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Vitae Pharmaceuticals, Inc. Index to Financial Statements

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 001-36617

VITAE PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)

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(215) 461-2000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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          Securities registered pursuant to Section 12(b) of the Act:

          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 o    No ý

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

          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 ý    No o

          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 Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. ý

          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 ý    No o

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

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

          As of June 30, 2015 (the last business day of the Registrant's most recently completed second fiscal quarter), the aggregate market value of shares of common stock of the Registrant held by non-affiliates of the Registrant, based on the last sale price of the common stock reported by The NASDAQ Global Market on such date, was approximately $148.1 million.

          As of February 29, 2016, there were 22,079,610 outstanding shares of the registrant's common stock, $.0001 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE:

          The registrant has incorporated by reference in Part III of this annual report on Form 10-K portions of the registrant's definitive Proxy Statement for the 2016 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant's last fiscal year.

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VITAE PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K contains "forward-looking statements" that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect," "could," "plan," "potential," "predict," "seek," "should," "would" or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other important factors, including those described in the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K. In light of these risks, uncertainties, assumptions and other factors, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

        Forward-looking statements include, but are not limited to, statements about:

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the timing of enrollment, commencement and completion of our clinical trials;



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the timing and success of preclinical studies and clinical trials conducted by us and our development partners;



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the scope, progress, expansion, and costs of developing and commercializing our current or future product candidates;



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the size and growth of the potential markets for our current or future product candidates and the ability to serve those markets;



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our expectations regarding our expenses and revenue, the sufficiency of our cash resources and needs for additional financing;



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our ability to establish and maintain development partnerships;



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the ability to obtain and maintain regulatory approval of our product candidates, and the labeling for any approved products;



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the rate and degree of market acceptance of any of our current or future product candidates;



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our expectations regarding competition;



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our anticipated growth strategies;



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our ability to attract or retain key personnel;



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our expectations regarding federal, state and foreign regulatory requirements;



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regulatory developments in the United States and foreign countries;



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our ability to obtain and maintain intellectual property protection for our structure-based drug discovery platform and our product candidates;



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the anticipated trends and challenges in our business and the market in which we operate; and

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the use or sufficiency of our existing cash, cash equivalents and marketable securities.

        Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Any forward-looking statement made by us in this Annual Report on Form 10-K speaks only as of the date of this report. Except as required by law, we disclaim any duty to update any of these forward-looking statements after the date of such statements are made, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

INDUSTRY AND MARKET DATA

        We obtained the industry, market and competitive position data used throughout this annual report on Form 10-K from our own internal estimates and research, as well as from industry and general publications, in addition to research, surveys and studies conducted by third parties. Internal estimates are derived from publicly-available information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In addition, while we believe the industry, market and competitive position data included in this annual report on Form 10-K is reliable and is based on reasonable assumptions, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed in "Risk Factors." These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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PART I

Item 1.    BUSINESS

        We are a clinical stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases where there are significant unmet medical needs. We are developing a robust and growing portfolio of novel product candidates generated by Contour®, our proprietary structure-based drug discovery platform. Our most advanced wholly owned product candidate is VTP-43742 for the treatment of psoriasis, as well as multiple other autoimmune disorders. In 2015, we completed two Phase 1 studies with VTP-43742 and expect to announce top-line results from a Phase 2a proof-of-concept clinical trial by the end of the first quarter of 2016. VTP-38543, our second product candidate is in a Phase 2a proof-of-concept clinical trial for the treatment of atopic dermatitis with trial results expected in the second half of 2016. We also have a product candidate, VTP-36951 for the treatment and prevention of Alzheimer's disease, or Alzheimer's, which was previously being developed by Boehringer Ingelheim GmbH, or BI, pursuant to a research collaboration and license agreement. We plan to make a decision on the development of VTP-36951 in the first half of 2016. We intend to advance and retain rights to our current and future product candidates that we believe can be developed and commercialized by us, and to strategically partner where doing so can accelerate a program and generate non-dilutive capital for us.

        Our current portfolio of product candidates includes:

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VTP-43742, a first in class oral small molecule, which is being developed for the treatment of psoriasis as well as multiple other autoimmune disorders. Autoimmune disorders comprise a large number of disease conditions where the body mounts an inappropriate immune response against normal, healthy tissues. These disorders include commonly known diseases such as psoriasis, psoriatic arthritis, ankylosing spondylitis, inflammatory bowel disease (IBD) and multiple sclerosis (MS), as well as numerous orphan diseases. Increased activity of a class of lymphocytes called Th17 cells is a critical part of the pathophysiology of many human autoimmune disorders. RAR-Related Orphan Receptor gamma-t, or RORgt, is a nuclear hormone receptor that is essential for the formation and function of these Th17 cells. Preclinical studies in animal models have demonstrated that inhibition of RORgt activity is beneficial for the treatment of multiple autoimmune disorders. In preclinical studies, VTP-43742 has been shown to down regulate the IL-23 receptor and inhibit the secretion of Interleukin 17, or IL-17, and other cytokines, which are pro-inflammatory proteins, from Th17 cells. In September 2015, we announced positive top-line results from a single ascending dose trial that assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in 53 healthy human volunteers over several dose levels. In November 2015, we announced positive top line results from a Phase 1 multiple ascending dose clinical trial of VTP-43742 designed to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple ascending doses of VTP-43742 in up to 40 healthy human volunteers over multiple dose levels. The observed half-life in plasma in these trials was consistent with once-a-day dosing. We are currently conducting a Phase 2a proof-of-concept trial in patients with moderate to severe psoriasis and have closed enrollment at 34 psoriatic patients. We believe that the totality of the data from these patients including clinical efficacy Psoriasis Area Severity Index, or PASI, scores from baseline and accelerated biomarker data, will be sufficient to allow us to decide on the next steps for the program. We are currently completing the study and analyzing the data and expect to announce clinical efficacy and initial biomarker results by the end of the first quarter of 2016. Assuming the results of the Phase 2a proof-of-concept trial are positive, we plan to initiate a Phase 2 trial in psoriasis in the second half of 2016 and continue to assess whether clinical trials in additional indications are appropriate for VTP-43742. In addition to VTP-43742, we are progressing backup compounds in our RORgt program and plan to continue to assess other additional potential indications for further development.

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VTP-38543, a potential first in class topical LXRb selective agonist, is being developed for atopic dermatitis, also known as eczema. Atopic dermatitis is a common inflammatory skin disease seen in children and adults. According to the National Eczema Association, an estimated 31.6 million people in the United States have symptoms of eczema or eczematous conditions. Atopic dermatitis is characterized by both a loss of barrier function, which is the impermeable outer layer of the skin, and skin inflammation. Liver X receptors, or LXRs, which include LXRa and LXRb, work to synthesize and transport fats out of skin cells, stimulate the production of the outer layer of skin cells, and inhibit the production of inflammatory proteins. Based on its mechanism, VTP-38543 is expected to improve barrier function and decrease inflammation, in this case in damaged skin tissue. VTP-38543 has been shown in preclinical studies to stimulate the development of mature skin cells known as corneocytes as well as to increase the surrounding lamellar body lipids in the skin to improve its barrier function, while also decreasing skin inflammation. In a preclinical model of atopic dermatitis, topical VTP-38543 has demonstrated equal anti-inflammatory efficacy versus high potency topical corticosteroids, the current standard of care. VTP-38543 is currently in a Phase 2a proof-of-concept clinical trial assessing the safety, tolerability and efficacy of VTP-38543 in patients with atopic dermatitis. We anticipate clinical trial results in the second half of 2016.



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VTP-36951 was being developed for the treatment and prevention of Alzheimer's exclusively by BI as BI 1147560 pursuant to a research collaboration and license agreement with BI, or the BACE Agreement. In July 2015, BI notified us that it was terminating the BACE Agreement for strategic business reasons effective as of October 21, 2015. In connection with the termination of the BACE Agreement, we received the rights to the BACE program, including VTP-36951, which includes, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer's and the other indications covered by the BACE Agreement. We continue to assess the BACE program to determine the appropriate next steps and expect to provide an update on our plans for the program in the first half of 2016.

        In addition to our existing product candidates, we utilize a structure-based drug discovery platform, and leverage our expertise to create novel, potent and selective product candidates. We utilize Contour to discover and develop product candidates for validated therapeutic targets against which the industry has traditionally struggled to develop drugs due to challenges related to potency, selectivity, pharmacokinetics, or patentability issues. We refer to these targets as "difficult-to-drug." Contour's computational software uses artificial intelligence and sophisticated algorithms to model the assembly of molecular fragments, which are chemical structures consisting of one to several atoms, into fully elaborated, drug-like structures that precisely fit each target's 3-dimensional binding site. These molecules are then assessed by Contour's state-of-the-art scoring function to identify the most promising and drug-like structures. Together, these functions allow us to rapidly focus on those structures with the highest potential from among hundreds of billions of possibilities for a given biologic target. We chemically synthesize, comprehensively test and critically evaluate these novel structures rapidly, iterating each new data set back into the design process until we identify product candidates with demonstrable first- or best-in-class potential. Our experienced scientists are experts in the related disciplines of structural biology, molecular modeling (i.e., the design of drugs using computers), medicinal chemistry and biology. Our scientists utilize our platform and approach for each of our product candidates to rapidly overcome discovery obstacles. We have achieved animal proof-of-concept with a qualified product candidate in less than 18 months from the initiation of a program.

        Our executive management team and accomplished drug discovery scientists possess substantial experience across the full spectrum of drug discovery, development and commercialization. Our Chief Executive Officer previously held a number of executive and commercial positions at Bristol-Myers Squibb Company, or BMS, including head of BMS' Immunology and Virology divisions. While at BMS, he successfully launched products in several therapeutic areas. Our Chief Scientific Officer was

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previously head of Clinical Discovery for BMS, where he was involved in the development of all of BMS' compounds from preclinical candidate selection through to human proof-of-concept, including central nervous system agent Abilify (aripriprazole), cardiovascular agent Eliquis (apixaban), oncology agent Erbitux (cetuximab) and Sprycel (dasatinib), virology agent Reyataz (atazanavir) and immunology agent Orencia (abatacept). Three internationally recognized medicinal chemists—two professors of chemistry from Harvard University and a former Merck distinguished scientist now in the American Chemical Society's Hall of Fame—founded our company.

Our Strategy

        Our goal is to leverage our leadership in structure-based drug discovery to deliver first- or best-in-class small molecule compounds to patients in diseases where there are significant unmet medical needs.

        The key elements of our business strategy are to:

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Advance our growing portfolio of product candidates. We have discovered internally a pipeline of novel product candidates in a variety of important disease areas, including VTP-43742 for the treatment of psoriasis, as well as multiple autoimmune disorders, and VTP-38543 for atopic dermatitis, and have initiated several early stage discovery programs. We currently intend to retain rights to VTP-43742 and VTP-38543, which we plan to advance through clinical development and commercialization.



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We intend to retain rights to and advance product candidates in certain therapeutic and geographic areas where we believe that we can effectively further develop and, if approved, commercialize a product candidate. As a result, we plan to establish late-stage development and commercialization capabilities for certain of our product candidates in the United States and potentially other markets. For example, we intend to progress VTP-43742 for the treatment of psoriasis, as well as potential multiple other autoimmune disorders which we are considering developing VTP-43742 to treat, in the United States because we believe that many potential autoimmune disorders are treated by specialist physicians who could be reached by a focused commercial organization.



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Selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of our product candidates. We intend to continue to consider opportunities to collaborate with large pharmaceutical and biotechnology companies for certain therapeutic areas and geographies where we can leverage our collaborators' development, regulatory and commercial expertise and financial resources to maximize the value of our product candidates and generate non-dilutive capital for Vitae.



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Leverage Contour, our proprietary structure-based drug discovery platform, to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets. We plan to continue to apply Contour to targets that have significant unmet medical needs and validated biology, but which have traditionally been considered difficult-to-drug. We believe targets with validated biology, achieved through genetics, animal data and direct clinical experience, increase the probability of success of our discoveries. Difficult-to-drug targets provide an opportunity to leverage our structure-based drug discovery capabilities with Contour to overcome significant discovery obstacles, including potency, selectivity, pharmacokinetics properties and novelty, and to discover and advance new product candidates with first- or best-in-class potential. We expect that using Contour and applying these selection criteria will result in the discovery and development of product candidates with the potential to have significant competitive advantages.



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Continue investing in technology, people and intellectual property. We believe that our technological approach to drug discovery, combined with our world class team of scientists

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spanning various scientific functions, enhances our ability to quickly and effectively discover and develop novel compounds. We intend to continue to invest in Contour and to recruit the world's leading scientists in order to maintain our leadership in the field.

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We seek to aggressively protect our assets by broadly filing patent applications that cover the novel discoveries we create. Each of our most advanced product candidates is the subject of patents and patent applications for composition of matter and methods of treatment in major markets worldwide. These patents and patent applications, if granted, are expected to provide us with intellectual property protection for all of our current product candidates until 2030 and beyond. We intend to continue to expand our intellectual property protections by seeking and maintaining domestic and international patents on inventions that are commercially important to our business. We will also rely on know-how and continuing technological innovation to develop and maintain our proprietary position.

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Product Portfolio

        The following table summarizes key information about our most advanced product candidates as of December 31, 2015:

VTP-43742 Targeting RAR-Related Orphan Receptor gamma-t (RORgt) for Autoimmune Disorders

Overview

        VTP-43742, our wholly owned clinical candidate in an on-going Phase 2a proof-of-concept trial in psoriasis, is an orally active small molecule inhibitor of RORgt activity for the treatment of a variety of autoimmune disorders. Autoimmune disorders comprise a large number of diseases in which the body mounts an inappropriate immunological response against normal human tissues. These disorders include common autoimmune disorders such as psoriasis, psoriatic arthritis, ankylosing spondylitis, IBD and MS, as well as numerous orphan diseases. Increased activity of a class of lymphocytes called Th17

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cells and excess production of inflammatory proteins, including Interleukin 17, or IL-17 and activation of the IL-23 pathway, by these cells are believed to be critical parts of the pathophysiology of many human autoimmune disorders. RORgt is a nuclear hormone receptor that is essential for the formation and function of Th17 cells. We believe inhibition of RORgt activity in Th17 cells will be beneficial for the treatment of multiple autoimmune disorders, specifically, psoriasis, psoriatic arthritis, ankylosing spondylitis, IBD and MS, as well as numerous orphan diseases. In preclinical studies we have determined that VTP-43742 is a potent binder to RORgt that inhibits the conversion of naïve T cells into Th17 cells and the secretion of multiple inflammatory proteins. It was shown to be greater than 1000-fold more potent for binding to RORgt relative to two closely related receptors, RORa and RORb. Those preclinical studies have also shown that VTP-43742 inhibits the secretion of IL-17, down regulates the IL-23 receptor and inhibits other inflammatory proteins from Th17 cells, and is therapeutically beneficial in an animal model of autoimmune diseases.

        We have selected moderate to severe psoriasis as the initial, lead indication for VTP-43742. Our decision is based on the clinical validation of the Th17 pathway by the IL-17 and IL-23 monoclonal antibodies, the unmet need for better oral therapies for psoriasis, the potential size of the market and the potential length of time to filing a New Drug Application with the U.S. Food and Drug Administration, or the FDA, compared to the other indications we evaluated.

        In September 2015, we announced positive top-line results from a single ascending dose trial that assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in 53 healthy human volunteers over several dose levels. In November 2015, we announced positive top line results from a Phase 1 multiple ascending dose clinical trial of VTP-43742 designed to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple ascending doses of VTP-43742 in up to 40 healthy human volunteers over multiple dose levels. The results of these trials demonstrated that VTP-43742 was generally safe and well tolerated at all dose levels across a broad dose range and that the half-life in plasma was consistent with once-a-day dosing. We also began a four week Phase 2a proof-of-concept clinical trial in psoriasis patients in second half of 2015. We expect to announce clinical efficacy and initial biomarker results for this multiple dose Phase 2a proof-of-concept clinical trial by the end of the first quarter of 2016. If the results of the Phase 2a proof-of-concept trial are positive, we plan to conduct a Phase 2 clinical trial in psoriasis, which we expect would begin in the second half of 2016. In addition to VTP-43742, we are currently advancing a second, structurally different compound in our RORgt program.

IL-17 and Th17 Cells in Autoimmune diseases

        IL-17 was discovered in the 1990's as a pro inflammatory protein, or cytokine. It has been implicated in multiple autoimmune disorders including psoriasis, MS and RA. In 2000, it was determined that IL-17 is produced primarily by a subset of T cells, which are a type of lymphocyte, called Th17 cells. Inappropriately regulated Th17 cells can attack normal human tissues, and have been shown to play a significant role in multiple autoimmune diseases. IL-23 stimulates Th17 cells, by binding to IL-23 receptors on Th17 cells, to secrete excessive amounts of multiple cytokines including IL-17. Persistent secretion of cytokines, especially IL-17, by Th17 cells promotes chronic inflammation by activating other cells to make additional inflammatory mediators such as tumor necrosis factor alpha, or TNFa, and the interleukins IL-1b, IL-6, and IL-8. Therapies inhibiting the activity of IL-23, particularly the new p19 specific IL-23 monoclonal antibodies, and IL-17 have the potential to transform treatment for various autoimmune diseases. Blockade of IL-17 activity by monoclonal antibodies has been shown to be clinically superior to Enbrel® and/or Stelara® in human psoriasis clinical trials. Additional Phase 3 trials assessing the efficacy of IL-17 antibodies in ankylosing spondylitis and psoriatic arthritis also delivered positive clinical data. In January 2015, the FDA approved the first IL-17 antibody, Cosentyx (secukinumab), for the treatment of moderate-to-severe psoriasis. The antibody was also approved in Japan and in Europe as a first-line treatment. These

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results have created interest in identifying targets in Th17/IL-17 pathway that could be exploited to treat chronic inflammation and autoimmune diseases.

        As shown in Figure 1 below, Th17 cells are derived from naïve T cells. A mix of cytokines and growth factors induce RORgt expression which helps to complete the differentiation process from naïve T cells to Th17 cells. The expression of RORgt drives the secretion of IL-17 from Th17 cells along with a group of additional cytokines, and it also upregulates the IL-23 receptor, providing a positive feedback loop, further driving the activity of Th17 cells. These cytokines are inflammatory mediators that, in turn, activate other inflammatory cells and the production of additional inflammatory molecules down stream of Th17 cells as depicted below.

Figure 1: Naive T cells differentiate into Th17 cells by action of multiple factors. Expression of RORgt in Th17 cells drives expression of inflammatory cytokines that exacerbate autoimmune disease.

RORgt as a Target in Autoimmune diseases

        The ROR protein family consists of three related receptor isotypes—RORa, RORb and RORg. RORa is expressed in many tissues, including brain, liver, thymus, and skeletal muscle. RORb has a limited expression pattern and is found mainly in the retina of the eye and the pineal gland, which is a small gland in the brain. RORg has a broad pattern of expression, similar to RORa. RORgt is a variant of the RORg gene and is found only in immune cells. Mice lacking RORa have a movement disorder due to deficiency and degeneration of specific brain cells. Similarly, lack of RORb in mice leads to blindness due to abnormal retinal development. Mice deficient in RORgt have impaired Th17 cell differentiation; however, these mice are otherwise healthy and are also resistant to many autoimmune disorders. We believe that these immuno-protective findings have stimulated a broad interest in developing RORgt inhibitors as a novel mechanism to control Th17 function to treat autoimmune disease. We believe that any viable product candidate needs to be highly specific for RORgt because of the potential safety concerns that are associated with inhibiting RORa or RORb activity.

        Antibodies being developed to target the Th17/IL-23/IL-17 pathways have been extensively studied and have demonstrated efficacy in human trials in psoriasis, MS, and ankylosing spondylitis, which is an immune mediated inflammatory disease of the lower back. One of the anti-IL-17 antibodies, secukinumab, in separate studies was shown to be superior to an anti-TNF-a antibody in psoriatic patients as well as an anti-IL-23 antibody. We believe that a small molecule, such as VTP-43742, that targets the same pathway by inhibiting the activity of RORgt in Th17 cells, may have the advantage of being orally active, affecting a broader spectrum of inflammatory proteins, having a lower cost of goods, and being easier to dose adjust or stop therapy when needed, and could compliment or compete with antibody approaches currently in development.

        The RORgt ligand pocket is well characterized and is suitable for targeting with small molecules. Many competing RORgt programs have struggled to achieve the potency and the requisite selectivity needed for a clinical candidate. There are subtle variations among the three ROR receptors in the

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ligand binding pocket. We have exploited these variations using Contour to develop VTP-43742. Our preclinical studies of VTP-43742 have shown that it is potent and is more than 1000-fold more selective at binding to RORg than binding to RORa and RORb.

Market Opportunity

        Autoimmune diseases are characterized by an abnormal immune response against substances or tissues normally found in the body. They include more than one hundred different disease indications, ranging from relatively common disorders such as psoriasis, which affects more than 10 million people worldwide, to very rare disorders affecting only a few hundred worldwide.

        Many autoimmune disorders have at their root an overactive immune system pathway known as the T_H17 pathway. RORgt, which our oral compound VTP-43742 inhibits, is the master regulator of that pathway. Antibody therapies targeting this T_H17 pathway have demonstrated superior clinical efficacy results versus well established current therapy standards, in numerous head-to-head clinical trials and in multiple autoimmune indications. Based on T_H17 pathway biology and these clinical results, we expect VTP-43742 to deliver benefit as an oral therapy option for: patients with psoriasis, which will be the lead indication we pursue, psoriatic arthritis, ankylosing spondylitis and possibly MS, steroid resistant asthma and IBD.

        Within the psoriasis market, we expect to target the moderate-to-severe patient population, which we believe has significant unmet medical need. In that segment, the large majority of physicians (85+%) choose between topical agents, phototherapy and oral therapies like methotrexate, cyclosporine apremilast or retinoids to treat their patients. We believe that an RORgt inhibitor like VTP-43742 could offer a valuable therapeutic option to physicians and patients, as a potential superior oral agent. Additionally, if VTP-43742 achieves antibody-like efficacy in these patients, VTP-43742 may have upside competing directly against the biologics portion of the market.

Preclinical Data

        We analyzed the ability of VTP-43742 to bind to RORgt in a biochemical binding assay. As shown in Figure 2 below, the Ki value of VTP-43742 to RORgt, which measures how tightly the compound binds to its target, is low (3.7 nM). The binding affinity of VTP-43742 to the other ROR isotypes, namely RORa and RORb, is much weaker as evidenced by the relatively higher Ki values, which is important because significant toxicities are associated with inhibition of these two related receptors. Our internal studies have shown VTP-43742 to be greater than 1000-fold more potent for RORgt as compared to RORa and RORb.

Figure 2: Binding affinity of VTP-43742 to isolated human ROR a, b, and gt.

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        Experimental autoimmune encephalomyelitis, or EAE, is a mouse model of MS that we believe can serve as a useful surrogate model for human MS since both are associated with inflammation and demyelination, or loss of the protective sheath around nerves, along with a Th17 dependent disease process. In a study of VTP-43742 in the EAE mouse model of MS, the efficacy of a maximum efficacious dose of VTP-43742 was compared to a maximum efficacious dose of a monoclonal antibody against mouse IL-17 to assess their effects on disease progression. VTP-43742 was orally administered twice daily from the time of disease induction while the IL-17 mAb was administered on Day 0 and 14. As shown in Figure 3 below, VTP-43742 reduced the clinical score to almost 0 while the IL-17 mAb demonstrated the expected 55% reduction. This provides experimental support consistent with orally administered VTP-43742 being at least equivalent, and potentially superior, to IL-17 pathway mAbs for the treatment of autoimmune diseases.

VTP-43742 Comparison to an IL-17 mAb in Mouse EAE Model

Figure 3: A maximum dose of VTP-43742 was compared to a maximum dose of a mouse IL-17 mAb for Clinical Score efficacy in the mouse EAE model of MS. In this model, VTP-43742 was superior to the IL-17 mAb.

        EAE is characterized by an immune mediated inflammatory response in the spinal cord of diseased mice which leads to the loss of the myelin sheaths around the nerve axons in the spinal cord. We therefore examined the effect of VTP-43742 on the spinal cord and the loss of myelin sheaths in EAE animals. Representative histological sections of hematoxylin and eosin, two tissue stains frequently used in the microscopic analysis of tissues, stained spinal cords from animals treated with dosing solution without drug, anti-IL-17 antibody, or VTP- 43742 were examined after disease induction. In Figure 4, in the vehicle treated animal, there are large numbers of vacuoles and inflammatory cells, while in the IL-17 mAb treated animal, there are decreased numbers of vacuoles but large numbers of inflammatory cells, consistent with clinical benefit of the IL-17 mAb treatment. The spinal cord from the VTP-43742 treated animal is normal in appearance which is consistent with the almost complete absence of clinical findings. Figure 5 below shows the spinal cord messenger RNA levels for IL-17A and for the receptor for IL-23, or IL-23R, from the VTP-43742 versus IL-17 mAb study in the EAE model. In the IL-17 mAb treated animals, the gene expression of IL-17A was little changed and IL-23R decreased by approximately 35%, while in the VTP-43742 treated animals, the gene expression of IL-17A and IL-23R both decreased by 80 to 90%. Collectively, these data demonstrate that

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VTP-43742 is effective in reducing disease activity, and has clinical efficacy equivalent, and potentially superior, to IL-17 mAbs, in a clinically relevant animal model of human MS via blockade of the immune mediated inflammatory process and an inhibition of RORgt driven gene expression.

Figure 4: Higher power micrographs from spinal cords of vehicle, IL-17 mAb, and VTP-43742 treated mice in the EAE model of MS. Vehicle treated animals have evidence of demyelination (large vacuoles) and inflammation, IL-17 mAb treated animals have less demyelination but large numbers of inflammatory cells, and VTP-43742 treated animals have a normal appearing spinal cord.

Figure 5: Spinal cord gene expression for IL-17A and the receptor for IL-23 (IL-23R) from the VTP-43742 versus IL-17 mAb study in the EAE model. For the IL-17 mAb treated animals, the gene expression was little changed (IL-17A) or decreased approximately 35% (IL-23R) while in the VTP-43742 treated animals, they were both decreased by 80 to 90%.

Clinical Trial Data

        In September 2015, we announced positive top-line results from a Phase 1 single ascending dose trial that assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in 53 healthy human volunteers over several dose levels. Overall, VTP-43742 was safe and generally well tolerated at all dose levels across a 60-fold dose range. No dose limiting findings and no serious adverse events were reported, and there were no drug-related clinical laboratory or electrocardiogram, or ECG, abnormalities. The plasma half-life was observed to be approximately 30 hours in this clinical trial, supporting the potential for effective once-a-day dosing in humans. In animal studies, continuous

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24 hour inhibition of RORgt was necessary to achieve full therapeutic efficacy, indicating the importance of a relatively long plasma half-life. In addition to the safety analysis, we also conducted an ex vivo assay in blood obtained from the study subjects to assess VTP-43742's ability to inhibit the production of pro-inflammatory cytokines from Th17 cells. Specifically, we measured the ability of VTP-43742 to inhibit the production of IL-17A, one of several pro-inflammatory cytokines whose production is regulated by RORgt. Subjects receiving VTP-43742 showed a dose-dependent suppression of RORgt dependent IL-17A production to more than 90 percent, with the effect largely sustained over the full 24-hour measurement period.

        In November 2015, we announced positive top line results from a Phase 1 multiple ascending dose clinical trial of VTP-43742 designed to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple ascending doses of VTP-43742 in 40 healthy human volunteers over multiple dose panels. In this double-blind, randomized, placebo-controlled trial examining the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple oral doses of VTP-43742 in 40 healthy human volunteers, VTP-43742 was shown to be safe and generally well tolerated at all dose levels assessed. There were no dose limiting findings, no serious adverse events, and all study subjects completed the full 10 days of dosing. We saw no drug-related clinical laboratory or ECG abnormalities. Additionally, dose proportionality was demonstrated across all dose levels tested, and the half-life was consistent with once-a-day dosing.

        In an ex vivo whole blood assay, VTP-43742 was also shown to suppress the RORgt dependent production of the pro-inflammatory cytokine IL-17A in blood obtained from study subjects. Those who received VTP-43742 showed a dose and exposure-dependent suppression of IL-17A production by more than 90 percent sustained for a full 24 hours in all but the lowest dose cohort. Figure 6 shows the drug levels over 24 hours after the tenth day of dosing. The lowest dose level exceeded the IC50 for inhibition of IL-17A secretion for the full 24 hours, while the next higher dose level was at or exceeded the IC90 for the full 24 hours. The three highest dose levels greatly exceeded the IC90 for the full 24 hours. These results extend the results of the suppression of IL-17 production seen in the single ascending dose clinical trial of VTP-43742 in healthy human volunteers.

Day 10 Plasma Exposures

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Figure 6: Plasma drug levels over 24 hrs after 10 days of dosing in study cohorts 1-5. The y-axis is a linear scale, and the error bars are standard deviation. The IC₅₀ and IC₉₀ concentrations/lines for inhibition of IL-17A secretion were determined from the ex vivo Whole Blood Assay. Cohort 1 was at or above the IC₅₀ for the full 24 hours and Cohort 2-5 were at or above the IC₉₀ for the full 24 hours.

        We are currently conducting a Phase 2a proof-of-concept study in patients with moderate to severe psoriasis, which has closed enrollment and we expect to announce clinical efficacy and initial biomarker results by the end of the first quarter of 2016. In this trial, we are assessing the safety, tolerability, pharmacokinetics and the clinical efficacy of VTP-43742. The clinical efficacy will be measured by the percent change in PASI score from baseline. PASI scoring is a standardized visual measure of the clinical severity of psoriasis. Typically it takes 12 to 16 weeks for psoriasis therapies to achieve their full clinical benefit in patients; however, we believe that the four-week duration of this trial will be sufficient to allow us to see a signal of efficacy. We note from literature that both orals and monoclonal antibodies demonstrate some level of efficacy at 4 weeks, but we caution that extrapolating to full efficacy response is difficult. The exact proportion ratio of 4 week efficacy compared to full 12 week efficacy in those studies varies widely, with the 4 week efficacy ratio ranging from as high as ³/4 to as low as ¹/4 of the full 12 week efficacy response, depending on the agent. In addition to the clinical data, we will also perform biomarker analysis from punch biopsies of patients, including histology, immunohistochemistry and transcriptional analysis.

Development Plans

        We initiated a four week, Phase 2a, multiple ascending dose clinical trial in September of 2015. This clinical trial is being performed in patients with moderate to severe psoriasis, in which we will analyze the safety, tolerability and pharmacokinetics of four weeks of once-a-day dosing of VTP-43742. This clinical trial is expected to provide proof-of-concept against an autoimmune disease since four weeks is generally a sufficient time period to observe at least some improvement in the skin lesions of psoriasis patients. In addition to demonstrating clinical improvement in the skin lesions of psoriatic patients, skin biopsies will be performed to assess inflammation as well as treatment related changes in Th17, IL-17, and other effector cytokines. We have closed enrollment at 34 psoriatic patients. We believe that the totality of the data from patients including clinical efficacy PASI scores and accelerated biomarker data, will be sufficient to allow us to decide on the next steps for the program. We are currently completing the study and analyzing the data and expect to announce clinical efficacy and initial biomarker results by the end of the first quarter 2016. We are also currently performing the necessary Phase 2 enabling non-clinical studies and planning for a Phase 2b clinical trial, which we expect to begin in the second half of 2016, assuming the results of the Phase 2a proof-of-concept trial are positive. In addition to VTP-43742, we are advancing a second, structurally different compound in our RORgt program.

VTP-38543 Targeted for Liver X Receptor Beta (LXRb) for Atopic Dermatitis

Overview

        We are currently enrolling patients in a Phase 2a proof-of-concept trial for VTP-38543, an LXRb selective agonist, as a topical agent for the treatment of mild to moderate atopic dermatitis. Atopic dermatitis is a common inflammatory skin disease in children that also affects a large number of adults. It is characterized by a loss of barrier function of the skin, as well as skin inflammation. Other diseases that have some of the same characteristics include contact or allergic dermatitis and psoriasis. The two most commonly used classes of topical therapies for atopic dermatitis are glucocorticoids and calcineurin inhibitors. Though effective, they both have been shown to have serious side effects in some patients. We believe there is a significant opportunity to develop a new therapy that is equally effective but has a better safety and tolerability profile.

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        Activation of LXR in skin keratinocytes plays an important role in maintaining skin function. LXR activity is critical for maintaining the impermeable barrier of skin by stimulating the differentiation of keratinocytes into corneocytes , and stimulating the secretion of lipid rich bodies, called lamellar bodies, which "glue" the corneocytes into becoming the impermeable outer barrier of skin. LXR activation also has an anti-inflammatory effect in skin. We believe LXR agonists' ability to both improve skin inflammation and improve the barrier function of the skin is unique.

        In cell based assays, VTP-38543 has been shown to increase LXRb activity and increase markers of lipid synthesis and secretion of lipids from cells. It has also shown decreases in the production of pro-inflammatory proteins from a human macrophage cell line. VTP-38543 decreases skin inflammation in an in vivo mouse model of skin inflammation. It also increases the production of proteins in the skin that are involved in lipid synthesis and secretion that are critical for maintenance of barrier function. Formulation work has been performed, and a formulation has been identified that we believe may provide acceptable skin penetration with appropriate efficacy. We initiated and are currently enrolling patients in a Phase 2a proof-of-concept trial in adult atopic dermatitis patients with VTP-38543 in December 2015.

Barrier Function and Inflammation in Atopic Dermatitis

        The most abundant cells in the epidermis are keratinocytes, shown in Figure 7 below. These cells differentiate to form the corneocytes, and also generate the lipids that, along with the corneocytes, make up the outermost layer of the epidermis, which is called the stratum corneum. The stratum corneum forms an impermeable protective barrier that prevents loss of water and blocks invasion by irritants, allergens and pathogens. Accumulating evidence from human genetic studies suggests that primary defects in the epidermal structure, particularly formation of the stratum corneum, play a pivotal role in many atopic dermatitis patients in driving the pathogenesis of atopic dermatitis. For example, filaggrin is an important structural protein in the stratum corneum. According to a 2009 study published in the Journal of Investigative Dermatology, up to 55% of Europeans with atopic dermatitis have mutations in the filaggrin gene. Other mutations have been identified in barrier proteins that decrease the formation of the lamellar lipids that are also a part of the stratum corneum. In other patients with atopic dermatitis, an inflammatory process appears to be playing the pivotal role in driving the pathophysiology. In these patients, the inflammatory process leads to breakdown of the barrier function and the full expression of the disease process. The net effect of these epidermal impairments and inflammatory processes is a reduced ability in atopic skin to self-repair, leading to extended signaling of repair and inflammatory cascades. These signals lead to further impairment of skin functions resulting in chronic activation of inflammatory cells which eventually presents as atopic dermatitis and related conditions.

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Figure 7: Depiction of the composition and architecture of the epidermis.

LXR in Promoting Barrier Function and Suppressing Inflammation

        LXRs are important regulators of epidermal biology. Activation of LXRs by ligands, which are molecules that bind to the ligand binding site on LXR, leads to stimulation of keratinocyte differentiation, epidermal lipid synthesis and an anti-inflammatory response in skin cells. LXR ligands stimulate keratinocyte differentiation by inducing the expression of genes involved in differentiation, including involucrin, loricrin and filaggrin Topical application of LXR agonists has been demonstrated to augment epidermal lipid synthesis and secretion into extracellular spaces in mouse skin by inducing new lipid synthesis and expression of the ABC family of lipid transporters. In addition, LXR ligands have been shown to have anti-inflammatory properties. LXR agonism exerts general inhibitory action on pro-inflammatory genes in multiple cell types. This anti-inflammatory activity is illustrated by the observed efficacy of LXR agonists in mouse models of irritant dermatitis. As a result, we believe LXR activation has potential as a novel therapeutic approach because it enhances the integrity of the epidermal barrier and simultaneously suppresses skin inflammation.

Market Opportunity

        Atopic dermatitis, also known as eczema, affects both children and adults. The National Eczema Association reports that there are approximately 31.6 million people in the United States with symptoms of eczema or eczematous conditions and, among that group, at least 17.8 million people have symptoms of atopic dermatitis, considered a more severe form of eczema. The National Institute of Arthritis and Musculoskeletal and Skin Diseases estimates that the worldwide prevalence of atopic dermatitis in infants and children is approximately 7- 17%, approximately 60% of whom have recurrence of the disease as adults. The two most commonly used classes of topical therapies for atopic dermatitis are glucocorticoids and calcineurin inhibitors. Though effective, they both have been shown to have serious side effects in some patients. For glucocorticoids, these side effects include thinning of the skin and loss of barrier function, adrenal suppression caused by drug absorption through the skin, and contraindications for use on the face and other sensitive areas of skin. For calcineurin inhibitors, these side effects include a burning sensation upon application and a black box warning for the potential to induce cancer. Two calcineurin inhibitors approved for sale in 2001 had combined annual sales of greater than $450 million in 2004. These two treatments were required to add a "black box warning" in 2005 for risk of cancer, and combined annual sales dropped. In 2013, the combined annual

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sales of these two products were approximately $240 million. We believe that VTP-38543 can be developed as a first-in-class therapy that controls inflammation and improves the skin barrier function in these patients while avoiding the side effects associated with existing treatments.

Preclinical Data

        The ability of VTP-38543 to bind to LXR was determined in biochemical binding assays. VTP-38543 is a potent binder to LXRb (26 nM). VTP-38543 was also tested for its ability to induce LXR-mediated activity in a cell-based assay. VTP-38543 is a potent partial agonist of LXRb with an EC50 of 16 nM.

        We also assessed the ability of VTP-38543 to reduce inflammation in a mouse ear model of inflammation. As shown in Figure 8 below, the chemical tetradecanoylphorbol acetate, or TPA, induced a strong inflammatory response (Figure 8B) as shown by the infiltration of neutrophils (small arrows) and increased ear swelling as indicated by the width of the double headed arrow. Topical treatment with VTP-38543 significantly reduced both neutrophil infiltration and swelling (Figure 8D). The effect was comparable to the reduction observed upon topical treatment with a potent glucocorticoid, clobetasol (Figure 8C).

Figure 8: VTP-38543 is efficacious in a chemically induced mouse ear model of inflammation. A: Vehicle treated, no chemical induction. B: Vehicle treated + chemical (TPA) induction. C: Glucocorticoid (clobetasol) + TPA induction. D: VTP-38543 + TPA induction.

        LXR activation has been previously shown to reduce inflammation in multiple human cell types including macrophages. IL-6 is a key cytokine involved in skin inflammation and is expressed in human macrophages. Consistent with its anti-inflammatory effect in the mouse dermatitis model, as shown in Figure 9 below, VTP-38543 was able to reduce IL-6 expression in human THP-1 macrophages in a concentration dependent manner.

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Inhibition of IL-6 Secretion by THP-1 Macrophages

Figure 9: VTP-38543 significantly decreased expression of IL-6 in activated THP-1 macrophages.

        ABCG1 and SREBP1c are key LXR target genes that are involved in lipid transport and lipid synthesis, and are important genes for maintaining dermal barrier function. Mice lacking ABCG1 or SREBP1c display abnormal barrier formation. VTP-38543 was tested in primary cultures of human epidermal keratinocytes for induction of these same lipid metabolism and transport markers. As shown in Figure 10 below, VTP-38543 induced the expression of both ABCG1 and SREBP1c in a concentration-dependent manner in primary human cells.

Figure 10: In primary cultures of human epidermal keratinocytes, VTP-38543 significantly increased expression of ABCG1 and SREBP1c after 24 hours.

        We have identified a suitable topical cream formulation with appropriate drug stability, release, permeation and aesthetic characteristics for use in a clinical trial. Formulated VTP-38543 was applied to fresh human skin obtained at the time of cosmetic surgery and placed in organ culture. As shown in

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Figure 11 below, there was a strong induction of the genes which are LXR dependent markers of barrier function.

Figure 11: ABCG1 and SREBP1c mRNA levels in human skin. Three different cream formulations of VTP-38543 were applied to fresh, whole-thickness, human skin, and put into organ culture for 24 hours. ABCG1 and SREBP1c mRNA levels were then quantitated.

Development Plans

        VTP-38543 is in a four-week Phase 2a proof-of-concept trial in adult patients with mild to moderate atopic dermatitis. The trial opened in December 2015 and we expect to enroll 100 patients. The clinical trial is a randomized, placebo-controlled, double-blind trial evaluating the safety, tolerability, efficacy, pharmacokinetics and pharmacodynamics of multiple ascending topical doses of VTP-38543. Top-line results for this clinical trial are expected in the second half of 2016.

VTP-36951 Targeting b-Site Amyloid Precursor Protein Cleaving Enzyme 1 (BACE) for Alzheimer's Disease

Overview

        VTP-36951 is our orally active BACE inhibitor. VTP-36951 was previously being developed for the treatment and prevention of Alzheimer's exclusively by BI as BI 1147560 pursuant to the BACE Agreement. Under the terms of the BACE Agreement, BI was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the BACE program. In July 2015, BI notified us that it was terminating the BACE Agreement for strategic business reasons effective as of October 21, 2015. In connection with the termination of the BACE Agreement, we received the rights to the BACE program, including VTP-36951, which includes, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer's, diabetes and the other indications covered by the BACE Agreement.

        Prior to termination of the BACE Agreement, we were developing VTP-37948/BI 1181181, or BI1181181, in collaboration with BI for Alzheimer's. However, in February of 2015, BI voluntarily placed BI 1181181 on a clinical hold to further investigate skin reactions observed in some study participants during a Phase 1 multiple rising dose trial. BI had completed its analysis and concluded that skin reactions would be burdensome for patients and, therefore, an obstacle for further development of the compound. BI had decided to move forward with the development of VTP-36951,

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which was discovered as part of our BACE collaboration. VTP-36951, has been shown to lower Ab levels by up to 95% in preclinical studies. In these preclinical studies, VTP-36951 has shown no significant off-target activity. We believe that VTP-36951 has attractive development properties, and BI has completed all GLP toxicology studies that we believe are necessary prior to first in human trials. We continue to assess the BACE program to determine the appropriate next steps and expect to provide an update on our plans for the program in the first half of 2016.

BI187004 (VTP-34072) Targeting 11b Hydroxysteroid Dehydrogenase Type 1 (11b HSD1) for Type 2 Diabetes and Metabolic Syndrome

        BI187004 (VTP-34072), an orally active 11b HSD1 inhibitor, previously was being developed in collaboration with BI for type 2 diabetes. Under the terms of the research collaboration and license agreement with BI, or the 11b Agreement, BI was exclusively responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the 11b HSD1 program. In July 2014, BI initiated a randomized, double-blind, placebo-controlled Phase 2 proof-of-concept trial to assess the safety, tolerability, efficacy, pharmacokinetics and pharmacodynamics of BI187004 as monotherapy and as an add-on to metformin background therapy over a period of 28 days in patients with type 2 diabetes mellitus. In June 2015, we reported that top-line results from the metformin arm of the Phase 2 trial did not meet the predefined primary efficacy endpoint criteria (fasting glucose lowering). In December 2015, we announced that BI187004 did not achieve the predefined primary efficacy endpoint criteria of the trial. As a result, BI informed us of its intention to terminate the program and the 11b Agreement effective as of March 9, 2016. We have no current plans to continue the program independently, but will continue to assess options.

Contour—Our Structure-Based Drug Design Platform

Other Discovery Programs

        We have initiated several early stage discovery programs using our Contour platform. We discovered certain potential compounds that bind to and inhibit our undisclosed targets. We plan to conduct preclinical animal studies to optimize these compounds, confirm that they are active and advance them as potential development candidates.

Traditional Discovery Approach Compared to Contour

        Small molecule drugs continue to represent the majority of drug approvals in the United States. In 2014, the FDA approved 30 small molecule drugs out of 41 new drug approvals. Small molecule drugs interact with a target molecule, typically a protein, either to induce or to inhibit that molecule's function within the human body. Traditionally, small molecule drugs have been discovered through the screening of thousands to millions of compounds from existing chemical libraries against a predictive biological assay for a disease target. Under this method of small molecule drug discovery, molecules or potential drugs are inspected one at a time and modeled or docked by a scientist. We believe that traditional small molecule drug discovery is an inefficient, costly and time-consuming process due in part to:

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the use of molecules that have been generated based on targets other than the one of interest;



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the absence of high affinity molecules from the library;



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the need for each molecule in a library for docking to be assessed in the many different shapes, or conformations, in which the molecule can exist, which can multiply the potential number of molecules to be docked to over a trillion members which vastly increases the complexity of the assessment; and

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the lack of a high quality scoring function, which is a computer program that predicts how tightly a molecule will bind to the active site on a protein, resulting in docking experiments of questionable reliability.

        By contrast, we are developing pharmaceutical product candidates through the use of our proprietary, structure-based drug design platform called Contour. The Contour platform combines our proprietary drug design and modeling software program with a proprietary directional model-based fast and accurate scoring function. Our experienced multi-disciplinary scientific staff integrates these features with the disciplines of x-ray crystallography, molecular modeling, medicinal chemistry and biology in order to create a rapid, iterative structure-based design and optimization process. We believe Contour enables our drug discovery process to be more efficient than traditional pharmaceutical approaches because it allows us to rationally design or alter chemical compounds to specifically interact with the targeted protein by computationally growing and scoring small molecules in a three dimensional structure of a target protein. We believe that the algorithms in Contour increase the chances for the discovery of potent and selective compounds for protein targets, and enable us to successfully pursue difficult-to-drug targets. Moreover, we believe that Contour accelerates optimization of lead compounds, since modification of a compound may be undertaken with knowledge of the relationship between the compound's structure and its desired biological effect, rather than through experimentation after randomly generated modifications to that compound.

Contour Discovery Process

        Our discovery process is summarized in Figure 12 below.

Figure 12: Contour discovery process.

        We select drug targets that are implicated in diseases that represent large market opportunities where there are significant unmet medical needs and where the target has validated biology but has been difficult-to-drug. We believe that our proprietary drug discovery platform Contour provides a competitive advantage in solving difficult-to-drug targets, or those that have not been successfully solved using conventional high throughput library screening and optimization. We believe targets with validated biology, achieved through genetics, animal data and direct clinical experience, increases the probability of success of our discoveries. We frequently rely on mouse gene knock-out models or human genetic diseases for target validation. We combine the experience and judgment of our internal

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scientific leadership team with that of outside key scientific thought leaders to finalize the selection of a new therapeutic target to pursue.

        We believe that the proprietary software component of our Contour platform represents a compelling de novo design approach to drug discovery because it increases the probability of successfully generating novel molecules that best fit into a protein binding site, as compared to the traditional human-guided computational methods. Our Contour platform allows for the creation of novel, drug-like molecules by assembling synthetically viable fragments in a protein binding site using a high-resolution x-ray crystal structure or homology model of the protein. As shown in Figure 13 below, our Contour platform does this by virtually growing drug-like molecules by assembling fragments in well-defined binding pockets. Dynamic Fragment Selection, or DFS, is a novel component of Contour that uses the physical characteristics of the binding site in selecting complementary fragments during the growth process. Contour's proprietary artificial intelligence experientially optimizes performance in subsequent iterations.

Figure 13: Our discovery process and illustration of the molecule assembly process by the Contour growth algorithm.

        The grown molecules are then scored by our proprietary empirical scoring function. The score produced by Contour provides a prediction of the binding affinity or potency of enzyme inhibition. The Contour scoring function allows us to rank order grown molecules and helps identify those that have a high probability of exhibiting activity against the protein target of interest. The final Contour score is approximately equivalent to pKi (-logKi). For example, scores of 6.0, 7.0, 8.0, 9.0, and 10.0 correspond to binding constants of 1000, 100, 10, 1.0, and 0.1 nM, respectively.

        As compared to other software programs used to predict protein-ligand binding affinities, we believe that Contour's is amongst the most effective at accurately predicting potency and position of a molecule in the protein binding site. This enables our team of drug discovery scientists to rapidly improve and optimize drug molecules.

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        Once the computationally designed compounds with the highest predicted binding affinity have been identified and prioritized by our modelers and chemists, our chemists synthesize these priority compounds. Synthesized compounds are assayed in a set of biochemical and cell based assays to determine binding affinity and activity against the molecular target. The pharmacokinetics of the synthesized compounds are determined in mice or rats. The efficiency and quality of this discovery process are exemplified by the speed at which important milestones have been reached for these challenging targets. By leveraging our Contour platform and through the efforts of our accomplished drug discovery scientists, we have in the case of each of our discovery programs been able to rapidly overcome the obstacles of the target and obtain novel compounds in 7 months or less and animal proof-of-concept with oral dosing in 16 months or less.

Collaborations

        We previously had two collaborations with BI relating to VTP-34072, for the treatment of type 2 diabetes, and VTP-36951, for the treatment of Alzheimer's. In October 2015, the BACE Agreement was terminated, and in December 2015, BI notified us that it was terminating the 11b Agreement effective as of March 9, 2016.

11b HSD1

        In October 2007, 21 months after initiating our 11b HSD1 program, we entered into a research collaboration and license agreement with BI, or the 11b Agreement, under which the companies agreed to combine their respective 11b HSD1 programs and to work together to identify and develop compounds for patients with type 2 diabetes and certain related metabolic disease conditions, such as dyslipidemia. As of December 31, 2015, we have received $80.2 million from BI since 2007 related to the 11b Agreement, including a $15 million equity investment, $22.2 million in upfront fees and research funding and $43 million in development milestones.

BACE

        In June 2009, 18 months after initiating our BACE program, we entered into a second research collaboration and license agreement with BI, or the BACE Agreement under which the companies agreed to work together to identify and develop BACE inhibitors for the treatment of Alzheimer's. As of December 31, 2015 we have received $78.2 million from BI related to BACE including a $15 million equity investment, $34.2 million in upfront fees and research funding and $29 million in development milestones.

Intellectual Property

        Our commercial success depends in part on our ability to obtain and maintain proprietary or intellectual property protection for our product candidates, our core technologies, and other know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary or intellectual property rights. Our policy is to seek to protect our proprietary and intellectual property position by, among other methods, filing patent applications in the United States and in foreign jurisdictions related to our proprietary technology and product candidates. We also rely on trade secrets, know-how and continuing technological innovation to develop and maintain our proprietary and intellectual property position.

        We file patent applications directed to the composition of matter and methods of use for our product candidates. The technology underlying our patents and patent applications has been developed

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by us and was not acquired from any in-licensing agreement. The intellectual property portfolios for our key product candidates are summarized below.

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RORgt—Autoimmune Disease:  Our most advanced RORgt inhibitor compound for our autoimmune disease program, VTP-43742, is in clinical development and is claimed in an international patent application filed under the Patent Cooperation Treaty, or PCT, as well as in the U.S. and Taiwan. These applications include claims to VTP-43742 as a member of a class of related compounds and methods of using these compounds to treat various indications. The PCT application will allow for the filing of patent applications and pursuit of patents on a worldwide basis. A U.S. patent specifically claiming VTP-43742 issued in February 2016. The issued U.S. patent and any patents that may issue from the pending applications will expire January 2035, not including possible extensions due to patent office or regulatory delay.



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LXRb—Atopic Dermatitis:  Our selective agonist compound for our atopic dermatitis program, VTP-38543, is in clinical development, and we are pursuing patent protection in 15 jurisdictions, including the U.S., Europe, Japan, Canada, Australia, Brazil, China and India. These patent applications include claims to VTP-38543 as a member of a class of related compounds and methods of using these compounds to treat various indications, including atopic dermatitis. A U.S. patent specifically claiming VTP-38543 issued in April 2015. The issued U.S. patent and any patents that may issue from the pending applications will expire in March 2033, not including possible extensions.



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LXRb—Acute Coronary Syndrome:  Our most advanced LXRb selective agonist compound for our ACS program, VTP-38443, and we are pursuing patent protection in 15 jurisdictions, including the U.S., Europe, Japan, Canada, Australia, Brazil, China and India. These patent applications include claims to VTP-38443 as a member of a class of related compounds and methods of using these compounds to treat various indications. A U.S. patent specifically claiming VTP-38543 issued in July 2015. The issued U.S. patent and any patents that may issue from these applications will expire in March 2033, not including possible extensions due to patent office or regulatory delay.

        The PCT is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in each of the member states. Although a PCT application is not itself examined and cannot issue as a patent, it allows the applicant to seek protection in any of the member states through applications to the national or regional patent offices of the individual countries in which the applicant wants to secure a patent, which are referred to as "national-phase" applications. Once the applicant enters the national phase, each national or regional patent office concerned begins the process of determining whether to grant a patent in the applicable country or region. Patents based on PCT national-stage applications are granted on a country-by-country basis. The grant of a patent from a PCT national-phase application in a particular member state does not provide any patent rights in any other PCT member state. However, with respect to regional offices under the PCT, such as the European Patent Office, once a patent has been granted by the regional office, the patent can be nationalized and made enforceable in each member country of the regional office without further examination.

        The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In most countries, including the U.S., the patent term is 20 years from the earliest filing date of 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 USPTO in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier filed patent. The term of a patent that covers a drug may also be eligible for patent term extension when FDA approval is granted, provided statutory and regulatory requirements are met. In the future, if and when our product candidates receive approval by the FDA or foreign regulatory

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authorities, we expect to apply for patent term extensions on issued patents covering those drugs, depending upon the length of the clinical trials for each product candidate and other factors. There can be no assurance that any of our pending patent applications will issue or that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents.

        With respect to Contour, our proprietary structure-based drug discovery platform, we consider trade secrets and know-how to be our primary intellectual property.

Competition

        The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technology, knowledge, experience and scientific resources provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions.

        Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical studies, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.

        The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience, price, the level of generic competition and the availability of reimbursement from government and other third-party payors.

        Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any drugs that we may develop. Our competitors also may obtain FDA or other regulatory approval for their drugs more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of a lower cost alternative for the indication, including generic drugs. Generic drugs for the treatment of the indications on which we currently plan to initially focus are currently on the market, and additional drugs are expected to become available on a generic basis over the coming years. If we obtain marketing approval for our product candidates, we expect that they will be priced at a significant premium over competitive generic drugs.

        While our product candidates may compete with many existing drugs and other therapies, to the extent they are ultimately used in combination with or as an adjunct to these therapies, our product candidates will not be competitive with them. Some of the currently-approved drug therapies are branded and subject to patent protection, and others are available on a generic basis. Many of these approved drugs are well-established therapies and are widely-accepted by physicians, patients and third-party payors.

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        If our product candidates are approved, they will compete with currently marketed drugs and potentially with product candidates currently in development focusing on the same mechanism of action which include:

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RORgt: We believe that a number of companies including large pharmaceutical companies and large biotech companies are actively assessing RORgt inhibitors in preclinical studies.



•

LXRb: We believe that Alexar Therapeutics, Inc. is developing an LXRb inhibitor for dermatologic conditions.



•

BACE: We believe that Merck & Co., AstraZeneca PLC in collaboration with Eli Lilly and Company, and Eisai Co., Ltd. in collaboration with Biogen Idec are studying BACE inhibitors in clinical trials.

Manufacturing

        We do not have any manufacturing facilities or personnel. We rely on third parties for the manufacture of our product candidates for preclinical studies and clinical trials, as well as the commercial manufacture if our product candidates receive marketing approval. We obtain our supplies from these manufacturers on a purchase order basis and do not have long-term supply arrangements in place. For all of the product candidates being developed by us, we intend to identify and qualify additional manufacturers to provide the active pharmaceutical ingredient, or API, and fill-and-finish services prior to seeking regulatory approval. All of our product candidates are small molecules and are manufactured in reproducible synthetic processes from readily available starting materials. We believe the chemistry is scalable and will not require unusual equipment in the manufacturing process. We expect to continue to develop product candidates that can be produced cost-effectively at contract manufacturing facilities.

Commercialization

        For certain of our unpartnered product candidates, we expect to retain U.S. commercial rights in specialty markets and establish regional partnerships to commercialize outside the United States. We have not established sales, marketing or product distribution operations because our most advanced product candidates are still in preclinical or early clinical development. We currently do not have any sales or marketing experience. We plan to establish the required capabilities within an appropriate time frame ahead of any product approval and commercialization to support a product launch.

Government Regulation and Product Approval

        Governmental authorities in the United States, at the federal, state and local level, and analogous authorities in other countries extensively regulate, among other things, the research, development, testing, manufacture, safety surveillance, efficacy, quality control, labeling, packaging, distribution, record keeping, promotion, storage, advertising, distribution, marketing, sale, export and import, and the reporting of safety and other post-market information of products such as those we are developing. Our product candidates must be approved by the FDA through the New Drug Application, or NDA, process before they may be legally promoted in the United States and by the European Medicines Agency through the Marketing Authorization Application, MAA, process before they may be legally marketed in Europe. Our product candidates will be subject to similar requirements in other countries outside of Europe and the United States prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and resources.

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United States Government Regulation

NDA Approval Processes

        In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, and the FDA's implementing regulations. An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:

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completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA's good laboratory practice regulations;



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in the case of clinical trials conducted in the United States, submission to the FDA of an IND which must take effect before clinical trials may begin;



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in the case of clinical trials conducted in the United States, approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;



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performance of adequate and well-controlled clinical trials in accordance with good clinical practice, or GCP, regulations to establish the safety and efficacy of the proposed drug product for each indication;



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preparation and submission to the FDA of an NDA;



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review of the product by an FDA advisory committee, where appropriate or if applicable;



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satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product or its components are produced to assess compliance with current good manufacturing practices, or cGMP, regulations and to assure that the facilities, methods and controls are adequate to preserve the product's identity, strength, quality and purity;



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payment of user fees and securing FDA approval of the NDA; and



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compliance with any post-approval requirements, including potential requirements for a risk evaluation and mitigation strategies and post-approval outcomes studies required by the FDA.

        Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Preclinical studies include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Clinical trials are required to be conducted in compliance with the rules and regulations of the countries in which they are being conducted. In the case of clinical trials conducted in the United States, an IND is required to be submitted to the FDA prior to commencing the trial. An IND sponsor must submit the results of the preclinical studies, together with manufacturing information and analytical data, to the FDA as part of the IND. Some preclinical studies may continue even after the IND is submitted. In addition to including the results of the preclinical studies, the IND will also include a protocol detailing, among other things, the objectives 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 determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND, and may affect one or more specific clinical trials or all clinical trials conducted under the IND.

        All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with cGCP regulations. They must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually.

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Sponsors also must timely report to FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure, or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug. An institutional review board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before the clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each research subject or the subject's legal representative, monitor the study until completed and otherwise comply with IRB regulations.

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

•

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



•

Phase 2.  Clinical trials are performed on a limited patient population intended 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 and optimal dosage.



•

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 studies are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product approval and labeling claims.

        Clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, 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. In some cases, clinical trials are overseen by an independent group of qualified experts organized by the trial sponsor, which is called the clinical monitoring board or data safety monitoring board. This group provides authorization for whether or not a trial may move forward at designated check points. These decisions are based on the limited access to data from the ongoing trial.

        During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to the submission of an IND, at the end of Phase 2 and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical trial results and present their plans for the pivotal Phase 3 clinical trial or trials that they believe will support the approval of the new drug. Sponsors may also request a Special Protocol Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis that will form the primary basis of an efficacy claim.

        According to published guidance on the SPA process, a sponsor that meets the prerequisites may make a specific request for an SPA and provide information regarding the design and size of the proposed clinical trial. The FDA is supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional information. An SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be

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documented and made part of the record. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the drug was identified after the testing began.

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

        The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, 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 user fees, but a waiver of such fees may be obtained under specified circumstances. The FDA reviews all NDAs submitted for a period of 60 days to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted 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 review. NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. A priority review designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA's goal for taking action on the NDA from ten months to six months from FDA filing of the NDA. The FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval and issue a complete response letter. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested.

Post-approval Requirements

        Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA and other governmental agencies, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

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        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 some state agencies for compliance with GMP regulations and other laws. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

        Failure to comply with the applicable U.S. requirements at any time during the product development process or approval process, or after approval, may subject us to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:

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refusal to approve pending applications;



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withdrawal of an approval;



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imposition of a clinical hold;



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warning letters;



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product seizures;



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total or partial suspension of production or distribution; or



•

injunctions, fines, disgorgement, or civil or criminal penalties.

        The FDA strictly regulates the marketing, labeling, advertising and promotion of drug 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. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

        From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often issued revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be issued or changed or what the impact of such changes, if any, may be.

Regulation Outside of the United States

        In addition to regulations in the United States, we will be subject to regulations of other countries governing our business activities, including, our clinical trials and the commercial sale and distribution of our products. Even if we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the United States before we can commence clinical trials in such countries and approval of the regulators of such countries or economic areas, such as the European Union, or EU, before we may market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing and promotion, pricing and reimbursement vary greatly by geographic region, and the time may be longer or shorter than that required for FDA approval.

        Under EU regulatory systems, a company may submit a MAA either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative disorders or diabetes and optional for those medicines which are highly innovative, provides for the grant of a single

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marketing authorization that is valid for all EU member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessments report, each member state must decide whether to recognize approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.

Other Healthcare Laws

        Although we currently do not have any products on the market, if our drug candidates are approved and we and our partners begin commercialization, we and/or our partners may be subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security, price reporting and physician sunshine laws. Our pre-commercial activity is subject to some of these laws, such as the laws relating to privacy and security, and anti-kickback laws described below, among others.

        The federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully, directly or indirectly, solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, lease of any good, facility, item or service for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. The term "remuneration" has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. Violations of this law are punishable by up to five years in prison, and can also result in criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs.

        Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.

        The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent or not provided as claimed. Entities can be held liable under these laws if they are deemed to "cause" the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers, promoting a product off-label, or for providing medically unnecessary services or items. In addition, our future activities relating to the reporting of wholesaler or estimated

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retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. Penalties for False Claims Act violations may include up to three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil statute, False Claims Act violations may also implicate various federal criminal statutes.

        The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, the Affordable Care Act amended the intent standard for certain healthcare fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

        The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

        Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws.

        Because we intend to commercialize products that could be reimbursed under a federal healthcare program and other governmental healthcare programs, we intend to develop a comprehensive compliance program that establishes internal controls to facilitate adherence to the rules and program requirements to which we will or may become subject. BI currently maintains a Code of Conduct and Corporate Integrity for its U.S. operations. Although the development and implementation of compliance programs designed to establish internal controls and facilitate compliance can mitigate the risk of investigation, prosecution, and penalties assessed for violations of these laws, the risks cannot be entirely eliminated. If our operations or those of our partners are found to be in violation of any of such laws or any other governmental regulations, we or our partners may be subject to penalties, including, without limitation, administrative civil, and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and individual imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

        HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, including the final omnibus rule published on January 25, 2013, mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH makes HIPAA's privacy and security standards directly applicable to "business associates", namely independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity. HITECH

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also increased the civil and criminal penalties that may be imposed against covered entities and business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney's fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties.

        The Affordable Care Act imposed, among other things, new annual reporting requirements for covered manufacturers for certain payments and "transfers of value" provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of value and ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an aggregate of $1 million per year for "knowing failures." Covered manufacturers were required to begin collecting data on August 1, 2013 and submit reports on aggregate payment data to the government for the first reporting period (August 1, 2013 - December 31, 2013) by March 31, 2014, and were required to report detailed payment data for the first reporting period and submit legal attestation to the completeness and accuracy of such data by June 30, 2014. Thereafter, covered manufacturers must submit reports by the 90th day of each subsequent calendar year.

        More generally, the Affordable Care Act has had, and is expected to continue to have, a significant impact on the healthcare industry. The Affordable Care Act was designed to expand coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the Affordable Care Act expanded and increased industry rebates for drugs covered under Medicaid programs and made changes to the coverage requirements under the Medicare prescription drug benefit. We cannot predict the impact of the Affordable Care Act on pharmaceutical companies, as many of the reforms require the promulgation of detailed regulations implementing the statutory provisions, some of which has not yet occurred. In the coming years, additional legislative and regulatory changes could be made to governmental health programs that could significantly impact pharmaceutical companies and the success of our product candidates.

Coverage and Reimbursement

        Sales of our products will depend, in part, on the extent to which the costs of our products will be covered by third-party payors, such as government health programs, private health insurers and managed care organizations. Third-party payors generally decide which drugs they will cover and establish certain reimbursement levels for such drugs. In particular, in the United States, private health insurers and other third-party payors often provide reimbursement for products and services based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of our product candidates will therefore depend substantially on the extent to which the costs of our product candidates will be paid by third-party payors. Additionally, the market for our product candidates will depend significantly on access to third-party payors' formularies without prior authorization, step therapy, or other limitations such as approved lists of treatments for which third-party payors provide coverage and reimbursement. Additionally, coverage and reimbursement for therapeutic products can differ significantly from payor to payor. One third-party payor's decision to

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cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. As a result, the coverage determination process will require us to provide scientific and clinical support for the use of our products to each payor separately and will be a time-consuming process.

        Third-party payors are developing increasingly sophisticated methods of controlling healthcare costs and increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could limit our net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products after approved as a benefit under their plans or, if they do, the level of reimbursement may not be sufficient to allow us to sell our products on a profitable basis. Decreases in third-party reimbursement for our products once approved or a decision by a third-party payor to not cover our products could reduce or eliminate utilization of our products and have a material adverse effect on our sales, results of operations and financial condition. In addition, state and federal healthcare reform measures have been and will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

        In addition, in some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, reimbursement and pricing for products launched in the EU do not follow those of the United States and generally tend to be significantly lower.

Employees

        As of December 31, 2015, we employed 56 employees, 54 of whom are full-time and engaged in research and development activities, operations, finance, business development and administration, and 28 of our employees hold doctorate degrees (Ph.D., M.D. or PharmD.). None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Our Corporate Information

        We were incorporated in Delaware in May 2001. Our principal executive offices are located at 502 West Office Center Drive, Fort Washington, Pennsylvania 19034 and our telephone number is (215) 461-2000. Our website address is www.vitaepharma.com. The inclusion of our website address in this report is, in each case, intended to be an inactive textual reference only and not an active hyperlink to our website. The information contained in, or that can be accessed through, our website is not part of this report.

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Available Information

        Our Annual Reports on 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our website located at www.vitaepharma.com after they are filed with or furnished to the Securities and Exchange Commission, or the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K, and you should not consider information contained on our website to be part of this annual report on Form 10-K or in deciding whether to purchase shares of our common stock. These reports are also available at the SEC's Internet website at www.sec.gov. The public also may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

        A copy of our Code of Conduct and Ethics and the charters of the Audit Committee, Compensation Committee and Nominating and Governance Committee are posted on our website, www.vitaepharma.com, and are available in print to any person who requests copies by contacting Vitae by calling (215) 461-2000 or by writing to Vitae, Inc., 502 West Office Center Drive, Fort Washington, Pennsylvania 19034.

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Item 1A.    RISK FACTORS

        You should carefully consider the risk factors set forth below as well as the other information contained in this Annual Report on Form 10-K and in our other public filings in evaluating our business and prospects. Any of the following risks could materially and adversely affect our business, prospects, financial condition or results of operations. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, prospect, financial condition or results of operations. In these circumstances, the market price of our common stock would likely decline and you could lose all or part of your investment.

Risks Related to Our Financial Position and Capital Needs

We have incurred substantial operating expenses in every year since our inception and anticipate that we will continue to incur substantial operating expenses for the foreseeable future. We may never achieve profitability from product sales.

        We are a clinical stage biotechnology company with no product sales to date. Investment in biotechnology product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we have incurred substantial operating expenses in every period since our inception in 2001. With the exception of collaboration revenues from programs that we partnered, we had no revenues. For the years ended December 31, 2015, 2014 and 2013, we had operating expenses of $44.3 million, $27.2 million and $20.3 million, respectively. As of December 31, 2015, we had an accumulated deficit of $174.0 million. Our operating expenses have resulted principally from costs incurred in our discovery, research and development activities.

        We anticipate that our expenses will increase in the future as we expand our development, manufacturing and commercialization activities, continue our discovery and research activities, and seek regulatory approval for our product candidates. If we do not enter into partnerships for any of our product candidates on acceptable terms, we may incur substantial operating losses over the next several years as we execute our plan to expand our development, manufacturing and commercialization activities and continue our discovery and research activities. There can be no assurance that we will enter into a new collaboration or receive milestone payments or royalties and, therefore, no assurance our operating expenses and net losses will not increase prohibitively in the future.

        To become and remain profitable, we or our partners must succeed in developing our product candidates, obtaining regulatory approval for them, and manufacturing, marketing and selling those products for which we or our partners may obtain regulatory approval. We or they may not succeed in these activities, and we may never generate revenue from product sales. Even if we are profitable in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become and remain profitable would depress our market value and could impair our ability to raise capital, expand our business, discover or develop other product candidates or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

We currently have no source of product sales revenue.

        To date, we have not generated any revenues from commercial sales of our product candidates. Our ability to generate product revenue depends upon our ability, alone or with our partners, to successfully commercialize products, including any of our current product candidates or other product candidates that we may develop, in-license or acquire in the future. We do not anticipate generating

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revenue from the sale of products for the foreseeable future. Our ability to generate future product revenue from our current or future product candidates also depends on a number of additional factors, including our or our partners' ability to:

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successfully complete research and clinical development of current and future product candidates;



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



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obtain marketing approval from relevant regulatory authorities in jurisdictions where we or our partners intend to market our product candidates;



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launch and commercialize future product candidates for which we or our partners obtain marketing approval, if any, and if launched independently, successfully establish a sales force, marketing and distribution infrastructure;



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



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achieve market acceptance for our or our partners' products, if any;



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establish, maintain and protect our intellectual property rights; and



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attract, hire and retain qualified personnel.

        In addition, because of the numerous risks and uncertainties associated with biotechnology product development, including that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of any potential future product sales revenues. In addition, our expenses could increase beyond expectations if we decide to or are required by the FDA or foreign regulatory authorities to perform studies or trials in addition to those that we currently anticipate. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing these products.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.

        As of December 31, 2015, our cash, cash equivalents and marketable securities were approximately $59.4 million. We believe that we will continue to expend substantial resources for the foreseeable future as we continue to develop VTP-43742 and VTP-38543, and any future product candidates. In the event that we determine to continue the clinical development of our BACE program or VTP-38443, we will expend substantial additional resources. These expenditures will include costs associated with research and development, potentially acquiring new technologies, conducting preclinical studies and clinical trials, seeking regulatory approvals and manufacturing products, as well as marketing and selling products approved for sale, if any. In addition, other unanticipated costs may arise. Because the outcome of our planned and anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates.

        Our future capital requirements depend on many factors, some of which may be beyond our control, including:

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

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the timing of, and the costs involved in, obtaining regulatory approvals for our other product candidates if clinical trials are successful;



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the cost of commercialization activities for our other product candidates, if any of these product candidates is approved for sale, including marketing, sales and distribution costs;



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the timing, receipt, and amount of milestone and royalty payments on product candidates developed under any future collaborations;



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the cost of manufacturing our other product candidates for clinical trials in preparation for regulatory approval and commercialization;



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



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



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the timing, receipt, and amount of sales of, or royalties on, other future product candidates, if any.

        Based on our current operating plan, which as of now does not include any expenses relating to further development of the BACE program, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our projected operating and capital expenditure requirements through the end of 2016. Our operating plan may change as a result of our assessment of the BACE program and many factors currently unknown to us, and we may need additional funds sooner than planned. We intend to assess the BACE program and revise our operating plan accordingly after determining the appropriate next steps. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

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

        We may seek additional capital through a variety of means, including through private and public equity offerings, debt financings and strategic partnerships. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts for VTP-43742, VTP-38543, VTP-36951 or other future product candidates or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

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Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments may be limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of our initial public offering.

        Under Section 382 of the Internal Revenue Code of 1986, as amended, 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 carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We believe that, as a result of our initial public offering, our follow-on public offering in January 2015, our preferred stock financings and other transactions, we have experienced, or may experience, an "ownership change." We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As of December 31, 2015, we had federal and state net operating loss carryforwards of approximately $87.3 million and $84.5 million, respectively, and federal research and development credits of approximately $7.7 million, which could be limited if we experience an "ownership change." Any such limitations would generally be equal to our equity value at the time of the ownership change multiplied by a risk-free rate of return published monthly by the IRS, which may result in greater tax liabilities than we would incur in the absence of such limitation. Such an increased liability could adversely affect our business, results of operations, financial condition and cash flow.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

        As has been widely reported, global credit and financial markets have been experiencing extreme disruptions over the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be compromised by economic downturns, a volatile business environment and unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary equity or debt financing more difficult to secure, more costly or more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could harm our growth strategy, financial performance and stock price and could require us to delay or abandon plans with respect to our business, including clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers or other third parties with which we conduct business may not survive difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

Risks Related to the Clinical Development and Regulatory Approval of Our Product Candidates

If we or our partners do not obtain regulatory approval for our current and future product candidates, our business will be adversely affected.

        Our product candidates are and will be subject to extensive governmental regulations relating to, among other things, development, clinical trials, manufacturing and commercialization. In order to obtain regulatory approval for the commercial sale of any product candidates, we or our partners must demonstrate through extensive preclinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Clinical testing is expensive, time-consuming and uncertain as to outcome. For instance, in the first quarter of 2015, BI voluntarily placed BI 1181181 on a temporary clinical hold to further investigate skin reactions observed in some study participants during a Phase 1 multiple rising dose trial. After completing its analysis, BI concluded that skin reactions are burdensome for patients and, therefore, an obstacle for further development of the compound. Prior to the termination of the BACE Agreement, BI decided to move forward with the development of a structurally different compound, VTP-36951.

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        We or our partners may gain regulatory approval for VTP-36951, VTP-43742, VTP-38543, VTP-38443, BI187004, or other future product candidates in some but not all of the territories available or some but not all of the target indications, resulting in limited commercial opportunity for the approved product candidates, or we or they may never obtain regulatory approval for these product candidates.

Delays in the commencement, enrollment or completion of clinical trials of our product candidates could result in increased costs to us as well as a delay or failure in obtaining regulatory approval, or prevent us from commercializing our product candidates on a timely basis, or at all.

        We cannot guarantee that clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely commencement, enrollment or completion of clinical development include:

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delays by us or our partners in reaching a consensus with regulatory agencies on trial design;



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



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delays in obtaining required Institutional Review Board, or IRB, approval at each clinical trial site;



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delays in recruiting suitable patients to participate in clinical trials;



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imposition of a voluntary clinical hold by our partners or us or a clinical hold by regulatory agencies for any reason, including safety concerns or after an inspection of clinical operations or trial sites;



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failure by CROs, other third parties or us or our partners to adhere to clinical trial requirements;



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failure to perform in accordance with the FDA's good clinical practices, or GCP, or applicable regulatory guidelines in other countries;



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delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;



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delays caused by patients not completing participation in a trial or not returning for post-treatment follow-up;



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clinical trial sites or patients dropping out of a trial;



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occurrence of serious adverse events in clinical trials that are associated with the product candidates that are viewed to outweigh its potential benefits; or



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changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

        Delays, including delays caused by the above factors, can be costly and could negatively affect our or our partners' ability to complete a clinical trial. If we or our partners are not able to successfully complete clinical trials, we will not be able to continue development, obtain regulatory approval or commercialize our product candidates.

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Clinical failure may occur at any stage of clinical development, and because our product candidates are in an early stage of development, there is a high risk of failure, and we may never succeed in developing marketable products or generating product revenue.

        Our early encouraging preclinical results for VTP-43742, VTP-38543, VTP-38443 and VTP-36951 and clinical results for BI187004 and BI 1181181 are not necessarily predictive of the results of our ongoing or future clinical trials. Promising results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and successful results from early clinical trials of a drug candidate may not be replicated in later and larger clinical trials or in clinical trials for different indications. For instance, in February 2015, BI voluntarily placed BI 1181181 on a temporary clinical hold to further investigate skin reactions observed in some study participants during a Phase 1 multiple rising dose trial. After completing its analysis, BI concluded that skin reactions are burdensome for patients and, therefore, an obstacle for further development of the compound. Prior to the termination of the BACE Agreement, BI decided to move forward with the development of a structurally different compound, VTP-36951. Additionally, in June 2015, we announced that top-line clinical efficacy results from the metformin arm of the on-going Phase 2 proof-of-concept clinical trial of BI187004 in the treatment of overweight type 2 diabetic patients did not meet BI's predefined endpoint criteria. If the results of our or our partners' ongoing or future clinical trials are inconclusive with respect to the efficacy of our product candidates or if we or they do not meet the clinical endpoints with statistical significance or do not meet market expectations or if there are safety concerns or adverse events associated with our product candidates, we may need to delay, reduce, modify or redesign the scope of, or eliminate one or more product development programs and we or our partner may be prevented or delayed in obtaining marketing approval for the applicable product candidate, which could have a material adverse effect on our business, prospects and financial condition and on the value of our common stock. In addition, if our competitor's clinical trials in similar indications are not successful, we may need to conduct additional or cost prohibitive clinical studies to overcome the presumptions resulting from these unsuccessful trials. For instance, in 2012, we halted our plans for a large Phase 2 clinical trial for a former product candidate, VTP-27999, which was being developed for renin inhibition, a protein important for kidney function and blood pressure control, following the release of clinical data from another pharmaceutical company that would have required us to significantly increase the scope, scale and duration of clinical trial work to obtain regulatory approval. Moreover, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay or prevent regulatory approval. Alternatively, even if we or our partners obtain regulatory approval, that approval may be for indications or patient populations that are not as broad as intended or desired or may require labeling that includes significant use or distribution restrictions or safety warnings. We or our partners may also be required to perform additional or unanticipated clinical trials to obtain approval or be subject to additional post-marketing testing requirements to maintain regulatory approval. In addition, regulatory authorities may withdraw their approval of a product or impose restrictions on its distribution, such as in the form of a modified risk evaluation and mitigation strategy.

Even if we or our partners receive regulatory approval for our product candidates, such approved products will be subject to ongoing regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions, and we or our partners may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our approved products.

        Any regulatory approvals that we or our partners receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor safety and efficacy. In addition, if the FDA approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse

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event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practice, or cGMP, and GCP, for any clinical trials that we or our partners conduct post-approval.

        Later discovery of previously unknown problems with an approved product, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, may result in, among other things:

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



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fines, warning letters, or holds on clinical trials;



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



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product seizure or detention, or refusal to permit the import or export of products; and



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injunctions or the imposition of civil or criminal penalties.

        The FDA's policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we or our partners are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or not able to maintain regulatory compliance, we or our partners may lose any marketing approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

If we or our partners fail to obtain regulatory approval in jurisdictions outside the United States, we and they will not be able to market our products in those jurisdictions.

        We and our partners intend to market our product candidates, if approved, in international markets, alone or in conjunction with others. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary from country-to-country and may require additional testing. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. In addition, in many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We or our partners may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

Risks Related to Our Reliance on Third Parties

We rely on third parties to conduct preclinical studies and clinical trials for our product candidates, and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

        We plan to design the clinical trials for VTP-43742, and VTP-38543 and expect to do so for any future unpartnered product candidates. However, we rely on CROs and other third parties to assist in managing, monitoring and otherwise carrying out many of these studies and trials. We and BI compete

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with many other companies for the resources of these third parties. The third parties on whom we and BI rely generally may terminate their engagements at any time, and having to enter into alternative arrangements would delay development and commercialization of our product candidates.

        The FDA and foreign regulatory authorities require compliance with regulations and standards, including GCP, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Although we and BI rely on third parties to conduct many of our and their clinical trials, we and BI are responsible for ensuring that each of these clinical trials is conducted in accordance with its general investigational plan, protocol and other requirements.

        If these third parties do not successfully carry out their duties under their agreements, if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to clinical trial protocols or to regulatory requirements, or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, the clinical trials of our product candidates may be delayed or not meet regulatory requirements. If clinical trials do not meet regulatory requirements or if these third parties need to be replaced, preclinical development activities or clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates on a timely basis or at all.

We intend to rely on third-party manufacturers to make our product candidates, and any failure by these manufacturers may delay or impair the ability to complete clinical trials or commercialize our product candidates.

        Manufacturing small molecule therapeutics is complicated and is tightly regulated by the FDA, the European Medicines Agency, or EMA, and comparable regulatory authorities around the world. For preclinical studies, clinical trials and commercial supply of our products that we have not partnered, we use and expect to continue to use contract manufacturing organizations. Successfully transferring complicated manufacturing techniques to contract manufacturing organizations and scaling up these techniques for commercial quantities will be time consuming and we may not be able to achieve such transfer. Moreover, the market for contract manufacturing services for product candidates is highly cyclical, with periods of relatively abundant capacity alternating with periods in which there is little available capacity. If any need we have for contract manufacturing services increases during a period of industry-wide tight capacity, we may not be able to access the required capacity on a timely basis or on commercially viable terms.

        In addition, we contract with fill-and-finishing providers with the appropriate expertise, facilities and scale to meet our needs. Failure to maintain cGMP can result in a contractor receiving FDA sanctions, which can impact our contractors' ability to operate or lead to delays in our clinical development programs. We have been notified by BI that it previously received a warning letter from the FDA in May 2013 concerning its manufacturing practices. In the warning letter, the FDA said it had identified significant violations of cGMP for the manufacture of active pharmaceutical ingredients, or API, and the cGMP regulations for finished pharmaceuticals. In June 2014, the FDA issued a close out letter to BI which stated that the FDA had completed an evaluation of BI's corrective actions in response to the May 2013 warning letter. While the FDA's close out letter stated that, based on its evaluation, it appeared that BI had addressed the violations contained in the May 2013 warning letter, the FDA stated that future FDA inspections and regulatory activities would further assess the adequacy and sustainability of BI's corrections of the violations. We believe that our current fill-and-finish contractors are operating in accordance with cGMP, but we can give no assurance that FDA or other regulatory agencies will not conclude that another lack of compliance exists. In addition, any delay in contracting for fill-and-finish services, or failure of the contract manufacturer to perform the services as needed, may delay clinical trials, registration and launches, and delay or limit our ability to receive any corresponding milestone or royalty payments. Any such issues may have a substantial negative effect on our business.

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We may not be successful in establishing and maintaining additional strategic partnerships, which could adversely affect our ability to develop and commercialize products, negatively impacting our operating results.

        A part of our strategy is to strategically evaluate and, as deemed appropriate, enter into additional collaborations in the future when strategically attractive, including potentially with major biotechnology or pharmaceutical companies, which could include another collaboration relating to our BACE program. We face significant competition in seeking appropriate partners for our product candidates, and the negotiation process is time-consuming and complex. In order for us to successfully partner our product candidates, potential partners must view these product candidates as economically valuable in markets they determine to be attractive in light of the terms that we are seeking and other available products for licensing by other companies. Even if we are successful in our efforts to establish new strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain such strategic partnerships if, for example, development or approval of a product is delayed or sales of an approved product are disappointing. Any delay in entering into new strategic partnership agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

        If we fail to establish and maintain additional strategic partnerships related to our product candidates, we will bear all of the risk and costs related to the development of any such product candidate, and we may need to seek additional financing, hire additional employees and otherwise develop expertise for which we have not budgeted. This could negatively affect the development of any unpartnered product candidate.

Risks Related to Our Intellectual Property

If we are unable to obtain or protect intellectual property rights related to our product candidates, we may not be able to compete effectively.

        We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our drug discovery platform and product candidates. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. The patent position of biotechnology and pharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the United States Patent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology patents. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our product candidates in the United States or in other countries. There is no assurance that all potentially relevant prior art relating to our patents and patent applications have been found. We may be unaware of prior art that could be used to invalidate an issued patent or prevent our pending patent applications from issuing as patents. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

        If patent applications we or our partners hold or have in-licensed with respect to our platform or product candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for our products, it could dissuade companies from collaborating with us. Several patent applications covering our product candidates and compounds have been filed recently.

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We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patents or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful challenge to these patents or any other patents owned by or licensed to us could deprive us of rights necessary for the successful commercialization of any product candidate that we or our partners may develop. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we and our partners cannot be certain that we were the first to file any patent application related to a product candidate. Furthermore, if third parties have filed such patent applications, an interference or derivation proceeding in the United States can be initiated by the USPTO or a third party to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after the earliest non-provisional filing date. Various extensions may be available; however, the life of a patent and the protection it affords is limited and all patents will eventually expire. If we encounter delays in obtaining regulatory approvals, the period of time during which we could market a product under patent protection could be reduced. Even if patents covering our product candidates are obtained, once the patent life has expired for a product, we may be open to competition from generic products.

        The patent prosecution process is expensive and time-consuming, and we and our current or future licensors, licensees or collaborators may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are reliant on our licensors, licensees or collaborators. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors, licensees or collaborators fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors, licensees or collaborators are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.

        Furthermore, we may not have identified all United States and foreign patents or published applications that affect our business either by blocking our ability to commercialize our product candidates or by covering similar technologies that affect our market. In addition, some countries do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our product candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.

        We also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

        If we fail to obtain or maintain patent protection or trade secret protection for any of our product candidates that we may develop, license or acquire, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability.

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        Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.

        The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

        Any loss of patent protection could have a material adverse impact on our business. We and our partners may be unable to prevent competitors from entering the market with a product that is similar to or the same as our products.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our and our partners' patent applications and the enforcement or defense of our issued patents.

        On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act introduced a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a "first to file" system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the USPTO, and are now able to challenge the validity of issued U.S. patents through various post-grant proceedings including opposition, derivation, reexamination, inter-partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope or enforceability of, or invalidate, our patent rights, which could adversely affect our or our partners' competitive position.

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

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

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Third-party claims of intellectual property infringement or misappropriation may prevent or delay our development and commercialization efforts.

        Our commercial success depends in part on us and our partners not infringing the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex-parte review and inter partes reexamination and post grant review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we and our partners are developing and may develop our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:

•

infringement and other intellectual property claims which, with or without merit, can be expensive and time-consuming to litigate and can divert management's attention from our core business;



•

substantial damages for past infringement, which we may have to pay if a court decides that our product infringes on a competitor's patent;



•

a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which the patent holder would not be required to do;



•

if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and



•

redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.

        Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates, that we failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until issued as patents. Except for the preceding exceptions, patent applications in the United States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering our platform technology or our product candidates could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our product candidates or the use or manufacture of our product candidates. We may also face a claim of misappropriation if a third party believes that we inappropriately obtained and used trade secrets of such third party. If we are found to have misappropriated a third party's trade secrets, we may be prevented from further using such trade secrets, limiting our ability to develop our product candidates, and we may be required to pay damages.

        If any third-party patents were held by a court of competent jurisdiction to cover aspects of our materials, formulations, methods of manufacture or methods for treatment, the holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate until such patent expired or unless we or our partners obtain a license. These licenses may not be available on acceptable terms, if at all. Even if we or our partners were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we or our partners could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or

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threatened patent infringement claims, we or our partners are unable to enter into licenses on acceptable terms. This could harm our business significantly. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.

        Parties making claims against us or our partners may obtain injunctive or other equitable relief, which could effectively block our or our partners' ability to further develop and commercialize one or more of our product candidates. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against us or our partners, we may have to pay substantial damages, including treble damages and attorneys' fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us bring our product candidates to market.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming, and unsuccessful. Further, our issued patents could be found invalid or unenforceable if challenged in court.

        If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent directed at one of our product candidates, or one of our future product candidates, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or insufficient written description. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product candidate. Such a loss of patent protection would have a material adverse impact on our business.

        Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms.

        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.

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        Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our product candidates to market.

We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

        A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of our products. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain a license from these third parties. Such a license may not be available on commercially reasonable terms or at all, which could materially harm our business.

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 industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, 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. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

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

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

        Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

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Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

        Because we rely on third parties to assist with research and development and to manufacture our product candidates, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor's discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

        In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with in the future will usually expect to be granted rights to publish data arising out of such collaboration, provided that we are notified in advance and given the opportunity to delay publication for a limited time period in order for us to secure patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. In the future we may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor's discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

The validity and enforceability of the patents and applications that cover our product candidates can be challenged by competitors.

        If any of our product candidates are approved by the FDA, one or more third parties may challenge the patents covering this approved product candidate, which could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims. For example, if a third party files an Abbreviated New Drug Application, or ANDA, for a generic drug product containing an approved product candidate, and relies in whole or in part on studies conducted by or for us, the third party will be required to certify to the FDA that: (1) there is no patent information listed in the FDA's Orange Book with respect to our NDA for the applicable approved product candidate; (2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third-party's generic drug product. A certification that the new product will not infringe the Orange Book-listed patents for the applicable approved product candidate, or that such patents are invalid, is called a paragraph IV certification. If the third party submits a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to us once the third-party's ANDA is accepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the third-party's ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is settled, or

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the court reaches a decision in the infringement lawsuit in favor of the third party. If we do not file a patent infringement lawsuit within the required 45-day period, the third-party's ANDA will not be subject to the 30-month stay. Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management's attention from our core business, and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing with our products.

If we do not obtain protection under the Hatch-Waxman Amendments by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

        Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one or more of our United States patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. Patent term restoration also may be available in certain foreign countries upon regulatory approval of our products candidates. However, we may not be granted patent term extension either in the United States or in any foreign country because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product may be shortened and our competitors may obtain approval of competing products following our patent expiration sooner, and our revenue could be reduced, possibly materially.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

        Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long-term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.

Risks Related to Commercialization of Our Product Candidates

Our future commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians, patients, key opinion leaders and healthcare payors.

        Even if we or our partners obtain regulatory approval for BI187004, VTP-36951, VTP-43742, VTP-38543, VTP-38443 or any other product candidates that we may develop or acquire in the future, the product may not gain market acceptance among physicians, key opinion leaders, healthcare payors,

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patients and the medical community. Market acceptance of any approved products depends on a number of factors, including:

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



•

the clinical indications for which the product is approved and the label approved by regulatory authorities for use with the product, including any warnings that may be required on the label;



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acceptance by physicians, key opinion leaders and patients of the product as a safe and effective treatment;



•

the cost, safety and efficacy of treatment in relation to alternative treatments;



•

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



•

the continued projected growth of drug markets in our various indications;



•

relative convenience and ease of administration;



•

the prevalence and severity of adverse side effects; and



•

the effectiveness of our, and our partners' sales and marketing efforts.

        Market acceptance is critical to our ability to generate significant revenue. Any product candidate, if approved and commercialized, may be accepted in only limited capacities or not at all. If any approved products are not accepted by the market to the extent that we expect, we may not be able to generate significant revenue and our business would suffer.

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

        Market acceptance and sales of any approved product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors and may be affected by existing and future healthcare 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. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for drugs and products. Coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be satisfactory. Inadequate reimbursement levels may adversely affect the demand for, or the price of, any drug candidate for which we obtain marketing approval.

        Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor's determination that use of a product is, among other things:

•

a covered benefit under its health plan;



•

safe, effective and medically necessary;



•

appropriate for the specific patient;



•

cost-effective; and



•

neither experimental nor investigational.

        Obtaining coverage and adequate reimbursement approval for a product from a government or other third party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We or our partners may not be able to provide data sufficient to gain acceptance with respect to coverage and

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adequate reimbursement. Moreover, a third-party 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. Additionally, coverage and reimbursement for drug products can differ significantly from payor to payor. One third-party payor's decision to cover a particular drug product does not ensure that other payors will also provide coverage for the drug product, or will provide coverage at an adequate reimbursement rate.

        Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our product candidates, once approved, unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of our product candidates will, therefore, depend substantially on the extent to which the costs of our product candidates will be paid by third-party payors.

        We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only to limited levels, we or our partners may not be able to commercialize certain of our products. In addition in the United States, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs.

The impact of recent healthcare reform legislation and other changes in the healthcare industry and in healthcare spending on us is currently unknown, and may adversely affect our business model.

        In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our drug candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any drug candidates for which we obtain marketing approval.

        Our revenue prospects could be affected by changes in healthcare spending and policy in the United States and abroad. We operate in a highly regulated industry and new laws, judicial decisions, or new interpretations of existing laws, or decisions, related to healthcare availability, the method of delivery or payment for healthcare products and services could negatively impact our business, operations and financial condition. There is significant interest in promoting health care reform, as evidenced by the enactment in the United States of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the Affordable Care Act. Among other things, the Affordable Care Act contains provisions that may reduce the profitability of drug products, including, for example, revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans, imposed mandatory discounts for certain Medicare Part D beneficiaries, and subjected manufacturers to new annual fees based on a pharmaceutical companies' share of sales to federal healthcare programs.

        We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue or commercialize our drugs.

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        It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. We cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

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the demand for any drug products for which we may obtain regulatory approval;



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



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our ability to obtain coverage and reimbursement approval for a product;



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our ability to generate revenues and achieve or maintain profitability; and



•

the level of taxes that we are required to pay.

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

        Our future success depends on our or our partners' ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of our product candidates. Our objective is to design, develop and commercialize new products with superior efficacy, convenience, tolerability and safety. In many cases, the product candidates that we commercialize with our strategic partners or on our own will compete with existing, market-leading products.

        If our product candidates are approved, they will compete with currently marketed drugs and potentially with product candidates currently in development focusing on the same mechanism or action which include:

•

RORgt: We believe that a number of companies including large pharmaceutical companies and large biotech companies are actively assessing RORgt inhibitors in preclinical studies.



•

LXRb: We believe that BMS is studying an LXRb inhibitor in cardiovascular clinical trials and Alexar Therapeutics, Inc. is developing an LXRb inhibitor for dermatologic conditions.



•

BACE: We believe that Merck & Co., AstraZeneca PLC in collaboration with Eli Lilly and Company, and Eisai Co., Ltd. in collaboration with Biogen Idec are studying BACE inhibitors in clinical trials.

        Many of our potential competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and in manufacturing biotechnology products. These companies also have significantly greater research and marketing capabilities than we do and may also have products that have been approved or are in late stages of development, and have collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection or FDA approval or discovering, developing and commercializing product candidates before we do. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. If we are not able to compete effectively against potential competitors, our business will not grow and our financial condition and operations will suffer.

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

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



•

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



•

the ability to commercialize any of our product candidates that receive regulatory approval;



•

the price of our products, including in comparison to branded or generic competitors;



•

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



•

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



•

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



•

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

Our product candidates may cause undesirable side effects or have other properties that delay or prevent their regulatory approval or limit their commercial potential.

        Undesirable side effects caused by our product candidates could cause us, BI or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities and potential products liability claims. For instance, BI had completed two Phase 1 trials and commenced a Phase 2 trial for BI187004 in July 2014 and had completed two Phase 1 trials for BI 1181181 when, in February 2015, BI voluntarily placed BI 1181181 on a temporary clinical hold to further investigate skin reactions observed in some study participants during a subsequent Phase 1 multiple rising dose trial. Serious adverse events deemed to be caused by our product candidates could have a material adverse effect on the development of our product candidates and our business as a whole. Our understanding of the relationship between our product candidates and potential adverse events may change as we gather more information or future unexpected adverse events may occur. There can be no assurance that adverse events associated with our product candidates will not be observed. As is typical in drug development, we have a program of ongoing toxicology studies in animals for our other clinical stage product candidates and cannot provide assurance that the findings from such studies or any ongoing or future clinical trials will not adversely affect our clinical development activities.

        If we or others identify undesirable side effects caused by our product candidates either before or after receipt of marketing approval, a number of potentially significant negative consequences could result, including:

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our clinical trials may be put on hold;



•

we or our partners may be unable to obtain regulatory approval for our product candidates;



•

regulatory authorities may withdraw approvals of our product candidates;



•

regulatory authorities may require additional warnings on the label;



•

a medication guide outlining the risks of such side effects for distribution to patients may be required;



•

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

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•

our reputation may suffer.

        Any of these events could prevent us from achieving or maintaining market acceptance of our product candidates and could substantially increase commercialization costs.

Price controls may be imposed in foreign markets, which may adversely affect our future profitability.

        In some countries, particularly member states of the European Union, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we or our partners may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

Risks Related to Our Business and Industry

We may not successfully identify, develop, commercialize or market potential product candidates.

        A key element of our strategy is to use our technology platform, Contour®, to build a pipeline of novel drug candidates. The drug discovery that we are conducting using our proprietary technology may not be successful in identifying compounds that are useful in treating diseases. Our research programs may initially show promise in identifying potential drug candidates, yet fail to yield drug candidates for clinical development for a number of reasons, including:

•

our research methodology, including our screening technology, may not successfully identify medically relevant potential product candidates;



•

our pursuit of difficult-to-drug targets may make it challenging to design potential product candidates;



•

results of clinical trials conducted by others on similar indications or on compounds with similar mechanisms of action could result in our having to conduct additional or cost prohibitive clinical trials, which could delay development and possibly make commercialization prohibitively expensive;



•

we may encounter product manufacturing difficulties that limit yield or produce undesirable characteristics that increase the cost of goods, cause delays or make the product candidates unmarketable;



•

our product candidates may cause adverse effects in patients or subjects, even after successful initial toxicology studies, which may make the product candidates unmarketable;



•

our product candidates may not demonstrate a meaningful benefit to patients or subjects; and



•

our collaboration partners may change their development profiles or plans for potential product candidates or abandon a therapeutic area or the development of a partnered product.

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        If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business, operating results and prospects and could potentially cause us to cease operations. For instance, in February 2015, BI voluntarily placed BI 1181181 on a temporary clinical hold to further investigate skin reactions observed in some study participants during a subsequent Phase 1 multiple rising dose trial and following its analysis, BI determined to suspend development of BI 1181181 and move forward with the development of a structurally different compound, VTP-36951. Moreover, in 2012, we halted our plans for a Phase 2 clinical trial for a former product candidate, VTP-27999, which was being developed for renin inhibition, following the release of clinical data from another pharmaceutical company that would have required us to significantly increase the scope, scale and duration of clinical trial work to obtain regulatory approval. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

        If we are unable to identify suitable compounds for preclinical and clinical development, we will not be able to obtain revenues from sale of drugs in future periods, which likely would result in significant harm to our financial position and adversely impact our stock price.

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.

        We are highly dependent on members of our management and scientific teams, including Jeffrey Hatfield, our Chief Executive Officer and President, and Richard Gregg, M.D., our Chief Scientific Officer. The loss of the services of either of these persons could impede the achievement of our research, development and commercialization objectives. We do not maintain "key person" insurance for any of our executives or other employees.

        Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

Our employees, independent contractors, principal investigators, CROs, consultants, commercial partners and vendors 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 and other third-party fraud or other misconduct. Misconduct by employees and other third-parties could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, 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 and other third- party 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. It is not

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always possible to identify and deter employee and other third-party 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 such laws. 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 civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.

Our current and future relationships with healthcare professionals, principal investigators, consultants, commercial partners, customers (actual and potential) and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency, health information privacy and security and other healthcare laws and regulations, which could expose us to penalties.

        Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any drug candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principal investigators, consultants, customers (actual and potential) and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws, including, without limitation, the federal Anti- Kickback Statute and the federal False Claims Act, that may constrain the business or financial arrangements and relationships through which we sell, market and distribute any drug candidates for which we obtain marketing approval. In addition, we may be subject to physician payment transparency laws and patient privacy and security regulation by the federal government and by the U.S. states and foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws that may affect our ability to operate include the following:

•

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



•

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



•

the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent;



•

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the

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payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

•

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose obligations on covered entities, including healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;



•

the federal Open Payments program, created under Section 6002 of the Affordable Care Act and its implementing regulations, imposed new annual reporting requirements for certain manufacturers of drugs, devices, biologicals and medical supplies for certain payments and "transfers of value" provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of value and ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an aggregate of $1 million per year for "knowing failures"; and



•

analogous state and foreign laws, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third- party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

        Further, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti- Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

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

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collaborators, is found not to be in compliance with applicable laws, it may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also affect our business.

We may encounter difficulties in managing our growth and expanding our operations successfully.

        As we seek to advance our product candidates through clinical trials and commercialization, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and, if necessary, sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

We have no sales, marketing or distribution capabilities and we will have to invest significant resources to develop these capabilities.

        We have no internal sales, marketing or distribution capabilities. If any of our unpartnered product candidates ultimately receives regulatory approval, we may not be able to effectively market and distribute the product candidate. We will have to invest significant amounts of financial and management resources to develop internal sales, distribution and marketing capabilities, some of which will be committed prior to any confirmation that any of such product candidates will be approved. We may not be able to hire consultants or external service providers to assist us in sales, marketing and distribution functions on acceptable financial terms or at all. Even if we determine to perform sales, marketing and distribution functions ourselves, we could face a number of additional related risks, including:

•

we may not be able to attract and build an effective marketing department or sales force;



•

the cost of establishing a marketing department or sales force may exceed our available financial resources and the revenues generated by our product candidates that we may develop, in-license or acquire; and



•

our direct sales and marketing efforts may not be successful.

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

        We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product 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, and 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 a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

•

injury to our reputation;

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•

withdrawal of clinical trial participants;



•

costs to defend the related litigations;



•

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;



•

loss of revenue;



•

the inability to commercialize our product candidates; and



•

a decline in our stock price.

        Failure to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical trials in the amount of $5.0 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

We and our development partners, third-party manufacturers and suppliers use biological materials and may use hazardous materials, and any claims relating to improper handling, storage, or disposal of these materials could be time consuming or costly.

        We and our development partners, third-party manufacturers and suppliers may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our development partner, third-party manufacturers and suppliers also produce hazardous waste products. Federal, state, and local laws and regulations govern the use, generation, manufacture, storage, handling, and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage and our property, casualty, and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

Our internal computer systems, or those of our development partners, third-party clinical research organizations or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

        Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs and other contractors, consultants and collaborators are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could

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result in delays in our or our partners' regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our or any of our partners' data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidate could be delayed.

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

        Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted, if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.

Due to the potential value of our investments, we could be determined to be an investment company, and if such a determination were made, we would become subject to significant regulation that would adversely affect our business.

        We may be deemed to be an investment company under the Investment Company Act of 1940 if, among other things, we own "investment securities" with a value exceeding 40% of the value of our total assets, unless a particular exemption or safe harbor is applicable. We invest certain of our assets in short- and long-term, investment grade securities, some of which may qualify as investment securities under the Investment Company Act. Investment companies are subject to registration under the Investment Company Act and compliance with a variety of restrictions and requirements imposed by the Investment Company Act. If we were to be deemed an investment company we would become subject to these restrictions and requirements, and the consequences of having been an investment company without registering under the Investment Company Act could have a material adverse effect on our business, financial condition and results of operations, as well as restrict our ability to sell and issue securities, borrow funds, engage in various transactions or other activities and make certain investment decisions. In addition, we may incur significant costs to avoid investment company status if an exemption from the Investment Company Act were to be considered unavailable to us at a time when the value of our investment securities exceeds 40% of the value of our total assets. We believe that we satisfy the conditions to be exempt from the Investment Company Act because, among other things, we are primarily engaged, directly and primarily in a business other than that of investing, reinvesting, owning, holding, or trading in securities, namely the discovery and development of novel small molecule therapeutics. However, absent an exemptive order from the SEC, our status of being exempt cannot be assured. Nevertheless, to address any uncertainty in this regard, we generally invest a significant portion of our portfolio in money market funds and U.S. government securities and limit the level of investment in corporate bonds and other instruments that could be considered "investment securities."

Risks Related to Our Common Stock

An active trading market for our common stock may not be sustained.

        Although our common stock has been listed and trading on The NASDAQ Global Market since our initial public offering in September 2014, an active trading market for our shares may not be

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sustained. If the market is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could materially adversely affect our business.

The trading price of the shares of our common stock has been and will likely continue to be highly volatile, and purchasers of our common stock may not be able to resell the shares of our common stock at or above your purchase price and could incur substantial losses.

        Our stock price has been and is likely to continue to be volatile. For example, between September 24, 2014 and February 29, 2016, the high and low sales prices per share of our common stock were $23.35 and $5.41, respectively. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above your purchase price. The market price for our common stock may be influenced by many factors, including:

•

our and our partners' ability to enroll patients in planned clinical trials;



•

results of the clinical trials, and the results of trials of our competitors or those of other companies in our market sector, and the timing of the release of those results;



•

the passage of legislation or other regulatory developments in the United States and foreign countries;



•

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



•

changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;



•

our ability to discover and develop or partner additional product candidates;



•

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



•

our ability to enter into strategic partnerships for the development of our product candidates;



•

market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' research reports or recommendations;



•

sales of our stock by us, our insiders and our other stockholders;



•

trading volume of our common stock;



•

speculation in the press or investment community;



•

general economic, industry and market conditions other events or factors, many of which are beyond our control;



•

additions or departures of key personnel; and



•

intellectual property, product liability or other litigation against us.

        In addition, the stock market has recently experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. In the past, stockholders have initiated class action lawsuits against

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biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies' stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

Our quarterly operating results may fluctuate significantly.

        We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

•

variations in the level of expenses related to our clinical trial and development programs;



•

addition or termination of clinical trials and development programs;



•

regulatory developments affecting our current or future product candidates;



•

our execution of any collaborative, licensing or similar arrangements and the timing of payments we may make or receive under these arrangements; and



•

nature and terms of stock-based compensation grants and any intellectual property infringement lawsuit in which we may become involved.

        If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

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

        The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We currently have research coverage by a small number of securities and industry analysts and there are no assurances that these analysts will continue coverage of our company. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

We may use our cash and cash equivalents in ways that you and other stockholders may not approve.

        Our management has broad discretion in the application of our cash and cash equivalents. Because of the number and variability of factors that will determine our use of our cash and cash equivalents, their ultimate use may vary substantially from their currently intended use. Our management might not apply our cash and cash equivalents in ways that ultimately increase the value of your investment. The failure by our management to apply our cash and cash equivalents effectively could harm our business. Pending their use, we may invest our cash and cash equivalents in a variety of capital preservation investments, including short- and long-term, interest-bearing, investment-grade instruments and U.S. government securities. These investments may not yield a favorable return to our stockholders.

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

        A small number of institutional investors and equity funds hold a significant number of shares of our common stock. Sales by these stockholders of a substantial number of shares of our common stock or the expectation of such sales, could cause a significant reduction in the market price of our common stock.

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        The holders of 9,491,680 shares of our outstanding common stock, or approximately 43.0% of our total outstanding common stock as of December 31, 2015, are entitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act.

        In addition to our outstanding common stock, as of December 31, 2015, there were a total of 1,910,784 shares of common stock that we have registered and that we are obligated to issue upon the exercise of currently outstanding options under our stock plans or issued warrants. Upon the exercise of these options or warrants, as the case may be, in accordance with their respective terms, these shares may be resold freely, subject to restrictions imposed on our affiliates under Rule 144.

        If significant sales of these shares occur in short periods of time, these sales could reduce the market price of our common stock. Any reduction in the trading price of our common stock could impede our ability to raise capital on attractive terms, if at all.

We do not intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our common stock.

        We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business. Any future debt financing arrangement, which we may enter into from time to time, may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

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

        As a public company, we have and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which requires, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC, and The NASDAQ Global Market to implement provisions of the Sarbanes-Oxley Act, imposes significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as mandatory "say on pay" voting requirements that will apply to us when we cease to be an emerging growth company. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and may impact the manner in which we operate our business in ways we cannot currently anticipate.

        The rules and regulations applicable to public companies have and will continue to substantially increase our legal and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. 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. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to

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make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

        We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this report and our other periodic reports and proxy statements, exemptions from the requirements of holding non-binding advisory votes on executive compensation and seeking stockholder approval of any golden parachute payments not previously approved and not being required to adopt certain accounting standards until those standards would otherwise apply to private companies. We could be an emerging growth company until December 31, 2019, although circumstances could cause us to lose that status earlier, including if we become a large accelerated filer (in which case we will cease to be an emerging company as of the date we become a large accelerated filer, which, generally, would occur if, at the end of a fiscal year, among other things, the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter), if we have total annual gross revenue of $1.0 billion or more during any fiscal year (in which cases we would no longer be an emerging growth company as of December 31 of such fiscal year), or if we issue more than $1.0 billion in non-convertible debt during any three year period before that time (in which case we would cease to be an emerging growth company immediately). Even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this report and our other periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors' views of us and, as a result, the value of our common stock.

        Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required to report upon the effectiveness of our internal control over financial reporting beginning with this Annual Report on Form 10-K. When and if we are a "large accelerated filer" or an "accelerated filer" and are no longer an "emerging growth company," each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company, we intend to take advantage of an exemption available to emerging growth companies from these auditor attestation requirements. The rules governing the standards that must be met for management to assess our

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internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we will need to upgrade our systems including information technology; implement additional financial and management controls, reporting systems, and procedures; and hire additional accounting and finance staff. If we or, if required, our auditors are unable to conclude that our internal control over financial reporting is effective, investors may lose confidence in our financial reporting, and the trading price of our common stock may decline.

Because a small number of our existing stockholders own a majority of our voting stock, your ability to influence corporate matters will be limited.

        As of December 31, 2015, our current executive officers, directors and greater than 5% stockholders, together with their respective affiliates, beneficially owned approximately 53.1% of our common stock, including shares subject to outstanding options and warrants that are exercisable within 60 days after such date. As a result, such persons, acting together, will have the ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. These persons will also have the ability to control our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

We may be subject to litigation, which could harm our stock price, business, results of operations and financial condition.

        We may be subject to litigation in the future. In the past, following periods of volatility in the market price of their stock, many companies similar to ours have been the subjects of securities class action litigation. Any such litigation can result in substantial costs and diversion of management's attention and resources and could harm our stock price, business results of operations and financial condition. As a result of these factors, holders of our common stock might be unable to sell their shares at or above the price they paid for such shares.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, may delay or prevent an acquisition of us or a change in our 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;



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limiting the removal of directors by the stockholders;



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creating a staggered board of directors;



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prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;



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



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

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•

permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; 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, who are responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. These provisions would apply even if an offer rejected by our board were considered beneficial by some stockholders. Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change of 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 47,000 square feet of space for our headquarters in Fort Washington, Pennsylvania under an agreement that expires in January 2018, with an option to extend to 2023. We believe that our existing facilities are adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

Item 3.    LEGAL PROCEEDINGS

        From time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition.

Item 4.    MINE SAFETY DISCLOSURES

        Not applicable

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market for Common Stock

        Our common stock is traded on the NASDAQ Global Market under the symbol "VTAE." Trading of our common stock commenced on September 24, 2014, in connection with our initial public offering of such securities. The following table sets forth the high and low sales prices per share of our common stock, as reported on the NASDAQ Global Market, for the periods indicated:

Holders of Record

        As of February 29, 2016, there were 68 holders of record of our common stock. Such record holders include those who are nominees for an undetermined number of beneficial owners.

Dividends

        We have never declared or paid cash dividends on our common stock. We intend to retain any future earnings and do not expect to pay any cash dividends in the foreseeable future.

Stock Performance Graph

        The following stock performance graph compares the cumulative total return to shareholders from an investment in our common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index, assuming a hypothetical investment of $100 in our common stock and in each index on September 24, 2014, the first date that shares of our common

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stock were publicly traded, and reinvestments of any dividends. The performance shown is not necessarily indicative of future performance.

        This stock performance graph shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing by us under the Securities Act of 1933, as amended (the Securities Act), or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Use of Proceeds from Initial Public Offering

        On September 29, 2014, we completed our IPO whereby 6,875,000 shares of common stock were sold at a public offering price of $8.00 per share for an aggregate offering price of $55.0 million. On October 27, 2014, an additional 1,031,250 shares of common stock were sold at the IPO price of $8.00 per share pursuant to the underwriters exercise in full of their over-allotment option (Underwriters' Option). The offer and sale of all of the shares in the IPO and pursuant to the Underwriters' Option were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-198090), which was declared effective by the securities and exchange commission (SEC) on September 24, 2014. The offering commenced as of September 24, 2014 and did not terminate before all of the securities registered in the registration statement were sold. The syndicate of underwriters was led by Stifel, Nicolaus & Company, Incorporated and BMO Capital Markets Corp., as joint book-running managers, and JMP Securities and Wedbush PacGrow Life Sciences, as co-managers. We raised approximately $56.4 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board committee service.

        There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus dated September 24, 2014, filed with the SEC pursuant to Rule 424(b)(4) pursuant to the Securities Act of 1933, as amended.

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Item 6.    SELECTED FINANCIAL DATA

        The following selected financial data has been derived from our financial statements and should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and with our financial statements and notes thereto appearing in Item 15 in this Annual Report on Form 10-K.

 

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of operations together with the "Selected Financial Data" and our financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. You should read the "Risk Factors" and "Information Regarding Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

        We are a clinical-stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases with significant unmet medical needs. We are developing a growing portfolio of novel product candidates internally generated by Contour®, our proprietary structure-based drug discovery platform. We intend to advance and retain rights to our current and future programs and product candidates that we believe we can develop and commercialize, and to strategically partner where doing so can accelerate the program and generate non-dilutive capital for Vitae. Our portfolio includes several wholly-owned product candidates in various phases of development:

•

Our most advanced, wholly-owned product candidate is VTP-43742, a first in class oral small molecule, which is being developed for the treatment of psoriasis as well as multiple other autoimmune disorders, and is currently being studied in a Phase 2a proof-of-concept clinical trial. In September 2015, we announced positive top-line results from a Phase 1 single ascending dose trial that assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in healthy human volunteers over several dose levels. In November 2015, we announced positive top line results from a Phase 1 multiple ascending dose clinical trial of VTP-43742 designed to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple ascending doses of VTP-43742 in healthy human volunteers over multiple dose levels. The observed half-life in plasma in these trials was consistent with once-a-day dosing. We are currently conducting a Phase 2a proof-of-concept trial in patients with moderate to severe psoriasis and expect to announce clinical efficacy and initial biomarker results by the end of the first quarter of 2016. Assuming the results of the Phase 2a proof-of-concept trial are positive, we plan to initiate a Phase 2 trial in psoriasis in the second half of 2016 and continue to assess whether clinical trials in additional indications are appropriate for VTP-43742.



•

Our other wholly-owned product candidate is VTP-38543, a potential first in class topical LXRb selective agonist, for the treatment of atopic dermatitis, which is in an on-going Phase 2a proof-of-concept clinical trial. Based on its mechanism, VTP-38543 is expected to improve barrier function and decrease inflammation, in this case in damaged skin tissue. VTP-38543 has been shown in preclinical studies to stimulate the development of mature skin cells known as corneocytes as well as to increase the surrounding lamellar body lipids in the skin to improve its barrier function, while also decreasing skin inflammation. In a preclinical model of atopic dermatitis, topical VTP-38543 has demonstrated equal anti-inflammatory efficacy versus high potency topical corticosteroids, the current standard of care. VTP-38543 is currently in a Phase 2a proof-of-concept clinical trial assessing the safety, tolerability and efficacy of VTP-38543 in patients with atopic dermatitis. We anticipate clinical trial results in the second half of 2016.

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•

We also have a product candidate, VTP-36951, for the treatment and prevention of Alzheimer's disease (Alzheimer's). VTP-36951 was being developed exclusively by BI as BI 1147560 pursuant to a research collaboration and license agreement with BI (the BACE Agreement). Effective as of October 21, 2015, the BACE Agreement was terminated by BI for strategic business reasons and we received the rights to develop and commercialize the terminated products in the BACE program, including VTP-36951. We continue to assess the BACE program to determine the appropriate next steps and expect to provide an update on our plans for the BACE program in the first half of 2016.

        We have leveraged our expertise and ability in structure-based drug discovery to create a growing portfolio of novel, potent and selective product candidates. Our goal is to further leverage this leadership in structure-based drug discovery to deliver first- or best-in-class small molecule drugs to patients in diseases with significant unmet medical needs. The key elements of our business strategy are to:

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advance our growing portfolio of product candidates;



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establish late-stage development and commercialization capabilities for certain of our product candidates in the United States and potentially other markets;



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selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of our product candidates;



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leverage Contour to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets; and



•

continue investing in technology, people and intellectual property.

        We believe these strategies provide us with multiple, sustainable-growth opportunities.

        We were incorporated in May 2001 and commenced principal operations during 2002. Since that time, we have been principally engaged in the discovery and development of novel product candidates. Prior to our IPO in September 2014, we had funded our operations principally with $132.7 million of capital in the form of license fees, milestone payments and research and development funding from our strategic partners and $120.1 million from the sale of convertible preferred stock, including $40.0 million of equity sales to our strategic partners, including BI. We have also funded our operations through credit facilities, equipment lease financings, federal grants and investment income. Through the issuance and sale of 7,906,250 shares of our common stock in our IPO, we raised $56.4 million, after deducting underwriting discounts and commissions and other offering expenses.

        On January 28, 2015, we issued and sold a total of 3,450,000 shares of our common stock at $11.90 per share in an underwritten public offering, including 450,000 shares of common stock sold pursuant to the exercise in full of the underwriters' option to purchase additional shares. Net proceeds from the offering, including the sale of the additional shares, was approximately $38.0 million, after deducting underwriting discounts and commissions and other offering expenses.

        For the years ended December 31, 2015 and 2014, we had net losses of $44.0 and $19.1 million, respectively, and for the year ended December 31, 2013, we had net income of $1.2 million. As of December 31, 2015, we had an accumulated deficit of $174.0 million. We have devoted substantially all of our capital resources to the research and development of our product candidates. Since our inception in 2001, we have had no revenues from product sales. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical development and clinical trials, and to eventually seek regulatory approval and pursue commercialization. Furthermore, we have incurred and expect to continue to incur additional costs associated with operating as a public reporting company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

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        Based on our current business plan, which does not include any expenses relating to further development of the BACE program, we believe that our existing cash, cash equivalents and marketable securities of approximately $59.4 million as of December 31, 2015, will be sufficient to fund our currently anticipated operating expenses and capital expenditure requirements through the end of 2016. We intend to continue our assessment of the BACE program and revise our operating plan accordingly after determining the appropriate next steps. We will need to secure additional funding in the future in order to carry out all of our planned research and development activities. We will seek to fund our operations through the sale of equity, debt financings or other capital sources, including potential collaborations or partnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Recent Highlights

        Since December 31, 2014, we experienced the following:

Research and Development Activities:

Pipeline Updates:

•

VTP-43742 (RORgt)—In 2015, we advanced VTP-43742, our wholly owned and first-in-class RAR-Related Orphan Receptor gamma-t (RORgt) inhibitor product candidate for the treatment of psoriasis as well as multiple autoimmune disorders in clinical development:



•

In June 2015, we initiated a Phase 1 single ascending dose clinical study of VTP-43742, and in September 2015, we announced positive top-line results from this trial. The single ascending dose trial assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in 53 healthy human volunteers over several dose levels. The plasma half-life of VTP-43742 was observed to be approximately 30 hours supporting the potential for effective once-a-day dosing in humans. In addition, VTP-43742 was evaluated in an ex vivo assay for its ability to inhibit the production of pro-inflammatory cytokine IL-17A in blood obtained from study subjects. Subjects receiving VTP-43742 showed a dose-dependent suppression of RORgt dependent IL-17A production to more than 90 percent, with the effect largely sustained over the full 24-hour measurement period.



•

In August 2015, we initiated a Phase 1 double-blind, placebo-controlled multiple ascending dose clinical trial of VTP-43742 designed to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple ascending doses of VTP-43742 in up to 40 healthy human volunteers over multiple dose panels. In November 2015, we announced positive top line results from this trial. The observed half-life in plasma in this trial was consistent with once-a-day dosing. We are currently conducting a Phase 2a proof-of-concept study in patients with moderate to severe psoriasis and expect to announce clinical efficacy and initial biomarker results by the end of the first quarter of 2016.



•

Based on our review of the potential diseases for which VTP-43742 may have utility and several other clinical and commercial factors discussed below, we selected moderate to severe psoriasis as the initial, lead indication for VTP-43742. We plan to continue to review other additional potential indications for further development.



•

VTP-38543 (LXRb)—We continued to advance VTP-38543, our first-in-class product candidate for the treatment of atopic dermatitis. In December 2015, we initiated a four-week Phase 2a proof-of-concept trial in adult patients with mild to moderate atopic dermatitis. The clinical trial

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is a randomized, double-blind trial evaluating the safety, tolerability, efficacy, PK and PD of multiple ascending topical doses of VTP-38543. Top-line results for this clinical trial are expected in the second half of 2016.

Other Programs:

•

In July 2015, we announced the end of the research collaboration and license agreement for beta secretase (BACE) inhibitors. Termination of the agreement by BI for strategic business reasons was effective October 21, 2015. In connection with the termination of the agreement, we received the rights to the BACE program, including VTP-36951, formerly BI 1147560. We continue to assess the program to determine the appropriate next steps. We plan to provide an update on our plans for the BACE program in the first half of 2016.



•

In December 2015, we announced that BI187004 did not achieve the predefined primary efficacy endpoint criteria of the trial. As a result, BI informed us of its intention to terminate the program and the 11b Agreement effective as of March 9, 2016. We have no current plans to continue the program independently, but will continue to assess options.

Financial Developments:

•

Reported net operating expenses of $44.3 million for the year ended December 31, 2015, and cash, cash equivalents and marketable securities of $59.4 million as of December 31, 2015.

Product Portfolio

        We have developed and utilized Contour, a computational structure-based drug discovery platform, to design and optimize compounds across a range of therapeutic targets and disease areas. The

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following table summarizes key information about our most advanced product candidates as of December 31, 2015:

VTP-43742 (RORgt)

        We discovered and are developing VTP 43742, an orally active small molecule inhibitor of RORgt activity, which is wholly owned by us, for the treatment of a variety of autoimmune disorders. Autoimmune disorders comprise a large number of diseases in which the body mounts an inappropriate immunological response against normal human tissues. These disorders include; psoriasis, psoriatic arthritis, ankylosing spondylitis, IBD and MS, as well as numerous orphan diseases. We commenced

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discovery efforts for this program in the fourth quarter of 2012 and selected VTP-43742 as a product candidate in the first quarter of 2014.

        In June 2015, we initiated a Phase 1 single ascending dose clinical trial of VTP-43742. In September of 2015, we announced positive top-line results from this trial which assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in 53 healthy human volunteers over several dose levels. VTP-43742 was safe and generally well tolerated at all dose levels across a broad dose range. No serious adverse events were reported and there were no drug-related clinical laboratory or ECG abnormalities. The plasma half-life of VTP-43742 was observed to be approximately 30 hours in this clinical trial, supporting the potential for effective once-a-day dosing in humans. In addition, VTP-43742 was evaluated in an ex vivo assay for its ability to inhibit the production of pro-inflammatory cytokine IL-17A in blood obtained from study subjects. Subjects receiving VTP-43742 showed a dose-dependent suppression of RORgt dependent IL-17A production to more than 90 percent, with the effect largely sustained over the full 24-hour measurement period.

        In August 2015, we initiated a Phase 1 double-blind, placebo-controlled multiple ascending dose clinical trial of VTP-43742 designed to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of multiple ascending doses of VTP-43742 in up to 40 healthy human volunteers over multiple dose levels in the trial. In November 2015, we announced positive top line results from this trial. The observed half-life in plasma in this trial was consistent with once-a-day dosing. In September 2015, we initiated a Phase 2a proof-of-concept study in patients with moderate to severe psoriasis to assess the safety, tolerability, pharmacokinetic, pharmacodynamic and clinical efficacy profile of multiple ascending doses of VTP-43742 in psoriatic patients in which patients are dosed for 28 days. We have closed enrollment at 34 psoriatic patients. We believe that the totality of the data from these patients including clinical efficacy PASI scores and accelerated biomarker data, will be sufficient to allow us to decide on the next steps for the program. We are currently completing the study and analyzing the data and expect to announce clinical efficacy and initial biomarker results by the end of the the first quarter 2016.

        We have selected moderate to severe psoriasis as the initial, lead indication for VTP-43742. It is our belief that of the diseases for which VTP-43742 may have utility, psoriasis represents the most attractive opportunity. Our decision is based on the clinical validation of the Th17 pathway from the IL-17 and IL-23 monoclonal antibodies, our belief in the probability of technical success, the unmet need for better oral therapies, the potential size of the market and the potential length of time to filing a New Drug Application (NDA) with the Food and Drug Administration (FDA) compared to the other indications we evaluated. Assuming the results of the Phase 2a trial are positive, we plan to initiate a Phase 2 trial in psoriasis in the second half of 2016 and continue to assess whether clinical trials in additional indications are appropriate for VTP-43742. In addition to VTP-43742, we are progressing backup compounds in our RORgt program and plan to continue to assess other additional potential indications for further development.

VTP-38543 (Liver X Receptor Beta (LXRb) for Atopic Dermatitis)

        We have discovered and are developing VTP 38543, an LXRb selective agonist, as a topical agent for the treatment of mild to moderate atopic dermatitis. Atopic dermatitis is a common inflammatory skin disease in children that also affects a large number of adults. It is characterized by a loss of barrier function of the skin, as well as skin inflammation.. We have selected VTP-38543 as a product candidate for atopic dermatitis and In December 2015, we initiated a four-week Phase 2a proof-of-concept trial in adult patients with mild to moderate atopic dermatitis. The clinical trial is a randomized, double-blind trial evaluating the safety, tolerability, efficacy, pharmacokinetic and pharmacodynamic profile of multiple ascending topical doses of VTP-38543. Top-line results for this clinical trial are expected in the second half of 2016.

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VTP-36951 (B-site Amyloid Precursor Protein-Cleaving Enzyme (BACE) Inhibitors)

        VTP-36951 was being developed for the treatment and prevention of Alzheimer's exclusively by BI as BI 1147560 pursuant to the BACE Agreement. Under the terms of the BACE Agreement, BI was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the BACE program. On July 23, 2015, BI notified us that it was terminating the BACE Agreement for strategic business reasons effective as of October 21, 2015. In connection with the termination of the BACE Agreement, we received the rights to the BACE program, including VTP-36951, which includes, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer's, diabetes and the other indications covered by the BACE Agreement.

        Prior to termination of the BACE Agreement, we were developing VTP-37948/BI 1181181 (BI1181181), in collaboration with BI for Alzheimer's. However, in February of 2015, BI voluntarily placed BI 1181181 on a temporary clinical hold to further investigate skin reactions observed in some study participants during a Phase 1 multiple rising dose trial. BI had completed its analysis and concluded that skin reactions are burdensome for patients and, therefore, an obstacle for further development of the compound. BI had decided to move forward with the development of VTP-36951, which was discovered as part of our BACE collaboration. BI had completed all GLP toxicology studies that we believe were necessary prior to first in human trials. We continue to assess the BACE program to determine the appropriate next steps and expect to provide an update on our plans for the program in the first half of 2016.

BI187004 (11b HSD1)

        BI187004, our orally active 11b HSD1 inhibitor, was being developed in collaboration with BI for type 2 diabetes. Under the terms of the 11b Agreement with BI, BI was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the 11b HSD1 program. BI187004 was being evaluated in a Phase 2 clinical trial for the treatment of type 2 diabetes. In December 2015, we announced that BI187004 did not achieve the predefined primary efficacy endpoint criteria of the trial. As a result, BI informed us of its intention to terminate the program and the 11b Agreement effective as of March 9, 2016. We have no current plans to continue the program independently, but will continue to assess options.

Strategic Partnerships

11b HSD1 Inhibitors with BI

        In October 2007, we entered into a research collaboration and license agreement with BI, which we refer to as the 11b Agreement. Based upon discoveries we made using Contour, we and BI formed a worldwide strategic partnership granting BI exclusive rights to develop and commercialize novel compounds for patients with type 2 diabetes and certain related metabolic disease conditions, such as abnormal blood cholesterol and triglyceride levels, obesity and hypertension, or high blood pressure. The alliance encompasses multiple series of novel, orally available 11b HSD1 inhibitors that were discovered using Contour. We also retained the right, subject to the approval of the joint steering committee established pursuant to the 11b Agreement, to develop 11b HSD1 inhibitors for certain indications outside of the core focus of diabetes and related metabolic conditions. The collaborative research program portion of this strategic partnership began in October 2007 and expired in December 2009.

        Under the 11b Agreement, we have received an aggregate of $65.2 million in non-equity funding as of December 31, 2015, including upfront license fees, research funding and success-based milestone payments. We received an upfront license fee from BI of $15.0 million upon execution of the 11b Agreement. In addition, BI made quarterly payments of $0.8 million during the 27-month collaborative

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research program period, for a total of $7.2 million. The upfront fee and the research collaboration payments were recognized as revenue over the 27-month funded research program period, from October 2007 through December 2009. Also, as of December 31, 2015, we earned $43.0 million for achieving substantive development milestone payments, including a $6.0 million milestone payment in the third quarter of 2014 from BI as a result of the first patient having been dosed in the Phase 2 clinical trial which commenced in July 2014. Pursuant to the 11b Agreement, BI was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the 11b program, including BI187004. In December 2015, we announced that BI187004 did not achieve the predefined primary efficacy endpoint criteria of the trial. As a result, BI informed us of its intention to terminate the program and the 11b Agreement effective as of March 9, 2016. We have no current plans to continue the program independently, but will continue to assess options.

B-site Amyloid Precursor Protein-Cleaving Enzyme Inhibitors with BI

        In June 2009, we entered into the BACE Agreement. Based upon discoveries we made using Contour, we and BI formed a worldwide strategic partnership granting BI exclusive rights to develop and commercialize BACE inhibitors for the treatment of certain indications, including Alzheimer's. The inhibition of BACE, an enzyme involved in the formation of amyloid-b plaques, which are insoluble aggregates made up of amyloid-b protein and which accumulate in the brains of patients with Alzheimer's, offers the potential to slow or even halt disease progression. Under the terms of the BACE Agreement, BI was to lead development and commercialization of all products for Alzheimer's to capitalize on its global marketing and sales expertise and was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the BACE program. On July 23, 2015, BI notified us that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons. In connection with the termination of the BACE Agreement, we received the rights to the BACE program, including VTP-36951, which is includes, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer's, diabetes and the other indications covered by the BACE Agreement.

        Under the BACE Agreement, we have received an aggregate of $63.2 million in non-equity funding as of December 31, 2015, including upfront license fees, research funding and success-based milestone payments. During the collaborative research program period, we were obligated to provide twelve full-time equivalent employees or FTEs per month for a period of 36 months to provide research services, and we received an upfront license fee from BI of $15.0 million upon execution of the BACE Agreement. In addition, BI made quarterly payments of approximately $1.0 million during the 36-month collaborative research program period, for a total of $12.2 million. The license fee and the research collaboration payments were recognized as revenue over the 36-month research program period, from June 2009 through June 2012. In April 2012, the initial research program was extended for an additional year through June 2013, and BI made quarterly payments of approximately $0.8 million over the 12-month extension period, for a total of $3.0 million. During this extension period, we were obligated to provide eight FTEs per month. The additional payments totaling $3.0 million were recognized ratably over the extension period through June 2013. The revenue recognition period for the license fee was also extended on a prospective basis through June 2013.

        In December 2012, we amended the BACE Agreement to expand the core indication definition to include additional indications, including type 2 diabetes and metabolic syndrome. Under the terms of the amendment, we received a nonrefundable fee of $4.0 million upon execution of the amendment. In accordance with the amendment, we were obligated to provide 12 months of research contributions at BI's discretion commencing in June 2013. Deferred revenue was recorded upon receipt of the cash payments, and revenue relating to the upfront payment was recognized over the 12-month period in which research contributions were delivered through June 30, 2014. We recorded $2.0 million in

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revenues related to the amendment for each of the years ended December 31, 2014 and 2013, respectively.

        As of December 31, 2015, we have earned $29.0 million in development milestone payments since the inception of the BACE Agreement.

Financial Operations Overview

Revenue

        To date, we have not generated any revenue from product sales. Primarily all of our revenue to date has been derived from license fees, milestone payments and collaborative research and development payments received from our strategic partners.

        In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research and development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development reimbursements, milestone and other payments received under our strategic partnerships, and the amount and timing of payments that we receive upon the sale of our products, to the extent any of our products are successfully commercialized. We do not expect to generate revenue from product sales for many years, if ever. If we or our strategic partners fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

        Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred.

        These expenses include, but are not limited to:

•

employee-related expenses, which include salaries, benefits and stock-based compensation;



•

expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies;



•

the cost of acquiring and manufacturing preclinical and clinical trial materials;



•

outsourced professional scientific services;



•

laboratory materials and supplies used to support our research activities;



•

allocated expenses for rent, utilities and other facility-related costs; and



•

software license fees associated with in-licensed products and technology.

        The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from any of our other product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

•

the number of clinical sites included in the trials;



•

the length of time required to enroll suitable patients;

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•

the number of patients that ultimately participate in the trials;



•

the number of doses patients receive;



•

the duration of patient follow-up; and



•

the results of our clinical trials.

        Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the foregoing 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 other regulatory authorities were to require us to conduct clinical trials beyond those which we currently anticipate, or if we experience significant delays in enrollment in any our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Drug commercialization takes several years and requires millions of dollars in development costs.

        We track research and development expenses on a program-by-program basis and have allocated common expenses, such as facilities, depreciation, stock-based compensation and other research and development support expenses to each program based on the personnel resources allocated to each program. We generally track these costs as separate programs after a program achieves animal-proof-of principle. In addition to our program specific costs, we have discovery costs related primarily to the design, synthesis and assessment of product candidates for new molecular targets and for previous product candidates for which we have decided not to pursue further development. These costs include attempts to replicate literature data, structural biology around the target and, to a limited extent, compound synthesis. Generally, these costs include activities up to and including animal proof-of-concept. In addition, discovery expenses include technology development costs related to Contour. These expenses consist principally of salaries and related costs for personnel engaged in the development and enhancement of the technology.

        We expect that the expenses related to our entire pipeline will continue to increase with successful progression of our product candidates, including potentially VTP-36951, into later stages of development and as we commence new discovery efforts on promising biological targets. However, future research and development costs for any particular program or product candidate are not reasonably certain because such costs are dependent on a number of variables, including successful completion of preclinical and clinical studies, the design and cost of future studies and the amount and timing of discovery efforts committed to back-up compounds.

General and Administrative Expense

        General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, legal and human resources functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent filing and prosecution costs and professional fees for investor relations, legal, auditing and tax services.

        We anticipate that our general and administrative expenses will increase as a result of increased payroll, expanded infrastructure and higher consulting, legal, regulatory and tax-related services associated with maintaining compliance with stock exchange listing and the SEC requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public reporting company.

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Other Income

        Other income primarily includes the impact of periodic revaluations of our preferred stock warrant liability and sales of Pennsylvania tax credits. Upon the closing of our IPO, the preferred stock warrant liability was reclassified to additional paid-in capital. We performed the final re-measurement of the warrants in connection with completion of the IPO in the third quarter of 2014.

Interest Income, Interest Expense and Loss on Debt Extinguishment

        Interest income consists of interest earned on our cash, cash equivalents and marketable securities. The primary objective of our investment policy is capital preservation.

        Interest expense consists primarily of interest, amortization of debt discount, and amortization of deferred financing costs associated with our notes payable.

        Loss on debt extinguishment consists of prepayment and other additional fees and the write-offs of unamortized debt discount and unamortized deferred financing costs as of the date of our loan payoff.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in detail in Note 2 to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

        Our revenues are generated primarily through collaborative arrangements which generally contain multiple elements, or deliverables, including licenses and research and development activities to be performed by us on behalf of the licensee. Payments to us under these arrangements typically include one or more of the following: (1) nonrefundable, upfront license fees, (2) funding of discovery research efforts on a full time equivalent, (FTE), basis, (3) reimbursement of research, development and intellectual property costs, (4) milestone payments, and (5) royalties on future product sales.

        We account for revenue arrangements with multiple deliverables entered into prior to January 1, 2011 in accordance with Accounting Standard Codification (ASC) Topic 605-25, Revenue Recognition: Multiple-Element Arrangements. The multiple-deliverable items are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. We allocate the consideration we receive among the separate units of accounting based on their respective fair value, and apply the applicable revenue recognition criteria to each of the separate units. Where an item in a revenue arrangement with multiple deliverables does not constitute a separate unit of accounting and for which delivery has not occurred, we defer revenue until the delivery of the item is completed.

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        Effective January 1, 2011, we adopted, on a prospective basis, Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, which amends ASC 605-25 and also adopted ASU 2010-17, Revenue Recognition—Milestone Method. Our collaborations with BI were entered into prior to the adoption of this guidance. The BACE Agreement amendment entered into December 2012 was accounted for under ASC 2009-13.

        In accordance with ASU 2009-13, we consider whether the deliverables under the arrangement represent separate units of accounting. In determining the units of accounting, we evaluate certain criteria, including whether the deliverables have stand-alone value. The consideration received is allocated to the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria is applied to each of the separate units.

        We determine the estimated selling price for agreement deliverables using the following hierarchy: (1) vendor-specific objective evidence, (VSOE), (2) third-party evidence, (TPE) or (3) best estimate of selling price if neither VSOE nor TPE is available. Determining the best estimate of selling price for a deliverable requires significant judgment and consideration of various factors, including market conditions, items contemplated during agreement negotiation as well as internally developed net present value models.

        We typically receive upfront, nonrefundable payments when licensing our intellectual property. For intellectual property licenses that do not have stand-alone value from the other deliverables to be provided, revenue is recognized over the contractual or estimated performance period, which is typically the term of the research and development obligations. The periods over which revenue should be recognized are subject to estimates by us and may change over the course of the research and development agreement. Such a change could have a material impact on the amount of revenue we record in future periods.

        Payments or reimbursements resulting from our research and development efforts are recognized as the services are performed and are presented on a gross basis so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is reasonably assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

        In accordance with ASU 2010-17, revenue is recognized from milestone payments when: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement; and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone, (b) relates solely to past performance and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. We have concluded that the clinical and development and regulatory milestones pursuant to our research and development arrangements are substantive.

        Royalty revenue is recognized when earned. We have not earned any royalty revenues to date.

Accrued Clinical and Preclinical Expenses

        As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable 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

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balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued clinical expenses include:

•

fees paid to vendors in connection with the preclinical development activities;



•

fees paid to contract manufacturers in connection with the production of preclinical and clinical trial materials;



•

fees paid to contract research organizations in connection with clinical studies; and



•

fees paid to investigative sites in connection with clinical studies.

        We base our expenses related to preclinical and clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies 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 adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.

Stock-Based Compensation

        We account for stock-based compensation expense in accordance with the provisions of ASC 718, Compensation—Stock Compensation, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of or may be settled by the issuance of the enterprise's equity instruments. ASC 718 requires that we measure the cost of equity-based service awards based on the grant-date fair value of the award, net of estimated forfeitures, and recognize the cost of such awards over the period during which the employee is required to provide service in exchange for the award (the vesting period) on a straight-line basis.

        We issue both performance-based stock options and performance-based restricted stock units (RSUs). Stock-based compensation expense is recognized beginning when it is deemed probable that the performance-based goal will be met, as determined by our board of directors.

        Under our Employee Stock Purchase Plan (the Purchase Plan), the employees ability to purchase shares of our common stock at the lower of the offering date price or the purchase date price represents a stock option under ASC 718-50. Accordingly, the Purchase Plan is a compensatory plan and stock-based compensation cost is determined based on the fair value of the award on the date of grant and is recognized over the requisite service period of the award.

        We expect to continue to grant stock options, and potentially other forms of equity awards, in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

Determining Fair Value of Stock-Based Awards

        Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. The fair value of each stock-based

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award is calculated using the Black-Scholes option pricing model. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Prior to our IPO, there was no public market for the trading of our common stock. Due to this fact and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. We selected companies from the biopharmaceutical industry with similar characteristics to us, including those in the early stage of product development and with a therapeutic focus.

        To calculate the expected term of stock option grants to employees, we use the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

        We have historically granted stock options at exercise prices not less than the fair market value of our common stock. Prior to our IPO, in the absence of a public trading market for our common stock, our board of directors was required to estimate the fair value of our common stock at each option grant date. Our board of directors, in making its independent determination, utilized a number of different sources. We used methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, considering numerous objective and subjective factors to determine common stock fair market value at each option grant date, including third party valuations of the common stock, external market conditions affecting the life sciences industry sector, the prices at which we sold shares of convertible preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant, our results of operations and financial position, the status of our research and development efforts, our stage of development and business strategy and the likelihood of achieving a liquidity event such as an initial public offering or sale of our company.

        The fair value of options granted were calculated using the following weighted-average assumptions in the Black-Scholes option pricing model for the years ended December 31, 2015, 2014 and 2013:

        The purchase price of common stock under our Employee Stock Purchase Plan (the ESPP) is equal to 85% of the lesser of (i) the fair market value per share of the common stock on the first business day of an offering period and (ii) the fair market value per share of the common stock on the purchase date. The fair value of the discounted purchases made under our ESPP is calculated using the Black-Scholes model. The fair value of the look-back provision plus the 15% discount is recognized as compensation expense over the offering period.

        The cost of each stock-based compensation award is determined based on the grant-date fair value, net of the effects of estimated forfeitures of the awards, and is recognized into expense over the

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award's service period. Stock-based compensation expense for the years ended December 31, 2015, 2014 and 2013 was recognized as follows:

 

Income Taxes

        For the years ended December 31, 2015, 2014 and 2013, we did not record a current or deferred income tax expense or benefit. We have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets. Based on our history of operating losses, we have concluded that it is not more likely than not that the benefit of our deferred tax assets will be realized. Accordingly, we have provided a full valuation allowance for deferred tax assets as of December 31, 2015 and 2014.

Comparison of Years Ended December 31, 2015 and 2014

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        Upfront License Fee Revenue.    For the year ended December 31, 2014, all upfront license fee revenue was entirely associated with the amortization of the upfront fee received upon execution of the second amendment to the BACE Agreement in December 2012 to expand the core BACE indication to include diabetes and metabolic disease. Revenue relating to the upfront payment was recognized over the 12-month period in which research contributions were delivered through June 30, 2014.

Collaborative Research Payments:

        Intellectual Property Costs.    For the years ended December 31, 2015 and 2014, revenue related to intellectual property cost reimbursements was $0.6 million and $0.7 million, respectively. The decrease of $0.1 million was primarily related to a decrease in intellectual property costs associated with the 11b Agreement.

        FTE Funding.    For the year ended December 31, 2014, all FTE funding revenue was related to the second amendment to the BACE Agreement in December 2012 to expand the core BACE indication to include diabetes and metabolic disease. FTE funding revenue was recognized over the 12-month period in which research contributions were delivered through June 30, 2014.

        Milestone Revenue.    Revenue for the year ended December 31, 2014 included $6.0 million in milestone payments from BI related to the 11b Agreement as a result of the first patient having been dosed in a Phase 2 clinical trial.

        Research and Development.    Research and development expense for the year ended December 31, 2015 was $35.5 million compared to $19.3 million for the year ended December 31, 2014, an increase of approximately $16.2 million. The increase was primarily attributable to a $11.1 million increase in clinical and preclinical expenses associated with our RORgt program, a $2.6 million increase in preclinical study expenses associated with our LXRb atopic dermatitis program, a $0.8 million increase in consulting and outsourced services, a $0.8 million increase in stock-based compensation expense and a $0.8 million increase in employee-related compensation and benefit expenses.

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        We also track fully-allocated research and development expenses on a program-by-program basis. Below is a summary of our research and development expenses by program for the years ended December 31, 2015 and 2014:

RORgt

        RORgt program expenses for the year ended December 31, 2015 were $20.3 million compared to $12.4 million for the year ended December 31, 2014, an increase of approximately $7.9 million. The increase was primarily attributable to the advancement of VTP-43742 into clinical development, including manufacturing and Phase 1 clinical trial costs.

LXRb

        LXRb program expenses for the year ended December 31, 2015 were $3.7 million compared to $0.4 million for the year ended December 31, 2014, an increase of approximately $3.3 million. The increase was primarily attributable to non-clinical development activities and manufacturing to support the initiation of clinical trials for VTP-38543 in the fourth quarter of 2015.

Other Programs

        Other program expenses for the year ended December 31, 2015 were $11.6 million compared to $6.5 million for the year ended December 31, 2014, an increase of approximately $5.1 million. The increase was primarily attributable to shift in discovery activities from our RORyt program to our next potential clinical candidates. Included in both periods are costs associated with the development of our Contour platform, which have remained consistent year over year.

        General and Administrative.    General and administrative expenses for the year ended December 31, 2015 were $9.3 million compared to $7.9 million for the year ended December 31, 2014, an increase of approximately $1.4 million. The increase was primarily the result of a $1.3 million increase in public reporting company compliance costs, including outside service and consulting fees, audit and legal fees, board of director fees and director & officer insurance costs, a $0.6 million increase in employee-related compensation expenses and a $0.1 million increase in franchise taxes due to the State of Delaware, partially offset by a $0.6 decrease in stock-based compensation expense.

        Other Income.    Other income for each of the years ended December 31, 2015 and 2014 was $0.3 million. During the year ended December 31, 2015, other income was entirely attributable to the sale of Pennsylvania tax credits. Other income for the year ended December 31, 2014 included a gain of $0.3 million from the revaluation of the fair value of our preferred stock warrant liability as of September 24, 2014, the closing date of our IPO and date of our final re-measurement of the warrants.

        Interest Income.    Interest income for the year ended December 31, 2015 was $0.4 million, as compared to $0.1 million for the year ended December 31, 2014. The increase in interest income was primarily attributable to an increase in our average cash balance for the year ended December 31, 2015, as compared to December 31, 2014.

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        Interest Expense.    Interest expense for the year ended December 31, 2015 was $0.1 million compared to $1.0 million for the year ended December 31, 2014, a decrease of $0.9 million. Interest expenses was related to the Silicon Valley Bank and Oxford Finance LLC credit facility. The outstanding balance of the credit facility was paid in full in February 2015.

        Loss on Debt Extinguishment.    Loss on debt extinguishment was $0.2 million for the nine months ended December 31, 2015. The loss was due to the repayment of the outstanding balance of the Silicon Valley Bank and Oxford Finance LLC credit facility in February 2015. The total payoff was $4.3 million, which included prepayment and other additional fees of $84,000. Included in the loss on debt extinguishment were write-offs of unamortized deferred financing fees of $21,000 and unamortized debt discount of $0.1 million as of the date of payoff.

Comparison of Years Ended December 31, 2014 and 2013

 

        Upfront License Fee Revenue.    For the years ended December 31, 2014 and 2013, all upfront license fee revenue was entirely associated with the BACE Agreement, totaling $0.2 million and $0.4 million, respectively. The $0.2 million decrease was attributable to a decrease of $0.2 million in amortization of deferred revenue due to the initial collaborative research period ending as of June 3, 2013.

Collaborative Research Payments:

        FTE Funding.    For the years ended December 31, 2014 and 2013, all FTE funding revenue was associated with the BACE Agreement, totaling $1.8 million and $3.1 million, respectively. The

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$1.3 million decrease was attributable to the initial collaborative research period for the BACE Agreement ending as of June 3, 2013.

        Intellectual Property Costs.    For the years ended December 31, 2014 and 2013, revenue related to intellectual property cost reimbursements was $0.7 million and $1.1 million, respectively. The decrease of $0.4 million was primarily related to a reduction in intellectual property costs associated with our 11b Agreement.

        Milestone Revenue.    Revenue for the year ended December 31, 2014 included $6.0 million in milestone payments from BI related to the 11b Agreement as a result of the first patient having being dosed in a Phase 2 clinical trial. Revenue for the year ended December 31, 2013 included $18.0 million in milestone payments from BI related to the BACE Agreement.

        Research and Development.    Research and development expense for the year ended December 31, 2014 was $19.3 million compared to $14.9 million for the year ended December 31, 2013, an increase of approximately $4.4 million. The increase was attributable to a $3.5 million increase in preclinical trial expenses associated with our RORgt program and new discovery program in immuno-oncology, a $0.5 million increase in outsourced professional scientific services, a $0.2 million increase in preclinical trial expenses associated with our LXRb program for atopic dermatitis and a $0.2 million increase in stock-based compensation expense.

        Included in research and development expense were stock-based compensation charges of $232,000 and $19,000 for the years ended December 31, 2014 and 2013, respectively. The increase in stock-based compensation expense of $0.2 million was primarily due to 52,675 performance-based stock options being deemed probable that the performance-based goal would be met. Stock-based compensation expense was recorded ratably over the completed service period associated with the performance condition.

        We also track fully-allocated research and development expenses on a program-by-program basis. Below is a summary of our research and development expenses by program for the year ended December 31, 2014 and 2013:

RORgt

        RORgt program expenses for the year ended December 31, 2014 were $12.4 million compared to $10.2 million for the year ended December 31, 2013, an increase of approximately $2.2 million. We commenced discovery efforts for the RORgt program in the fourth quarter of 2012 and selected VTP-43742 as a product candidate in the first quarter of 2014. As a result of these activities, expenses related to RORgt increased in 2014 as compared with 2013.

BACE

        BACE program expenses for the year ended December 31, 2013 were $0.9 million. We entered into the BACE Agreement in 2009. The funded research obligation of our strategic partnership began

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in June 2009 and expired in June 2013. In addition, the second amendment to the BACE Agreement in December 2012 obligated us, at BI's discretion, to supply a specified number of FTEs on a monthly basis during the period July 1, 2013 through June 30, 2014. We did not incur any research and development associated with the BACE program for the year ended December 31, 2014.

LXRb

        LXRb program expenses for the year ended December 31, 2014 were $0.4 million compared to $0.6 million for the year ended December 31, 2013, a decrease of approximately $0.2 million. Discovery efforts related to the LXRb program were substantially complete during 2012. During 2013 and 2014, we focused primarily on clinical development, regulatory strategy and formula development.

Other Programs

        Other Program expenses for the year ended December 31, 2014 were $6.5 million compared to $3.2 million for the year ended December 31, 2013, an increase of approximately $3.3 million. The increase was primarily attributable to shift in discovery activities from our RORyt, BACE and LXR programs to our next potential clinical candidates. In addition, costs increased by $0.5 million due to the additional use of outsourced professional scientific services for our other research programs. Included in both periods are costs associated with the development of our Contour platform, which have remained consistent year over year.

        General and Administrative.    General and administrative expenses for the year ended December 31, 2014 was $7.9 million compared to $5.4 million for the year ended December 31, 2013, an increase of $2.5 million. The increase was primarily the result of a $1.9 million increase in stock-based compensation expense, a $0.3 million increase in recruiting expenses, a $0.3 million increase in public company compliance costs, including outside service and consulting fees, SEC reporting costs and stock exchange and transfer agent fees, a $0.2 million increase in insurance expenses primarily related to increased costs for directors' and officers' insurance, and a $0.1 million increase for board compensation expenses; partially offset by a $0.4 million decrease in outside patent costs.

        Included in general and administrative expenses were stock-based compensation charges of $2.0 million and $81,000 for the years ended December 31, 2014 and 2013, respectively. The increase in stock-based compensation expense of $1.9 million was primarily due to a $1.4 million increase related to the vesting of 391,304 shares of common stock underlying performance-based restricted stock units and a $0.3 million increase related to 58,026 performance-based stock options being deemed probable that the performance-based goal would be met. Stock-based compensation expense was recorded ratably over the completed service period associated with the performance condition.

        Other Income.    Other income for each of the years ended December 31, 2014 and 2013 was $0.3 million. During the year ended December 31, 2014, an increase of $58,000 was attributable to the revaluation of the fair value of our preferred stock warrant liability which was partially offset by a decrease of $42,000 for the sale of Pennsylvania tax credits. Upon the closing of our IPO, the preferred stock warrant liability was reclassified to additional paid-in capital. We performed the final re-measurement of the warrant liability in connection with completion of the IPO.

        Interest Income.    Interest income for the year ended December 31, 2014 was $64,000 compared to $70,000 for the year ended December 31, 2013. The decrease in interest income was attributable to a decrease in the average interest rates of our investments for the year ended December 31, 2014 compared to December 31, 2013.

        Interest Expense.    Interest expense for the year ended December 31, 2014 was $1.0 million compared to $1.4 million for the year ended December 31, 2013, a decrease of $0.4 million. The decrease was entirely due to a reduction in our average loan balance in 2014 from monthly principal payments being applied against our notes payable.

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Liquidity and Capital Resources and Plan of Operations

        On January 28, 2015, we issued and sold a total of 3,450,000 shares of our common stock at $11.90 per share in an underwritten public offering, including 450,000 shares of common stock sold pursuant to the exercise in full of the underwriters' option to purchase additional shares. Net proceeds from the offering, including the sale of the additional shares, was approximately $38.0 million, after deducting underwriting discounts and commissions and other offering expenses.

        On September 29, 2014, we sold 6,875,000 shares of common stock in our IPO for net proceeds of $48.8 million after underwriting discounts and commissions and other offering expenses. On October 27, 2014, we issued and sold an additional 1,031,250 shares of common stock at the IPO price of $8.00 per share for net proceeds of $7.6 million, after deducting underwriting discounts and commissions and other offering expenses, in connection with the full exercise by the underwriters of their over-allotment option. Prior to our IPO, we funded our operations through the private placement of equity securities, revenue from strategic partnerships, debt financing and interest income. As of December 31, 2015, we have received gross proceeds of $120.1 million from the issuance of convertible preferred stock, including $40.0 million of equity sales to our strategic partners, all which occurred prior to our IPO. As of December 31, 2015, we had received an aggregate of $138.7 million in cash from non-equity capital in the form of license fees, milestone payments and research and development funding received from our strategic partners. In addition, we have received approximately $39.8 million in funding from our debt financings with various commercial lenders; all such debt has been repaid. As of December 31, 2015, we had an accumulated deficit of $174.0 million and working capital of $53.8 million which includes cash, cash equivalents and marketable securities of approximately $59.4 million. As of December 31, 2015, our cash equivalents and marketable securities included money market funds, certificates of deposit and corporate debt securities.

        Under settlement procedures applicable to an outstanding RSU award held by our chief executive officer, we were required to deliver the underlying 391,304 shares on March 13, 2015. On the settlement date, we net settled the award by delivering approximately 220,148 shares of our common stock to our chief executive officer and withholding approximately 171,156 shares of common stock to satisfy income taxes at the applicable minimum statutory rate. In connection with the net settlement, we remitted the tax liabilities on behalf of our chief executive officer to the relevant tax authorities in cash.

        On October 5, 2015, we filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, rights, debt securities and units up to an aggregate amount of $200.0 million (the 2015 Shelf Registration Statement). On November 5, 2015, the 2015 Shelf Registration Statement was declared effective by the SEC. In the future, we may periodically offer one or more of these securities in amounts, prices and terms to be announced when and if the securities are offered. At the time any of the securities covered by the 2015 Shelf Registration Statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering.

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Analysis of Cash Flows

        The following table summarizes our cash flows for the years ended December 31, 2015, 2014 and 2013:

Net cash (used in) provided by operating activities

        During the years ended December 31, 2015 and 2014, our operating activities used cash of $38.0 and $17.8 million, respectively. Operating losses in both periods were driven significantly by cash payments for research and development and general administrative expenses exceeding cash inflows from revenue arrangements.

        During the year ended December 31, 2013, our operating activities provided cash of $12.1 million. The cash provided by operating activities primarily resulted from our collections of the December 31, 2013 accounts receivable balances totaling $8.7 million and cash inflows from revenue arrangements exceeding payments for research and development expenses and general and administrative expenses.

Net cash (used in) provided by investing activities

        During the year ended December 31, 2015 our investing activities used cash of $12.1 million. The cash used by investing activities was primarily a result of the purchase price of marketable securities exceeding the sale and maturity of similar marketable securities. Purchases of property and equipment for the year ended December 31, 2015 were $0.3 million.

        During the year ended December 31, 2014, our investing activities used cash of $24.8 million. The cash used by investing activities was primarily a result of the purchase price of marketable securities exceeding the sale and maturity of similar marketable securities. Purchases of property and equipment for the year ended December 31, 2014 were $0.3 million.

        During the year ended December 31, 2013, our investing activities provided cash of $5.7 million. The cash provided by investing activities for the year ended 2013 was due primarily to the sales and maturity of marketable securities exceeding the purchase price of similar marketable securities. Purchases of property and equipment for the year ended December 31, 2013 was $0.2 million.

Net cash provided by (used in) financing activities

        During the year ended December 31, 2015, our financing activities provided cash of $32.4 million. The cash provided by financing activities was primarily a result of proceeds received from the issuance of our common stock in our public offering in January 2015, net of expenses, totaling $38.0 million and proceeds received from the exercises of common stock options of $1.3 million. These increases were partially offset by the repayment of the outstanding principal balance of the Silicon Valley Bank and Oxford Finance LLC credit facility of $4.9 million and the net settlement of a RSU award for which we withheld 171,156 shares of common stock and remitted $1.9 million in tax liabilities on behalf of our chief executive officer to the relevant tax authorities.

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        During the year ended December 31, 2014, our financing activities provided cash of $51.0 million. The cash provided by financing activities was primarily a result of proceeds received from the issuance of our common stock in our IPO and exercises of common stock options in the aggregate amount of $58.9 million, partially offset by principal payments on notes payable of $5.5 million and payments of offering costs of $2.4 million.

        During the year ended December 31, 2013, our financing activities used cash of $4.3 million. The cash used in 2013 was primarily a result of the beginning of principal payments on notes payable of $4.6 million partially offset by the reduction of restricted cash of $0.2 million and proceeds from the exercise of common stock options of $0.1 million.

Plan of Operation

        We anticipate we will incur net losses for the next several years as we continue clinical development of our RORgt and LXRb programs, which will drive significantly higher research and development expenses. In addition, we plan to continue to invest in discovery efforts to explore additional targets, build commercial capabilities and expand our corporate infrastructure. We may not be able to complete the development and initiate commercialization of these programs if, among other things, our preclinical research and clinical trials are not successful or if the FDA does not approve our product candidates arising out of our current preclinical program when we expect, or at all.

        In connection with the termination of the BACE Agreement, we plan to assess the BACE program and revise our operating plan accordingly after determining the appropriate next steps, which may include the addition of expenses related to the further development of the BACE program. We plan to provide an update on our plans for the BACE program in the first half of 2016.

        We are a publicly-traded company and incur significant legal, accounting and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and The NASDAQ Stock Market, requires public companies to implement specified corporate governance practices that we were not required to incur as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We estimate that we incur approximately $2.0 million to $3.0 million in incremental costs per year associated with being a publicly traded company, although it is possible that our incremental costs will be higher than we currently estimate.

        Based on our current business plan, which as of now does not include any expenses relating to further development of the BACE program, we believe that our existing cash, cash equivalents and marketable securities as of December 31, 2015, will be sufficient to fund our currently anticipated operating expenses and capital expenditure requirements through the end of 2016. We intend to assess the BACE program and revise our operating plan accordingly after determining the appropriate next steps. We have based these estimates of our capital needs on assumptions that may prove to be wrong or which we may determine to adjust, and we could utilize our available capital resources sooner than we currently expect. If we are required to raise additional capital, we may seek to sell additional equity or debt securities or incur indebtedness. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may also seek funding through collaborations or partnerships with other companies or other strategic transactions. If we are unable to raise sufficient additional capital we may need to substantially curtail our planned operations.

        Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our

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working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

•

the number and characteristics of the product candidates we pursue;



•

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



•

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



•

the cost of manufacturing our product candidates and any products we successfully commercialize;



•

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



•

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



•

the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.

Please see "Risk Factors" for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

        The following table summarizes our contractual obligations at December 31, 2015:

        The table above detailing contractual commitments and obligations does not include severance pay obligations to certain of our executive officers in the event of a not-for-cause termination under existing employment contracts. The cash amount for which we might be liable upon any such termination, based on current executive pay and bonus levels, could range between $0.2 million to $1.4 million.

Purchase Commitments

        We have no material non-cancelable purchase commitments with contract manufacturers or service providers as we have generally contracted on a cancelable basis.

Off-Balance Sheet Arrangements

        During the years ended December 31, 2015 and 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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Tax Loss Carryforwards

        As of December 31, 2015, we have net operating loss (NOL) carryforwards of approximately $87.3 million to offset future federal income taxes and approximately $84.5 million to offset future state income taxes. The federal and state net operating loss carryforwards begin to expire in 2024. For state income tax purposes, the Pennsylvania taxing authority limits the amount of NOL carryforwards which can be used to offset Pennsylvania taxable income, based on the greater of $5.0 million or 30% of Pennsylvania taxable income before the NOL deduction. We also have research and development and investment tax credit carryforwards of approximately $7.7 million to offset future federal income taxes, and approximately $0.1 million to offset future Pennsylvania state income taxes. The federal and state tax credits begin to expire in 2021 and 2028, respectively.

        The NOL carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carry-forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This could limit the amount of NOLs that we can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of our company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. Additionally, U.S. tax laws limit the time during which these carry-forwards may be applied against future taxes, therefore, we may not be able to take full advantage of these carry-forwards for federal income tax purposes. We intend to evaluate the ownership history of our company to determine if there were any ownership changes as defined under Section 382(g) of the Code before utilizing the NOL carry-forwards.

        At December 31, 2015, we recorded a 100% valuation allowance against our deferred tax assets of approximately $75.1 million, as our management believes it is not more likely than not that they will be realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss carryforwards, an adjustment to recognize the income tax benefit attributable to our net operating loss carryforwards would increase net income in the period in which we make such a determination.

Recently Issued Accounting Standards

        We did not adopt any new accounting pronouncements during the year ended December 31, 2015 that had a material effect on our financial statements.

        In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will supersede and replace nearly all existing GAAP revenue recognition guidance, including industry-specific guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. We are evaluating ASU 2014-09 and have not yet determined what, if any, effect ASU 2014-09 will have on our results of operations or financial condition.

        In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern. ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements are issued, and to make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 is effective for annual reporting periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. We are currently evaluating the impact of the adoption of ASU 2014-15 on our financial statements.

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        In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the balance sheet classification of deferred taxes and requires that all deferred taxes be presented as noncurrent. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted. The adoption of this update is not expected to have a material effect on our financial statements.

JOBS Act

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act), and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy or information statements, exemptions from the requirements of holding a non-binding advisory vote on executive compensation and seeking stockholder approval of any golden parachute payments not previously approved and not being required to adopt certain accounting standards until those standards would otherwise apply to private companies.

        As an emerging growth company, we have irrevocably elected to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

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Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to market risk related to changes in interest rates. As of December 31, 2015 and 2014, we had cash and cash equivalents and marketable securities of $59.4 million and $65.3 million, respectively, consisting of money market funds, certificates of deposit and corporate debt securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in marketable debt securities. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. We do not currently have any auction rate securities.

        We contract with research organizations and investigational sites globally. We may be subject to fluctuations in foreign currency rates in connection with payments made under these agreements. Historically, we have not hedged our foreign currency exchange rate risk, as the impacts of changes in foreign currency rates on payments made under these arrangements have not been material.

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Financial statements and supplementary data required pursuant to this Item are presented beginning on page F-1 of this report.

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

        None.

Item 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

        In connection with the preparation of this Annual Report on Form 10-K, the Company completed an evaluation, as of December 31, 2015, under the supervision of and with participation from the Company's management, including the Chief Executive and Chief Financial Officers, as to the effectiveness of the Company's disclosure controls and procedures. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2015, the Company's disclosure controls and procedures were effective.

Management's Report on Internal Control over Financial Reporting

        Our management is responsible for establishing and maintaining adequate "internal control over financial reporting" for the Company, as that term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. 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 U.S. 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.

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway

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Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2015 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

        Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurances and 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 policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

        There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    OTHER INFORMATION

        Not applicable.

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PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        The information required by this item regarding our directors, including the audit committee and audit committee financial experts, and executive officers corporate governance, our code of conduct and compliance with Section 16(a) of the Exchange Act will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of fiscal year ended December 31, 2015 (2016 Proxy Statement) and is incorporated herein by reference.

Item 11.    EXECUTIVE COMPENSATION

        The information required by this item regarding executive compensation will be included in our 2016 Proxy Statement and is incorporated herein by reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information required by this item regarding security ownership of certain beneficial owners and management and related stockholder matters will be included in our 2016 Proxy Statement and is incorporated herein by reference.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information required by this item regarding certain relationships and related transactions and director independence will be included in our 2016 Proxy Statement and is incorporated herein by reference.

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this item regarding principal accounting fees and services will be included in our 2016 Proxy Statement and is incorporated herein by reference.

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PART IV

Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   Documents filed as part of this report:

        (1)   Financial Statements.    The financial statements filed as part of this report are listed on the Index to Financial Statements on page F-1.

        (2)   Financial Statement Schedules.    All financial statement schedules have been omitted here because they are not applicable, not required, or the information is shown in the financial statements or notes thereto.

        (3)   Exhibits.    The exhibits required by Item 601 of Regulation S-X and Item 15(b) of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits and are incorporated herein.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey S. Hatfield and Richard Morris, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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Vitae Pharmaceuticals, Inc.
Index to Financial Statements

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Vitae Pharmaceuticals, Inc.

        We have audited the accompanying balance sheets of Vitae Pharmaceuticals, Inc. (the "Company") as of December 31, 2015 and 2014, and the related statements of operations, comprehensive (loss) income, convertible preferred stock and stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes 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. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitae Pharmaceuticals, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

Philadelphia, Pennsylvania
March 4, 2016

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Vitae Pharmaceuticals, Inc.

Balance Sheets

   

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

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Vitae Pharmaceuticals, Inc.

Statements of Operations

   

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

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Vitae Pharmaceuticals, Inc.

Statements of Comprehensive (Loss) Income

   

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

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Vitae Pharmaceuticals, Inc.
Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)

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

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Vitae Pharmaceuticals, Inc.

Statements of Cash Flows

   

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

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Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

1. Organization

        Vitae Pharmaceuticals, Inc. ("Vitae" or the "Company") is a clinical-stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases in which there are significant unmet medical needs. The Company is developing a robust and growing portfolio of novel product candidates internally generated by Contour®, its proprietary structure-based drug discovery platform. The Company has a portfolio that includes several wholly-owned product candidates in various stages of development.

        The Company's most advanced, wholly-owned product candidate is VTP-43742, a first in class oral small molecule, which is being developed for the treatment of psoriasis as well as multiple autoimmune disorders, and is currently being studied in a Phase 2a proof-of-concept clinical trial. The Company's other wholly-owned product candidate is VTP-38543 for the treatment of atopic dermatitis, which is in Phase 2a clinical development. The Company intends to advance and retain rights to these and other programs and product candidates that the Company believes it can develop and commercialize, and to strategically partner where doing so can accelerate the program and generate non-dilutive capital for Vitae.

        The Company also has a product candidate, VTP-36951, in pre-clinical development for the treatment and prevention of Alzheimer's disease, or Alzheimer's. VTP-36951 was being developed exclusively by BI as BI 1147560 pursuant to a Research Collaboration and License Agreement with BI that was entered into in June 2009 (the "BACE Agreement"). On July 23, 2015, BI notified the Company that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons. In connection with the termination of the BACE Agreement, the Company received the rights to the BACE program, including VTP-36951, which includes, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer's, diabetes and the other indications covered by the BACE Agreement. The Company continues to assess the BACE program to determine appropriate next steps.

        The Company was also developing BI187004/VTP-34072 ("BI187004"), which was in a Phase 2 clinical trial for the treatment of type 2 diabetes, and was being developed under a Research Collaboration and License Agreement with Boehringer Ingelheim GmbH ("BI") that was entered into in October 2007 (the "11b Agreement"). In December 2015, the Company announced that BI187004 did not achieve the predefined primary efficacy endpoint criteria of the trial. As a result, BI informed the Company of its intention to terminate the program and the 11b Agreement effective as of March 9, 2016. The Company has no current plans to continue the program independently, but will continue to assess options.

        The collaborations with BI, including the BACE Agreement, have provided the Company with an aggregate of $158 million in funding as of December 31, 2015, including $30 million from sales of the Company's equity securities and $128 million in upfront license fees, research funding and success-based milestones.

        Vitae is currently pursuing the following strategies: advance its growing portfolio of product candidates, establish late-stage development and commercialization capabilities for certain of the Company's product candidates in the U.S. and potentially other markets, selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of the Company's product candidates, leverage Contour to rapidly discover novel small molecule product candidates for additional

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Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

1. Organization (Continued)

validated, difficult-to-drug targets, and continue investing in technology, people and intellectual property.

        As of December 31, 2015, the Company had cash, cash equivalents and marketable securities of approximately $59.4 million. Based on the Company's current operating plan, which does not include any expenses relating to further development of the BACE program, the Company believes that its existing cash, cash equivalents and marketable securities will be sufficient to fund its projected operating requirements through the end of 2016. The Company intends to assess the BACE program and revise its operating plan accordingly after determining the appropriate next steps. The Company will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of the Company's planned research and development activities and further potential development of the BACE program. The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. The Company is subject to a number of risks similar to other life sciences companies, including, but not limited to, successful discovery and development of its drug candidates, raising additional capital, development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company's products.

2. Summary of Significant Accounting Policies and Basis of Accounting

Basis of Accounting

        The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates ("ASU") of the FASB.

        On April 5, 2012, the Jump-Start Our Business Startups Act (the "JOBS Act") was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an "emerging growth company." The Company is considered an emerging growth company, but has elected to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Use of Estimates

        Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. In preparing these financial statements, management used significant estimates in the following areas, among others: stock-based compensation expense, the determination of the fair value of stock-based awards, the fair value of liability-classified preferred stock warrants, the accounting for research and development costs, accrued expenses and the recoverability of the Company's net deferred tax assets and related valuation allowance.

Segment and Geographic Information

        Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company's chief operating decision maker is its chief executive officer. The Company and its chief executive officer view the Company's operations and manage its business as one operating segment. All revenues and long-lived assets of the Company are earned and reside in the United States and the Company's collaboration revenue is generated in the United States.

Concentrations of Credit Risk and Off-Balance Sheet Risk

        The Company invests cash that is not currently being used for operational purposes in accordance with its investment policy. The policy allows for the purchase of low-risk debt securities issued by U.S. government agencies and very highly rated corporations, subject to certain concentration limits. The weighted-average days to maturity of the Company's portfolio shall not exceed 12 months. The Company believes its established guidelines for investment of its excess cash maintain safety and liquidity through its policies on diversification and investment maturity.

        Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and available-for-sale marketable securities.

        The Company is exposed to credit risk in the event of default by the institutions holding the cash and cash equivalents, and that issue available-for-sale securities, to the extent of the amounts recorded in the balance sheet.

Cash and Cash Equivalents and Restricted Cash

        The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company was required to maintain a cash balance in the amount of $200,000 as collateral for an outstanding letter of credit at December 31, 2015 and 2014, respectively, and has classified this balance as restricted cash in the balance sheet. The Company is required to maintain the $200,000 letter of credit through January 2018. No amounts were outstanding under the letter of credit at December 31, 2015 and 2014.

Marketable Securities, Available-for-Sale

        Marketable securities consist of securities with original maturities greater than three months, and are comprised of securities issued by U.S. government agencies and corporate debt securities.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

Marketable securities recorded as current assets have maturities of less than one year from the balance sheet date. Marketable securities recorded as noncurrent assets have maturities of one year or greater from the balance sheet date.

        Management determines the appropriate classification of securities at the time of purchase. The Company has classified its investment portfolio as available-for-sale in accordance with ASC 320, Investments—Debt and Equity Securities. The Company's available-for-sale securities are carried at fair value with unrealized gains and losses reported in other comprehensive income (loss). Marketable securities are evaluated periodically for impairment. If it is determined that a decline of any investment is other than temporary, then the carrying amount of the investment is written down to fair value and the write-down is included in the statement of comprehensive income as a loss.

Deferred Rent and Lease Incentives

        Deferred rent and lease incentives consist of the difference between cash payments made under operating lease agreements and the related rent expense, which is recognized on a straight-line basis over the term of the lease. In August 2011, Vitae amended its facility lease agreement extending the expiration to January 31, 2018 in exchange for reduced rental rates during the extension period. Lease incentives received at the commencement of the lease are amortized on a straight-line basis over the original lease term and recorded as a reduction in rent expense. Cash rent payments exceeded rent expense by $13,074 for the year ended December 31, 2015. Recognition of rent expense exceeded actual cash rent payments by $1,144 for the year ended December 31, 2014. Deferred rent and lease incentives recognized in the balance sheet were $77,708 and $90,782 as of December 31, 2015 and 2014, respectively.

Fair Value of Financial Instruments

        At December 31, 2015 and 2014, the Company's financial instruments included cash and cash equivalents, restricted cash, marketable securities, accounts payable, accrued expenses and also included notes payable at December 31, 2014. The carrying amounts reported in the Company's financial statements for cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximates their respective fair values because of the short-term nature of these instruments. The Company's marketable securities are carried at fair value based on quoted market prices and other observable inputs. Notes payable approximated fair value because the interest rate is reflective of the rate the Company could obtain on debt with similar terms and conditions. For the period from January 1, 2014 to September 24, 2014, the Company also reported a preferred stock warrant liability, the carrying amount of which was the estimated fair value of the liability (Note 6). The Company determines the estimated fair value of financial instruments using available market information and management's estimates. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

Deferred Offering Costs

        Generally, deferred offering costs consist of legal, accounting, and printing fees incurred in connection with offerings of the Company's equity securities, and are capitalized when incurred. In

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

connection with the Company's January 2015 underwritten public offering of common stock, deferred offering costs totaling $0.2 million were recognized in the balance sheet as of December 31, 2014.

Comprehensive Income (Loss)

        Comprehensive income (loss) is defined as changes in stockholders' equity (deficit) exclusive of transactions with owners (such as capital contributions and distributions). Comprehensive income (loss) is comprised of net income (loss) and unrealized (losses) gains on marketable securities.

Property and Equipment

        Property and equipment consist primarily of laboratory equipment, computer equipment and software, office furniture and equipment and leasehold improvements, all of which are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful life of the asset or the remaining lease term at the time the asset is placed into service, whichever is shorter. Maintenance and repairs are expensed as incurred. The following estimated useful lives were used to depreciate the Company's assets:

        Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the balance sheet accounts and any resulting gain or loss is charged to income.

Revenue Recognition

Revenue Arrangements with Multiple Deliverables

        The Company's revenues are generated primarily through collaborative arrangements which generally contain multiple elements, or deliverables, including licenses and research and development activities to be performed by the Company on behalf of the licensee. Payments to Vitae under these arrangements typically include one or more of the following: (1) nonrefundable, upfront license fees, (2) funding of discovery research efforts on a full-time equivalent ("FTE") basis, (3) reimbursement of research, development and intellectual property costs, (4) milestone payments, and (5) royalties on future product sales.

        The Company accounts for revenue arrangements with multiple deliverables entered into prior to January 1, 2011 in accordance with ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. The multiple-deliverable items are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The Company allocates the consideration it receives among the separate units of accounting based on their respective fair value, and applies the applicable revenue recognition criteria to each of the separate units. Where an item in

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

a revenue arrangement with multiple deliverables does not constitute a separate unit of accounting and for which delivery has not occurred, the Company defers revenue until the delivery of the item is completed.

        Effective January 1, 2011, the Company adopted on a prospective basis Accounting Standards Update ("ASU") 2009-13, Multiple-Deliverable Revenue Arrangements, which amends ASC 605-25 and also adopted ASU 2010-17, Revenue Recognition—Milestone Method.

        In accordance with ASU 2009-13, the Company considers whether the deliverables under the arrangement represent separate units of accounting. In determining the units of accounting, management evaluates certain criteria, including whether the deliverables have stand-alone value. The consideration received is allocated to the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria is applied to each of the separate units.

        The Company determines the estimated selling price for agreement deliverables using the following hierarchy: (1) vendor-specific objective evidence ("VSOE"), (2) third-party evidence ("TPE") or (3) best estimate of selling price if neither VSOE nor TPE is available. Determining the best estimate of selling price for a deliverable requires significant judgment and consideration of various factors including market conditions, items contemplated during agreement negotiation as well as internally developed net present value models.

        The Company typically receives upfront, nonrefundable payments when licensing its intellectual property. For intellectual property licenses that do not have stand-alone value from the other deliverables to be provided, revenue is recognized over the contractual or estimated performance period, which is typically the term of the research and development obligations. The periods over which revenue should be recognized are subject to estimates by management and may change over the course of the research and development agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

        Payments or reimbursements resulting from the Company's research and development efforts are recognized as the services are performed and are presented on a gross basis so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is reasonably assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the balance sheet.

        In accordance with ASU 2010-17, Vitae recognizes revenue from milestone payments when: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) Vitae does not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the Company's performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. The Company has concluded that the clinical and development and regulatory milestones pursuant to its research and development arrangements are substantive.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

        The following table details the amount of collaborative revenue recognized for the years ended December 31, 2015, 2014 and 2013:

Research and Development Expense

        Research and development costs are charged to expense as incurred. These costs include, but are not limited to, employee-related expenses, including salaries, benefits and travel and stock-based compensation of the Company's research and development personnel, expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical trials and preclinical studies, the cost of acquiring, developing and manufacturing clinical trial materials, facilities, other supplies, allocated facilities, depreciation and other expenses, which include rent and utilities, insurance, and costs associated with preclinical activities and regulatory operations. Nonrefundable advances for future research and development services are deferred and recognized as expense as the related services are provided.

        Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to the Company by its vendors with respect to their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development expense, as the case may be.

Accrued Clinical and Preclinical Expenses

        As part of the process of preparing the financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with its applicable personnel to identify services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of actual cost. The majority of the Company's service providers invoice monthly in arrears for services performed. The Company makes estimates of its accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at that time. The Company periodically confirms the accuracy of the estimates

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

with the service providers and makes adjustments if necessary. Examples of estimated accrued clinical expenses include:

•

fees paid to vendors in connection with the preclinical development activities;



•

fees paid to contract manufacturers in connection with the production of preclinical and clinical trial materials;



•

fees paid to contract research organizations in connection with clinical studies; and



•

fees paid to investigative sites in connection with clinical studies.

        The Company bases its expenses related to preclinical and clinical studies on its estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on its 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, the Company estimates 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 the estimate, the Company adjusts the accrual accordingly. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company's understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.

Preferred Stock Warrants

        Prior to the Company's initial public offering ("IPO") in September 2014, the Company's preferred stock warrants were recognized in the balance sheet as liabilities in accordance with the guidance for accounting for certain financial instruments with characteristics of both liabilities and equity as the warrants entitled the holder to purchase preferred stock that was considered contingently redeemable. The fair value of the preferred stock warrant liability was re-measured at the end of each reporting period, and any changes in fair value were recognized in the statement of operations as other income or expense. Upon the closing of the IPO, the preferred stock warrants were, in accordance with their terms, automatically converted into warrants to purchase common stock, which resulted in the reclassification of the preferred stock warrant liability to additional paid-in capital and gain or loss recognition for changes in fair value was discontinued. Measurements of the fair value of the preferred stock warrant liability were classified as Level 3 measurements (see Note 6).

Stock-Based Compensation Expense

        The Company accounts for stock-based compensation expense in accordance with the provisions of ASC 718, Compensation—Stock Compensation, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of or may be settled by the issuance of the enterprise's equity instruments. ASC 718 requires that an entity measure the cost of equity-based

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

service awards based on the grant-date fair value of the award and recognize the cost of such awards over the period during which the employee is required to provide service in exchange for the award (the vesting period).

        For stock options issued to employees and members of the Board for their services on the Board, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock over a period consistent with the expected life of the option, risk-free interest rates, the value of the common stock and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, the Company recognizes stock-based compensation expense, net of estimated forfeitures, equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject to both performance and service-based vesting conditions, the Company recognizes stock-based compensation expense using the straight-line recognition method when it is probable that the performance condition will be achieved. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes

        Income taxes are recorded in accordance with ASC 740, Income Taxes ("ASC 740"), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

        The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes interest and penalties accrued on any unrecognized tax benefits in its provision for income taxes in the statement of operations. As of December 31, 2015 and 2014, the Company does not have any significant uncertain tax positions.

Net Income (Loss) Per Common Share

        Prior to the Company's IPO in September 2014, the Company used the two-class method to compute net income per common share because the Company had outstanding securities, other than common stock, that contractually entitled the holders to participate in dividends and earnings of the Company. The two-class method requires earnings available to common stockholders for the period, after an allocation of earnings to participating securities, to be allocated between common and participating securities based upon their respective rights to receive distributed and undistributed

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

earnings. Each series of the Company's convertible preferred stock were entitled to receive annual non-cumulative dividends that ranged from $0.60 - $1.66 per share, payable prior and in preference to dividends paid to holders of common stock when and if declared by the Company's board of directors. In the event a dividend was paid on common stock, holders of preferred stock were entitled to a proportionate share of any such dividend as if they were holders of common shares (on an as-if converted basis).

        For periods with net income prior to the IPO, net income per common share information was computed using the two-class method. Under the two-class method, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Basic net income attributable to common stockholders is computed by an adjustment to subtract from net income the portion of current year earnings that the preferred stockholders would have been entitled to receive pursuant to their dividend rights had all of the year's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the convertible preferred shares had no obligation to fund losses.

        Diluted net income per common share is computed by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stock, the dilutive effects of stock options, restricted stock units, and warrants. Potential dilutive shares consist of incremental common stock issuable upon the exercise of stock options and warrants. Basic and dilutive computations are the same in periods with net losses attributable to common stockholders as the dilutive effects of stock options, restricted stock units and warrants would be antidilutive.

Recent Accounting Pronouncements

        In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. The Company is evaluating ASU 2014-09 and has not yet determined what, if any, effect ASU 2014-09 will have on its results of operations or financial condition.

        In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern. ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements are issued, and to make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 is effective for the Company for annual reporting periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-15 on its financial statements.

        In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the balance sheet classification of deferred taxes and requires that all deferred taxes be presented as noncurrent. ASU 2015-17 is effective for fiscal years beginning

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)

after December 15, 2016 with early adoption permitted. The adoption of this update is not expected to have a material effect on the Company's financial statements.

3. Net Income (Loss) Per Common Share

        The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated:

        The following outstanding securities at December 31, 2015, 2014 and 2013 have been excluded from the computation of diluted weighted shares outstanding, as their effects on net loss per share would have been anti-dilutive:

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

4. Property and Equipment

        At December 31, 2015 and 2014, property and equipment, net of accumulated depreciation and amortization consisted of the following:

        Depreciation expense was $219,822, $212,690, and $204,733 for the years ended December 31, 2015, 2014 and 2013, respectively.

5. Accrued Expenses

        At December 31, 2015 and 2014, accrued expenses consisted of the following:

6. Fair Value Measurements

        The Company measures certain assets and liabilities at fair value in accordance with Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

•

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

6. Fair Value Measurements (Continued)

•

Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.



•

Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

        The Company's Level 1 assets included money market funds and certificates of deposit ("CD"). Level 2 assets included U.S. government agency securities and corporate debt securities. The following fair value hierarchy tables present information about each major category of financial assets measured at fair value on a recurring basis as of December 31, 2015 and 2014:

 

        The fair value of the preferred stock warrant liability on the date of issuance of the warrants and on each re-measurement date thereafter was estimated using the Black-Scholes option pricing model using the following assumptions: contractual life according to the remaining terms of the warrants, no dividend yield, weighted average volatility of 83% and weighted average fair value of the underlying instruments of $8.00 and $16.33, and weighted average risk-free interest rate of 2.01% and 2.68%, at September 24, 2014 and December 31, 2013, respectively. For this liability, the Company developed its own assumptions that did not have observable inputs or available market data to support the fair value. This method of valuation involved using inputs such as the fair value of the Company's common stock,

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

6. Fair Value Measurements (Continued)

stock price volatility, the contractual term of the warrants, risk free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants was considered a Level 3 measurement. For the period January 1, 2014 to September 24, 2014, the date of the Company's IPO, the fair value of the preferred stock warrant liability decreased $301,294 to its then fair value amount of $176,081, which was reclassified to additional paid-in capital. The table below sets forth a summary of changes in fair value of the Company's Level 3 financial instruments measured on a recurring basis:

7. Investments

Marketable Securities

        Marketable securities consisted of the following as of December 31, 2015 and 2014:

        As of December 31, 2015, the Company's marketable securities had maturities that were less than one year.

8. Notes Payable

Term Notes

Silicon Valley Bank and Oxford Finance LLC.—2011 Credit Facility

        In December 2011, the Company entered into a $15 million senior secured credit facility with Silicon Valley Bank and Oxford Finance LLC. (together, the "Lenders") and drew-down all funds at that time. In connection with the credit facility, the Company issued to the Lenders 10-year warrants to purchase an aggregate of 29,889 shares of Series D preferred stock with an exercise price of $27.60 per share. The Series D preferred stock warrants were immediately converted into warrants to purchase common stock upon the closing of the Company's IPO. Upon issuance, the estimated fair value of the preferred stock warrants was $680,625 determined using the Black-Scholes option pricing model and

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

8. Notes Payable (Continued)

was recorded as a debt discount, which subsequently accreted to interest expense over the term of the loan.

        On February 27, 2015, the Company repaid the outstanding balance of the 2011 credit facility. The total payoff was $4,342,855, which included prepayment and other additional fees of $84,453. The Company had $20,852 of deferred financing fees and $101,373 of unamortized debt discount as of the payoff date. The debt repayment was accounted for as an extinguishment as per ASC 470-50, Debt: Modifications and Extinguishments, and a loss on extinguishment of debt totaling $206,678 was recorded in the nine months ended December 31, 2015, consisting of the unamortized deferred financing, unamortized debt discount and prepayment and other additional fees.

9. Stockholders' Equity (Deficit)

Common Stock

        On September 29, 2014, the Company closed its IPO, in which it issued and sold 6,875,000 shares of common stock at a price of $8.00 per share, for aggregate gross proceeds of $55.0 million. On October 27, 2014, the underwriters of the Company's IPO exercised in full their over-allotment option and the Company issued and sold an additional 1,031,250 shares of common stock at the IPO price of $8.00 per share, for aggregate gross proceeds of $8.3 million. Total net proceeds for the IPO, including the underwriters' exercise of their over-allotment option, was $56.4 million, after deducting underwriting discounts and commissions and other offering expenses.

        On January 28, 2015, the Company issued and sold a total of 3,450,000 shares of its common stock at $11.90 per share in an underwritten public offering, including 450,000 shares of common stock sold pursuant to the exercise in full of the underwriters' option to purchase additional shares. Net proceeds from the offering, including the sale of the additional shares, was approximately $38.0 million, after deducting underwriting discounts and commissions and other offering expenses.

        Each holder of common stock is entitled to one vote per share on all matters submitted to a vote of stockholders. The Company has not provided for cumulative voting in the election of directors. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of the Company's common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that the board of directors may determine from time to time. Upon the Company's liquidation, dissolution or winding-up, the holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Company's common stock.

Preferred Stock

        In connection with the IPO, the Company filed an Amended and Restated Certificate of Incorporation that established the preferred stock the Company was authorized to issue. As of December 31, 2015, the Company had authorized 15,000,000 shares of preferred stock at $0.0001 par value. There were no shares of preferred stock issued or outstanding as of December 31, 2015.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

9. Stockholders' Equity (Deficit) (Continued)

        As of December 31, 2013, the Company had authorized 211,775,287 shares of preferred stock at $0.0001 par value. The shares were further designated as 675,000 shares of Series A-1 preferred stock, 16,575,000 shares of Series A-2 preferred stock, 151,812,780 shares of Series B preferred stock, 16,700,007 shares of Series C preferred stock, and 26,012,500 shares of Series D preferred stock. The Company had the following convertible preferred stock outstanding which immediately converted into common shares upon the closing of the Company's IPO on September 29, 2014:

Treasury Stock

        In connection with cashless employee stock option exercises for the year ended December 31, 2015, employees tendered 211 shares of common stock with a fair value of $2,324 to the Company as consideration for the exercise price. Treasury stock is recorded using the cost method. Treasury stock retirements are recorded by deducting the par value from common stock and charging the remaining excess of cost over par to accumulated deficit.

Warrants

        Series D preferred stock warrants were immediately converted into common stock warrants upon the closing of the Company's IPO. As of December 31, 2015, the Company had warrants outstanding for the purchase of 45,468 shares of common stock. The following table summarizes the warrants outstanding and exercisable as of December 31, 2015:

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

9. Stockholders' Equity (Deficit) (Continued)

Shares Reserved for Future Issuance

        At December 31, 2015, the Company's shares of common stock reserved for future issuance were:

10. Employee Compensation Plans

        In July 2014, the Company's Board of Directors approved the 2014 Stock Plan (the "2014 Plan") and reserved to be authorized for issuance under the 2014 Plan the sum of (1) 1,782,500 shares of the Company's common stock, (2) the number of shares of the Company's common stock reserved under the Predecessor Plans (as defined below) that are not issued or subject to outstanding awards under the Predecessor Plans as of the closing of the Company's IPO and (3) any shares of the Company's common stock which are subject to outstanding options under the Predecessor Plans as of the closing of the Company's IPO that subsequently expire or lapse unexercised or are subsequently forfeited to or repurchased by the Company, provided that the shares reserved under clauses (2) and (3) above shall include no more than 1,070,687 shares of the Company's common stock. As of December 31, 2015, there are 2,026,774 shares available for grant without restriction.

        Under the 2014 Plan, options to purchase common stock, restricted stock and restricted stock units may be granted to the Company's employees, nonemployee directors, and consultants providing services to the Company. The aggregate number of shares of the Company's common stock reserved for issuance under the 2014 Plan shall automatically be increased on the first business day of each of the Company's fiscal years by a number equal to the smallest of (i) 4% of the total number of shares of the Company's common stock actually issued and outstanding on the last business day of the prior fiscal year (excluding any rights to purchase shares of the Company's common stock that may be outstanding, such as options or warrants), (ii) 1,426,000 shares of the Company's common stock or (iii) a number of shares of Common Stock determined by the Company's board of directors. As of January 1, 2016, the number of shares of common stock that may be issued under the 2014 Plan was automatically increased by 882,640 shares, increasing the number of shares of common stock available for issuance under the 2014 Plan to 2,909,414 shares.

        The Company has three additional share-based compensation plans pursuant to which outstanding awards have been made, but from which no further awards can or will be made: (i) the 2001 Stock Plan (the "2001 Plan"); (ii) the 2004 Stock Plan (the "2004 Plan"); and the 2013 Stock Plan (the "2013 Plan", and collectively with the 2001 Plan and the 2004 Plan, the "Predecessor Plans").

        The cost of stock-based compensation awards are determined based on the grant-date fair value, net of the effects of estimated forfeitures of the awards, and is recognized into expense over the

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

10. Employee Compensation Plans (Continued)

award's service period. Stock-based compensation expense for the years ended December 31, 2015, 2014 and 2013:

 

Stock Options

        All options granted under the Plans were granted with exercise prices equal to or above the fair market value of the Company's common stock on the date of grant. Options granted under the Plans vest over a time period or based on performance milestones established at the sole discretion of the Company's board of directors or its compensation committee. Vesting for time-based options generally occurs over a period of not greater than four years. All stock options expire no later than ten years from the grant date. Under the terms of the Plans, employees may use shares to exercise a portion of these options. Shares tendered for this purpose are valued at the fair market value as of the date the options are exercised.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

10. Employee Compensation Plans (Continued)

        The following table summarizes stock option activity under the Plans during the year ended December 31, 2015:

        The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $3,935,280, $166,693 and $112,583, respectively.

        The Company granted 303,559 performance-based stock options to employees in March 2011. These performance options have a 10-year life and exercise prices equal to the fair value of the Company's stock at the grant date. Vesting of no more than 60% of these performance options is dependent on (i) meeting certain performance conditions, which relate to the Company's research and development progress, which were established by the Company's board of directors and (ii) the passage of time subsequent to the achievement of such performance conditions. Vesting of no more than 40% of these performance options is dependent on (i) meeting certain performance conditions, which relate to a deemed liquidation of the Company, an IPO or consummation of a strategic transaction, which were established by the Company's board of directors and (ii) the passage of time subsequent to the achievement of such performance conditions. The Company's board of directors determines if the performance conditions have been met. Stock-based compensation expense for these options is recorded when management estimates that the vesting of these options is probable based on the status of the Company's research and development programs and other relevant factors. For the year ended December 31, 2015, the vesting of 55,251 performance-based stock options was deemed probable and stock-based compensation expense was recorded ratably over the service period associated with the performance condition. As of December 31, 2015, a total of 165,939 performance-based stock options had been deemed probable. Any change in these estimates will result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimates had been utilized since the beginning of the service period.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

10. Employee Compensation Plans (Continued)

        The Company uses the Black-Scholes valuation model to estimate the fair value of stock options at the grant date. The Black-Scholes valuation model requires the Company to make certain estimates and assumptions, including assumptions related to the expected price volatility of the Company's stock, the period during which the options will be outstanding, the rate of return on risk- free investments, and the expected dividend yield for the Company's stock.

        The weighted average fair value of options granted during the years ended December 31, 2015, 2014 and 2013 were $8.33, $4.23 and $3.68 per share, respectively. The fair values of stock options granted were calculated using the following weighted-average assumptions:

        The weighted-average valuation assumptions for all stock-based awards were determined as follows:

•

Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.



•

Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. The expected term of the options granted is derived using the "simplified" method, as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment.



•

Expected stock price volatility: The expected volatility is based on historical stock price volatilities of similar entities within the Company's industry over the period that is commensurate with the expected term of the option.



•

Expected dividend yield: The estimate for annual dividends is $0.00, because the Company has not historically paid, and does not expect for the foreseeable future to pay, a dividend.

        The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2015, 2014 and 2013 was $1,023,539, $58,758 and $70,762, respectively.

        As of December 31, 2015, excluding performance-based stock options that have not been deemed probable, the aggregate unrecognized stock-based compensation expense related to unvested options

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

10. Employee Compensation Plans (Continued)

granted under the Stock Plans that were expected to vest was $5,711,467. That expense is expected to be recognized as follows:

        The aggregate estimated fair value of options for which the satisfaction of the related-performance conditions have not been deemed probable was $546,951 as of December 31, 2015.

Restricted Stock Units

        During 2013, the Company awarded a performance-based RSU covering 391,304 shares of common stock from the 2013 Plan. An RSU award entitles the holder to receive shares of the Company's common stock as the award vests. Vesting of the performance-based RSU was contingent upon the achievement of pre-determined performance-based milestones, as determined by the Company's board of directors or its compensation committee. The grant-date fair value of the RSU was $3.68 per share and was based on the fair market value of the Company's common stock on the date of grant.

        During the year ended December 31, 2014, it was determined that the performance-based milestones on the RSU award were met and the award was fully vested. Accordingly, the Company recorded $1,440,000 in stock-based compensation which was recorded in general and administrative operating expense in the statements of operations in 2014.

        Under settlement procedures applicable to the performance-based RSU, which was held by the Company's chief executive officer, the Company was required to deliver the underlying 391,304 shares on March 13, 2015. On the settlement date, the Company net settled the award by delivering approximately 220,148 shares of its common stock to its chief executive officer and withholding approximately 171,156 shares of common stock to satisfy income taxes at the applicable minimum statutory rate. In connection with the net settlement, the Company remitted the $1,910,101 tax liability on behalf of its chief executive officer to the relevant tax authorities in cash.

11. Employee Benefit Plans

        In July 2014, the Company established an Employee Stock Purchase Plan (the "Purchase Plan"). Under the Company's Purchase Plan, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The Purchase Plan is administered by the compensation committee of the Company's board of directors. Under the Purchase Plan, eligible employees may purchase stock at 85% of the lower of the fair market value of a share of the Company's common stock on the first day of an offering period or on the purchase date. Eligible employees may contribute up to 15% of their eligible compensation. A participant may

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

11. Employee Benefit Plans (Continued)

purchase a maximum of 2,100 shares of common stock per purchase period. Under the Purchase Plan, a participant may not accrue rights to purchase more than $25,000 worth of the Company's common stock for each calendar year in which such right is outstanding

        As of the Company's first business day of each fiscal year, the aggregate number of shares that may be issued under the Purchase Plan shall automatically increase by a number equal to the least of (i) 1% of the total number of shares of the Company's common stock actually issued and outstanding on the last business day of the prior fiscal year (excluding any rights to purchase shares of the Company's common stock that may be outstanding, such as options or warrants), (ii) 356,500 shares of the Company's common stock, or (iii) a number of shares of the Company's common stock determined by the Company's board of directors. The Company's board of directors determined not to increase the shares under the Purchase Plan in 2016.

        During the year ended December 31, 2015, 22,723 common shares were issued under the Purchase Plan at an average purchase price of $10.10 per share. The total cash received from common shares issued through the Purchase Plan was $229,502 for the year ended December 31, 2015. In accordance with the guidance in ASC 718-50, the ability to purchase shares of the Company's common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation cost is determined based on the option's grant-date fair value and is recognized over the requisite service period of the option. The Company used the Black-Scholes valuation model and recognized stock-based compensation expense of $190,552 during the year ended December 31, 2015.

12. Collaborative Research Agreements

Boehringer Ingelheim

11b HSD1 Inhibitors

        In October 2007, the Company entered into the 11b Agreement with BI pursuant to which BI is responsible for the development and commercialization of 11b HSD1 inhibitors for certain indications, including type 2 diabetes.

        The funded research period under the 11b Agreement for which the Company was required to provide research services ended in December 2009. During the year ended December 31, 2014, the Company recognized $6,000,000 in collaborative revenues from the receipt of a $6.0 million milestone payment from BI as a result of the first patient having been dosed in the Phase 2 clinical trial which commenced in July 2014. The Company has earned $43 million in development milestones since the inception of the 11b Agreement.

        The Company has the right, subject to the approval of the joint steering committee established pursuant to the 11b Agreement, to develop and commercialize certain 11b HSD1 inhibitors for indications other than those considered part of metabolic syndrome or reduction of cardiovascular events. In December 2015, BI notified the Company that it was terminating the 11b Agreement effective as of March 9, 2016.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

12. Collaborative Research Agreements (Continued)

Beta-site Amyloid Precursor Protein-cleaving Enzyme 1 (BACE) Inhibitors

        In June 2009, the Company entered into a Research Collaboration and License Agreement (the "BACE Agreement") with BI pursuant to which BI is responsible for the development and commercialization of BACE inhibitors for the treatment of Alzheimer's disease and other forms of dementia.

        Under the BACE Agreement, the Company was obligated to provide 12 full-time-equivalent employees ("FTE's") per month for a period of 36 months to provide research services. Under the terms of the BACE Agreement, the Company received an upfront, license fee of $15 million. This payment was initially recorded to deferred revenue. In addition, under the BACE Agreement, BI was required to make payments for each quarter during the 36-month funded research period of $1,020,000 for a total of $12,240,000. The license fee and the research collaboration fee were being recognized as revenue over the 36-month funded research period commencing June 2009 and continuing through June 2012, which was determined to be the Company's period of substantial involvement under the BACE Agreement. In April 2012, the initial research term was extended for an additional year through June 2013 and BI paid the Company an additional $2,960,000 for the research contributions over the 12 month extension period ($740,000 per quarter). During the extension period the Company was obligated to provide eight FTE's per month. The additional payment of $2,960,000 was recognized ratably over the extension period through June 2013. The revenue recognition period for the nonrefundable license fee was also extended on a prospective basis through June 2013.

        In December 2012, the Company amended the BACE Agreement to expand the core indication definition to include certain other indications, including diabetes and metabolic syndrome. Under the terms of the amendment, Vitae received an upfront fee of $4 million. In accordance with the amendment, the Company was obligated to provide 12 months of research services commencing June 2013 with such services to be completed no later than June 30, 2014. Revenue relating to the upfront payment was recognized over the period in which future research contributions were delivered through June 30, 2014 including $2.0 million that was recognized in the years ended December 31, 2014 and 2013, respectively.

        For the year ended December 31, 2013, the Company earned $18 million for the achievement of substantive development milestones. The Company earned $29 million in development milestones since the inception of the BACE Agreement. On July 23, 2015, BI notified the Company that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons. In connection with the termination of the BACE Agreement, the Company received the rights to the BACE program, including VTP-36951, which includes, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer's, diabetes and the other indications covered by the BACE Agreement. Under the BACE Agreement, no material payments were required to be made by or to the Company in connection with the termination of the agreement.

13. Income Taxes

        Since its inception, the Company has never recorded a provision or benefit for federal or state income taxes.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

13. Income Taxes (Continued)

        The Company sold $277,206, $45,678 and $91,729 of Pennsylvania research and development tax credits and recorded net proceeds of $260,574, $42,024 and $84,391 in other income in the statements of operations during the years ended December 31, 2015, 2014 and 2013, respectively.

        As of December 31, 2015 and 2014, the Company has recognized a valuation allowance to the full extent of its deferred tax assets, as the likelihood of realization of the benefit cannot be determined. For the years ended December 31, 2015 and 2014, the Company increased the valuation allowance by $17,102,000 and $8,431,000, respectively. The Company believes that any of its uncertain tax positions would not result in adjustments to its effective income tax rate because likely corresponding adjustments to deferred tax assets would be offset by adjustments to recorded valuation allowances. The Company files U.S. federal and state income tax returns, which are generally subject to tax examinations for the tax years ended December 31, 2012 through December 31, 2015. To the extent the Company utilizes NOL or tax credit attribute carryforwards in the future, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities of the future period tax return in which the attribute is utilized.

        The Company has analyzed tax positions in all jurisdictions where it is required to file an income tax return and has concluded that the Company does not have any material unrecognized tax benefits or interest and penalties thereon as of December 31, 2015 and 2014.

        The reconciliation of the income tax benefit computed at statutory rates to the Company's recorded tax (benefit) expense was as follows:

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Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

13. Income Taxes (Continued)

        The tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows:

        At December 31, 2015, the Company had net operating loss carryforwards of approximately $87,299,000 and $84,487,000 to offset future federal and state taxable income, respectively. Federal and state net operating loss carryforwards available to offset future taxable income will expire beginning in the year 2024 and through the year 2035. For state income tax purposes, the Pennsylvania taxing authority limits the amount of NOL carryforwards which can be used to offset Pennsylvania taxable income, based on the greater of $5.0 million or 30% of Pennsylvania taxable income before the NOL deduction. At December 31, 2015 and 2014, the Company had deferred tax assets of approximately $75,063,000 and $57,964,000, respectively, primarily arising from the carryforward of the net operating losses, research and development tax credits and deferred capitalized research expenses. The Company has research and development ("R&D") and investment tax credit carryforwards of approximately $7,732,000 and $100,000 to offset future federal and Pennsylvania state income taxes, respectively. The federal investment tax credits will expire beginning in the year 2021 through the year 2035. The state R&D tax credits will expire beginning in the year 2028 through the year 2029.

        The NOL carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carry-forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This could limit the amount of NOLs that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of our company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. Additionally, U.S. tax laws limit the time during which these carry-forwards may be applied against future taxes, therefore, the Company may not be able to take full advantage of these carry-forwards for federal income tax purposes. The Company intends to evaluate the ownership history of our company to determine if there were any ownership changes as defined under Section 382(g) of the Code before utilizing the NOL carry-forwards.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

14. Related Party Transactions

        A member of the Company's board of directors is a partner/founder of a law firm that provided various legal services to the Company. The Company incurred costs payable to this law firm totaling $444,000, $1,262,000 and $267,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

        Additionally, $27,000 and $129,000 was due to the related party as of December 31, 2015 and 2014, respectively.

        BI, the Company's collaborative research partner (Note 12), is an affiliate of a stockholder in the Company.

15. Commitments and Contingencies

        The Company leases office space pursuant to a noncancelable operating lease that will expire in January 2018. The Company has the right to extend the lease for one additional period of five years at fixed escalation amounts. In addition, the Company leases certain office equipment under operating leases. Rental expense under these leases was approximately $778,000, $779,000 and $781,000 for the years ended December 31, 2015, 2014 and 2013, respectively. The following is a schedule by year of future minimum rental payments required under the noncancelable leases as of December 31, 2015:

16. Reverse Stock Split

        In connection with preparing for the IPO, the Company's board of directors and stockholders approved a 1-for-23 reverse stock split of the Company's preferred and common stock. The reverse split became effective on September 8, 2014. All preferred share, common share and per share amounts in the financial statements and notes have been retroactively adjusted to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in aggregate par value of common stock to additional paid-in capital.

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Table of Contents

Vitae Pharmaceuticals, Inc.

Notes to the Financial Statements (Continued)

For the Years Ended December 31, 2015, 2014 and 2013

17. Interim Financial Information (Unaudited)

(in thousands, except for share data)

 

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