ended December 31, 2013 consisted primarily of gross proceeds of $57.9 million from the public offering in June 2013 offset by underwriting discounts and offering costs of $3.7 million, and $5.2 million of proceeds from the amendment of the December 2011 Note.  The cash provided by financing activities of $51.8 million in the year ended December 31, 2014 consisted primarily of gross proceeds of $50.0 million from the at-the-marketing offering (ATM) offset by agent fees and offering costs of $1.2 million, and $3.0 million of proceeds from the amendment of the December 2011 Note.  The cash provided by financing activities of $142.5 million in the year ended December 31, 2015 consisted primarily of gross proceeds of $147.0 million from the public offering in January 2015, $3.0 million from proceeds from the exercise of stock options and warrants, $1.0 million in the debt refinance with Comerica Bank, offset by underwriting discounts of $8.9 million, offering costs of $0.2 million and debt issuance costs of $0.3 million.  

Funding Requirements

To date, we have not generated any product revenue from our clinical stage product candidates or from any other source. We do not know when, or if, we will generate any product revenue. We do not expect to generate product revenue unless and until we obtain marketing approval of and commercialize solithromycin and/or Taksta or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval and engage in commercial readiness activities for, solithromycin and Taksta and our other product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We will need substantial additional funding in connection with our continuing operations.

Based on our current assumptions, we expect that our cash and equivalents, including the proceeds of the January 2016 public offering, will enable us to fund our operating expenses and capital expenditure into the second quarter of 2017, including the completion of the NDA submission for solithromycin for CABP, the completion of our Phase 3 trial for solithromycin for the treatment of gonorrhea, and the cost of preparing for and the initial launch of solithromycin in the U.S. This projection does not include any funds from future financings or partnerships beyond the Toyama relationship and the BARDA contract. We will need to obtain additional financing for the continued development of solithromycin and Taksta and our other product candidates and to support the ongoing commercialization  of solithromycin and any of our other product candidates. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

Our future capital requirements will depend on many factors, including:

 

·

the progress, costs and results of our ongoing Phase 3 uncomplicated gonorrhea trial, our ongoing Taksta Phase 3 trial for ABSSSI and planned exploratory study for bone and join infections and any future trials for solithromycin and Taksta;

 

·

the costs of pre-launch commercialization activities for solithromycin for CABP including the purchase of commercial quantities of API for the planned commercial launch;

 

·

the costs of commercial launch activities, including product sales, marketing, manufacturing and distribution, for solithromycin for CABP;

 

·

the progress, costs and results of our ongoing Phase 2 trials for solithromycin for COPD and NASH;

 

·

the scope, progress costs, and results of pre-clinical development, laboratory testing and clinical trials for our other product candidates;

 

·

the costs, timing and outcome of regulatory review of our product candidates;

 

·

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our other product candidates for which we receive regulatory approval;

 

·

receipt of payments under the BARDA contract;

 

·

our ability to establish collaborations on favorable terms;

 

·

the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

 

·

revenue if any, received from sales of our product candidates, if approved by the FDA;

81


 

 

·

our ability to enter into any license agreements for the distribution of our product candidates outside the U.S.; 

 

·

the extent to which we acquire or invest in businesses, products and technologies;

 

·

our ability to obtain government or other third-party funding; and

 

·

obtaining milestone payments from Toyama.

Until we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We do not anticipate any substantial product revenue until we launch soithromycin in the U.S., assuming approval of our NDA for the treatment for CABP.  Assuming FDA approval, we do not expect to be able to launch solithromycin for CABP until sometime in 2017 at the earliest. We do not have any committed external source of funds except for the potential $10.0 million revolver available under the Comerica loan we entered into in July 2015, which will be available to us in the event of approval of our planned NDA for solithromycin for CABP. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of any securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or declaring dividends, such as was imposed under the loan from Hercules and are imposed under the Comerica loan. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

We plan to sell solithromycin in the U.S. through our own specialty sales and marketing teams that will focus on the continuum of care for CABP focused in the outpatient setting primarily on emergency rooms, urgent care centers, outpatient clinics and other high CABP antibiotic prescribing physician offices and in the hospital focused primarily on key academic medical centers and teaching hospitals with significant influence in a given geography. Currently, we expect to build an antibiotic specialty sales force of between 200 and 300 representatives to be able to address the high prescribing centers we have identified as our primary target. According to data we have generated, these high prescribers represent approximately 4% of the prescribers writing prescriptions for azithromycin and levofloxacin to treat CABP, and are responsible for approximately 40% of such prescriptions annually. We do not plan to hire sales representatives unless the FDA approves the NDA for solithromycin for CABP.  We believe solithromycin represents an attractive commercialization opportunity outside the U.S. As with our current development arrangement with Toyama for the commercialization of solithromycin in Japan, we intend to seek one or more commercialization partners for foreign markets.  In the meantime, we are working on the necessary regulatory application filings for solithromycin as a treatment for CABP in both the U.S. and Europe, and are continuing our commercial readiness activities to prepare for the commercial launch of solithromycin in the U.S.  We will need additional financing to support the ongoing commercialization of solithromycin, any development for other indications for solithromycin, as well as to continue development activities to obtain regulatory approval of and to commercialize Taksta.  We plan, as noted, to seek partners as well as equity or debt financings or other sources of third-party funding, including government grants to support the continued development and commercialization of solithromycin, Taksta and our other products candidates. If we are unable to raise additional funds when needed, whether on favorable terms or not, we may be required to delay, limit, reduce or terminate our development of our product candidates, or our commercialization efforts, or to grant rights to others to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2015 and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More

 

 

 

 

 

 

 

1 - 3

 

 

4 - 5

 

 

Than

 

 

 

Total

 

 

years

 

 

years

 

 

5 years

 

Operating lease

 

$

3,046

 

 

$

2,185

 

 

$

820

 

 

$

41

 

The Scripps Research Institute

 

 

630

 

 

 

255

 

 

 

170

 

 

 

205

 

Macrolide Pharmaceuticals Inc.

 

 

1,500

 

 

 

1,500

 

 

 

-

 

 

 

-

 

Loan and Security Agreement

 

 

20,000

 

 

 

17,778

 

 

 

2,222

 

 

 

-

 

Interest on Loan and Security Agreement

 

 

2,232

 

 

 

2,204

 

 

 

28

 

 

 

-

 

Total (1)

 

$

27,408

 

 

$

23,922

 

 

$

3,240

 

 

$

246

 

 

 

(1)

Minimum purchase obligations under the supply agreement with FFFC was excluded from the above table as the conditions of the agreement make the committed amount undeterminable at this time

 

 

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In July 2015, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Comerica Bank (“Comerica”).  The Loan and Security Agreement provides that we may borrow up to $20.0 million in a term loan (the “Term Loan”) and, upon FDA approval of our planned NDA for solithromycin, we may also borrow an aggregate amount equal to the lesser of (i) up to 75% of our eligible inventory and 80% of eligible accounts receivable or (ii) $10.0 million (the “Revolver”). After FDA approval of our planned NDA for solithromycin, we may convert the Term Loan to the Revolver, in which event the Revolver would have a maximum amount available to us of $25.0 million.  The Loan and Security Agreement specifies the criteria for determining eligible inventory and eligible accounts receivable and sets forth ongoing limitations and conditions precedent to the our ability to borrow under the Revolver. 

At closing, we received the full $20.0 million under the Term Loan and paid a facility fee of $100,000 for the Term Loan and a facility fee of $187,500 for the Revolver.  We immediately used proceeds from the Term Loan to pay all of our $17.7 million outstanding principal and interest and $1.2 million in end of term and prepayment fees under the loan and security agreement (“December 2011 Note”) with Hercules Technology Growth Capital, Inc. (“Hercules”) and terminated the December 2011 Note. We recorded a charge of $328,423 on the early extinguishment of the December 2011 Note.  

Amounts borrowed under the Term Loan may be repaid and reborrowed at any time without penalty or premium.  The Term Loan will be interest-only through April 30, 2016, followed by an amortization period of 36 months of equal monthly payments of principal plus interest, beginning on May 1, 2016 and continuing on the same day of each month thereafter until paid in full.  Any amounts borrowed under the Term Loan will bear interest at a floating interest rate equal to the 30 Day LIBOR rate plus 5.2%.  Amounts available to be borrowed under the Revolver may also be repaid and reborrowed at any time without penalty or premium prior to December 31, 2017, at which time all advances under the Revolver shall be immediately due and payable in full.  Any amounts borrowed under the Revolver will bear interest at the 30 Day LIBOR rate plus 4.2%.  Once available, the Revolver is subject to an annual unused facility fee equal of 0.25%.  Under the Loan and Security Agreement, we are subject to certain covenants including maintaining a minimum unrestricted cash balance of $15.0 million and continuing the development or commercially launching solithromycin.

Effective June 12, 2012, Cempra Pharmaceuticals, Inc., our wholly owned subsidiary, entered into a license agreement with The Scripps Research Institute, or TSRI, whereby TSRI licensed to us rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to us are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, we paid a one-time only, non-refundable license issue fee in the amount of $350,000. Our rights under the agreement are subject to certain customary rights of the U.S. government that arise or result from TSRI’s receipt of research support from the U.S. government.

We are also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, we must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in connection with the achievement of such milestone. Any payments made to TSRI under the TSRI license for territories subject to the Optimer agreement, discussed below, can be deducted pursuant to the terms of the license agreement we have with Optimer from any sales-based royalty payments due under the Optimer agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the TSRI agreement, we are also required to pay additional fees on royalties, sublicensing and milestone payments if we, an affiliate, or a sub licensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

The term of the TSRI license agreement (and the period during which we must pay royalties to TSRI in a particular country for a particular product) will end, on a country-by-country and product-by-product basis, at such time as no patent rights licensed from TSRI cover a particular product in the particular country. We have included in the table above the annual payments due TSRI, but

83


 

have not included any other payments because we cannot estimate if, when or in what amounts such payments will become due under the agreement.

In March 2006, we entered into a Collaborative Research and Development and License Agreement with Optimer. Under the terms of the Optimer agreement, we acquired exclusive rights to further develop and commercialize certain Optimer technology worldwide, excluding ASEAN countries. As partial consideration for this license, during 2007 and 2006, we issued to Optimer an aggregate of 1,193,638 common shares with a total value of $0.2 million. We also have an obligation to make additional payments upon achievement of specified development, regulatory and commercialization milestones. The aggregate amount of such milestone payments we may need to pay is based in part on the number of products developed under the agreement. The aggregate amount of such payments would be $27.5 million if four products are developed and gain FDA approval. A milestone payment is due only once on a product regardless of the number of indications it may be approved for.  Additional limited milestone payments would be due if we develop more than four products. In July 2010, we made a $0.5 million milestone payment to Optimer after our successful completion of the Phase 1 trial for oral solithromycin and in July 2012 we made a $1.0 million milestone payment upon completion of our discussions with the FDA for the protocol for our proposed pivotal Phase 3 trial for oral solithromycin. Optimer can elect to receive certain milestone payments in cash or in shares of our common stock having an equivalent fair market value. We are also obligated to make tiered, mid-single-digit royalty payments to Optimer based on annual net sales of licensed products outside the ASEAN countries, which royalties are subject to reduction in the event additional licenses are obtained from third parties in order to practice our rights under the agreement and/or we are required to grant a compulsory license to a third party. We have not included these payments in the table above because we cannot estimate if, when or in what amounts such payments will become due under this agreement.

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for pre-clinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice and therefore we believe that our non-cancelable obligations under these agreements are not material.

In January 2016, Cempra Pharmaceuticals, Inc. entered into an API manufacturing and supply agreement with FUJIFILM Finechemicals Co., Ltd., or FFFC, which will provide us with solithromycin in sufficient quantities and at reasonable prices to help ensure we meet our obligation under the May 8, 2013 supply agreement with Toyama Chemical Co., Ltd.  We are subject to a minimum purchase obligation for a designated number of years after the successful completion of validation studies and the manufacturing facility by FFFC, beginning in the month that API is delivered after regulatory approval in Japan.  The agreement’s initial term runs until December 16, 2025. After the end of the initial term, and at the end of each year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate within a designated period of time prior to the expiration of the term, in which case the agreement will terminate at the end of such term.

On January 29, 2016, Cempra Pharmaceuticals, Inc. entered into an Option and License Agreement with Macrolide Pharmaceuticals, Inc. (“MP”), pursuant to which MP granted us an exclusive option to license certain of MP’s patents and know-how involving macrolides, including specifically novel methods of synthesizing solithromycin (the “Compound”).  Under the agreement, we will support research at MP focused on developing a novel, cost-competitive manufacturing approach to solithromycin. The option will run until the later to occur of (i) the earlier of (a) the date that we first obtain FDA approval for any product incorporating the Compound as an active pharmaceutical ingredient, or API, or (b) January 27, 2019, or (ii) the date that is six months after the earlier of (a) MP’s satisfaction of certain milestones, or (b) we terminate of MP’s obligations under the evaluation program.  Under the evaluation program called for in the agreement, MP will conduct research activities for the manufacture of the Compound, which activities we will evaluate to determine whether to exercise the option to license.

Upon execution of the agreement, we paid MP a non-refundable, non-creditable initial license fee of $375,000.  For conducting the evaluation program, we will pay MP a non-refundable, non-creditable fee in the aggregate amount of $375,000 within five business days of entry into the agreement.  In addition, we will pay MP the expected reasonable, documented, direct compensation-related costs of employees and advisors necessary to conduct MP’s portion of the evaluation program in the aggregate amount of $1.5 million, which we will pay in 18 equal consecutive non-refundable, non-creditable monthly installments of $83,333, beginning with the first monthly anniversary of entry into the agreement. Further, we will pay MP up to an aggregate of $1.0 million upon the satisfaction of certain performance milestones.

If we exercise the option, the license will be exclusive and worldwide (other than Association of Southeast Asian Nations) and for any and all uses in human and non-human animals, and with the right to sublicense. We may, in our discretion, exercise the option for a reduced portion of the territory and, if we have elected a reduction the territory, may increase as we wish within the territory, and as many times as we wish, provided such increase is made within 60 months of our exercise of the option.

If we exercise the option, we will pay MP a non-refundable, non-creditable license fee of $1.0 million, of which $500,000 will be paid within 15 business days of exercise, and $500,000 will be paid in the form of “deemed royalty” payments (up to such amount)

84


 

equal to a fraction of a percent of net sales of licensed products. We will pay tiered royalties of a fraction of a percent on designated levels of annual net sales of license products.  Further, we will pay a non-refundable, non-creditable additional royalty equal to a fraction of a percent on the net sales of licensed products of a designated amount sold by us, our sublicensees, and product partners, but the royalty will not exceed $1.0 million in the aggregate. Royalties will be paid on a country-by-country basis and product-by-product basis until the date on which there are no valid claims of any licensed MP patent covering a product in the applicable country.

If we exercise the option, the agreement’s term will run on a country by country and product by product basis until the date on which there are no valid claims in the licensed MP patents covering a particular product in a particular country.

Net Operating Losses

As of December 31, 2015, we had federal net operating loss carryforwards of approximately $250.5 million and state net operating loss carryforwards of approximately $170.7 million. The net operating loss carryforwards begin to expire in 2026 and 2021 for federal and state tax purposes, respectively. We also had federal research and development credit carryforwards of approximately $9.2 million which begin to expire in 2026, federal orphan drug credits carryforwards of approximately $3.1 million which begin to expire in 2033, federal charitable contribution carryforwards of approximately $80,200 which begin to expire in 2016, and state credit carryforwards of approximately $701,600, which begin to expire in 2018.

The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If our net operating loss carryforwards are limited, and we have taxable income which exceeds the permissible yearly net operating loss carryforward, we would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules.

Recent Accounting Pronouncements

In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The new standard requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual report period. The amendments in this ASU may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We adopted this standard as of December 31, 2015 with prospective application. As a result, we reclassified our deferred tax assets classified as current to noncurrent and our deferred tax liabilities classified as current to noncurrent in our December 31, 2015 consolidated balance sheet. Prior balance sheets were not retrospectively adjusted.

In April 2015, the FASB issued ASU 2015-3, Simplifying the Presentation of Debt Issuance Costs.  The new standard will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable International Financial Reporting Standards, or IFRS.  Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts.  This guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  This standard has been early adopted by us without a material impact on our consolidated financial statements.

In May 2014, FASB, issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance, as amended by ASU-2015-14, is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which is effective for us for the year ending December 31, 2018. We are currently evaluating the impact that the implementation of this standard will have on our consolidated financial statements.

Cautionary Statement

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks. For more detail, see “Item 1A. Risk Factors”.

85


 

Statements contained in this Form 10-K that are not historical facts are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include, among others: risks related to the costs, timing, regulatory review and results of our studies and clinical trials and those of our strategic partners; the results of studies of our product candidates conducted by others; our and our strategic partners’ ability to obtain necessary FDA and foreign regulatory approval of our product candidates; differences between historical studies on which we have based our planned clinical trials and actual results from our trials; our anticipated capital expenditures, our estimates regarding our capital requirements, and our need for future capital; our liquidity and working capital requirements; our ability to commercialize and launch, whether on our own or with a strategic partner, any product candidate that receives regulatory approval; our expectations regarding our revenues, expenses and other results of operations; the unpredictability of the size of the markets for, and market acceptance of, any of our products, including solithromycin and Taksta; our ability to produce and sell any approved products and the price we are able to realize for those products; our need to obtain additional funding and our ability to obtain future funding on acceptable terms; our dependence on the success of solithromycin and Taksta; the possible impairment of, or inability to obtain, intellectual property rights and the cost of obtaining such rights from third parties; our ability to retain and hire necessary employees and to staff our operations appropriately; our ability to compete in our industry and innovation by our competitors; our ability to stay abreast of and comply with new or modified laws and regulations that currently apply or become applicable to our business; estimates and estimate methodologies used in preparing our financial statements; the future trading prices of our common stock and the impact of securities analysts’ reports on these prices; and the risks set out in our filings with the SEC.

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates.  Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10.0% change in interest rates would not have a material effect on the fair market value of our portfolio.  Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

We do not believe that our cash and equivalents have significant risk of default or illiquidity. While we believe our cash and equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and equivalents at one or more financial institutions that are in excess of federally insured limits.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during 2013, 2014 or 2015.

 

 

Item 8. Financial Statements and Supplementary Data

The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide the reasonable assurance discussed above.

86


 

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.

The effectiveness of our internal control over financial reporting as of December 31, 2015, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

No change to our internal control over financial reporting occurred during the last fiscal quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

Not applicable.

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

We have adopted a written code of ethics and business conduct that applies to our directors, executive officers and all employees. We intend to disclose any amendments to, or waivers from, our code of ethics and business conduct that are required to be publicly disclosed pursuant to rules of the SEC by filing such amendment or waiver with the SEC. This code of ethics and business conduct can be found in the corporate governances section of our website, www.cempra.com.

87


 

Executive Officers

As of February 18, 2016, our executive officers are Dr. Prabhavathi Fernandes, our President and Chief Executive Officer, Mark W. Hahn, our Chief Financial Officer, David S. Moore, our Chief Commercial Officer, and Dr. David W. Oldach, our Chief Medical Officer. Information for each is provided below.

 

Name

 

Age
(as of
02/18/16)

 

Business Experience For Last Five Years

 

Prabhavathi Fernandes, Ph.D.

 

 

66

 

 

Dr. Fernandes, one of our founders, has been our President and Chief Executive Officer and a member of our board of directors since our founding in November 2005. Prior to that, she was President and Chief Executive Officer of several privately-held companies, including DarPharma, Inc. from 2003 to 2005, Ricerca Biosciences from 2000 to 2003 and Small Molecule Therapeutics from 1998 to 2000. Dr. Fernandes was Vice President, Drug Discovery of Bristol-Myers Squibb Company from 1988 to 1998, Senior Director of Squibb Pharmaceutical Research Institute from 1987 to 1988, Senior Project Leader of Abbott Laboratories from 1983 to 1987 and Senior Microbiologist of the Squibb Institute for Medical Research, the research division of E.R. Squibb and Sons, from 1980 to 1983. During her years at Squibb, Abbott and Bristol-Meyers Squibb, she was directly involved in the development of numerous antibiotics, four of which have been approved by the FDA and one achieving sales over a billion dollars. She has served on the advisory board of Optimer Pharmaceuticals, Inc. since 2004 and the supervisory board of GPC Biotech AG from 2004 to 2008. Dr. Fernandes served on the product development working group for Biodefense for the National Institute of Allergy and Infectious Diseases from 2003 to 2004 and the U.S. Congressional Panel for Assessment of Impact of Antibiotic Resistant Bacteria and the American Society for Microbiology Advisory Panel for Antibiotic Resistance from 1991 to 1995. Dr. Fernandes holds a B.S. in botany, zoology and chemistry from the University of Bangalore (India), an M.S. in microbiology from the Christian Medical College (India) and a Ph.D. in microbiology from Thomas Jefferson University, Philadelphia,

 

Mark W. Hahn

 

 

53

 

 

Mr. Hahn has been our Executive Vice President and Chief Financial Officer since February 2010. From 2008 to 2009, Mr. Hahn was the Chief Financial Officer of Athenix Corp., an agricultural biotechnology company, leading its merger with Bayer CropScience, where he served as Finance Director into 2010. Mr. Hahn has been the chief financial officer of various companies including GigaBeam Corporation, a telecommunications equipment company, from 2007 to 2008; BuildLinks, Inc., a software company, from 2002 to 2007; PerformaWorks, Inc., a software company, from 2001 to 2002; and Charles & Colvard, Ltd., a consumer products company, from 1996 to 2001. Mr. Hahn also served in various capacities, culminating in Senior Manager, at Ernst & Young and its predecessors from 1984 until 1996. Mr. Hahn holds a B.B.A. in accounting and finance from the University of Wisconsin-Milwaukee and is a certified public accountant in the State of Maryland and North Carolina.

 

David Moore

 

 

42

 

 

Mr. Moore joined us in January 2014.  From July 2013 to December 2013, Mr. Moore was Chief Business Officer of Ocera Therapeutics where he was responsible for developing the commercial plans for an orphan-designated advanced liver disease product for both the community and acute care markets.  Mr. Moore was Chief Business Officer of Tranzyme Pharma from December 2012 to July 2013, and Vice President, Commercial Operations from August 2011 to January 2013, during which time he was responsible for building the commercial organization as well as in- and out-licensing clinical-stage assets.  Between January 1998 and July 2011, Mr. Moore held increasing levels of responsibility in the Ortho-McNeil and Janssen divisions of Johnson & Johnson.  Mr. Moore received his B.Sc. in Biology from Towson University and an M.B.A. from Lehigh University, and a second graduate degree in Health Policy Excellence from Thomas Jefferson University.

88


 

Name

 

Age
(as of
02/18/16)

 

Business Experience For Last Five Years

 

David W. Oldach, M.D.

 

 

58

 

 

Dr. Oldach joined us in February 2011.  From 2006 to 2011, Dr. Oldach directed clinical research at Gilead Sciences, Inc., where his drug development experience ranged from IND/first-in-human trial development and execution through NDA-supportive Phase 3 protocol development and execution. Dr. Oldach received his Medical Degree, Magna Cum Laude, from the University of Maryland School of Medicine and completed a residency in Internal Medicine at the Massachusetts General Hospital. He completed an Infectious Disease Fellowship at Johns Hopkins University School of Medicine, serving under John Bartlett. His academic clinical research included studies in community-acquired pneumonia and surgical infections, as well as HCV pathogenesis. At the time of his transition from academic medicine to industry, Dr. Oldach was a tenured Associate Professor of Medicine at the University of Maryland School of Medicine and served as the Infectious Diseases Section Chief in the Baltimore Veterans Administration Hospital. 

 

The other information required by this Item concerning our directors is incorporated by reference from the section captioned “Proposal No. 1—Election of Directors” and “Corporate Governance” contained in our proxy statement related to the 2016 Annual Meeting of Stockholders scheduled to be held on May 18, 2016 which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K. The information required by this Item concerning compliance with Section 16(a) of the Exchange Act by our directors, executive officers and persons who own more than 10% of our outstanding common stock is incorporated by reference from the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the proxy statement.

 

 

Item 11. Executive Compensation

The information required by this Item concerning directors and executive compensation is incorporated by reference from the section captioned “Director Compensation,” “Executive Compensation – Summary Compensation Table” “Executive Compensation – Compensation Discussion and Analysis,” “Executive Compensation – Grants of Plan Based Awards,” “Executive Compensation – Option Exercises and Stock Vested,” “Executive Compensation – Outstanding Equity Awards at Fiscal Year End 2015” “Executive Compensation – Compensation Committee Interlocks and Insider Participation,” and “Executive Compensation – Compensation Committee Report” contained in the proxy statement.

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the indicated information as of December 31, 2015 with respect to our equity compensation plans:

 

 

 

Number of

securities to

be issued

upon exercise

of outstanding

options, warrants

and rights

 

 

Weighted-

average exercise

price of

outstanding

options, warrants

and rights

 

 

Number of

securities remaining

available for

future issuance

under equity

compensation

plans

 

Plan Category

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by our shareholders

 

 

2,908,677

 

 

$

12.59

 

 

 

2,256,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by our shareholders

 

 

-

 

 

$

-

 

 

 

-

 

Total

 

 

2,908,677

 

 

 

 

 

 

 

2,256,361

 

 

Our equity compensation plans consist of the Sixth Amended and Restated 2006 Stock Plan and the 2011 Equity Incentive Plan, both of which were approved by our stockholders.

The other information required by this Item is incorporated by reference to the information under the section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the proxy statement.

 

 

89


 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to the information under the section captioned “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters—Independence of Directors” contained in the proxy statement.

 

 

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated by reference to the information under the section captioned “Audit and Audit Committee Matters” contained in the proxy statement.

 

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(2) Financial Statement Schedules:

All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.

(3) Exhibits. The following exhibits are included herein or incorporated herein by reference:

 

Exhibit

   No.  

Description

Registrant's

    Form   

Dated

Exhibit

Number

Filed

Herewith

2.1

Form of Plan of Conversion of Cempra Holdings, LLC.

S-1

10/12/2011

2.1

 

3.1

Certificate of Incorporation of Cempra, Inc.

S-1/A

1/13/2012

3.1

 

3.2

Form of Bylaws of Cempra, Inc.

S-1

10/12/2011

3.2

 

4.1

Specimen of Common Stock Certificate of Cempra, Inc.

S-1/A

11/22/2011

4.1

 

4.2

Form of Registration Rights Agreement by and among Cempra, Inc. and certain of its stockholders, to be effective upon the corporate conversion.

S-1

10/12/2011

4.2

 

10.1

Forms of Indemnification Agreements by and between Cempra, Inc. and its directors.

S-1

10/12/2011

10.1

 

10.2

Cempra, Inc. Sixth Amended and Restated 2006 Stock Plan.

S-1/A

1/13/2012

10.2

 

10.3

Cempra, Inc. 2011 Equity Incentive Plan and Form of Stock Option Agreement thereunder.

S-1/A

1/13/2012

10.3

 

10.4*

Collaborative Research and Development and License Agreement dated March 31, 2006, by and between Cempra Pharmaceuticals, Inc. and Optimer Pharmaceuticals, Inc.

S-1

10/12/2011

10.4

 

90


 

Exhibit

   No.  

Description

Registrant's

    Form   

Dated

Exhibit

Number

Filed

Herewith

10.5*

Supply Agreement effective March 15, 2011, by and among CEM-102 Pharmaceuticals, Inc., Ercros S.A. and Gyma Laboratories of America, Inc.

S-1

10/12/2011

10.5

 

10.6

Office Lease Agreement dated November 9, 2011 between Cempra Pharmaceuticals, Inc. and Property Reserve, Inc. 

S-1/A

11/22/2011

10.6

 

10.7

Loan and Security Agreement dated December 20, 2011 between Cempra Holdings, LLC and Hercules Technology Growth Capital, Inc.

S-1/A

12/22/2011

10.7

 

10.8

Secured Promissory Note dated December 20, 2011, issued by Cempra Holdings, LLC to Hercules Technology Growth Capital, Inc.

S-1/A

12/22/2011

10.8

 

10.9*

License Agreement, effective June 12, 2012, between The Scripps Research Institute and Cempra Pharmaceuticals, Inc. 

10-Q

8/08/2012

10.9

 

10.10

2011 Equity Incentive Plan, as amended May 23, 2013.

10-Q

7/31/2013

10.3

 

10.11*

Exclusive License and Development Agreement by and between Cempra Pharmaceuticals, Inc. and Toyama Chemical Co., Ltd., dated May 8, 2013.

10-Q

7/31/2013

10.13

 

10.12*

Supply Agreement by and between Cempra Pharmaceuticals, Inc. and Toyama Chemical Co., Ltd., dated May 8, 2013.

10-Q

7/31/2013

10.14

 

10.13*

Contract by and between Cempra, Inc. and the Biomedical Advanced Research and Development Authority, dated May 24, 2013.

10-Q

7/31/2013

10.15

 

10.14*

Development and Supply Agreement by and between Cempra Pharmaceuticals, Inc. and Hospira Worldwide, Inc. effective as of July 1, 2013.

10-Q/A

11/08/2013

10.18

 

10.15

Amendment No. 1, effective as of September 26, 2013 to Exclusive License And Development Agreement by and between Cempra Pharmaceuticals, Inc. and Toyama Chemical Co., Ltd, dated May 8, 2013.

10-Q

10/29/2013

10.19

 

10.16

Amendment No. 2 to Loan and Security Agreement, dated May 31, 2013, by and among Cempra, Inc., and each of its subsidiaries signatory thereto, and Hercules Capital Funding Trust 2012-1, as a lender and Hercules Technology Growth Capital, Inc., as a lender and as an agent for the lenders.

8-K

6/06/2013

10.12

 

10.17

Form of Employment Agreement by and between Cempra, Inc. and Prabhavathi B. Fernandes, Ph.D.

8-K

8/13/2013

10.16

 

10.18

Form of Change in Control Severance Agreement by and between Cempra, Inc. and Prabhavathi B. Fernandes, Ph.D.

8-K

8/13/2013

10.17

 

10.19

First Amendment, dated May 17, 2013, to Office Lease Agreement dated November 9, 2011 between Cempra Pharmaceuticals, Inc., and Property Reserve, Inc.

10-K

2/28/2014

10.21

 

10.20

Second Amendment, dated August 13, 2013, to Office Lease Agreement dated November 9, 2011 between Cempra Pharmaceuticals, Inc., and Property Reserve, Inc.

10-K

2/28/2014

10.22

 

10.21

Amendment No. 3 to Loan and Security Agreement, dated March 27, 2014, by and among Cempra, Inc., and each of its subsidiaries signatory thereto, and Hercules Capital Funding Trust 2012-1, as a lender and Hercules Technology Growth Capital, Inc., as a lender and as an agent for the lenders.

8-K

10/17/2014

10.23

 

91


 

Exhibit

   No.  

Description

Registrant's

    Form   

Dated

Exhibit

Number

Filed

Herewith

10.22

Third Amendment, dated March 31, 2014, to Office Lease Agreement dated November 9, 2011 between Cempra, Inc. and Property Reserve, Inc.

10-Q

4/29/2014

10.24

 

10.23

Change in Control Severance Agreement, dated May 23, 2014, by and between Cempra, Inc. and Mark W. Hahn.

8-K

5/29/2014

10.25

 

10.24

Amendment No. 4 to Loan and Security Agreement, dated June 30, 2014, by and among Cempra, Inc., and each of  its subsidiaries signatory thereto, and Hercules Capital Funding Trust 2012-1, as a lender and Hercules Technology Growth Capital, Inc., as a lender and as an agent for the lenders.

10-Q

7/29/2014

10.25

 

10.25

Amendment, dated November 13, 2014, to Contract by and between Cempra Pharmaceuticals, Inc. and the Biomedical Advanced Research and Development Agency, dated May 24, 2013.

10-K

2/29/2015

10.27

 

10.26

Change in Control Severance Agreement, dated May 23, 2014, by and between Cempra, Inc. and David Moore

10-Q

4/30/2015

10.1

 

10.27

Loan and Security Agreement, dated as of July 10, 2015, by and among Comerica Bank and Cempra, Inc., Cempra Pharmaceuticals, Inc. and CEM-102 Pharmaceuticals, Inc.

8-K

7/16/2015

10.1

 

10.28

Form of Change in Control Severance Agreement by and between Cempra, Inc. and David W. Oldach, M.D.

8-K

10/19/2015

10.1

 

10.29

Amendment to Form of Employment Agreement by and between Cempra, Inc. and Prabhavathi B. Fernandes, Ph.D.

8-K

10/19/2015

10.2

 

10.30

Amendment to Form of Change in Control Severance Agreement by and between Cempra, Inc. and Prabhavathi Fernandes, Ph.D.

8-K

10/19/2015

10.3

 

10.31

Amendment to Form of Change in Control Severance Agreement by and between Cempra, Inc. and Mark W. Hahn

8-K

10/19/2015

10.4

 

10.32

Amendment to Form of Change in Control Severance Agreement by and between Cempra, Inc. and David Moore

8-K

10/19/2015

10.5

 

10.34**

Option and License Agreement, dated January 29, 2016, between Cempra Pharmaceuticals, Inc. and Macrolide Pharmaceuticals, Inc.

 

 

 

X

10.35**

API Manufacturing and Supply Agreement, entered into January 18, 2016, by and between Cempra, Inc. and FUJIFILM Finechemicals Co., Ltd.

 

 

 

X

21.1

List of subsidiaries of Cempra Holdings, LLC.

S-1

10/12/2011

21.1

 

23.1

Consent of Independent Registered Public Accounting Firm

 

 

 

X

31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

X

31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

X

32.1

Certification of the Chief Executive Officer Pursuant to 18 U.S. C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

X

32.2

Certification of the Chief Financial Officer Pursuant to 18 U.S. C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

X

101

Financials in XBRL format.

 

 

 

X

92


 

 

*

The Registrant has received confidential treatment with respect to portions of this exhibit. Those portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request.

**

Confidential treatment has been requested with respect to certain portions of this exhibit.  Omitted portions have been filed separately with the SEC.

 

 

 

93


 

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CEMPRA, INC.

 

 

 

By: 

 

 /s/ Prabhavathi Fernandes, Ph.D.

 

 

Prabhavathi Fernandes, Ph.D.

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant and on the dates indicated.

 

Signature

 

Title

 

Date

 

/s/ Prabhavathi Fernandes, Ph.D.

 

 

President, Chief Executive Officer and Director

(Principal Executive Officer)

 

 

February 25, 2016

Prabhavathi Fernandes, Ph.D.

 

 

 

/s/ Mark W. Hahn

 

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

February 25, 2016

Mark W. Hahn

 

 

 

/s/ Shane M. Barton

 

 

Controller and Chief Accounting Officer

(Principal Accounting Officer)

 

 

February 25, 2016

Shane M. Barton

 

 

 

/s/ Garheng Kong, M.D., Ph.D.

 

 

Chairman of the Board

 

 

February 25, 2016

Garheng Kong, M.D., Ph.D.

 

 

 

/s/ Dov Goldstein, M.D.

 

 

Director

 

 

February 25, 2016

Dov Goldstein, M.D.

 

 

 

/s/ John H. Johnson

 

 

Director

 

 

February 25, 2016

John H. Johnson

 

 

 

/s/ Richard Kent, M.D.

 

 

Director

 

 

February 25, 2016

Richard Kent, M.D.

 

 

 

/s/ P. Sherrill Neff P.

 

 

Director

 

 

February 25, 2016

Sherrill Neff

 

 

 

/s/ Michael R. Dougherty

 

 

Director

 

 

February 25, 2016

Michael R. Dougherty

 

 

 

/s/ David N. Gill

 

 

Director

 

 

February 25, 2016

David N. Gill

 

 

 

 

 

 


 

INDEX TO

CONSOLIDATED FINANCIAL STATEMENTS

CEMPRA, INC.

 

 

 

 

F-1


 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Cempra, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders’ equity, and of cash flows present fairly, in all material respects, the financial position of Cempra Inc. and its subsidiaries at December 31, 2015 and December 31, 2014 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in 2015).  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

February 25, 2016

 

 

 

F-2


 

CEMPRA, INC.

Consolidated Balance Sheets

 

 

 

December 31,

 

 

December 31,

 

 

 

2014

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

99,113,378

 

 

$

153,765,060

 

Receivables

 

 

2,350,052

 

 

 

7,638,644

 

Prepaid expenses

 

 

3,387,883

 

 

 

572,605

 

Total current assets

 

 

104,851,313

 

 

 

161,976,309

 

Furniture, fixtures and equipment, net

 

 

113,146

 

 

 

89,727

 

Deposits

 

 

346,228

 

 

 

73,214

 

Total assets

 

$

105,310,687

 

 

$

162,139,250

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,893,790

 

 

$

9,634,599

 

Accrued expenses

 

 

1,002,496

 

 

 

1,474,780

 

Accrued payroll and benefits

 

 

1,595,882

 

 

 

2,336,741

 

Current portion of long-term debt

 

 

3,593,536

 

 

 

4,444,444

 

Total current liabilities

 

 

18,085,704

 

 

 

17,890,564

 

Deferred revenue

 

 

11,325,946

 

 

 

11,325,946

 

Long-term debt

 

 

14,878,114

 

 

 

15,257,780

 

Total liabilities

 

 

44,289,764

 

 

 

44,474,290

 

Commitments and Contingencies (Notes 4 and 10)

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock; $.001 par value; 5,000,000 shares authorized; no shares issued or

   outstanding at December 31, 2014 and December 31, 2015

 

 

-

 

 

 

-

 

Common stock; $.001 par value; 80,000,000 shares authorized; 37,474,944

   and 43,990,751 issued and outstanding at December 31, 2014 and

   December 31, 2015, respectively

 

 

37,475

 

 

 

43,991

 

Additional paid-in capital

 

 

288,892,951

 

 

 

436,643,081

 

Accumulated deficit

 

 

(227,909,503

)

 

 

(319,022,112

)

Total shareholders’ equity

 

 

61,020,923

 

 

 

117,664,960

 

Total liabilities and shareholders’ equity

 

$

105,310,687

 

 

$

162,139,250

 

 

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

 

 

 

F-3


 

CEMPRA, INC.

Consolidated Statements of Operations

 

 

 

Years Ended December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

3,477,554

 

 

$

9,608,951

 

 

$

12,448,139

 

License

 

 

4,335,412

 

 

 

4,338,642

 

 

 

10,000,000

 

Supply

 

 

-

 

 

 

1,268,341

 

 

 

4,860,431

 

Total revenue

 

 

7,812,966

 

 

 

15,215,934

 

 

 

27,308,570

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

41,299,695

 

 

 

62,539,108

 

 

 

93,352,367

 

General and administrative

 

 

9,433,447

 

 

 

12,076,767

 

 

 

22,871,297

 

Total costs and expenses

 

 

50,733,142

 

 

 

74,615,875

 

 

 

116,223,664

 

Loss from operations

 

 

(42,920,176

)

 

 

(59,399,941

)

 

 

(88,915,094

)

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

17,693

 

 

 

134,380

 

 

 

8,800

 

Interest expense

 

 

(2,132,223

)

 

 

(2,383,709

)

 

 

(2,206,315

)

Other income (expense), net

 

 

(2,114,530

)

 

 

(2,249,329

)

 

 

(2,197,515

)

Net loss and comprehensive loss

 

$

(45,034,706

)

 

$

(61,649,270

)

 

$

(91,112,609

)

Basic and diluted net loss attributable to common shareholders per share

 

$

(1.53

)

 

$

(1.81

)

 

$

(2.09

)

Basic and diluted weighted average shares outstanding

 

 

29,449,716

 

 

 

34,130,901

 

 

 

43,565,518

 

 

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

 

 

F-4


 

CEMPRA, INC.

Consolidated Statements of Shareholders’ Equity  

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2012

 

 

24,903,774

 

 

$

24,904

 

 

$

178,970,975

 

 

$

(121,225,527

)

 

$

57,770,352

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

3,211,802

 

 

 

-

 

 

 

3,211,802

 

Issuance of common shares upon exercise of options and warrants

 

 

22,629

 

 

 

22

 

 

 

61,843

 

 

 

-

 

 

 

61,865

 

Issuance of common stock, net of offering costs of $0.2 million

 

 

8,273,938

 

 

 

8,274

 

 

 

54,199,390

 

 

 

-

 

 

 

54,207,664

 

Reclassification of additional paid-in capital to warrant liability

 

 

-

 

 

 

-

 

 

 

(241,587

)

 

 

-

 

 

 

(241,587

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(45,034,706

)

 

 

(45,034,706

)

Balance as of December 31, 2013

 

 

33,200,341

 

 

$

33,200

 

 

$

236,202,423

 

 

$

(166,260,233

)

 

$

69,975,390

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

3,105,338

 

 

 

-

 

 

 

3,105,338

 

Issuance of common shares upon exercise of options and warrants

 

 

182,078

 

 

 

182

 

 

 

351,157

 

 

 

-

 

 

 

351,339

 

Issuance of common stock, net of offering costs of $0.1 million

 

 

4,092,525

 

 

 

4,093

 

 

 

48,433,516

 

 

 

-

 

 

 

48,437,609

 

Reclassification of warrant liability to additional paid-in capital

 

 

-

 

 

 

-

 

 

 

800,517

 

 

 

-

 

 

 

800,517

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(61,649,270

)

 

 

(61,649,270

)

Balance as of December 31, 2014

 

 

37,474,944

 

 

$

37,475

 

 

$

288,892,951

 

 

$

(227,909,503

)

 

$

61,020,923

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

5,888,156

 

 

 

-

 

 

 

5,888,156

 

Issuance of common shares upon exercise of options and warrants

 

 

478,307

 

 

 

478

 

 

 

3,037,865

 

 

 

-

 

 

 

3,038,343

 

Issuance of common stock, net of offering costs of $0.2 million

 

 

6,037,500

 

 

 

6,038

 

 

 

138,824,109

 

 

 

-

 

 

 

138,830,147

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(91,112,609

)

 

 

(91,112,609

)

Balance as of December 31, 2015

 

 

43,990,751

 

 

$

43,991

 

 

$

436,643,081

 

 

$

(319,022,112

)

 

$

117,664,960

 

 

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

 

 

 

F-5


 

CEMPRA, INC.

Consolidated Statements of Cash Flows

 

 

 

Year ended December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(45,034,706

)

 

$

(61,649,270

)

 

$

(91,112,609

)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

39,622

 

 

 

76,273

 

 

 

69,224

 

Share-based compensation

 

 

3,211,802

 

 

 

3,105,338

 

 

 

5,888,156

 

Change in fair value of warrant liabilities

 

 

217,443

 

 

 

(119,657

)

 

 

-

 

Amortization of debt issuance costs

 

 

650,780

 

 

 

767,396

 

 

 

400,062

 

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

152,855

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

(1,626,237

)

 

 

(723,815

)

 

 

(5,288,592

)

Prepaid expenses

 

 

(142,930

)

 

 

(2,979,972

)

 

 

2,815,278

 

Deposits

 

 

(11,637

)

 

 

(13,197

)

 

 

273,014

 

Accounts payable

 

 

4,101,969

 

 

 

5,620,188

 

 

 

(2,259,191

)

Accrued expenses

 

 

49,739

 

 

 

610,839

 

 

 

472,284

 

Accrued payroll and benefits

 

 

438,699

 

 

 

552,635

 

 

 

740,859

 

Deferred revenue

 

 

5,664,588

 

 

 

5,661,358

 

 

 

-

 

Net cash used in operating activities

 

 

(32,440,868

)

 

 

(49,091,884

)

 

 

(87,848,660

)

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of furniture, fixtures and equipment

 

 

(134,125

)

 

 

(51,698

)

 

 

(45,805

)

Net cash used in investing activities

 

 

(134,125

)

 

 

(51,698

)

 

 

(45,805

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowing on long-term debt

 

 

5,238,327

 

 

 

3,000,000

 

 

 

20,000,000

 

Payments on long-term debt

 

 

(238,327

)

 

 

-

 

 

 

(18,995,245

)

Payment of debt issuance costs

 

 

(300,372

)

 

 

(34,906

)

 

 

(327,098

)

Proceeds from exercise of stock options and warrants

 

 

61,865

 

 

 

351,339

 

 

 

3,038,343

 

Proceeds from issuance of common stock, net of underwriting discounts

 

 

54,407,814

 

 

 

48,534,797

 

 

 

139,043,625

 

Payment of offering costs

 

 

(200,150

)

 

 

(97,188

)

 

 

(213,478

)

Net cash provided by financing activities

 

 

58,969,157

 

 

 

51,754,042

 

 

 

142,546,147

 

Net change in cash and equivalents

 

 

26,394,164

 

 

 

2,610,460

 

 

 

54,651,682

 

Cash and equivalents at beginning of the period

 

 

70,108,754

 

 

 

96,502,918

 

 

 

99,113,378

 

Cash and equivalents at end of the period

 

$

96,502,918

 

 

$

99,113,378

 

 

$

153,765,060

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,208,526

 

 

$

1,578,934

 

 

$

1,526,689

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of the long-term debt proceeds to warrant

 

$

461,144

 

 

$

-

 

 

$

-

 

Reclassification of additional paid-in capital to warrant liability

 

$

241,587

 

 

$

-

 

 

$

-

 

Reclassification of warrant liability to additional paid-in capital

 

$

-

 

 

$

800,517

 

 

$

-

 

 

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

 

 

 

F-6


 

CEMPRA, INC.

December 31, 2015

Notes to Consolidated Financial Statements

 

1. Description of Business

Cempra, Inc. (the “Company” or “Cempra”, previously known as Cempra Holdings, LLC) is the successor entity of Cempra Pharmaceuticals, Inc. which was incorporated on November 18, 2005 and commenced operations in January 2006. Cempra is located in Chapel Hill, North Carolina, and is a pharmaceutical company developing medicines to treat drug-resistant bacterial infections in the hospital and community.

The Company expects to continue to incur losses and require additional financial resources to advance its products to either commercial stage or liquidity events.  There can be no assurance that the Company will be able to obtain additional financial resources such as debt or equity financing or generate revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all.  The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

 

2. Basis of Presentation

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts and results of operations of Cempra and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Concentrations of Risks

The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the U.S. The Company maintains cash in accounts which are in excess of federally insured limits.

Receivables

Receivables consist of amounts billed and amounts earned but unbilled under the Company’s licensing agreements or its contract with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services (“BARDA”). Receivables under the BARDA contract are recorded as qualifying research activities are conducted and invoices from the Company’s vendors are received. Unbilled receivables are also recorded based upon work estimated to be complete for which the Company has not received vendor invoices.  The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance based on its history of collections and write-offs and the current status of all receivables. The Company does not accrue interest on trade receivables. If accounts become uncollectible, they will be written off through a charge to the allowance for doubtful accounts. The Company has not recorded an allowance for doubtful accounts as management believes all receivables are fully collectible.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Furniture, fixtures and leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

Furniture, fixtures and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If there is an impairment, a loss is recognized.

F-7


 

Income Taxes

Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized.

Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates and manages its business as one operating segment and all of the Company’s operations are in North America.

Intellectual Property

The Company’s policy is to file patent applications to protect technology, inventions and improvements that are considered important to the development of its business. The patent positions of technology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The Company accounts for its intellectual property under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other. Patent costs since inception have been expensed as incurred.

Research and Development Expenses

Research and development (“R&D”) expenses include direct and indirect R&D costs. Direct R&D consists principally of external costs, such as fees paid to investigators, consultants, central laboratories and clinical research organizations, including costs incurred in connection with clinical trials, and related clinical trial fees and all employee-related expenses for those employees working in research and development functions, including stock-based compensation for R&D personnel. Indirect R&D costs include insurance or other indirect costs related to the Company’s research and development function to specific product candidates. R&D costs are expensed as incurred. Expenses paid but not yet incurred are recorded in prepaid expenses.  The Company expenses pre-approval inventory as R&D until regulatory approval is received.

Clinical Trial Accruals

As part of the process of preparing financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with conducting clinical trials. The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company determines accrual estimates through discussions with applicable personnel and outside service providers as to the progress of trials, or the services completed. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial accrual is dependent upon the timely and accurate reporting of fee billings and passthrough expenses from contract research organizations and other third-party vendors as well as the timely processing of any change orders from the contract research organizations.

Revenue Recognition

The Company’s revenue generally consists of research related revenue under federal contracts, supply revenue and licensing revenue related to non-refundable upfront fees, milestone payments and royalties earned under license agreements. Revenue is recognized when the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

F-8


 

For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods and services are delivered, limited to the consideration that is not contingent upon future deliverables. When an arrangement is accounted for as a single unit of accounting, the Company determines the period over which the performance obligations will be performed and revenue recognized.

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. Contingent-based payments the Company may receive under a license agreement will be recognized when received.

 

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted average number of common stock shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted average number of common stock shares adjusted for the dilutive effect of common stock equivalent shares outstanding during the period. Common stock equivalents consist of convertible senior notes (using the “as if converted” method), stock options, restricted stock shares and stock warrants. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect on earnings per share.

Share-Based Compensation

The Company accounts for share-based compensation following the provisions of FASB ASC Topic 718, Stock Compensation. The Company measures compensation cost for share-based payment awards granted to employees and non-employee directors at fair value using the Black-Scholes option-pricing model. The Company recognizes compensation expense on a straight-line basis over the service period for awards expected to vest. Compensation cost related to share-based payment awards granted to non-employees is adjusted each reporting period for changes in the fair value of the Company’s shares until the measurement date. The measurement date is generally considered to be the date when all services have been rendered or the date on which options are fully vested.

The Company recorded the following share-based compensation expense in accordance with ASC Topic 718:

 

 

 

Year Ended December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

Research and development

 

$

962,443

 

 

$

811,227

 

 

$

1,948,116

 

General and administrative

 

 

2,249,359

 

 

 

2,294,111

 

 

 

3,940,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,211,802

 

 

$

3,105,338

 

 

$

5,888,156

 

 

Allocations to research and development and general and administrative expense are based upon the department to which the associated employee reported. No related tax benefits of the share-based compensation expense have been recognized.

Valuation Assumptions for Stock Option Plans

The employee share-based compensation expense recognized was determined using the Black-Scholes option-pricing model. Option-pricing models require the input of subjective assumptions and these assumptions can vary over time.

The weighted-average assumptions used to determine the fair value of each option grant are as follows:

 

 

 

2013

 

 

2014

 

 

2015

 

Estimated dividend yield

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Expected share price volatility

 

 

70.8

%

 

 

82.3

%

 

 

74.3

%

Risk-free interest rate

 

 

1.0

%

 

 

2.0

%

 

 

1.7

%

Expected life of option (in years)

 

 

5.5

 

 

 

5.8

 

 

 

5.6

 

Weighted-average fair value per share

 

$

4.26

 

 

$

8.58

 

 

$

17.00

 

 

F-9


 

Expected stock price volatility is based on an average of the Company’s volatility and several peer public companies due to the Company’s limited history. For purposes of identifying peer companies, the Company considered characteristics such as industry, market capitalization, length of trading history, similar vesting terms and in-the-money option status. The risk-free rate is based on the U.S. Treasury yield curve during the expected life of the option. The dividend yield percentage is zero because the Company neither currently pays dividends nor intends to do so during the expected option term. The expected term represents the average time that options are expected to be outstanding. Due to a lack of term length data, the Company elected to use the mid-point between the vesting date and the contractual term as the expected term for employee options and contractual life for non-employees options.  This is in accordance with the simplified method prescribed in SEC Staff Accounting Bulletin No. 107, Share-Based Payment, as the options meet the criteria of “plain-vanilla” options.

Recent Accounting Pronouncements

In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The new standard requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual report period. The amendments in this ASU may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company adopted this standard as of December 31, 2015 with prospective application. As a result, the Company reclassified its deferred tax assets classified as current to noncurrent and its deferred tax liabilities classified as current to noncurrent in its December 31, 2015 consolidated balance sheet. Prior balance sheets were not retrospectively adjusted.

In April 2015, the FASB issued ASU 2015-3, Simplifying the Presentation of Debt Issuance Costs.  The new standard will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable International Financial Reporting Standards (“IFRS”).  Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts.  This guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  This standard has been early adopted by the Company without a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).   The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP.  The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance.  This guidance, as amended by ASU 2015-14, is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which is effective for the Company for the year ending December 31, 2018.  The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.

 

 

 

3. Fair Value of Financial Instruments

The carrying values of cash equivalents, receivables, prepaid expenses, and accounts payable at December 31, 2015 approximated their fair values due to the short-term nature of these items.

The Company’s valuation of financial instruments is based on a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

At December 31, 2014 and December 31, 2015, the Company held money market funds classified as Level 1 financial instruments of $85.8 million and $129.0 million, respectively.  The Term Loan (defined and discussed in Note 9), which is classified as a Level 2 liability, has a variable interest rate and, accordingly, its carrying value approximates its fair value.  At December 31, 2015, the carrying value was $19.7 million.  There were no transfers between levels of the fair value hierarchy for any assets or liabilities measured at fair value in the twelve months ended December 31, 2015.

 

 

F-10


 

4. Significant Agreements and Contracts

License Agreements

Optimer Pharmaceuticals, Inc.

In March 2006, the Company, through its wholly owned subsidiary, Cempra Pharmaceuticals, Inc., entered into a Collaborative Research and Development and License Agreement (“Optimer Agreement”) with Optimer Pharmaceuticals, Inc. (“Optimer”). Under the terms of the Optimer Agreement, the Company acquired exclusive rights to further develop and commercialize certain Optimer technology worldwide, excluding member nations of the Association of Southeast Asian Nations. Optimer was acquired by Cubist Pharmaceuticals, Inc. in October 2013, which was in turn acquired by Merck in January 2015.

In exchange for this license, during 2006 and 2007, the Company issued an aggregate of 125,646 common shares with a total fair value of $190,418 to Optimer. These issuances to Optimer were expensed as incurred in research and development expense.

In July 2010, the Company paid a $500,000 milestone payment to Optimer after the successful completion of its first solithromycin Phase 1 program. In July 2012, the Company paid a $1,000,000 milestone after the successful completion of its first solithromycin Phase 2 program. Both milestones were expensed as incurred in research and development expense. Under the terms of the Optimer Agreement, the Company will owe Optimer additional payments, contingent upon the achievement of various development, regulatory and commercialization milestone events. The aggregate amount of such milestone payments the Company may need to pay is based in part on the number of products developed under the agreement and would total $27,500,000 (including payments made to date) if four products are developed through FDA approval. The Company will also pay tiered mid-single-digit royalties based on the amount of annual net sales of its approved products.

The Scripps Research Institute

In June 2012, the Company entered into a license agreement with The Scripps Research Institute (“TSRI”), whereby TSRI licensed to the Company rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to the Company are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, the Company paid a one-time only, non-refundable license issue fee in the amount of $350,000 which was charged to research and development expense in the second quarter of 2012.

The Company is also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, the Company must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in connection with the achievement of such milestone. Pursuant to the terms of the Optimer Agreement, any payments made to TSRI under this license for territories subject to the Optimer Agreement can be deducted from any sales-based royalty payments due under the Optimer Agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the agreement, the Company is also required to pay additional fees on royalties, sublicensing and milestone payments if the Company, an affiliate with TSRI, or a sublicensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.  License and milestone payments received under the license agreement with Toyama (discussed below), have resulted in a payment of $200,000 of fees to TSRI as of December 31, 2015.

Biomedical Advanced Research and Development Authority

In May 2013, the Company entered into an agreement with BARDA, for the evaluation and development of the Company’s lead product candidate solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens.

F-11


 

The agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $17.7 million, and four option work segments that BARDA may request at its sole discretion pursuant to the agreement. If all four option segments are requested, the cumulative value of the agreement would be approximately $58 million. Three of the options are cost plus fixed fee arrangements and one option is a cost sharing arrangement for which the Company would be responsible for a designated portion of the costs associated with that work segment. The estimated period of performance for the base performance segment is May 24, 2013 through February 29, 2016.   BARDA exercised the second option in November 2014.  The value of the second option work segment is approximately $16.0 million and the estimated period of performance is November 14, 2014 through November 30, 2016.  If all option segments are requested, this estimated period of performance would be extended until approximately May 23, 2018.

Under the agreement, the Company is reimbursed and recognizes revenue as allowable costs are incurred plus a portion of the fixed-fee earned. The Company considers fixed-fees under cost reimbursable agreements to be earned in proportion to the allowable costs incurred in performance of the work as compared to total estimated agreement costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed.  For the years ended December 31, 2013, 2014 and 2015, the Company recognized $3.5, $9.6 and $12.4 million in revenue under this agreement, respectively.

The agreement provides the U.S. government the ability to terminate the agreement for convenience or to terminate for default if the Company fails to meet its obligations as set forth in the statement of work.  The Company believes that if the government were to terminate the agreement for convenience, the costs incurred through the effective date of such termination and any settlement costs resulting from such termination would be allowable costs.

Toyama Chemical Co., Ltd.

In May 2013, Cempra Pharmaceuticals, Inc., the Company’s wholly owned subsidiary, entered into a license agreement with Toyama Chemical Co., Ltd. (“Toyama”), whereby the Company licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin, the Company’s lead compound, as its sole active pharmaceutical ingredient, or API, for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama granted the Company certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

Following execution of the agreement, the Company received a $10.0 million upfront payment from Toyama. Toyama is also obligated to pay the Company up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent, development and commercial milestones.  Under the terms of the license agreement, Toyama must also pay the Company a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances.  In August 2014, the Company received a $10.0 million milestone payment from Toyama (“August 2014 Milestone”), which was triggered by Toyama’s progress of its solithromycin clinical development program in Japan. The payment was made following Toyama’s receipt of regulatory clearance to begin a Phase 2 trial of solithromycin in Japan following successful completion of a Phase 1 trial.  In March 2015, the Company recognized a $10.0 million milestone from Toyama based on the Japan Patent Office issuing a Decision of Allowance for the Company’s patent covering certain crystal forms of solithromycin in Japan, which payment was received in April 2015.  

As part of the license agreement, Toyama and the Company also entered into a supply agreement, whereby the Company will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in Phase 1 and Phase 2 clinical trials in Japan. Pursuant to the supply agreement, which is an exhibit to the license agreement, Toyama will pay the Company for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to the Company’s costAll API for solithromycin supplied by the Company to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from the Company at prices determined by the Company’s manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. Either party may terminate the supply agreement for uncured material breach or insolvency of the other party, with Toyama’s right to terminate for the Company’s breach subject to certain further conditions in the case of the Company’s failure to supply API for solithromycin or clinical supply, but otherwise the supply agreement will continue until the expiration or termination of the license agreement.  Through December 31, 2015, the Company has recognized $6.1 million in revenue under this supply agreement.

The Company has determined that there are six deliverables under this agreement including (1) the license to develop and commercialize solithromycin in Japan, (2) the obligation of the Company to conduct Phase 3 studies and obtain regulatory approval in

F-12


 

the United States and one other territory, (3) participation in a Joint Development Committee, or JDC, (4) participation in a Joint Commercialization Committee, or JCC, (5) the right to use the Company’s trademark, and (6) a supply agreement. The amounts received under the license agreement have been allocated to the deliverables based on their relative fair values and will be recognized into income when the revenue recognition criteria have been achieved.  

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. Contingent-based payments the Company may receive under a license agreement will be recognized when received.

Royalties are recorded as earned in accordance with the contract terms when third party sales can be reliably measured and collectability is reasonably assured.

The Company recognized $4.3 million in revenue associated with the delivery of the license in May 2013.  Additionally, because the milestone event triggering the August 2014 Milestone payment was considered non-substantive for accounting purposes, this milestone payment is being recognized into revenue proportionately to the six deliverables in the agreement using the same allocation as the upfront payment.  Therefore, $4.3 million of the August 2014 Milestone payment was recognized into revenue in August 2014.  The remainder of the upfront and milestone payments which aggregate to $11.3 million are recorded as deferred revenue at December 31, 2015 and will be recognized as revenue when the revenue recognition criteria of each deliverable has been met. The Company also recognized a $10.0 million milestone based on the Japan Patent Office issuing a Decision of Allowance for the Company’s patent covering certain crystal forms of solithromycin in Japan.  The March 2015 milestone payment is considered substantive for accounting purposes, and therefore the $10.0 million milestone was recognized in its entirety as revenue in March 2015.

 

 

5. Receivables

Receivables consist of amounts billed and amounts earned but unbilled under the Company’s licensing agreements or its contract with BARDA. At December 31, 2015, the Company’s receivables consisted primarily of earned but unbilled receivables under the BARDA agreement.

 

 

6. Prepaid Expenses

Prepaid expenses are compromised of the following as of:

 

 

 

December 31,

 

 

 

2014

 

 

2015

 

Prepaid developmental expenses

 

$

2,936,702

 

 

$

-

 

Prepaid insurance

 

 

242,980

 

 

 

155,729

 

Other prepaid expenses

 

 

208,201

 

 

 

416,876

 

Total prepaid expenses

 

$

3,387,883

 

 

$

572,605

 

 

 

The $2.9 million in prepaid development expenses in 2014 consisted of payments for active pharmaceutical ingredient (API) which has been used through the course of 2015 for the clinical development program of solithromycin in Japan.

 

 

F-13


 

7. Furniture, Fixtures and Equipment

Furniture, fixtures and equipment consist of the following as of:

 

 

 

Useful Life (years)

 

 

December 31,

 

 

 

 

 

 

 

2014

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computer equipment

 

 

2

 

 

$

173,241

 

 

$

209,068

 

Software

 

 

2

 

 

 

62,675

 

 

 

62,675

 

Furniture

 

 

5

 

 

 

45,935

 

 

 

45,935

 

Leasehold improvements

 

 

3

 

 

 

21,183

 

 

 

31,163

 

Total furniture, fixtures and equipment

 

 

 

 

 

 

303,034

 

 

 

348,841

 

Less: accumulated depreciation

 

 

 

 

 

 

(189,888

)

 

 

(259,114

)

Furniture, fixtures and equipment, net

 

 

 

 

 

$

113,146

 

 

$

89,727

 

 

Depreciation expense for the years ended December 31, 2013, 2014 and 2015 was $39,622, $76,273 and $69,224, respectively.

 

 

8. Accrued Expenses

Accrued expenses are comprised of the following as of:

 

 

 

December 31,

 

 

 

2014

 

 

2015

 

Accrued professional fees

 

$

372,639

 

 

$

641,469

 

Other accrued fees

 

 

32,062

 

 

 

222,409

 

Franchise tax

 

 

383,287

 

 

 

436,050

 

Accrued interest

 

 

148,025

 

 

 

99,167

 

Deferred rent

 

 

66,483

 

 

 

75,685

 

Total accrued expenses

 

$

1,002,496

 

 

$

1,474,780

 

 

 

9. Long-term Debt

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Comerica Bank (“Comerica).  The Loan and Security Agreement provides that the Company may borrow up to $20.0 million in a term loan (the “Term Loan”) and, upon FDA approval of its planned New Drug Application for solithromycin, the Company may also borrow an aggregate amount equal to the lesser of (i) up to 75% of its eligible inventory and 80% of eligible accounts receivable or (ii) $10.0 million (the “Revolver”).  After FDA approval of the Company’s planned New Drug Application for solithromycin, the Company may convert the Term Loan to the Revolver, in which event the Revolver would have a maximum amount available to the Company of $25.0 million.  The Loan and Security Agreement specifies the criteria for determining eligible inventory and eligible accounts receivable and sets forth ongoing limitations and conditions precedent to the Company’s ability to borrow under the Revolver. The Company granted Comerica a security interest in substantially all of its personal property assets, excluding its intellectual property and its stock in its subsidiaries, to secure its outstanding obligations under the Loan and Security Agreement. The Company is also obligated to comply with various other customary covenants, including, among other things, restrictions on its ability to: dispose of assets, make acquisitions, be acquired, incur indebtedness, grant liens, make distributions to its stockholders, make investments, enter into certain transactions with affiliates, or pay down subordinated debt, subject to specified exceptions.

At closing, the Company received the full $20.0 million under the Term Loan and paid a facility fee of $100,000 for the Term Loan and a facility fee of $187,500 for the Revolver.  The Company immediately used proceeds from the Term Loan to pay all of its $17.7 million outstanding principal and interest and $1.2 million in end of term and prepayment fees under the loan and security agreement (“December 2011 Note”) with Hercules Technology Growth Capital, Inc. (“Hercules”) and terminated the Hercules loan.  The Company recorded a charge of $328,423 on the early extinguishment of the December 2011 Note.

Amounts borrowed under the Term Loan may be repaid and reborrowed at any time without penalty or premium.  The Term Loan is interest-only through April 30, 2016, followed by an amortization period of 36 months of equal monthly payments of principal plus interest, beginning on May 1, 2016 and continuing on the same day of each month thereafter until paid in full.  Any amounts borrowed under the Term Loan will bear interest at a floating interest rate equal to the 30 Day LIBOR rate plus 5.2%.  Amounts available to be borrowed under the Revolver may also be repaid and reborrowed at any time without penalty or premium prior to December 31, 2017, at which time all advances under the Revolver shall be immediately due and payable in full.  Any amounts

F-14


 

borrowed under the Revolver will bear interest at the 30 Day LIBOR rate plus 4.2.  Once available, the Revolver is subject to an annual unused facility fee equal of 0.25%.  Under the Loan and Security Agreement, the Company is subject to certain covenants including maintaining a minimum unrestricted cash balance of $15.0 million and continuing the development or commercially launching solithromycin.

In December 2011, the Company entered into the $20.0 million December 2011 Note with Hercules and borrowed $10.0 million upon closing. Borrowings under the December 2011 Note bore interest at the greater of (i) 9.55%, or (ii) the sum of 9.55% plus the prime lending rate, as published by the Wall Street Journal, minus 3.25% per annum. In connection with the initial closing of the December 2011 Note, the Company entered into a warrant agreement with Hercules.  In May 2013, the Company amended its December 2011 Note, increasing the initial loan amount to $15.0 million, and receiving an additional $5.2 million upon closing.    In March 2014, the Company amended the December 2011 Note providing the Company the ability to request, at any time prior to December 26, 2014, another borrowing in the aggregate amount of $3.0 million.   This amendment also provided for the Company to make interest only payments through May 31, 2015. In June 2014, the Company borrowed the additional $3.0 million and amended the December 2011 Note to provide the Company the ability to borrow up to an additional $10.0 million.  Warrants associated with the December 2011 Note were reclassified to additional paid-in capital in the second quarter of 2014.  The Hercules loan was terminated and paid using proceeds from the Comerica Term Loan.      

 

In connection with the initial closing of the December 2011 Note, the Company entered into a warrant agreement with Hercules (the “First Hercules Warrant”), under which Hercules has the right to purchase 39,038 shares of the Company’s common stock. The exercise price of the First Hercules Warrant was initially $10.25 per share, subject to adjustment in the event of a merger, reclassification, subdivision or combination of shares or stock dividend and subject also to antidilution protection.  In connection with the May 2013 amendment to the loan agreement, the exercise price of the First Hercules Warrant was reduced to the lower of (a) $6.11, and (b) the effective price per share of the Company’s common stock issued or issuable in any offering of the Company’s equity or equity-linked securities that occured prior to June 1, 2014, provided that such offering was effected principally for equity or debt-financing purposes. Since the May 2013 amendment to the warrant resulted in a variable exercise price, the fair value of the warrant as of the date of the amendment was reclassified from additional paid-in capital to a warrant liability. The Company did not offer any common stock between the amendment date and June 1, 2014 at a price below $6.11, therefore, the exercise price of the First Hercules Warrant became fixed at $6.11, which resulted in the warrant liability being reclassified to additional paid-in capital in the second quarter of 2014.  

 

Additionally, in connection with the May 2013 amendment of the December 2011 Note, the Company entered into a warrant agreement with Hercules (the “Second Hercules Warrant”), under which Hercules has the right to purchase an aggregate number of shares of the Company’s common stock equal to the quotient derived by dividing $609,533 by the exercise price then in effect, which is defined as the lower of (a) $6.11, and (b) the effective price per share of the Company’s common stock issued or issuable in any offering of the Company’s equity or equity-linked securities prior to June 1, 2014, provided that such offering was effected principally for equity or debt-financing purposes. The Second Hercules Warrant expires on May 31, 2023. Proceeds equal to the fair value of the Second Hercules Warrant were recorded as a liability at the date of issuance. The Company did not offer any common stock between the amendment date and June 1, 2014 at a price below $6.11, therefore, the exercise price of the Second Hercules Warrant became fixed at $6.11, which resulted in the warrant being fixed at 99,759 shares of common stock and the warrant liability being reclassified to additional paid-in capital in the second quarter of 2014.

In December 2014, Hercules exercised the First Hercules Warrant of 39,038 shares and the Second Hercules Warrant of 99,759 shares in a cashless exercise which resulted in 97,931 shares issued.  The exercise price was deemed to be $20.75, the average of the closing prices over a five day period ending three days before the day the current fair market value of the common stock was determined.

Scheduled Maturities:

Scheduled maturities of long-term debt are as follows:

 

Year Ending December 31:

 

 

 

 

2016

 

$

4,444,444

 

2017

 

 

6,666,667

 

2018

 

 

6,666,667

 

2019

 

 

2,222,222

 

Total

 

 

20,000,000

 

Less: Unamortized discount

 

 

(297,776

)

Less: Current portion of long-term debt

 

 

(4,444,444

)

Long-term debt

 

$

15,257,780

 

F-15


 

 

 

10. Commitments and Contingencies

Future minimum lease payments required under non-cancellable operating leases as of December 31, 2015 are as follows:

 

 

 

Operating

 

 

 

Leases

 

2016

 

$

685,819

 

2017

 

 

741,170

 

2018

 

 

757,768

 

2019

 

 

502,309

 

2020 and thereafter

 

 

358,647

 

Total minimum lease payments

 

$

3,045,713

 

 

Rent expense for the years ended December 31, 2013, 2014 and 2015 was $145,549, $185,647, and $443,081, respectively.

See Note 4—Significant Agreements and Contracts for contingencies related to the Optimer Agreement and the TSRI agreement.

 

 

11. Shareholders’ Equity

Common Stock

During January 2015, the Company completed a public offering issuing 6,037,500 shares of common stock, at a price of $24.50 per share, resulting in net proceeds to the Company of approximately $138.8 million after deducting underwriting discounts and commissions, and expenses of approximately $9.1 million

During 2015, the Company issued 417,999 shares of common stock at a weighted average exercise price of $6.40 per share for the exercise of option grants and 60,309 shares of common stock at a weighted average exercise price of $6.00 per share for the exercise of warrants issued.

In March 2013, the Company entered into an at-the-market (“ATM”) sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”) under which the Company could, at its discretion, from time to time sell shares of its common stock, with a sales value  of up to $25.0 million. The Company provided Cowen with customary indemnification rights, and Cowen was entitled to a commission at a fixed commission rate of 3.0% of the gross proceeds per share sold.  Sales of the shares under the Sales Agreement were to be made in transactions deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended. In October 2014, the Company and Cowen amended the Sales Agreement (the “Amended Agreement”) to increase the aggregate gross sales proceeds that could be raised to $50 million.

The Company began the sale of ATM shares in July 2014 and sold an aggregate of 4,092,525 shares of common stock under the Sales Agreement in 2014 resulting in net proceeds of $48.5 million after deducting commissions of $1.5 million.  The Sales Agreement was terminated on January 5, 2015.

During June 2013, the Company completed a public offering issuing 8,273,938 shares of common stock, at a price of $7.00 per share, resulting in net proceeds to the Company of approximately $54.2 million after deducting underwriting discounts of $3.5 million and offering costs of $0.2 million.

The following table presents common stock reserved for future issuance for the following equity instruments as of December 31, 2015:

 

Warrants to purchase common stock (1)

 

 

94,912

 

Options:

 

 

 

 

Outstanding under the 2006 Stock Plan

 

 

499,726

 

Outstanding under the 2011 Equity Incentive Plan

 

 

2,314,039

 

Available for future grants under the 2011 Equity Incentive Plan

 

 

2,256,361

 

Total common stock reserved for future issuance

 

 

5,165,038

 

 

(1)

The Warrants to purchase common stock are exercisable at a price of $6.00 per share and expire in August 2018.

 

F-16


 

 

12. Stock Option Plans

The Company adopted the 2006 Stock Plan in January 2006 (“the 2006 Plan”). The 2006 Plan provided for the granting of incentive share options, nonqualified share options and restricted shares to Company employees, representatives and consultants. As of December 31, 2015, there were options for an aggregate of 499,726 shares issued and outstanding under the 2006 Plan.

The Company’s board of directors adopted the 2011 Equity Incentive Plan in October 2011 (the “2011 Plan”), which, as amended in May 2015, authorizes the issuance of up to 4,842,105 shares under the 2011 Plan, with an automatic annual increase discussed below. As of December 31, 2015, there were 2,256,361 options shares available under the 2011 Plan.  The number of shares of common stock reserved for issuance under the 2011 Plan automatically increases on January 1 of each year, continuing through January 1, 2021, by 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year.

Upon adoption of the 2011 Plan, the Company eliminated the authorization for any unissued shares previously reserved under the Company’s 2006 Plan. The stock awards previously issued under the 2006 Plan remain in effect in accordance with the terms of the 2006 Plan.

The following table summarizes the Company’s 2006 and 2011 Plan activity:

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Options

 

 

Price

 

 

Term (in years)

 

 

Value (1)

 

Outstanding - December 31, 2012

 

 

1,162,602

 

 

$

4.18

 

 

 

 

 

 

 

 

 

Granted

 

 

758,374

 

 

 

7.03

 

 

 

 

 

 

 

 

 

Exercised

 

 

(13,685

)

 

 

0.60

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(74,440

)

 

 

7.16

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Outstanding - December 31, 2013

 

 

1,832,851

 

 

 

5.26

 

 

 

 

 

 

 

 

 

Granted

 

 

753,250

 

 

 

12.35

 

 

 

 

 

 

 

 

 

Exercised

 

 

(39,980

)

 

 

2.16

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(60,021

)

 

 

10.28

 

 

 

 

 

 

 

 

 

Expired

 

 

(1,541

)

 

 

7.22

 

 

 

 

 

 

 

 

 

Outstanding - December 31, 2014

 

 

2,484,559

 

 

$

7.34

 

 

 

 

 

 

 

 

 

Granted

 

 

790,850

 

 

 

26.73

 

 

 

 

 

 

 

 

 

Exercised

 

 

(417,999

)

 

 

6.40

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(43,645

)

 

 

15.71

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Outstanding - December 31, 2015

 

 

2,813,765

 

 

 

12.80

 

 

 

7.20

 

 

$

52,228,412

 

Exercisable - December 31, 2015

 

 

1,850,890

 

 

 

8.48

 

 

 

6.41

 

 

 

41,960,983

 

Vested and expected to vest at December 31, 2015 (2)

 

 

2,754,796

 

 

$

12.59

 

 

 

7.16

 

 

$

51,664,889

 

 

(1)

Intrinsic value is the excess of the fair value of the underlying common shares as of December 31, 2015 over the weighted-average exercise price.

(2)

The number of stock options expected to vest takes into account an estimate of expected forfeitures.

F-17


 

The following table summarizes certain information about all options outstanding as of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Exercise Price

 

Number of Options

 

 

Weighted Average

Remaining

Contractual

Term (in years)

 

 

Number of Options

 

 

Weighted Average

Remaining

Contractual

Term (in years)

 

$0.48 - $1.43

 

 

32,633

 

 

 

0.49

 

 

 

32,633

 

 

 

0.49

 

$2.09 - $2.47

 

 

467,093

 

 

 

4.03

 

 

 

467,093

 

 

 

4.03

 

$6.63 - $7.86

 

 

879,008

 

 

 

6.75

 

 

 

842,215

 

 

 

6.73

 

$8.70 - $13.71

 

 

669,160

 

 

 

8.12

 

 

 

300,119

 

 

 

8.05

 

$23.51- $43.43

 

 

765,871

 

 

 

9.12

 

 

 

208,830

 

 

 

8.98

 

 

 

 

2,813,765

 

 

 

 

 

 

 

1,850,890

 

 

 

 

 

 

During the year ended December 31, 2013, 2014 and 2015, the Company recorded $3,211,802, $3,105,338, and $5,888,156 in share-based compensation expense, respectively. As of December 31, 2015, approximately $11,550,570 of total unrecognized compensation cost related to unvested share options is expected to be recognized over a weighted-average period of 2.83 years.

 

During the year ended December 31, 2015, the Company received $2,676,489 in cash proceeds from the exercise of stock options through the course of the year.

Other information pertaining to the Company’s stock option awards is as follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

2013

 

 

2014

 

 

2015

 

Weighted average grant date fair value per share of options

$

4.26

 

 

$

8.58

 

 

$

17.00

 

Total intrinsic value of options exercised

$

146

 

 

$

313

 

 

$

11,970

 

 

 

13. Income Taxes

No provision for U.S. Federal or state income taxes has been recorded as the Company has incurred net operating losses since inception.

Significant components of the Company’s deferred income tax assets as of December 31, 2014 and 2015 consist of the following:

 

 

 

2014

 

 

2015

 

Current

 

 

 

 

 

 

 

 

Deferred income tax assets

 

 

 

 

 

 

 

 

Other current assets

 

$

23,900

 

 

$

-

 

Total net deferred income taxes, current

 

 

23,900

 

 

 

-

 

Less valuation allowance

 

 

(23,900

)

 

 

-

 

Total net deferred income taxes, current

 

$

-

 

 

$

-

 

Non-current

 

 

 

 

 

 

 

 

Deferred income tax assets

 

 

 

 

 

 

 

 

Tax loss carryforwards

 

$

58,528,300

 

 

$

86,600,000

 

Contribution carryforwards

 

 

16,000

 

 

 

27,300

 

Tax credits

 

 

7,559,400

 

 

 

12,718,900

 

Start-up costs

 

 

6,164,400

 

 

 

5,660,700

 

Share-based compensation

 

 

1,600,100

 

 

 

3,315,100

 

Deferred revenue

 

 

2,038,600

 

 

 

4,048,800

 

Other assets

 

 

355,300

 

 

 

350,000

 

Total net deferred income taxes, non-current

 

 

76,262,100

 

 

 

112,720,800

 

Less valuation allowance

 

 

(76,262,100

)

 

 

(112,720,800

)

Total net deferred income tax

 

$

-

 

 

$

-

 

 

F-18


 

In accordance with ASU No. 2015-17, at December 31, 2015, the Company is presenting all deferred tax assets and liabilities as noncurrent.  The Company did not adjust any prior periods retrospectively.

 

At December 31, 2014 and 2015, the Company provided a full valuation allowance against its net deferred tax assets since at that time, the Company could not assert that it was more likely than not that these deferred tax assets would be realized. There was an increase in the valuation allowance in the current year in the amount of $36,434,800.

The table below summarizes changes in the deferred tax valuation allowance:

 

 

 

2013

 

 

2014

 

 

2015

 

Balance at beginning of year

 

$

36,345,900

 

 

$

52,858,300

 

 

$

76,286,000

 

Charges to costs and expenses

 

 

16,512,400

 

 

 

23,427,700

 

 

 

36,434,800

 

Write-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of year

 

$

52,858,300

 

 

$

76,286,000

 

 

$

112,720,800

 

 

As of December 31, 2015, the Company had federal net operating loss carryforwards of approximately $250,488,300 and state net operating loss carryforwards of approximately $170,746,700. The net operating loss carryforwards begin to expire in 2026 and 2021 for federal and state tax purposes, respectively.  The Company's federal and state net operating loss carryforwards include approximately $8,726,100 of excess tax benefits related to deductions from the exercise of stock options. The tax benefit of these deductions has not been recognized in deferred tax assets. If utilized, the benefits from these deductions will be recorded as adjustments to additional paid-in capital. The Company also had federal research and development credit carryforwards of approximately $9,188,100 which begin to expire in 2026, federal orphan drug credits carryforwards of approximately $3,067,800 which begin to expire in 2033, federal charitable contribution carryforwards of approximately $80,200 which began to expire in 2016, and state credit carryforwards of approximately $701,600, which begin to expire in 2018.  

The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the Company’s net operating loss carryforwards are limited, and the Company has taxable income which exceeds the permissible yearly net operating loss carryforward, the Company would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

The reasons for the difference between actual income tax expense (benefit) for the years ended December 31, 2013, 2014 and 2015 and the amount computed by applying the statutory federal income tax rate to losses before income tax (benefit) are as follows:

 

 

 

2013

 

 

2014

 

 

2015

 

 

 

Amount

 

 

% of Pretax Earnings

 

 

Amount

 

 

% of Pretax Earnings

 

 

Amount

 

 

% of Pretax Earnings

 

United States federal tax at statutory rate

 

$

(15,311,800

)

 

 

34

%

 

$

(20,960,800

)

 

 

34

%

 

$

(30,978,300

)

 

 

34

%

State taxes (net of federal benefit)

 

 

(1,463,600

)

 

 

3

%

 

 

(1,238,800

)

 

 

2

%

 

 

(1,592,900

)

 

 

2

%

Nondeductible expenses

 

 

901,900

 

 

 

(2

%)

 

 

889,900

 

 

 

(1

%)

 

 

1,380,200

 

 

 

(1

%)

Credits

 

 

(1,731,500

)

 

 

4

%

 

 

(3,329,200

)

 

 

5

%

 

 

(4,958,900

)

 

 

5

%

Adjustment for state rate change

 

 

1,092,000

 

 

 

(2

%)

 

 

1,249,100

 

 

 

(2

%)

 

 

721,900

 

 

 

(1

%)

Other, net

 

 

600

 

 

 

0

%

 

 

(37,900

)

 

 

0

%

 

 

(1,006,800

)

 

 

1

%

Change in valuation allowance

 

 

16,512,400

 

 

 

(37

%)

 

 

23,427,700

 

 

 

(38

%)

 

 

36,434,800

 

 

 

(40

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

-

 

 

 

0

%

 

$

-

 

 

 

0

%

 

$

-

 

 

 

0

%

 

On July 23, 2013, North Carolina enacted House Bill 998, which reduced the corporate income tax rate from 6.9% in 2013 to 6% in 2014 and to 5% in 2015.  As a result of the new enacted tax rate, the Company adjusted its deferred tax assets in 2013 by applying the lower rate, which resulted in a decrease in the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $1,092,000. On September 18, 2015, North Carolina enacted House Bill 97, which reduced the corporate income tax rate from 5% to 4% in 2016.  As a result of the new enacted tax rate, the Company adjusted its deferred tax assets in 2015 by applying the lower rate, which resulted in a decrease in the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $721,900.

As of December 31, 2014 and 2015, the Company had no unrecognized tax benefits. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2014 and 2015, the Company had no accrued interest or penalties related to uncertain tax positions.

F-19


 

The Company has analyzed its filing positions in all significant federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to United States Federal, state, and local tax examinations by tax authorities for years before 2012 although carryforward attributes that were generated prior to 2012 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a future period. No income tax returns are currently under examination by taxing authorities.

 

 

14. Net Loss Per Share

Basic and diluted net loss per common share was determined by dividing net loss attributable to common shareholders by the weighted average common shares outstanding during the period. The Company’s potentially dilutive shares, which include redeemable warrants and common share options, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

 

 

 

December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

Warrants outstanding

 

 

301,938

 

 

 

330,585

 

 

 

132,464

 

Stock options outstanding

 

 

1,726,918

 

 

 

2,411,891

 

 

 

2,910,694

 

 

 

 

2,028,856

 

 

 

2,742,476

 

 

 

3,043,158

 

 

 

F-20


 

15. Selected Quarterly Data (unaudited, in thousands, except for loss per share data)

 

 

 

Quarter Ended

 

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2015

 

 

2015

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

2,076

 

 

$

3,171

 

 

$

2,497

 

 

$

4,704

 

License

 

 

10,000

 

 

 

-

 

 

 

-

 

 

 

-

 

Supply

 

 

1,887

 

 

 

1,883

 

 

 

-

 

 

 

1,090

 

Total revenue

 

$

13,963

 

 

$

5,054

 

 

$

2,497

 

 

$

5,794

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

26,117

 

 

 

23,676

 

 

 

23,541

 

 

 

20,018

 

General and administrative

 

 

4,650

 

 

 

5,732

 

 

 

5,848

 

 

 

6,641

 

Loss from operations

 

 

(16,804

)

 

 

(24,354

)

 

 

(26,892

)

 

 

(20,865

)

Interest income

 

 

2

 

 

 

2

 

 

 

-

 

 

 

5

 

Interest expense

 

 

(614

)

 

 

(617

)

 

 

(679

)

 

 

(296

)

Net loss attributable to common shareholders

 

$

(17,416

)

 

$

(24,969

)

 

$

(27,571

)

 

$

(21,156

)

Net loss per share - basic and diluted

 

$

(0.41

)

 

$

(0.57

)

 

$

(0.63

)

 

$

(0.48

)

Shares used in calculating basic and diluted net loss per share

 

 

42,671

 

 

 

43,686

 

 

 

43,911

 

 

 

43,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2014

 

 

2014

 

 

2014

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

2,984

 

 

$

1,897

 

 

$

3,431

 

 

$

1,298

 

License

 

 

-

 

 

 

-

 

 

 

4,335

 

 

 

3

 

Supply

 

 

99

 

 

 

-

 

 

 

-

 

 

 

1,169

 

Total revenue

 

$

3,083

 

 

$

1,897

 

 

$

7,766

 

 

$

2,470

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

16,383

 

 

 

15,198

 

 

 

15,653

 

 

 

15,305

 

General and administrative

 

 

3,190

 

 

 

2,605

 

 

 

2,853

 

 

 

3,429

 

Loss from operations

 

 

(16,490

)

 

 

(15,906

)

 

 

(10,740

)

 

 

(16,264

)

Interest income

 

 

45

 

 

 

88

 

 

 

1

 

 

 

1

 

Interest expense

 

 

(576

)

 

 

(560

)

 

 

(617

)

 

 

(632

)

Net loss attributable to common shareholders

 

$

(17,021

)

 

$

(16,378

)

 

$

(11,356

)

 

$

(16,895

)

Net loss per share - basic and diluted

 

$

(0.51

)

 

$

(0.49

)

 

$

(0.34

)

 

$

(0.46

)

Shares used in calculating basic and diluted net loss per share

 

 

33,201

 

 

 

33,217

 

 

 

33,588

 

 

 

36,493

 

 

 

 

16. Subsequent Events

In January 2016, the Company completed a public offering of 4,166,667 shares of common stock at a price of $24.00 per share resulting in net proceeds of $94.0 million after deducting underwriting discounts, commissions and expenses of approximately $6.0 million.

On January 18, 2016, the Company’s wholly owned subsidiary, Cempra Pharmaceuticals, Inc., entered into an API manufacturing and supply agreement with FUJIFILM Finechemicals Co., Ltd. (“FFFC”), which will provide the Company with solithromycin in sufficient quantities and at reasonable prices to help ensure the Company meets its obligation under the May 8, 2013 supply agreement with Toyama Chemical Co., Ltd.  The Company is subject to a minimum purchase obligation for a designated number of years after the successful completion of validation studies and the manufacturing facility by FFFC, beginning in the month that API is delivered after regulatory approval.  The agreement’s initial term runs until December 16, 2025. After the end of the initial term, and at the end of each year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate within a designated period of time prior to the expiration of the term, in which case the agreement will terminate at the end of such term.

 

On January 29, 2016, Cempra Pharmaceuticals, Inc. entered into an Option and License Agreement with Macrolide Pharmaceuticals, Inc. (“MP”), pursuant to which MP granted the Company an exclusive option to license certain of MP’s patents and know-how involving macrolides, including specifically novel methods of synthesizing solithromycin (the “Compound”).  Under the

F-21


 

agreement, the Company will support research at MP focused on developing a novel, cost-competitive manufacturing approach to solithromycin. The option will run until the later to occur of (i) the earlier of (a) the date that the Company first obtains FDA approval for any product incorporating the Compound as an active pharmaceutical ingredient, or API, or (b) January 27, 2019, or (ii) the date that is six months after the earlier of (a) MP’s satisfaction of certain milestones, or (b) the Company’s termination of MP’s obligations under the evaluation program.  Under the evaluation program called for in the agreement, MP will conduct research activities for the manufacture of the Compound, which activities the Company will evaluate to determine whether to exercise the option to license.

 

Upon execution of the agreement, the Company paid MP a non-refundable, non-creditable initial license fee of $375,000.  For conducting the evaluation program, the Company will pay MP a non-refundable, non-creditable fee in the aggregate amount of $375,000 within five business days of entry into the agreement.  In addition, the Company will pay MP the expected reasonable, documented, direct compensation-related costs of employees and advisors necessary to conduct MP’s portion of the evaluation program in the aggregate amount of $1.5 million, which the Company will pay in 18 equal consecutive non-refundable, non-creditable monthly installments of $83,333, beginning with the first monthly anniversary of entry into the agreement. Further, the Company will pay MP up to an aggregate of $1.0 million upon the satisfaction of certain performance milestones.

 

If the Company exercises the option, the license will be exclusive and worldwide (other than Association of Southeast Asian Nations) and for any and all uses in human and non-human animals, and with the right to sublicense. The Company may, in its discretion, exercise the option for a reduced portion of the territory and, if the Company has elected a reduction the territory, may increase as it wishes within the territory, and as many times as it wishes, provided such increase is made within 60 months of the Company’s exercise of the option.

 

If the Company exercises the option, it will pay MP a non-refundable, non-creditable license fee of $1.0 million, of which $500,000 will be paid within 15 business days of exercise, and $500,000 will be paid in the form of “deemed royalty” payments (up to such amount) equal to a fraction of a percent of net sales of licensed products. The Company will pay tiered royalties of a fraction of a percent on designated levels of annual net sales of license products.  Further, the Company will pay a non-refundable, non-creditable additional royalty equal to a fraction of a percent on the net sales of licensed products of a designated amount sold by the Company, its sublicensees, and product partners, but the royalty will not exceed $1.0 million in the aggregate. Royalties will be paid on a country-by-country basis and product-by-product basis until the date on which there are no valid claims of any licensed MP patent covering a product in the applicable country.

If the Company exercises the option, the agreement’s term will run on a country by country and product by product basis until the date on which there are no valid claims in the licensed MP patents covering a particular product in a particular country.

 

 

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