advm-10k_20171231.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2017

or

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

For the transition period from                      to                     

Commission File Number: 001-36579

 

Adverum Biotechnologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-5258327

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1035 O’Brien Drive

Menlo Park, California 94025

(650) 272-6269

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

 

Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

 

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

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

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

As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $87.8 million, based on the closing price of the registrant’s common stock on the Nasdaq Global Market on June 30, 2017 of $2.50 per share. Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not a determination for other purposes.

As of February 28, 2018, the registrant had 62,173,278 shares of common stock, par value $0.0001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the Proxy Statement) for the 2018 Annual Meeting of Stockholders of the registrant are incorporated by reference into Part III of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2017.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

 

 

3

 

 

 

 

 

Item 1

 

Business

 

3

Item 1A

 

Risk Factors

 

26

Item 1B

 

Unresolved Staff Comments

 

57

Item 2

 

Properties

 

58

Item 3

 

Legal Proceedings

 

58

Item 4

 

Mine Safety Disclosures

 

58

 

 

 

 

 

PART II

 

 

 

59

 

 

 

 

 

Item 5

 

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

 

59

Item 6

 

Selected Financial Data

 

62

Item 7

 

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

 

64

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

78

Item 8

 

Financial Statements and Supplementary Data

 

78

Item 9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

110

Item 9A

 

Controls and Procedures

 

110

Item 9B

 

Other Information

 

111

 

 

 

 

 

PART III

 

 

 

112

 

 

 

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

 

112

Item 11

 

Executive Compensation

 

112

Item 12

 

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

 

112

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

 

112

Item 14

 

Principal Accountant Fees and Services

 

112

 

 

 

 

 

PART IV

 

 

 

113

 

 

 

 

 

Item 15

 

Exhibits, Financial Statement Schedules

 

113

Item 16

 

Form 10-K Summary

 

113

 

 

 

 

 

Signatures

 

118

 

In this report, unless otherwise stated or the context otherwise indicates, references to “Adverum,” “Adverum Biotechnologies,” “the Company,” “we,” “us,” “our” and similar references refer to Adverum Biotechnologies, Inc., a Delaware corporation.

 

Adverum, the Adverum logo and other trademarks or service marks of Adverum that may appear in this Annual Report on Form 10-K are the property of the Company. This Annual Report on Form 10-K contains additional trade names, trademarks, and service marks of other companies. The Company does not intend its use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of the Company by, these other companies, and all such third-party trade names, trademarks, and service marks are the property of their respective owners.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

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

 

our ability to advance our viral vector manufacturing and delivery capabilities;

 

the timing or likelihood of regulatory filings, designations and approvals;

 

our plans to explore potential applications of our gene therapy platform in other indications in ophthalmology and rare diseases;

 

our expectations regarding the clinical effectiveness of our product candidates;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

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

 

our expectation regarding the potential market sizes for our product candidates;

 

our intellectual property position;

 

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

 

developments and projections relating to our competitors and our industry;

 

our expectations regarding the time during which we will be an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012;

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and

 

the safety, efficacy and projected development timeline and commercial potential of any product candidates.

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Any forward-looking statement in this Annual Report on Form 10-K reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, 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. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Annual Report on Form 10-K contains estimates, projections and other information concerning our industry, our business and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

 

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PART 1.

Item 1. Business

Overview

We are a clinical-stage gene therapy company targeting unmet medical needs in serious rare and ocular diseases. Leveraging our next-generation adeno-associated virus (“AAV”)-based directed evolution platform, we generate gene therapy product candidates designed to provide durable efficacy by inducing sustained expression of a therapeutic protein. Our core capabilities include clinical development and in-house manufacturing expertise, specifically in process development, assay development, and current Good Manufacturing Practices (“cGMP”) quality control. Our leadership team has significant drug development and gene therapy expertise.

We are advancing our robust pipeline of gene therapy product candidates designed to treat rare diseases, alpha-1 antitrypsin (“A1AT”) deficiency and hereditary angioedema (“HAE”), as well as wet age-related macular degeneration (“wAMD”). Our pipeline of lead and partnered gene therapy programs is shown below.

 

 

For the treatment of A1AT deficiency, we are advancing our gene therapy product candidate ADVM-043, AAVrh.10-A1AT, in an ongoing Phase 1/2 clinical trial (the “ADVANCE trial”). The ADVANCE trial is a multi-center, open-label, dose-escalation study. The primary endpoint is safety and tolerability and secondary endpoints include changes in plasma concentrations of both total and M-specific A1AT levels. The study will include up to 20 patients across up to four planned dosing cohorts of up to 5 patients each. The first three cohorts of patients will receive a single intravenous (“IV”) administration of ADVM-043 and the fourth cohort of patients will receive a single intrapleural (“IP”) administration of ADVM-043. In the first cohort, patients (n=2) have been dosed and evaluated following a single administration of ADVM-043 at a dose of ~1E12 vg/kg (8E13 total vg). Based on a review of the preliminary safety data, the independent data monitoring committee (“DMC”) has recommended escalating to the intermediate dose (~5E12 vg/kg (4E14 total vg) of ADVM-043, which will be utilized in the second cohort of patients, which is open for enrollment. Further details about the study can be found at ClinicalTrials.gov under trial identifier number NCT02168686. We expect to report preliminary data from this trial in the second half of 2018.

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* Based on an 80kg patient

ADVM-043 is designed as a potential single-administration treatment to induce stable, long-term A1AT protein levels, or expression. In a preclinical proof-of-concept study, ADVM-043 demonstrated robust protein expression above therapeutic levels in mice following either IV or IP administration. In another study in non-human primates, evidence of stable long-term expression of hA1AT was observed out to one year following IP administration of ADVM-043.

For treatment of the rare disease HAE, we are advancing our preclinical gene therapy product candidate ADVM-053, AAVrh.10-C1EI. ADVM-053 is designed as a potential single-administration treatment to provide sustained expression of the C1 esterase inhibitor (“C1EI”) protein to eliminate protein level variability and to prevent breakthrough edema attacks. In preclinical studies, a single IV administration of ADVM-053 increased C1EI protein expression above therapeutic levels and decreased vascular permeability. We plan to submit an Investigational New Drug (“IND”) application for ADVM-053 for HAE with the U.S. Food and Drug Administration (“FDA”) in the second half of 2018.

For wAMD, we are advancing our preclinical gene therapy product candidate ADVM-022, AAV.7m8-aflibercept. Comprising a proprietary vector capsid (“AAV.7m8”) and a proprietary expression cassette, ADVM-022 is administered as a single intravitreal injection and is designed to minimize the treatment burden of anti-Vascular Endothelial Growth Factor (“VEGF”) injections, which is the current standard of care for treatment of wAMD. We have presented preclinical proof-of-concept data of ADVM-022’s anti-angiogenic effect in the laser-induced choroidal neovascularization (“CNV”) model in non-human primates (“NHP”), the industry standard for testing new wAMD therapies. The data from a single injection of ADVM-022 showed efficacy that was comparable to the anti-VEGF standard of care, which was used as positive control in the CNV study. At scientific meetings in September 2017, we presented additional long-term data, which continued to demonstrate sustained expression of anti-VEGF protein following a single intravitreal injection of ADVM-022. Pharmacokinetic data on one non-human primate demonstrated sustained expression for 52 weeks. In a separate ongoing study, sustained expression for at least seven months has been observed in seven non-human primates. In this ongoing preclinical study, we continue to assess the durability of protein expression in non-human primates and expect to report 12-month efficacy data in the NHP CNV model in the first half of 2018. We plan to submit an IND application for ADVM-022 for wAMD with the FDA in the second half of 2018.

Our earlier-stage research programs include gene therapy product candidates targeting cardiomyopathy associated with Friedreich’s ataxia (“FA”) and severe allergy.

Our partnered programs include vectors we are developing under collaboration agreements. Under an agreement with Editas Medicine, Inc. (“Editas”) we are leveraging our AAV-vectors for use with Editas’ leading Clustered Regularly Interspaced Short Palindromic Repeats (“CRISPR”)-based genome editing technologies to treat up to five inherited retinal diseases. Our agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”) provides for development of up to eight distinct ocular therapeutic targets, and includes AVA-311 for the treatment of juvenile X-Linked Retinoschisis (“XLRS”).

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On May 11, 2016, we completed the acquisition of all of the outstanding shares of Annapurna Therapeutics SAS (“Annapurna”), a privately-held French gene therapy company, (the “Annapurna acquisition”) and, as a result, Annapurna became our wholly-owned subsidiary. At the closing of the Annapurna acquisition, we issued 14,087,246 shares of our common stock to the shareholders of Annapurna, and the outstanding stock options or other rights to purchase capital stock of Annapurna were exchanged for our stock options or other rights to purchase capital stock of our common stock.

We changed our name from “Avalanche Biotechnologies, Inc.” to “Adverum Biotechnologies, Inc.” upon completion of the Annapurna acquisition.

Our Strengths

We believe we have the capabilities, resources, and expertise to enable Adverum to become a leading gene therapy company. These strengths include:

 

industry-leading capabilities in AAV technology;

 

a robust pipeline of gene therapy product candidates targeting the treatment of serious rare and ocular diseases;

 

a robust patent portfolio;

 

proprietary vectors; and

 

an experienced leadership team with expertise in developing gene therapies.

 

Our Strategy

Our goal is to discover, develop, and commercialize novel gene therapies with the potential to treat patients living with serious rare diseases or diseases of the eye. The key elements of our strategy to achieve this goal are to:

 

Target large patient populations impacted by wAMD and well-established orphan indications offering significant market potential. For wAMD, there are an estimated 1.2 million individuals in the U.S. and 3 million on a worldwide basis living with this disease, and the incidence of new cases is expected to continue to grow significantly from an aging population. The standard-of-care therapies generated approximately $9.2 billion in sales in 2017. For A1AT deficiency, approximately 100,000 individuals in the U.S. are affected. The therapeutic market for patients with A1AT deficiency was estimated at approximately $575 million in the U.S., $700 million in North America, and $1.2 billion worldwide in 2016. For HAE, there are approximately 8,000 individuals in the U.S. impacted by this disease. The therapeutic market for HAE was approximately $1.7 billion worldwide in 2016.

 

Address unmet needs in serious rare and ocular diseases. Our gene therapies are designed as single-administration treatments to address the unmet needs of patients with serious rare and ocular diseases. Currently, patients living with A1AT deficiency, HAE and wAMD are treated with therapies that require frequent IV, subcutaneous injection (“SQ”), or intravitreal administration and have significant limitations. As an example, for patients with emphysema due to A1AT deficiency, the current standard-of-care treatment is weekly IV infusions of A1AT. This treatment regimen can be difficult for patients to comply with and underdosing can lead to worsening lung function. For HAE, the current standard-of-care treatment is IV or SQ infusions of C1EI 2-3 times a week, which offer limited efficacy as patients can still have breakthrough attacks, which can be fatal. For wAMD, the current standard-of-care treatment requires patients to receive intravitreal injections of anti-VEGF proteins every 4-8 weeks, which can be difficult for patients to comply with and leads to loss of vision from underdosing.

 

Pursue indications with well-defined clinical and regulatory paths to mitigate the risk of the development of our novel gene therapies. We have selected indications that have prior clinical validation, including established endpoints, and defined regulatory paths. For example, in A1AT deficiency, published clinical data demonstrate the correlation of patients’ serum A1AT protein levels with the risk for emphysema, and four plasma derived protein products have been approved by the FDA based on demonstrating an increase in the A1AT protein levels. Similarly, data show that augmenting serum A1AT protein levels can slow the loss of lung parenchyma. In HAE, there are several therapies approved for routine prophylaxis on the basis of reducing breakthrough attacks by elevating C1-esterase inhibitor levels to an established threshold. For wAMD, anti-VEGF proteins are the approved standard-of-care, and our gene therapy utilizes a proprietary vector designed to deliver an anti-VEGF protein through an intravitreal injection.

 

Accelerate the clinical development of our pipeline of gene therapies toward near-term milestones. To accelerate the development of our pipeline, we are executing our clinical and regulatory plans to have three gene therapy programs in the clinic in the near term. We are advancing ADVM-043 for the treatment of patients with A1AT deficiency in the ADVANCE trial, which began patient dosing in December 2017. We expect to report preliminary data from the ADVANCE trial in the second half of 2018. For ADVM-022 for wAMD, we are conducting IND-enabling studies as well as an ongoing preclinical study to assess the durability of protein expression in non-human primates and long-term efficacy of ADVM-022 in the laser induced CNV model in NHPs. We expect to report the 12-month efficacy data in the first half of

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2018. In addition, we plan to submit an IND application for ADVM 022 for wAMD with the FDA in the second half of 2018. For ADVM-053 for HAE, IND-enabling studies are ongoing and we also plan to submit an IND application with the FDA in the second half of 2018.

 

Advance our earlier-stage research initiatives and leverage our industry-leading capabilities in novel vector development. We plan to continue to leverage our next-generation AAV-based directed evolution platform to engineer AAV capsid and discover novel vectors with potential enhanced tropism for certain tissues and/or improved antibody neutralization profile over currently existing AAV variants. Combining our vectorology and manufacturing expertise, we have the capability to generate large amounts of high-throughput recombinant AAV capsid libraries that can be screened in large animals rather than rodents in order to maximize chances of applicability to human subjects. We are also focused on discovering improved ubiquitous and cell-specific promoters and expression cassettes to offer optimal transgene expression target tissue. We plan to use this expertise to expand our pipeline and manage and potentially extend the life cycle of our novel gene therapies.

 

Collaborate with partners to leverage our industry-leading AAV vector expertise and ophthalmic vector development and product delivery capabilities. Under a collaboration agreement with Editas Medicine, we are leveraging our proprietary AAV vectors for use with Editas’ leading CRISPR-based genome editing technologies to treat up to five inherited retinal diseases. Our collaboration agreement with Regeneron provides for the development of up to eight distinct ocular therapeutic targets and, includes AVA-311 for the treatment of juvenile XLRS. We plan to continue to explore ways to work collaboratively with these and potential new partners who may benefit from our capabilities and expertise in AAV vector development and product delivery.

 

Prepare manufacturing capabilities for late-stage clinical trials and commercialization. We plan to begin the initial stage of investing in a manufacturing facility to build on our internal process development capabilities. Our in-house manufacturing process is based on the Baculovirus/Sf9 production system, which has been used for a number of FDA and EMA-approved products and is capable of producing large quantities of AAVs. Currently, we utilize our process development capabilities to deliver scalable processes to GMP contract manufacturers. As we prepare for larger, late-stage clinical trials and potential commercialization, we plan to invest in stages in a manufacturing facility to meet our product production requirements.

Gene Therapy Background

Gene therapy is a powerful treatment modality to address disease biology in a targeted and efficient way. With gene therapy, affected individuals are administered vectors encoding therapeutic genes, expressing for example the functional version of a mutated protein (e.g., A1AT or C1EI) or a therapeutic protein (e.g. anti-VEGF). Instead of providing proteins or other therapies externally and dosing them over a long period, gene therapy offers the possibility of dosing once, or a very limited number of times, to achieve a long-term, durable benefit. Once a patient’s cells have incorporated the therapeutic gene, the cells are potentially able to continue to produce the therapeutic protein for years.

Similar to existing classes of protein or biologic therapies such as monoclonal antibodies and drug-antibody conjugates, gene therapy has taken a number of years to evolve from a research tool into a viable and compelling treatment modality. There have been several recent advances in gene therapy, including the following:

 

Compelling clinical data. Positive data from gene therapy clinical trials have been reported in a variety of indications, including adrenoleukodystrophy, beta-thalassemia, chronic lymphoid leukemia, hemophilia, Spinal Muscular Atrophy, HIV infection and Parkinson’s disease, as well as several ophthalmic diseases including biallelic RPE65 mutation-associated retinal dystrophy, Choroideremia and Leber’s Hereditary Optic Neuropathy.

 

Increased investment by biopharmaceutical companies. The modality of gene therapy has been further validated by growing interest and investments by biopharmaceutical companies. Large, global biopharmaceutical companies, such as BioMarin Pharmaceutical Inc., Biogen Idec Inc., Celgene Corporation, GlaxoSmithKline plc, Novartis, Sanofi, Regeneron and Shire Pharmaceuticals Group Plc, have increased their investment in the gene therapy field. Additionally, pure-play gene therapy companies, such as Applied Genetic Technologies Corporation, Audentes Therapeutics, Inc., bluebird bio, Inc., REGENXBIO Inc. (“REGENXBIO”), Spark Therapeutics, Inc., uniQure N.V. and Voyager Therapeutics, have attracted recent investment in this growing field.

 

Approval of gene therapy products by regulatory authorities. The FDA recently approved its first AAV vector-based gene therapy product, LUXTURNA™ (voretigene neparvovec-rzyl) for the treatment of patients with confirmed biallelic RPE65 mutation-associated retinal dystrophy.

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Our Novel AAV Vector Discovery and Optimization System

Our next-generation discovery platform is based on vectors derived from AAV, which is a small, non-pathogenic virus, encoding a therapeutic DNA instead of the viral protein genes. The resulting vector is used to deliver a functional gene into a desired cell population, which when expressed, will result in continuous protein production. We believe AAV vectors offer numerous advantages over other viral and non-viral vector technologies used for gene therapy. These advantages, highlighted below, have the potential to allow AAVs to be safe, to be applicable for a variety of indications and to exhibit long-term efficacy.

 

Highly-efficient transfer of DNA. AAV vectors offer highly-efficient transfer of DNA to the patient.

 

Non-pathogenic. Parental AAV virus is not known to cause any disease in humans.

 

Non-replicating. Parental AAV virus is naturally replication deficient. Once inside the host cell, AAV vectors do not replicate, and cannot spread.

 

Long-term expression. Once incorporated into the host cell, AAV vectors can continue to drive expression of a therapeutic protein for years. This may avoid the need for frequent treatments, that are the standard of care for the treatment of A1AT deficiency, HAE and wAMD.

 

Low-integrating potential. AAV vector genomes remain mainly as a stable non-integrated episome in the host cell nucleus, mitigating the risk of potential safety concerns.

 

Low inflammatory potential. Compared to other vectors used in direct gene therapy approaches, AAV vectors elicit only mild inflammatory reactions.

 

Ability to transduce non-dividing cells. AAV vectors are able to efficiently transduce non-dividing cells or slow-dividing cells such as retinal cells and hepatocytes which allow production of the therapeutic protein at the site of the disease (wAMD) or its natural organ of production (A1AT).

 

Tested in humans. AAV vectors have been used safely in more than 130 gene therapy trials to date.

AAV is naturally occurring and has become a leading vector used in gene therapy. According to the Journal of Gene Medicine, AAV has been used in over 130 clinical trials as of August 2016. The most frequently studied variant of AAV is AAV2, which can preferentially infect a number of cell types, including those found in the retina.

As effective as existing AAV vectors are in gene therapy, we believe there is an opportunity to advance vector capabilities beyond those currently available. Naturally occurring AAV variants have evolved with particular characteristics, some of which pose limitations to their use in gene therapy.

In order to create next-generation vectors, we use a multi-step process known as directed evolution. Our directed evolution technology uses a library of engineered AAV capsid genes, which exhibit different properties and capabilities than naturally occurring AAVs. Once we have created an initial pool of millions of different AAVs, each with distinct genetic and chemical composition, we screen the AAVs in the pool for novel properties, e.g., specific transduction of a particular cell type of interest or the capability to evade pre-existing neutralizing immune response. After isolating engineered capsids with potentially desirable properties from the target tissue, a smaller pool of optimized vectors from this screening process is further generated and screened until we have identified a select number of engineered AAVs with the characteristics we seek.

Our Product Candidates

We have a pipeline of gene therapy product candidates in development for the treatment of patients with serious rare and ocular diseases.

ADVM-043 for Treatment of A1AT Deficiency

Market for A1AT Deficiency

A1AT deficiency is an orphan disease affecting approximately 100,000 individuals in the United States (the “U.S.”). The disease is caused by mutations in the SERPINA1 gene, resulting in very low levels of A1AT. A1AT deficiency is associated with the development of emphysema and premature death.

The market for A1AT deficiency therapy was approximately $575 million in the U.S., $700 million in North America and $1.2 billion worldwide in 2016. The current standard-of-care treatment for patients with this disease who have developed emphysema includes weekly IV infusions of a plasma derived A1AT, at an estimated cost of $100,000 annually per patient. This current treatment regimen is burdensome and can result in underdosing, which in turn can lead to worsening lung function.

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Our Approach for A1AT Deficiency

ADVM-043 is our gene therapy candidate that has the potential to induce stable, long-term A1AT protein expression. In a preclinical proof-of-concept study, ADVM-043 demonstrated robust protein expression in mice, with protein levels 2.5 times above normal levels of A1AT. Data showed that hA1AT was present in the serum following either IV or IP administration of ADVM-043. In another study in non-human primates, evidence of stable long-term expression of hA1AT was observed out to one year following IP administration of ADVM-043.

ADVM-043 utilizes AAVrh.10, a vector selected based on peer-reviewed published research which compared 25 different vectors used in the lung showing superiority of protein expression from AAVrh.10 over other serotypes. In addition, AAVrh.10 has been shown to transduce the liver, which is the organ that naturally produces A1AT with high efficiency. Our biodistribution and preclinical data on this vector lead us to believe there is potential for AAVrh.10-A1AT, when administered intravenously, to provide therapeutic levels of A1AT.

We are advancing ADVM-043 in the ADVANCE trial in A1AT deficiency patients and we expect to report preliminary data from this trial in the second half of 2018.

 

ADVM-053 for Treatment of HAE

 

Market for HAE

 

HAE is an orphan disease affecting approximately 8,000 individuals in the U.S. This disease is caused by a genetic mutation that results in low levels of C1EI. Low C1EI levels can be associated with sudden swelling and edema of respiratory airways, gastrointestinal tract, and extremities.

The current standard-of-care prophylaxis treatment regimen generally requires IV infusions or subcutaneous injections of C1EI 2-3 times a week, at an estimated cost of $0.5 million – $0.6 million annually per patient in the U.S. This treatment regimen can be burdensome for patients and their caregivers, and patients may still experience breakthrough edema attacks despite treatment.

A prior study demonstrated that patients treated with more frequent infusions of C1EI can significantly decrease and, in some patients, eliminate breakthrough attacks. However, a daily infusion treatment regimen is not clinically practical and, therefore, there is an unmet medical need for sustained C1EI delivery to patients in order to prevent breakthrough edema attacks.

 

Our Approach for HAE

 

ADVM-053 is our preclinical gene therapy product candidate that has the potential to be a prophylactic treatment of HAE. ADVM-053 is designed to be administered as a single IV injection to prevent HAE attacks.

ADVM-053 also utilizes an AAVrh.10-based vector, which has been shown to target the liver, which is the natural source of C1EI. In prior preclinical studies, a single IV administration of ADVM-053 showed robust C1EI protein expression. In a proof-of-concept study, ADVM-053 increased C1EI protein expression above anticipated therapeutic levels. An additional study, in a mouse model of the disease, demonstrated that ADVM-053 decreased vascular permeability.

We are advancing ADVM-053 for HAE and plan to submit an IND with the FDA in the second half of 2018.

ADVM-022 for Treatment of wAMD

Market for wAMD

Age-related macular degeneration (“AMD”) is a progressive disease affecting the retinal cells in the macula, the region of the eye responsible for central vision. Disease progression results in the death of retinal cells and the gradual loss of vision.

Approximately 10% of patients living with AMD have an advanced form of the disease called wAMD, in which blood vessels begin to invade the cellular space between layers of cells in the retina. These new blood vessels are often leaky, which results in fluid and blood in the retina and causes vision loss.

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wAMD is a leading cause of vision loss in subjects over 60 years of age. A significant number of individuals are impacted by this disease, which has a prevalence of approximately 1.2 million individuals in the U.S. and 3 million on a worldwide basis. The incidence of new cases of wAMD in the U.S. is approximately 150,000 to 200,000 annually, and this number is expected to grow significantly based on the country’s aging population.

Although the underlying molecular causes of AMD are not completely known, VEGF is known to play a central role in the growth of new blood vessels in wAMD. The standard-of-care therapies for wAMD include Lucentis® and EYLEA®, which together generated annual sales of approximately $9.2 billion in 2017, in addition to off-label use of Avastin®.

 

Lucentis, a recombinant humanized monoclonal antibody fragment that binds to and inhibits VEGF proteins in the eye, was approved in the U.S. in 2006 and in Europe in 2007. In 2017, Lucentis achieved worldwide sales of approximately $3.3 billion.

 

EYLEA, a recombinant fusion protein containing portions of the human VEGF receptors that binds to VEGF, was approved in the U.S. in 2011. EYLEA has exhibited strong adoption in the market due to its more convenient dosing regimen compared to Lucentis and in 2017, EYLEA® achieved worldwide sales of approximately $5.9 billion.

 

Avastin is a recombinant human monoclonal antibody that binds to VEGF and is approved as an anti-cancer agent. Avastin is widely prescribed off-label in ophthalmic diseases such as wAMD and makes up approximately 60% of the wAMD market by volume.

The current treatment regimen can be burdensome, as patients generally require intravitreal injections with anti-VEGF proteins every 4-8 weeks. Compliance with this regimen can be difficult for patients and their caregivers, leading to compliance deficiencies and loss of vision from underdosing.

Our Approach for wAMD

ADVM-022 is our preclinical gene therapy product candidate for the treatment of wAMD. With AAV.7m8 and a proprietary expression cassette, ADVM-022 is administered as a single intravitreal injection and is designed to minimize the treatment burden of the standard of care frequent injections. At scientific meetings, we have presented preclinical proof-of-concept data of ADVM-022’s anti-angiogenic effect in the laser-induced CNV model in non-human primates, the industry standard for testing new wAMD therapies. The data from a single injection of ADVM-022 showed efficacy that was comparable to the anti-VEGF standard of care, which was the positive control in the CNV model. We presented additional long-term data at scientific meetings in September 2017, which continued to demonstrate sustained expression of anti-VEGF protein following a single intravitreal injection of ADVM-022. Pharmacokinetic data on one non-human primate demonstrated sustained expression for 52 weeks. In a separate ongoing study, sustained expression for at least seven months has been observed in seven non-human primates. In this ongoing preclinical study, we continue to assess the durability of protein expression in non-human primates and expect to report 12-month efficacy data for ADVM-022 in the laser induced CNV model in the first half of 2018.

We are advancing ADVM-022 and plan to submit an IND application with the FDA in the second half of 2018.

GenSight Biologics has also obtained a license from us to use AAV.7m8 for GS030 gene therapy encoding channelrhodopsin protein. GenSight has received MHRA approval to initiate a Phase 1/2 trial in retinitis pigmentosa, which is expected to begin in 2018.

Other Preclinical Product Candidates

 

In addition to our lead programs, we are developing a gene therapy product candidate for the treatment of cardiomyopathy associated with FA, a debilitating neurodegenerative disease resulting in poor coordination of legs and arms, progressive loss of the ability to walk, generalized weakness, loss of sensation, scoliosis, diabetes and cardiomyopathy as well as impaired vision, hearing and speech. It affects approximately 5,000 people in the U.S. and approximately 5,000 to 10,000 people in Europe. Currently, we are conducting observational studies and are in the early stages of preclinical development.

Manufacturing

Our AAV vector manufacturing process is based on the Baculovirus Expression Vector System (“BEVS”), which has been used in a number of FDA- and EMA-approved products. This approach is well suited for the production of large quantities of AAVs, as it takes advantage of the efficiency of viral infection coupled with the high density and scalability of insect cells grown in serum-free suspension cultures. Compared to the mammalian cell-based approaches commonly used in the field, our manufacturing process is designed to produce higher yields of vectors per manufacturing campaign in a cost-effective manner.

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Our BEVS manufacturing process, using the eye as an example, is presented in the figure below.

 

1)

The process begins with two DNA constructs, one encoding the therapeutic protein and the other encoding AAV helper components for the AAV capsid and replication of vectors.

 

2)

Each DNA construct is inserted into the genome of a baculovirus to create two types of recombinant baculoviruses.

 

3)

The two baculoviruses are used to transduce Sf9 insect cells, which in turn produce large amounts of AAV vectors containing the therapeutic gene of interest.

 

4)

The transduced Sf9 insect cells are then harvested and treated with a lysis buffer solution to burst the insect cells and release the AAV vectors.

 

5)

Recovered AAV vectors are then purified to remove unwanted debris.

 

6)

Following purification, the vectors are formulated in a physiological solution and placed in vials.

 

7)

The resulting drug product is ready for use as a therapeutic treatment for the targeted disease (e.g., injection in the eye to treat wAMD).

BEVS Manufacturing Process

 

 

Our AAV manufacturing method is industrialized, highly scalable and ready for adaptation for commercial stage. We believe our process provides the following advantages over competing systems:

 

Industrial-scale biologics production. Our BEVS system can produce quantities of product required at commercial stage by incorporating scalable, well-established process steps used throughout the industry for biologic products.

 

Safety advantages. Our BEVS system does not use mammalian cell cultures or tumorigenic cell lines, and the DNA sequences used to allow AAV vector production are inactive in mammalian cells, which lowers the risk of off-target expression from our products.

 

High yield and low cost. Because of its scalability, our BEVS system allows the production of large quantities of AAV vectors up to one hundred times greater per manufacturing campaign than those obtained using conventional AAV production systems. This lowers the unit cost of goods and may enable us to meet global demand for large markets, such as wAMD.

 

High purity. Our BEVS system coupled with our proprietary downstream purification process produces a highly pure drug substance.

 

Precedent regulatory framework. Several FDA- and EMA-approved vaccines and gene therapy products including FluBlok, Cervarix and Glybera are manufactured using similar BEVS technology.

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Our products are manufactured using proprietary cell banks and a scalable process developed internally that is transferred to approved Contract Manufacturing Organizations (“CMOs”). These CMOs produce investigational drugs under cGMP conditions to support our clinical trials. Raw materials of highest quality are purchased from various suppliers and are used throughout the manufacturing process.

 

We have entered into a manufacturing technology license agreement pursuant to which we and Lonza Houston, Inc. are assessing certain technology potentially useful for the manufacture of our products. The license agreement provides that the parties will conduct activities to evaluate such technology and that we may elect to engage Lonza to manufacture our products. We also granted to Lonza certain licenses to practice the manufacturing technology for products other than those being developed by us, our affiliates or sublicensees.

We continue to evaluate new raw material suppliers as well as CMOs with available manufacturing slots in order to provide manufacturing flexibility. As we prepare for larger, late-stage clinical trials and potential commercialization, we plan to begin the initial stage of investing in a manufacturing facility to build on our internal process development capabilities.

Competition

The biopharmaceutical industry is characterized by intense and dynamic competition to develop new technologies and proprietary therapies. Any product candidates that we successfully develop and commercialize will have to compete with existing therapies and new therapies that may become available in the future. While we believe that our AAV-based directed evolution platform, single-administration gene therapy candidates, and expertise in the field of gene therapy provide us with competitive advantages, we face potential competition from various sources, including larger and better-funded pharmaceutical, specialty pharmaceutical, and biotechnology companies, as well as from academic institutions, governmental agencies, and public and private research institutions.

Our wAMD gene therapy ADVM-022 utilizes a proprietary vector and is administered through an intravitreal injection and will compete with a variety of therapies currently marketed and in development, including biologics, small molecules and gene therapy. Existing anti-VEGF therapies, Lucentis, EYLEA and Avastin, are well-established therapies and are widely accepted by physicians, patients and third-party payers as the standard-of-care treatment of patients with wAMD. To date, we are not aware of any treatment that has demonstrated a better benefit to patients than regular anti-VEGF protein delivery.

We know of a significant number of product candidates in development for wAMD, and we group them into four main categories:

 

biosimilar anti-VEGFs

 

combination / add-on therapy for efficacy improvement (for example, Anti-angiopoietin-2)

 

next generation anti-VEGF with quarterly injection

 

long acting delivery device / gene therapy to lower treatment frequency

There are several other companies with marketed products or products in development for the treatment of wAMD. These companies include Alcon, Allergan, Allegro Ophthalmics, LLC, Apellis Pharmaceuticals, Applied Genetic Technologies Corporation, Bayer, Hoffmann-La Roche Ltd., Iconic Therapeutics, Inc., Novartis, Ocular Therapeutix, Inc., Ohr Pharmaceuticals, Inc., Ophthotech Corporation, Opthea Limited, PanOptica Pharma, Quark Pharmaceuticals, SciFluor Life Science, LLC, Regeneron and REGENXBIO.

For the treatment of A1AT deficiency and HAE, we know of a number of products currently in development that aim to reduce the frequency of administration, improve the route of administration, and deliver better efficacy compared to the standard-of-care treatments available today. There are several companies with marketed products or products in clinical development for A1AT deficient patients with emphysema including Kamada Ltd., Shire and Grifols Therapeutics. For the treatment of HAE, there are several companies with marketed products or products in clinical development, including CSL Behring, Biocryst Pharmaceuticals, Ionis Pharmaceuticals, and Shire.

Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of treatments and commercializing those treatments. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achieving widespread market acceptance. Our competitors’ treatments may be more effective, or more effectively marketed and sold, than any treatment we may commercialize and may render our treatments obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our treatments.

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Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical study sites and subject registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. We expect any treatments that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, the level of generic competition and the availability of reimbursement from government and other third-party payers.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, we expect that our therapeutic products, if approved, will be priced at a significant premium over competitive generic products and our ability to compete may be affected in many cases by insurers or other third-party payers seeking to encourage the use of generic products.

Research and Development Expense

Our research and development expenses were $39.8 million, $31.7 million and $25.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

License and Collaboration Agreements

Regeneron

In May 2014, we entered into a collaboration agreement with Regeneron for an initial period of three years to research, develop and commercialize novel gene therapy products for the treatment of ophthalmologic diseases. These products are based on our proprietary viral vectors that express transgenes encoding molecules that modulate up to a total of eight specified targets, and encoding certain endogenous molecules known to bind to and modulate such targets (such products, including AVA-311, collectively the “Products”). In February 2017, Regeneron exercised its option to extend the research term of the collaboration agreement for an additional three years, through May 1, 2020.

Pursuant to the collaboration agreement, we and Regeneron have been conducting a research program to identify potential Products for a specified time period. Regeneron bears all costs of performing research under the Collaboration Agreement. Regeneron has a right to substitute a certain number of such targets and may, subject to a payment to us, expand the collaboration beyond the four initially designated targets to include up to four additional targets not currently being researched or developed by Adverum, and endogenous molecules known to bind to and modulate such additional targets, in the research program.

Regeneron has an option, exercisable with respect to all Products containing transgenes expressing molecules that modulate one of the specified targets, to obtain an exclusive, worldwide license to research, develop and commercialize such Products for the treatment, prevention or diagnosis of human disease or other medical disorders. Regeneron may exercise this option prior to the expiration of the term of the research program, within a certain time period after the acceptance for filing with the FDA of the IND for such Products. Regeneron must pay us an option fee each time it exercises an option.

Regeneron has the right to submit an IND with the FDA for Products prior to exercising its option. If Regeneron exercises its option for specified Products, Regeneron will be primarily responsible for developing, obtaining and maintaining regulatory approval for, and commercializing such Products.

We have a right to co-fund costs of developing, manufacturing and commercializing Products containing transgenes encoding molecules capable of modulating a target with respect to which Regeneron has exercised its option, subject to certain exceptions. We may exercise this co-funding right up to two times. If we exercise such right, we may elect to bear up to 35% of all development costs incurred for such Products. For any co-funded Products, Regeneron’s payment obligations extend until the Products are no longer sold in the applicable territory. For those Products for which we exercise this option, either party may opt out of sharing development costs for all Products containing transgenes encoding molecules capable of modulating a protein target, in which case the other party may continue to develop and commercialize such Products, subject to the payment of a royalty to the other party ranging from low-single digit to low double-digit royalties. While Regeneron will record all revenue from sales of the co-funded Products, Regeneron will share in the net profits and losses of sales of any Products for which we exercised our co-funding right, with each party receiving a share of profits and bearing its share of losses in accordance with the share of development costs borne by each party for such Product, provided that neither party exercises its opt-out right for such Products.

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Under the Collaboration Agreement, Regeneron made an initial payment of $8.0 million dollars for collaboration research costs, a one-time option fee and a one-time license grant fee.

In addition to the initial payment, Regeneron may make the following payments to us:

 

Reimbursement for additional collaboration research costs;

 

Up to $80.0 million in development and regulatory milestones for product candidates directed toward each of the eight therapeutic candidates, for a combined total of up to $640.0 million in potential milestone payments for product candidates directed toward all eight therapeutic targets subject to the Collaboration Agreement; and

 

Tiered, low- to mid-single digit royalties on annual net sales, subject to certain adjustments.

For each Product, Regeneron’s payment obligations extend until the last to occur of the following: (i) the discontinuation of development of the Product or (ii) once a Product is approved by the FDA, the later of (x) the duration of patent coverage for the Product or (y) ten years after first commercial sale of the Product in a particular territory.

The collaboration agreement will expire with respect to each collaboration target upon expiration of all payment obligations by Regeneron. The collaboration agreement may also be terminated (i) by Regeneron at will, either in its entirety or on a target by target basis, upon 30 days’ prior written notice to us, (ii) by either party, upon written notice in connection with a material breach remaining uncured 60 days after initial written notice, (iii) by us, if Regeneron challenges the patent rights licensed by us under the collaboration agreement or (iv) by either party, for insolvency of the other party. 

Under our research, collaboration and license agreement with Regeneron, we are required to have a mutually agreed-on research plan with Regeneron in order to invoice Regeneron for services performed. We do not currently have a research plan in place, and, consequently, we are not currently receiving any reimbursements from Regeneron.

Editas

In August 2016, we entered into a collaboration, option, and license agreement with Editas pursuant to which we and Editas collaborate on certain studies using AAV vectors in connection with Editas’ genome editing technology and we grant to Editas an exclusive option to obtain certain exclusive rights to use our proprietary vectors in up to five ophthalmic indications. We received a $1.0 million non-refundable upfront payment, with $0.5 million of such payment to be credited against Editas’ obligation to fund research and development costs during the year ended December 31, 2016. Under the terms of the agreement, both we and Editas are subject to exclusivity obligations. In January 2018, we and Editas extended the collaboration, option and license agreement. In consideration of extending the agreement, Editas made a one-time payment of $0.5 million to us in February 2018.

Under the terms of the agreement, as amended, Editas may exercise the option with respect to a designated initial indication until September 30, 2018. With respect to the four other indications, Editas may exercise the option until the fourth anniversary of the effective date, provided that the option will expire on the third anniversary of the effective date if Editas has not exercised the option with respect to the initial indication or any other indication by such date. Upon Editas’ timely exercise of the option with respect to the designated initial indication, Editas will pay us a $1.3 million fee. For the first additional indication for which Editas timely exercises its option, Editas will pay us a $1.5 million fee. Upon each subsequent exercise of the option, Editas will pay us a $1.0 million fee per indication. If Editas elects to develop a product using certain of our proprietary vectors, we will be eligible to receive up to $15.5 million in development and commercialization milestone payments for such product, and tiered royalties between the mid-single digits and low teens on net sales of such product, subject to certain adjustments.

Unless earlier terminated, the agreement will be in effect until the later of the expiration of the option exercise period or the expiration of the royalty term of the last product. At any time after the option is first exercised, Editas may terminate the Agreement for convenience in its entirety or on an indication-by-indication or country-by-country basis, upon prior written notice to us. We may also terminate the agreement if Editas challenges our patents relating to its proprietary vectors and does not withdraw such challenge within a defined period of time. In addition, either party may terminate the agreement with written notice upon a bankruptcy of the other party or upon an uncured material breach by the other party.

University of California

In May 2010, we entered into a license agreement with the Regents of University of California (“Regents”), as amended in September 2013. Under the license agreement, the Regents have granted to us an exclusive, even as to the Regents, license, with the right to grant sublicenses, under the Regents’ undivided interest in patent rights covering a method of using recombinant gene delivery vectors for treating or preventing diseases of the eye, to develop and commercialize products covered by such patent rights in all fields of use in the U.S. The licensed patent rights are jointly owned by the Regents and Chiron Corporation, which was acquired by Novartis AG (“Chiron”), but our license extends only to the Regents’ interest in such patent rights.

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Under the license agreement, we are obligated to make milestone payments totaling up to $0.9 million upon reaching certain stages of development of the licensed products for one indication and totaling up to $0.5 million for each subsequent indication for which licensed products are developed, for up to a maximum of two additional indications. Through December 31, 2017, none of these goals had been achieved, and no milestones were payable. The license agreement also contains certain royalty payment requirements for net sales of licensed products.

Our license agreement with the Regents continues in effect for the life of the last-to-expire patent. We expect the agreement to terminate prior to any commercialization of any product candidates to which they apply. We may terminate this agreement without cause at any time upon 30 days’ prior written notice to the Regents. The Regents may terminate this agreement for a breach by us that remains uncured for 60 days, if we become insolvent, if we directly or through a third-party file a claim that a licensed patent right is invalid or unenforceable or if we fail to meet or extend the date for meeting certain diligence milestones.

Cornell University

 

We were a party to a master service agreement (“MSA”) with Cornell University (“Cornell”) originally established in August 2014 and amended in December 2015. Under the MSA, Cornell provided assistance in regulatory affairs, overall project management, and parameter development. The MSA, as amended, provided for Annapurna to pay Cornell $13.3 million ratably over 4 years for these services as services were performed.

 

In December 2016, we informed Cornell that we decided to terminate the MSA for material breach, effective January 6, 2017. Subsequently, Cornell informed us that it disputes the validity of our termination of the MSA. Although we intend to defend the validity of our termination of the MSA, we recorded $2.0 million of estimated costs associated with the termination of the MSA during the year ended December 31, 2017. This MSA included services relating to our gene therapy programs ADVM-043, ADVM-053 and severe allergy. Our three licensing agreements with Cornell for these programs remain unchanged.

 

The decision to terminate the MSA was due to Cornell’s failure to deliver therapeutic material of ADVM-043 suitable for use in human patients. As a result of this decision, we contracted with a large-scale contract manufacturing organization that complies with cGMP industry standards and can produce product quantities for both our planned clinical trials and potential commercial supply. This was part of our planned upgrade of the manufacturing process for ADVM-043, implementing our proprietary, highly-scalable baculovirus-based production system, in advance of our initiation of the ADVANCE trial in the fourth quarter of 2017.

 

In December 2015, Annapurna entered into three licensing agreements with Cornell, pursuant to which we are advancing gene therapy programs ADVM-043, ADVM-053, and severe allergy, which originally were initiated at the Department of Genetic Medicine at Weill Cornell.

A1AT Deficiency License Agreement: Under this agreement, we hold an exclusive license to certain know-how related to A1AT deficiency and rights to an IND application to initiate clinical studies of gene therapy for A1AT.

HAE License Agreement: Under this agreement, we hold an exclusive license to certain technology related to HAE and a non-exclusive license to certain other intellectual property related to the HAE program.

Allergy License Agreement: Under this agreement, we hold an exclusive license to certain patents related to allergens and a non-exclusive license to certain other technology related to allergens.

Across these three license agreements, Cornell is entitled to receive aggregate annual maintenance fees ranging from $30,000 to $0.3 million per year, up to $16.0 million in aggregate milestone payments and royalties on sales in the low single-digits, subject to adjustments and minimum thresholds.

We may terminate any of these license agreements for convenience upon ninety days written notice. Cornell may terminate any of the license agreements for material breach if such breach is not cured within a specified number of days. Cornell may also terminate the HAE License Agreement and/or the Allergy License Agreement if we commence any action and file a written claim asserting that any portion of the licensed patent rights is invalid or unenforceable.

Dr. Crystal, Chairman of Genetic Medicine, the Bruce Webster Professor of Internal Medicine and a Professor of Genetic Medicine and of Medicine at Weill Cornell, served as a consultant to Annapurna since inception and continues to provide services to us for an annual base compensation of $0.2 million.

 

REGENXBIO

 

A1AT Deficiency/Allergy License Agreement: In October 2015, we entered into an exclusive worldwide license with REGENXBIO to certain intellectual property in order to develop and commercialize products for the treatment of A1AT deficiency. Under this agreement, we also had an option to be granted an exclusive worldwide license to certain intellectual property to develop and

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commercialize products for the treatment of severe allergies, however this option was not exercised, and expired in October 2016. Under this license agreement, REGENXBIO was eligible to receive annual maintenance fees, up to approximately $20.0 million in combined milestone payments and royalties in the mid-to-high single digits. In April 2017, we notified REGENXBIO that we exercised our right to terminate this license agreement for any reason upon six months’ written notice.  The termination was effective in October 2017.

FA License Agreement: In April 2014, we entered into an exclusive worldwide license to certain intellectual property in order to develop and commercialize products using the AAVrh.10 vector for FA, where the vector is administered by any route except directly to the central nervous system (“FA Systemic”).

Under the terms of this license agreement, we also had options to obtain a non-exclusive worldwide license to develop and commercialize an FA product where the vector is administered directly to the central nervous system (“FA CNS”), as well as an FA Systemic product using another AAV vector. The option to obtain a non-exclusive license to FA Systemic expired in April 2015 and the option to obtain a non-exclusive license for FA CNS expired in April 2016, and neither were exercised. In October 2017, we notified REGENXBIO that we exercised our right to terminate this license agreement for any reason upon six months’ written notice.  The termination will be effective in April 2018.

Inserm Transfert

 

In July 2014, we entered into an agreement with Inserm Transfert (“Inserm”) whereby we hold an exclusive license to certain patents to develop and commercialize products for the treatment of FA and a non-exclusive license to certain other intellectual property related to the FA program. The agreement was amended in October 2015 to increase the scope of the intellectual property under the licenses. Under this agreement, Inserm is entitled to receive certain de minimis license payments, certain development milestone payments of up to approximately €2.0 million in the aggregate and royalties on sales in the low single-digits, subject to adjustments.

Unless earlier terminated, this agreement will be in effect on a country-by-country, licensed product-by-licensed product basis until the later of the expiration of the last claim of the licensed intellectual property which cover the manufacture, use or sale of such product in such country or 10 years after the first commercial sale of such product in such country in which such product is sold. Upon a country-by-country and product-by-product basis, Annapurna will have a fully paid up, perpetual, irrevocable license with respect to such product in such country under the licensed intellectual property following expiration of this agreement with respect to such product in the applicable country. Annapurna may terminate this agreement upon 60 days’ prior written notice. Inserm may terminate this license agreement if Annapurna becomes the subject of a voluntary or involuntary petition in bankruptcy or fails to meet development milestones and such failure is not cured within a specified number of days. Inserm may also terminate the license granted to Annapurna in a given country if Annapurna (i) before regulatory approval of a product in any country, has ceased conducting any development of products in all countries for 12 consecutive months or (ii) after regulatory approval of a product in a given country, has ceased marketing such product in such country for 12 consecutive months.

Pursuant to Section 4.7 of the agreement with Inserm, our acquisition of Annapurna triggered a one-time payment to Inserm of €0.3 million.

Intellectual Property

Overview

We strive to protect and enhance the proprietary technology, inventions and improvements that are commercially important to the development of our business, including seeking, maintaining and defending patent rights, whether developed internally or licensed from third parties. We also rely on trade secrets relating to our proprietary technology platform and on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain our proprietary position in the field of gene therapy that may be important for the development of our business. We additionally may rely on regulatory protection afforded through orphan drug designations, data exclusivity, market exclusivity, and patent term extensions where available.

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Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business; defend and enforce our patents; preserve the confidentiality of our trade secrets; obtain regulatory exclusivity and operate without infringing the valid enforceable patents and proprietary rights of third parties. Our ability to stop third parties from making, using, selling, offering to sell or importing our products may depend on the extent to which we have rights under valid and enforceable licenses, patents or trade secrets that cover these activities. In some cases, these rights may need to be enforced by third party licensors. With respect to both licensed and company-owned intellectual property, we cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our commercial products and methods of manufacturing the same.

We own or license more than 60 patent applications pending in the U.S. and foreign jurisdictions. More than 50 patent applications have been filed in the U.S. and foreign jurisdictions by or on behalf of universities which have granted us exclusive license rights to the technology. To date, more than 20 patents have been issued to us or to our licensors that are active. Our policy is to file patent applications to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. We seek patent protection in the U.S. and abroad for a variety of technologies, including: research tools and methods, AAV-based biological products, methods for treating diseases of interest and methods for manufacturing our AAV-based products. We also intend to seek patent protection or rely upon trade secret rights to protect other technologies that may be used to discover and validate targets and that may be used to identify and develop novel biological products. We seek protection, in part, through confidentiality and proprietary information agreements. We are a party to various other license agreements that give us rights to use specific technologies in our research and development.

Company-owned Intellectual Property

We own three families of patent applications that are directed to AAV-based compositions and methods for treating or preventing eye diseases associated with neovascularization. Applications in the first of these families relate to an AAV gene therapy for the treatment of wAMD using an anti-VEGF composition, various unit dosages, dosing regimens and routes of administration. Applications in this family are pending in the U.S., and corresponding patent applications are pending elsewhere in North America, Europe, and Asia. Patents that may eventually issue from this patent family, if any, are generally expected to expire in 2033, subject to possible patent term extensions.  Applications in the second and third of these families relate to AAV gene therapy for the treatment of wAMD using the 7m8 vector to deliver ranibizumab or aflibercept.  Each family has an application pending in the U.S. and a corresponding pending PCT application.  Patents that may eventually issue from either of these patent families, if any, are generally expected to expire in 2037, subject to possible patent term extensions.

We also own seven families of patent applications that are directed to various aspects of our proprietary technology platform.  These families contain pending U.S. provisional or PCT applications or national phase applications in the U.S., elsewhere in North America, Europe, and Asia. Patents that may eventually issue from these families, if any, are generally expected to expire between 2036 and 2038, subject to possible patent term extensions.

We are also pursuing innovative ways to regulate the expression of transgenes in tissues. To that end, we have, in collaboration with Stanford University, filed a U.S. patent application that is directed to methods for regulating gene expression in a subject. Patents that grant from this application, if any, are expected to expire in 2033, subject to possible patent term extensions.

Licensed Intellectual Property

We have obtained both exclusive and non-exclusive licenses to patents directed to both compositions of matter and methods of use and to other intellectual property.

For example, we have exclusively licensed several families of patents and patent applications that relate to variant rAAV virions having desirable characteristics, such as increased infectivity, as well as novel methods to screen for such variants.

One patent family that we have exclusively licensed includes granted patents in the U.S., as well as elsewhere in North America and Europe, as well as a pending patent application in Canada. The patents in this family are projected to expire in 2024, subject to possible patent term extensions.

Another patent family that we have exclusively licensed includes granted U.S. patents that are projected to expire in 2031 and a pending U.S. patent application that, if granted, is also projected to expire in 2031, in both cases subject to possible patent term extensions.

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A third patent family that we have exclusively licensed includes claims directed to the novel AAV7m8 vector, which allows delivery of transgenes to the retina via intravitreal injection, and which we utilize in clinical candidates ADVM-022 and ADVM-032.  This family includes issued patents in the U.S., as well as elsewhere in North America, Europe, Asia, and the Pacific.  Corresponding applications are pending in the U.S. and elsewhere in North America, Asia and the Pacific. Patents that issue from this patent family, if any, are generally expected to expire in 2032, subject to possible patent term extensions.

We have also nonexclusively licensed rights to a patent family that includes issued patents in the U.S., Europe, and Asia. These patents are expected to expire in 2027, subject to possible patent term extensions.

We have exclusively licensed a family of patent applications related to gene therapy treatments for HAE, C1-esterase deficiency, which includes pending U.S. and foreign applications. Patents that grant from this patent family, if any, are generally expected to expire in 2036, subject to possible patent term extensions and adjustments.

We have exclusively licensed a family of patent applications related to gene therapy treatments for severe allergies, which includes pending U.S. and foreign applications. Patents that grant from this patent family, if any, are generally expected to expire in 2036, subject to patent term extensions and adjustments.

We have exclusively licensed a family of patents and applications related to the treatment of cardiomyopathy associated with FA. This family includes a granted US patent and pending applications in the U.S. and elsewhere in North America, Europe, Asia, and the Pacific. Patents that grant from this patent family, if any, are generally expected to expire in 2033, subject to possible patent term extensions and adjustments.

We have also exclusively licensed a patent family directed to the use of certain rAAVs for use in FA Systemic including pending applications in Australia, Canada, China, Europe, Hungary, Israel, Japan, New Zealand and the U.S. patents that grant from this patent family, if any, are generally expected to expire in 2022, subject to possible patent term extensions and adjustments.

We have exclusively licensed certain know-how related to gene therapy for A1AT deficiency and rights to an IND to initiate clinical studies of gene therapy for A1AT.

Trade Secret Protection

Finally, we may rely, in some circumstances, on trade secrets to protect our technology, including with regard to technology or other aspects of our product candidates for which we do not obtain patent protection. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Government Regulation

The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon companies involved in the clinical development, manufacturing, marketing and distribution of drug product and biologic product candidates. These agencies and other federal, state and local entities regulate the research, development, testing, manufacturing, quality control, approval, labeling, storage, record keeping, advertising, promotion, distribution, post-approval monitoring and reporting, sampling, and export and import of our product candidates.

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In the U.S., the FDA regulates drug and biologic products under the Federal Food, Drug, and Cosmetic Act (“FFDCA”), and the FDA implements regulations and other laws, including, in the case of biologics, the Public Health Service Act. If we fail to comply with applicable FDA or other requirements at any time during the product development process, clinical testing, the approval process, or post-approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any FDA enforcement action could have a material adverse effect on our business, financial condition, results of operations and prospects. Biologics require the submission of a Biologics License Application (“BLA”) and approval by the FDA before being marketed in the U.S. Similarly, FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed in the U.S.

Within the FDA, the Center for Biologics Evaluation and Research (“CBER”) regulates gene therapy products. Within CBER, the review of gene therapy and related products is consolidated in the Office of Tissues and Advanced Therapies and FDA has established the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER in its review. Gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from the U.S. National Institutes of Health (“NIH”) are also subject to review by the NIH Office of Biotechnology Activities’ Recombinant DNA Advisory Committee (“RAC”), which will soon only publicly review clinical trials if the trials cannot be evaluated by standard oversight bodies and pose unusual risks. Although the FDA decides whether individual gene therapy protocols may proceed, the RAC public review process can delay the initiation of a clinical trial.  Similarly, the FDA can put an IND on clinical hold even if the RAC provides an exemption from an in-depth, public review. The FDA and the NIH have published guidance documents with respect to the development and submission of gene therapy protocols. The FDA also has published guidance documents related to, among other things, gene therapy products IND applications; FDA guidance documents provide the current thinking about a particular subject, yet are not legally binding. However, products in this area are novel and present highly complex scientific and medical issues, making the predictability of FDA’s policies and practices in this area less certain.

The process required by the FDA before our product candidates may be marketed in the U.S. generally involves:

 

Completion of non-clinical laboratory tests, preclinical studies and formulation studies all performed in accordance with current Good Laboratory Practice (“GLP”) regulations;

 

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

 

Approval by an independent institutional review board (“IRB”), at each clinical site before each trial may be initiated;

 

Performance of adequate and well-controlled human clinical trials according to Good Clinical Practice (“GCP”), and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the drug candidate for its proposed indication;

 

Performance of clinical trial product manufactured under cGMP to establish the identity, strength, quality, purity or potency of the product;

 

Satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug or biologic is produced, prior to commercialization, to assess compliance with cGMP, regulations, and any additional requirements pertaining to the manufacture and distribution of drug and biologic products;

 

Submission to the FDA of a BLA for marketing approval that includes substantial evidence of purity and potency, safety and efficacy from results of nonclinical testing and clinical trials;

 

Successful completion of FDA audit(s) of the nonclinical and clinical trial sites that generated the data in support of the BLA;

 

Successful completion of the advisory committee review, if FDA convenes an advisory committee; and

 

Payment of user fees and FDA review and approval, or licensure, of the BLA prior to any commercial marketing, sale or shipment of the product.

The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Before testing any drug product or biologic product candidate, including a gene therapy product, in humans, the product candidate enters the preclinical testing stage. Preclinical tests include laboratory evaluation of product chemistry, formulation, stability and toxicity, as well as animal studies to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including GLPs.

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Our gene therapy studies involve recombinant DNA research, and therefore compliance with NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules (“NIH Guidelines”) is mandatory.  Appropriate protocol(s) and related documentations are submitted to, and the study is registered with, the NIH Office of Biotechnology Activities (“OBA”), pursuant to the NIH Guidelines. The NIH is responsible for convening the Recombinant DNA Advisory Committee (“RAC”) that will discuss the protocol(s) including issues that raise novel or particularly important scientific, safety or ethical considerations. The OBA will notify the FDA of the RAC's decision regarding the necessity for full public review of a gene therapy protocol. RAC proceedings and reports are posted to the OBA website and can be accessed by the public.

The results of preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical trial protocol, are submitted as part of an IND to the FDA. Some preclinical testing may continue even after the IND is submitted. The OBA notifies the FDA of the RAC’s decision regarding the necessity for full public review of a gene therapy protocol. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions relating to the content(s) of the IND that could potentially expose human research subjects to health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the IND goes into effect and the clinical trial can begin.  With gene therapy protocols, if the FDA allows the IND to proceed, but the RAC decides that full public review of the protocol is warranted, the FDA will request at the completion of its IND review that sponsors delay initiation of the protocol until after completion of the RAC review process. The FDA also may impose clinical holds on a biologic product candidate at any time before or during clinical trials due to safety concerns or non-compliance. If the FDA imposes a clinical hold on an IND, clinical trials may not commence or recommence without FDA authorization and then only under terms authorized by FDA.

Clinical trials involve the administration of the investigational product candidate to human subjects under the supervision of qualified investigators, generally physicians not employed by or under the study sponsor’s control. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, the parameters to be used in monitoring subject safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur, and the effectiveness criteria to be used. Each protocol must be submitted to the FDA as part of the IND. An IRB for each medical center proposing to conduct a clinical trial must also review and approve a plan for any clinical trial before it can begin at that center and the IRB must monitor the clinical trial until it is completed. Clinical testing also must satisfy GCP requirements, including the requirements for informed consent from all subjects. FDA usually recommends that sponsors observe all surviving subjects who receive treatment using gene therapies in clinical trials for potential gene therapy-related delayed adverse events for a minimum 15-year period, including a minimum of five years of annual examinations followed by 10 years of annual queries, either in person or by questionnaire. FDA does not require the long-term tracking to be complete prior to its review of the BLA.

All clinical research performed in the United States in support of a BLA must be authorized in advance by the FDA under the IND regulations and procedures described above. However, a sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, under FDA regulations at 21 CFR 312.120, FDA will accept a well-designed, well-conducted, non-IND foreign study as support for an application for marketing approval if (i) the study was conducted in accordance with GCP as further detailed in the regulation, including review and approval by an independent ethics committee, and (ii) if FDA is able to validate the data from the study through an onsite inspection, if necessary.  In addition, FDA requires that a sponsor or applicant who submits data from a foreign clinical study not conducted under an IND as support for a marketing application submit, in addition to other required information, a description of the actions the sponsor or applicant took to ensure that the research conformed to GCP.  Further, when a sponsor intends for marketing approval of a new drug to be based solely on foreign clinical data, additional requirements apply that are described in FDA regulations.

Clinical Trials

For purposes of BLA submission and approval, clinical trials are typically conducted in three or four sequential phases, which may overlap or be combined.

 

Phase 1: Clinical trials are initially conducted in a limited population of subjects to test the product candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients with severe problems or life-threatening diseases to gain an early indication of its effectiveness.

 

Phase 2: Clinical trials are typically well-controlled, closely monitored studies that are generally conducted in a limited subject population to evaluate dosage tolerance and appropriate dosage, identify possible adverse effects and safety risks, and evaluate preliminarily the efficacy of the product candidate for specific targeted indications in subjects with the disease or condition under study.

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Phase 3: Clinical trials are typically conducted when Phase 2 clinical trials demonstrate that a dose range of the product candidate is effective and has an acceptable safety profile. Phase 3 clinical trials are commonly referred to as “pivotal” studies, which typically denotes a study which presents the data that the FDA or other relevant regulatory agency will use to determine whether or not to approve a product candidate. Phase 3 clinical trials are generally undertaken with large numbers of subjects, such as groups of several hundred to several thousand, to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse subject population at multiple, geographically-dispersed clinical trial sites.

 

Phase 4: In some cases, the FDA may condition approval of a BLA for a product candidate on the sponsor’s agreement to conduct additional clinical trials after the product’s approval. In other cases, a sponsor may voluntarily conduct additional clinical trials post approval to gain more information about the product. Such post approval trials are typically referred to as Phase 4 clinical trials or post-marketing or post approval studies.

During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Written IND safety reports must be promptly submitted to the FDA, the NIH and the investigators for serious and unexpected adverse events, any findings from other studies, tests in laboratory animals or in vitro testing that suggest a significant risk for human subjects, or any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines that the information qualifies for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor's initial receipt of the information. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB's requirements or if the biological product has been associated with unexpected serious harm to patients.

In addition to the regulations discussed above, there are a number of additional standards that apply to clinical trials involving the use of gene therapy. The FDA has issued various guidance documents regarding gene therapies, which outline additional factors that the FDA will consider at each of the above stages of development and relate to, among other things: the proper preclinical assessment of gene therapies; the chemistry, manufacturing and control information that should be included in an IND application; the proper design of tests to measure product potency in support of an IND or BLA application; and measures to observe delayed adverse effects in subjects who have been exposed to investigational gene therapies when the risk of such effects is high. Further, the FDA usually recommends that sponsors observe subjects for potential gene therapy-related delayed adverse events for a 15-year period, including a minimum of five years of annual examinations followed by 10 years of annual queries, either in person or by questionnaire. The NIH and the FDA have a publicly accessible database, the Genetic Modification Clinical Research Information System, which includes information on gene therapy trials and serves as an electronic tool to facilitate the reporting and analysis of adverse events on these trials.

Per the regulations, a sponsor (in industry or academia) of a clinical trial must register a clinical trial on the ClinicalTrials.gov website, the registry of new and on-going clinical trials of drugs, biologics, and device products. Sponsors are required to maintain the currency of the posting of the clinical trials posted on-line in the registry. This clinical trial registry and results data bank for clinical trials also contains summary results information on a clinical trial including adverse event information from the clinical trials and for pediatric post-market surveillance of a device product. The registry also provides information that helps patients find trials for which they might be eligible, enhance the design of clinical trials and prevent duplication of unsuccessful or unsafe trials, improve the evidence base that informs clinical care, increase the efficiency of drug and device development processes, improve clinical research practice, and build public trust in clinical research. These phases of testing may not be completed successfully within any specified period, if at all. Concurrent with clinical trials, companies usually complete additional animal trials and must also develop additional information about the chemistry and physical characteristics of the product candidate and finalize a process for manufacturing the product candidate in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

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Biologics License Applications

The results of preclinical studies and of the clinical trials, together with other detailed information, including extensive manufacturing information and information on the composition of the product, are submitted to the FDA in the form of a BLA requesting approval to market the product for one or more specified indications. The submission of a BLA must be accompanied by a substantial user fee unless a waiver applies, and is subject to a sixty day filing review period to determine if the application is substantially complete to permit substantive review. Given our current company size and likely growth over the next years prior to a BLA submission, we would likely submit for a waiver to the Prescription Drug User Fee Act (“PDUFA”) fees based on our company size and it being our first BLA.

Under the PDUFA, the FDA has a performance goal to review applications within 6 months for priority reviews or 10 months for standard reviews. The review timeline begins upon FDA’s acceptance of the original application submission for filing, no later than 60 calendar days from the date FDA receives the application. In some instances, the review process and the PDUFA goal date may be extended depending on the information required in order the FDA reviewers to complete their review of the BLA.

The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of a BLA if the applicable statutory and regulatory criteria are not satisfied, which may require additional clinical data or an additional Phase 3 clinical trial. Even if such data are submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret data. Moreover, even if a product receives approval, the approval may be significantly limited to specific disease and dosages or the indications for use may otherwise be limited or subject to Risk Evaluation and Mitigation Strategies, which could restrict the commercial value of the product. Once the FDA approves a BLA, or supplement thereto, the FDA may withdraw the approval if ongoing regulatory requirements are not met or if safety problems are identified after the product reaches the market. Where a withdrawal may not be appropriate, the FDA still may seize existing inventory of such product or require a recall of any biologic or drug already on the market. In addition, the FDA may require testing, including Phase 4 clinical trials and surveillance programs to monitor the effect of approved biologics which have been commercialized. The FDA has the authority to prevent or limit further marketing of a biologic or drug based on the results of these post-marketing programs.

Biologics may be marketed only for the FDA approved indications and in accordance with the provisions of the approved labeling. Further, if there are any modifications to the product, including changes in indications, labeling, or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new BLA or BLA supplement, which may require us to develop additional data or conduct additional preclinical studies and clinical trials.

Before approving a BLA, the FDA will inspect the facility or the facilities at which the finished biologic or drug product, and sometimes, for drug products, the active drug ingredient, is manufactured, and will not approve the product unless cGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assess their compliance and will not approve the product unless compliance with IND study requirements and GCP requirements is satisfactory.

The testing and approval processes require substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, or at all. Even if we believe a clinical trial has demonstrated safety and efficacy of one of our product candidates for the treatment of a disease, the results may not be satisfactory to the FDA. Preclinical and clinical data may be interpreted by the FDA in different ways, which could delay, limit or prevent regulatory approval. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals which could delay or preclude us from marketing drugs. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the biologic. After approval, certain changes to the approved product, such as adding new indications, manufacturing changes, or additional labeling claims are subject to further FDA review and approval. Depending on the nature of the change proposed, a BLA supplement must be filed and approved before the change may be implemented. For many proposed post-approval changes to a BLA, the FDA has up to 180 days to review the application. As with new BLAs, the review process is often significantly extended by the FDA requests for additional information or clarification.

In addition, prior to submitting a BLA for a new biologic, a sponsor may be able to take advantage of one or more FDA programs that are intended to facilitate and expedite development and review of new drugs to address unmet medical need in the treatment of a serious or life-threatening condition (e.g., priority review, fast track designation) provided the product meets the criteria for those programs.  While some of these programs have been in existence for a number of years, Congress established additional programs intended to expedite the development of drugs and biologics in the recently enacted 21st Century Cures Act (Cures Act), which was signed into law on December 13, 2016.  Notably with respect to gene therapy products, section 3012 of the Cures Act clarifies the authority of FDA to facilitate the development, review, and approval of “genetically targeted drugs” and “variant protein targeted drugs” to address an unmet medical need in one or more patient subgroups, including subgroups of patients with different mutations of a gene, with respect to rare diseases or conditions that are serious or life-threatening.  21st Century Cures Act Section 3033 also

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established a regenerative advanced therapy designation process intended to expedite the development of regenerative medicine therapies, defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies or products, except for those regulated solely under Section 361 of the Public Health Service Act and part 1271 of Title 21, Code of Federal Regulations, that are intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition, and for which preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or condition.

Other Regulatory Requirements

Any biologics manufactured or distributed by us or our collaborators pursuant to FDA approvals would be subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the product. Biologic and drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP, which impose certain procedural and documentation requirements upon us and our third party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a product from distribution or withdraw approval of the BLA for that biologic.

The FDA closely regulates the post-approval marketing and promotion of biologics and drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet.  Under FDA’s current interpretation of the relevant laws, in proactively promoting a drug, a company generally can make only those substantiated claims relating to safety and efficacy that are for indications approved by the FDA and that are otherwise consistent with the FDA-approved label for the drug or biologic. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, clinical hold, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated corrective advertising or communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.

Other Healthcare Laws and Regulations

If we obtain regulatory approval for any of our product candidates, we may also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

The federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

Federal false claims laws, including the False Claims Act and civil monetary penalty law, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;

 

Federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

The federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members;

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Health Insurance Portability and Accountability Act, as amended by Health Information Technology for Economic and Clinical Health Act, which governs and protects the security and privacy of individually identifiable health information of certain health plans, healthcare clearinghouses and healthcare providers, and their respective business associates that perform services for them involving individually identifiable health information; and

 

State and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers; state 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 and other potential referral sources; state 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 laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs, imprisonment, and additional reporting requirements and oversight if become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, recent events in the pharmaceutical and biotechnology industry generally have resulted in increased public and governmental scrutiny of the cost of drugs. In particular, U.S. federal prosecutors have issued subpoenas to pharmaceutical companies seeking information about drug pricing practices and the U.S. Senate is investigating several pharmaceutical companies relating to drug price increases and pricing practices. If we obtain regulatory approval of any of our product candidates, our revenue and future profitability could be negatively affected if these inquiries were to result in legislative or regulatory proposals that limit our ability to increase the prices of our products.

Coverage and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we obtain regulatory approval. In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of coverage and reimbursement from third-party payers. Third-party payers include government authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payer will provide coverage for a drug product may be separate from the process for setting the reimbursement rate that the payer will pay for the drug product. Third-party payers may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. Moreover, a payer’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. A number of gene therapy products have been approved over the past year by the FDA. Although the CMS subsequently approved its first method of coverage and reimbursement for one such product, the methodology has been subject to challenge by members of Congress. CMS’s decision as to coverage and reimbursement for one product does not mean that all similar products will be eligible for analogous coverage and reimbursement. As there is no uniform policy for coverage and reimbursement amongst third-party payors in the United States, even if CMS approves coverage and reimbursement for any of our product candidates, it is unclear what affect, if any, such a decision will have on our ability to obtain and maintain coverage and adequate reimbursement from other private payors.

Third-party payers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. In order to obtain coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. If third-party payers do not consider a product to be cost-effective compared to other available therapies, they may not cover the product after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit. The United States government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. By way of example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Affordable Care Act, contains provisions that may reduce the profitability of drug products, including, for example, increased the minimum rebates owed by manufacturers under the Medicaid Drug Rebate Program, extended the rebate program to individuals enrolled in Medicaid managed care plans, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are

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inhaled, infused, instilled, implanted or injected, and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals.  In addition, following the November 2016 Presidential election in the United States, significant uncertainty exists regarding the future of the Affordable Care Act.  It is possible that there will be legislation in the future either to amend or replace the Affordable Care Act and that such new legislation will be generally unfavorable toward the pharmaceutical and biotechnology industries (including with regard to a possible reduction in the number of insured individuals with access to drug coverage or additional measures aimed at high cost drug and biologic products).  At this time, it is unclear whether those changes will also have an impact on biologic product exclusivity or the biosimilar product licensure pathway established under the Biologics Price Competition and Innovation Act (BPCIA), which was enacted as part of the Affordable Care Act.

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

International Regulation

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

Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized, decentralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marking authorization that is valid for all European Union member states. The decentralized procedure includes selecting one reference member state (RMS), and submitting to more than one EU member state at the same time. The RMS National Competent Authority conducts a detailed review and prepares an assessment report, to which concerned member states provide comment. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marking authorization may submit an application to the remaining member states post-initial approval. Under the centralized procedure, within 120 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.

In addition to regulations in Europe and the United States, we or our collaborators will be subject to a variety of foreign regulations governing clinical trials and commercial distribution of our future drugs.

Environmental Regulation

We are subject to numerous foreign, federal, state and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions, product stewardship and end-of-life handling or disposition of products, and environmental protection, including those governing the generation, storage, handling, use, transportation and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. Although the costs to comply with applicable laws and regulations, including requirements in the European Union relating to the restriction of use of hazardous substances in products, have not been material, we cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.

Segment and Geographic Information

We operate and manage our business as one reporting and operating segment, which is the business of developing and commercializing gene therapeutics. Our chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance.

To date, we have not generated any revenue from product sales and our revenues are generated in the U.S. Substantially all of our non-monetary long-lived assets are located in the U.S.

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Employees

As of February 28, 2018, we had 78 full-time employees, including a total of 17 employees with M.D., DVM or Ph.D. degrees. Within our workforce, 56 employees are engaged in research and development and 22 in business development, finance, legal, human resources, facilities, information technology and general management and administration. None of our employees are represented by labor unions or covered by collective bargaining agreements.

Corporate and Available Information

We were incorporated in Delaware in 2006 under the name “Avalanche Biotechnologies, Inc.” We completed the initial public offering of our common stock in August 2014. On May 11, 2016, upon the completion of our acquisition of Annapurna Therapeutics SAS, we changed our name to “Adverum Biotechnologies, Inc.” Our common stock is currently listed on The Nasdaq Global Market under the symbol “ADVM” We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, and therefore we are subject to reduced public company reporting requirements.

Our principal executive offices are located at 1035 O’Brien Drive, Menlo Park, CA 94025, and our telephone number is (650) 272-6269. Our website address is www.adverum.com. We make available on our website, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. Further, a copy of this Annual Report on Form 10-K is located 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 can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The information found on our website is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.

 

 

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Item 1A. Risk Factors

You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. The risks described below are not the only risks facing the Company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Financial Position and Need for Capital

 

We have incurred significant operating losses since inception, and we expect to incur significant losses for the foreseeable future. We may never become profitable or, if achieved, be able to sustain profitability.

We have incurred significant operating losses since we were founded in 2006 and expect to incur significant losses for the foreseeable future as we continue development of our product candidates. As of December 31, 2017, we had an accumulated deficit of $254.1 million. Losses have resulted principally from costs incurred in our clinical trials for our prior wAMD product candidate, AVA-101, research and development programs and from our general and administrative expenses. In the future, we intend to continue to conduct research and development, clinical testing, regulatory compliance activities and, if any of our product candidates is approved, sales and marketing activities that, together with anticipated general and administrative expenses, will likely result in us incurring significant losses for the next several years.

We currently generate no revenue from sales, and we may never be able to commercialize any of our product candidates. We do not currently have the required approvals to market any of our product candidates, and we may never receive such approvals. We may not be profitable even if we or any of our future development partners succeed in commercializing any of our product candidates. Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

We expect that our cash and cash equivalents will be sufficient to fund our lead gene therapy programs through the end of 2019. If this expectation proves to be wrong, we may be forced to delay, limit or terminate certain of our development efforts.

As of December 31, 2017, our cash, cash equivalents and short-term investments were approximately $190.5 million. We currently expect this cash, cash equivalents and short-term investments, together with the net proceeds from our February 2018 underwritten public offering of our common stock, to fund our planned operations through the end of 2019. However, this estimate is based on a number of assumptions that may prove to be wrong, including our expectations about the timing of planned clinical trials, and changing circumstances beyond our control may cause capital to be consumed more rapidly than currently anticipated. As a result, our operating plan may change, and we may need to seek additional funds sooner than planned, through collaboration agreements and public or private financings. If we run low on capital before we are able to achieve meaningful clinical data for some or all of our lead product candidates, we may be unable to successfully raise additional funds, and, consequentially, may need to significantly curtail some or all of our development activities.

We will need to raise additional funding, which may not be available on acceptable terms, or at all. If we fail to obtain additional capital necessary to fund our operations, we will be unable to successfully develop and commercialize our product candidates.

We will require substantial future capital in order to complete the preclinical and clinical development for our product candidates and to potentially commercialize these product candidates. Any future clinical trials of our product candidates would cause an increase in our spending levels, as would other corporate activities. The amount and timing of any expenditure needed to implement our development and commercialization programs will depend on numerous factors, including:

 

the type, number, scope, progress, expansion costs, results of and timing of any future preclinical studies and clinical trials of any of our product candidates which we are pursuing or may choose to pursue in the future;

 

the need for, and the progress, costs and results of, any additional clinical trials or nonclinical studies of our product candidates we may initiate based on the results of any clinical trials that we may plan or discussions with the FDA, including any additional clinical trials or nonclinical studies the FDA or other regulatory agencies may require evaluating the safety of our product candidates;

 

the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;

 

the costs and timing of obtaining or maintaining manufacturing for our product candidates, including commercial manufacturing if any product candidate is approved;

 

the costs and timing of establishing sales and marketing capabilities and enhanced internal controls over financial reporting;

 

the terms and timing of establishing collaborations, license agreements and other partnerships;

 

costs associated with any new product candidates that we may develop, in-license or acquire;

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the effect of competing technological and market developments;

 

our ability to establish and maintain partnering arrangements for development; and

 

the costs associated with being a public company.

Some of these factors are outside of our control. We do not expect our existing capital resources to be sufficient to enable us to fund the completion of our clinical trials and remaining development program through commercial introduction. We expect that we will need to raise additional funds in the future.

We have not sold any products, and we do not expect to sell or derive revenue from any product sales for the foreseeable future. We may seek additional funding through collaboration agreements and public or private financings. Additional funding may not be available to us on acceptable terms or at all and the terms of any financing may adversely affect the holdings or the rights of our stockholders. In addition, the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.

If we are unable to obtain funding on a timely basis, we will be unable to complete any future clinical trials for our product candidates and we may be required to significantly curtail some or all of our activities. We also could be required to seek funds through arrangements with collaborative partners or otherwise that may require us to relinquish rights to our product candidates or some of our technologies or otherwise agree to terms unfavorable to us.

Risks Related to the Discovery and Development of Our Product Candidates

Our business will depend substantially on the success of one or more of ADVM-043, ADVM-053, and ADVM-022, our lead product candidates. If we are unable to develop, obtain regulatory approval for, or successfully commercialize, any or all of our lead product candidates, our business will be materially harmed.

Our lead product candidates are in the early stages of development and will require substantial clinical development and testing, manufacturing bridging studies, process validation and regulatory approval prior to commercialization. We are conducting the ADVANCE trial in patients with A1AT deficiency and we are continuing pre-clinical development of our other lead product candidates to support planned INDs in the second half of 2018. It is critical to our business to successfully develop and ultimately obtain regulatory approval for one or more of these lead product candidates. Our ability to commercialize our product candidates effectively will depend on several factors, including the following:

 

successful completion of preclinical studies and clinical trials, including the ability to demonstrate safety and efficacy of our lead product candidates;

 

receipt of marketing approvals for any future products for which we complete clinical trials, including securing regulatory exclusivity to the extent available;

 

establishing commercial manufacturing capabilities, for example, by making arrangements with third-party manufacturers that can provide adequate and quality products and services to support clinical development and the market demand for our product candidates, if approved;

 

successfully launching commercial sales of the product, whether alone or in collaboration with others;

 

acceptance of the product as a viable treatment option by patients, the medical community and third-party payers;

 

establishing market share while competing with other therapies;

 

a continued acceptable safety profile of our products following regulatory approval;

 

maintaining compliance with post-approval regulation and other requirements; and

 

qualifying for, identifying, registering, maintaining, enforcing and defending intellectual property rights and claims covering our product candidates.

If we, or our collaborators, do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to commercialize our product candidates, which would materially and adversely affect our business, financial condition, results of operations and prospects.

Moreover, of the large number of biologics and drugs in development in the pharmaceutical industry, only a small percentage result in the submission of a biologics license application (“BLA”) to the FDA and even fewer are approved for commercialization. Furthermore, even if we do receive regulatory approval to market any of our lead product candidates, any such approval may be subject to limitations on the indicated uses for which we may market the product, or limitations related to its distribution. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, there can be no assurance that any of our product candidates will be successfully developed or commercialized. If we decide to invest in the continued development and potential commercialization of any or all of our lead product candidates and we or any of our future development partners are unable to develop, or obtain regulatory approval for, or, if approved, successfully commercialize, such product candidates, we may not be able to generate sufficient revenue to continue our business.

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Our gene therapy platform is based on a novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.

We have concentrated our research and development efforts on our gene therapy platform and our future success depends on the successful development of product candidates based on this platform. There can be no assurance that any development problems we experience in the future related to our platform will not cause significant delays or unanticipated costs, or that such development problems can be solved. We may also experience delays in developing a sustainable, reproducible and scalable manufacturing process or transferring that process to commercial partners, which may prevent us from completing our clinical trials or commercializing our products on a timely or profitable basis, if at all.

In addition, the clinical trial requirements of the FDA, the European Medicines Agency (“EMA”) and other regulatory agencies and the criteria these regulators may use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or extensively studied pharmaceutical or other product candidates. The FDA recently approved its first vector-based human gene therapy product, LUXTURNATM (voretigene neparvovec-rzyl) for the treatment of patients with confirmed biallelic RPE65 mutation-associated retinal dystrophy.

Regulatory requirements governing gene and cell therapy products may change in the future. Gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from the National Institutes of Health (“NIH”) may also be subject to review by the NIH Office of Science Policy’s Recombinant DNA Advisory Committee (“RAC”). Although the FDA decides whether individual gene therapy protocols may proceed, the RAC review process can impede the initiation of a clinical trial, even if the FDA has reviewed the study and approved its initiation. Clinical trial sites in the U.S. that receive NIH funding for research involving recombinant or synthetic nucleic acid molecules are required to follow RAC recommendations, or risk losing NIH funding for such research or needing NIH pre-approval before conducting such research.

Conversely, the FDA can put an IND on clinical hold even if the RAC has provided a favorable review of the gene transfer protocol. Also, before a clinical study can begin at an NIH-funded institution, that entity’s institutional review board (“IRB”) and its Institutional Biosafety Committee will have to review the proposed clinical trial to assess the safety of the study. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the FDA or other regulatory bodies to change the requirements for human research on or approval of any of our product candidates.

These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these treatment candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we may be required to consult with these regulatory and advisory groups, and comply with applicable guidelines or recommendations. If we fail to do so, we may be required to delay or discontinue development of our product candidates. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue to maintain our business.

We may not be successful in our efforts to identify or discover additional product candidates.

The success of our business depends primarily upon our ability to identify, develop and commercialize products based on our platform. Our research programs, including those subject to our collaborations with Regeneron and Editas, may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

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, financial condition, results of operations, and prospects and could potentially cause us to cease operations. 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.

Except for our recently-initiated ADVANCE Phase 1/2 trial, we have not tested any of our internally-developed viral vectors or product candidates in clinical trials.

Drug development has inherent risk. Except for our ADVANCE Phase 1/2 trial, which was initiated in December 2017, none of our current product candidates has been evaluated in human clinical trials, and we may experience unexpected results in the future. We or any of our future development partners will be required to demonstrate through adequate and well-controlled clinical trials that our product candidates containing our proprietary vectors are safe and effective, with a favorable benefit-risk profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials.

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The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any of our future development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.

If our proprietary vectors are not shown to be safe and effective, we may not realize the value of our investment in our technology. In addition, success in pre-clinical studies or in early clinical trials does not mean that later clinical trials will be successful, because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through pre-clinical and initial clinical testing. Furthermore, any future trials will need to demonstrate sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, only a small percentage of products under development result in the submission of a BLA to the FDA and even fewer are approved for commercialization.

We cannot confirm that results from any clinical trials that we plan will be successful, and any safety concerns observed in any one of our clinical trials in our targeted indications could limit the prospects for regulatory approval of our product candidates in those and other indications.

Preliminary and interim data from our clinical trials that we may announce or publish from time to time may change as more patient data become available.

From time to time, we may announce or publish preliminary or interim data from our clinical trials. Preliminary and interim results of a clinical trial are not necessarily predictive of final results.

Preliminary and interim data are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues or further patient follow up occurs and more patient data become available. As a result, preliminary and interim data should be viewed with caution until the final data from a locked database are available. Material adverse changes in the final data compared to the interim data could significantly harm our business, prospects, financial condition and results of operations.

Our product candidates are subject to extensive regulation, compliance with which is costly and time consuming, and such regulation may cause unanticipated delays or prevent the receipt of the required approvals to commercialize our product candidates.

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of our product candidates are subject to extensive regulation by the FDA and by comparable regulatory authorities in foreign markets. In the U.S., we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved, as well as the target indications and patient population. Approval policies or regulations may change, and the regulatory authorities have substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

The FDA or comparable foreign regulatory authorities can delay, limit or deny approval of a product candidate for many reasons, including:

 

such authorities may disagree with the design or implementation of our or any of our future development partners’ clinical trials;

 

we or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication;

 

such authorities may not accept clinical data from trials which are conducted at multinational clinical facilities or in countries where the standard of care is potentially different from that of the U.S.;

 

the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;

 

we or any of our future development partners may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

such authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

approval may be granted only for indications that are significantly more limited than what we apply for and/or with other significant restrictions on distribution and use;

 

such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or any of our future development partners contract for clinical and commercial supplies; or

 

the approval policies or regulations of such authorities may significantly change in a manner rendering our or any of our future development partners’ clinical data insufficient for approval.

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With respect to foreign markets, approval procedures vary among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us or any of our future development partners from commercializing our product candidates.

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

We initiated the ADVANCE Phase 1/2 trial in patients with A1AT deficiency in December 2017. Identifying and qualifying subjects to participate in the ADVANCE trial and future planned clinical trials for ADVM-053 and ADVM-022 will be critical to our success. The timing of future clinical trials will depend on the speed at which we can recruit subjects to participate in future testing of these product candidates.

Subject enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. We will be required to identify and enroll a sufficient number of subjects with the relevant disease we are targeting for any future clinical trials for our product candidates. Potential subjects may not be adequately diagnosed or identified with the diseases which we are targeting or may not meet the entry criteria for our trials. We also may encounter difficulties in identifying and enrolling subjects with a stage of disease appropriate for such future clinical trials. We may not be able to identify, recruit and enroll a sufficient number of subjects, or those with required or desired characteristics to achieve diversity in a study.

In particular, ADVM-043 and ADVM-053 are designed to treat rare genetic disorders with limited patient pools from which to draw for clinical trials. ADVM-043 is focused on the treatment of patients with A1AT deficiency. It is estimated that A1AT deficiency affects approximately 100,000 individuals in the U.S.

ADVM-053 is focused on the treatment of patients with HAE. The prevalence of HAE is estimated to be 1 in 10,000 to 1 in 50,000, impacting approximately 8,000 individuals in the United States. Enrollment of eligible subjects with orphan diseases like A1AT and HAE may be limited or slower than we anticipate in light of the small subject populations involved. We plan to seek initial marketing approval of these product candidates in the U.S. and Europe and we may not be able to initiate clinical trials if we cannot enroll a sufficient number of eligible subjects to participate in the clinical trials required by the FDA or the EMA or other regulatory agencies. In addition, the process of finding and diagnosing subjects may prove costly.

Further, if patients are unwilling to participate in our gene therapy studies because of negative publicity from adverse events in the biotechnology or gene therapy industries or inadequate results in our preclinical studies or clinical trials or for other reasons, including competitive clinical trials for similar patient populations or available approved therapies, our recruitment of subjects, conduct of preclinical studies or clinical trials and ability to obtain regulatory approval of our product candidates may be hindered.

Trials using early versions of retroviral vectors, which integrate with, and thereby alter, the host cell’s DNA, have led to several well-publicized adverse events. For example, generalized public backlash developed against gene therapy following the death in September 1999 of an 18-year-old who had volunteered for a gene therapy experiment at the University of Pennsylvania. Researchers at the university had infused the volunteer’s liver with a gene aimed at reversing a rare metabolic disease of the liver. The procedure triggered an extreme immune-system reaction that caused multiple-organ failure in a very short time, leading to the first death to occur as a direct result of a gene therapy experiment. In addition, in 2003, 20 subjects treated for X-linked severe combined immunodeficiency in two gene therapy studies using a murine gamma-retroviral vector showed correction of the disease, but the studies were terminated after five subjects developed leukemia (four of whom were subsequently cured). The cause of these adverse events was shown to be insertional oncogenesis, which is the process whereby the corrected gene inserts near a gene that is important in a critical cellular process like growth or division, and this insertion results in the development of a cancer (often leukemia). Using molecular diagnostic techniques, it was determined that clones from these subjects showed retrovirus insertion in proximity to the promoter of the LMO2 proto-oncogene. Earlier generation retroviruses like the one used in these two trials have been shown to preferentially integrate in regulatory regions of genes that control cell growth.

If we have difficulty enrolling a sufficient number of patients to conduct clinical trials on our product candidates as planned, we may need to delay, limit or terminate future clinical trials, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

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We believe we have appropriately accounted for the above factors in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are correct or that we will not experience delays in enrollment, which would result in the delay of completion of such trials beyond our expected timelines.

The occurrence of serious complications or side effects in connection with use of our product candidates, either in preclinical studies or clinical trials or post-approval, could lead to discontinuation of our clinical development program, refusal of regulatory authorities to approve our product candidates or, post-approval, revocation of marketing authorizations or refusal to approve new indications, which could severely harm our business, prospects, financial condition and results of operations.

During the conduct of preclinical studies and clinical trials, subjects may experience changes in their health, including illnesses, injuries and discomforts. Often, it is not possible to determine whether or not the product candidate being studied caused these conditions. Various illnesses, injuries, and discomforts may be reported from time-to-time in clinical trials of our product candidates. It is possible that as we test our product candidates in larger, longer and more extensive clinical programs, or as use of these product candidates becomes more widespread if they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by patients. Many times, side effects are only detectable after investigational products are tested in large-scale, Phase 3 clinical trials or, in some cases, after they are made available to patients on a commercial scale after approval. If additional clinical experience indicates that any of our product candidates has side effects or causes serious or life-threatening side effects, the development of the product candidate may fail or be delayed, or, if the product candidate has received regulatory approval, such approval may be revoked, which would severely harm our business, prospects, financial condition and results of operations.

Our product candidates built on AAV vectors have similar risks to other gene therapy vectors, including inflammation, cytotoxic T-cell response, anti-AAV antibodies and immune response to the expressed transgene, such as T-cell responses and/or auto-antibodies against the expressed protein. Recent studies by third parties have also found that intravenous delivery of certain AAV vectors at very high doses may result in toxicity and that studies involving high doses of AAV vectors should be monitored carefully for such toxicity. In addition, patients given infusions of any protein may develop severe hypersensitivity reactions or infusion reactions. With respect to our product candidates that are being or may be studied in diseases of the eye, there are additional potential serious complications related to intravitreal injection to the eye. Serious complications or serious, unexpected side effects in connection with the use of our product candidates could materially harm our business, prospects, financial condition and results of operations.

Serious complications or serious, unexpected side effects in connection with the use of our product candidates could materially harm our business, prospects, financial condition and results of operations.

Risks Related to Our Reliance on Third Parties

We will rely on third parties to conduct our planned clinical trials. If these third parties do not meet our deadlines or otherwise conduct the trials as required, our clinical development programs could be delayed or unsuccessful and we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We are dependent on third parties to conduct preclinical studies and clinical trials for our product candidates, and, therefore, the timing of the initiation and completion of these studies or trials is controlled by such third parties and may occur at times substantially different from our estimates. Specifically, we use clinical research organizations (“CROs”) to conduct our clinical trials and we rely on medical institutions, clinical investigators, CROs and consultants to conduct our trials in accordance with our clinical protocols and regulatory requirements. Our CROs, investigators and other third parties play a significant role in the conduct of these trials and subsequent collection and analysis of data.

There is no guarantee that any CROs, investigators or other third parties on which we rely for administration and conduct of our clinical trials will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fails to meet expected deadlines, fails to adhere to our clinical protocols, fails to meet regulatory requirements, or otherwise performs in a substandard manner, our clinical trials may be extended, delayed or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in our ongoing clinical trials unless we are able to transfer those subjects to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected the interpretation of the study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any BLA we submit to the FDA. Any such delay or rejection could prevent us from commercializing our product candidates.

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We have relied, and expect to continue to rely, on third parties to conduct some or all aspects of our vector production, product manufacturing, protocol development, research and preclinical and clinical testing, and these third parties may not perform satisfactorily.

We do not expect to independently conduct all aspects of our vector production, product manufacturing, protocol development, research and preclinical and clinical testing. We currently rely, and expect to continue to rely, on third parties with respect to these items.

Any of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it could delay our product development activities. Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibility to ensure compliance with all required regulations and study protocols. If any of these third parties on which we rely do not perform satisfactorily, we will remain responsible for ensuring that each of our IND-enabling studies and clinical trials are conducted in accordance with the study plan and protocols.

These third parties may not successfully carry out their contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols. For example, on December 6, 2016, we delivered a notice to the appropriate persons at Cornell University of our intent to terminate our Amended and Restated Master Services Agreement for breach as a result of Cornell University’s failure to deliver suitable materials for use in our clinical trials of ADVM-043. If third parties breach their contractual obligations to us, we may not be able to complete, or may be delayed in completing, the preclinical studies and clinical trials required to support future IND submissions, development work, and approval of our product candidates.

Reliance on third-party manufacturers also entails risks to which we would not be subject to if we manufactured the product candidates ourselves, including:

 

the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;

 

reduced control as a result of using third-party manufacturers for all aspects of manufacturing activities;

 

termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us; and

 

disruptions to the operations of our third-party manufacturers or suppliers caused by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier.

Any of these events could lead to clinical study delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize future products.

We and our contract manufacturers are subject to significant regulation with respect to manufacturing our products. The manufacturing facilities on which we rely may not continue to meet regulatory requirements and may have limited capacity.

We currently have relationships with limited number of suppliers for the manufacturing of our viral vectors and product candidates. Our suppliers may require licenses to manufacture such components if such processes are not owned by the suppliers or in the public domain and we may be unable to transfer or sublicense the intellectual property rights we may have with respect to such activities. All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contract manufacturer for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with the FDA’s current Good Manufacturing Practices (“cGMP”). These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of a BLA on a timely basis and must adhere to the FDA’s current Good Laboratory Practice regulations and cGMP regulations enforced by the FDA through its facilities inspection program. Our contract manufacturers have not produced a commercially-approved product and therefore have not obtained the requisite FDA approvals to do so. Our facilities and quality systems and the facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our product candidates or any of our other potential products. In addition, the regulatory authorities may, at any time, audit or inspect our manufacturing facilities or those of our third-party contractors involved with the preparation of our product candidates or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If the facility does not pass a pre-approval plant inspection, FDA approval of the products will not be granted.

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The regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities or those of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Such violations could also result in civil and/or criminal penalties. Any such remedial measures or other civil and/or criminal penalties imposed upon us or third parties with whom we contract could materially harm our business.

If we or our third-party manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or biologic product, revocation of a pre-existing approval, other civil or criminal penalties or closing one or more manufacturing facilities. As a result, our business, financial condition and results of operations may be materially harmed.

Additionally, if supply from an approved manufacturer is interrupted, there could be a significant disruption in commercial supply. An alternative manufacturer would need to be qualified through a BLA supplement which could result in further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements, and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical trials may be delayed or we could lose potential revenue.

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 research and develop 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 independent 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, financial conditions, results of operations and prospects.

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 could impair our competitive position and have an adverse impact on our business, financial condition, results of operations and prospects.

Risks Related to Commercialization of Our Product Candidates

Any termination or suspension of, or delays in the commencement or completion of, clinical trials for our product candidates could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.

Before we can initiate clinical trials in the U.S. for our product candidates, we need to submit the results of preclinical testing to the FDA, along with other information including information about product candidate chemistry, manufacturing and controls and our proposed clinical trial protocol, as part of an IND. We may rely in part on preclinical, clinical and quality data generated by CROs and other third parties for regulatory submissions for our product candidates. If these third parties do not make timely regulatory submissions for our product candidates, it will delay our plans for our clinical trials. If those third parties do not make this data available to us, we will likely have to develop all necessary preclinical and clinical data on our own, which will lead to significant delays and increase development costs of the product candidate. In addition, the FDA may require us to conduct additional preclinical

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testing for any product candidate before it allows us to initiate clinical testing under any IND, which may lead to additional delays and increase the costs of our preclinical development. Delays with any regulatory body or agency may significantly affect our product development timeline. Delays in the commencement or completion of any clinical trials that we plan for our product candidates could significantly affect our product development costs. We do not know whether any trials that we plan will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

 

the FDA failing to grant permission to proceed or placing the clinical trial on hold;

 

subjects failing to enroll or remain in our trial at the rate we expect;

 

subjects choosing an alternative treatment for the indication for which we are developing our product candidates, or participating in competing clinical trials;

 

lack of adequate funding to continue the clinical trial;

 

subjects experiencing severe or unexpected drug-related adverse effects;

 

a facility manufacturing any of our product candidates or any of their components being ordered by the FDA or other government or regulatory authorities to temporarily or permanently shut down due to violations of cGMP or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;

 

any changes to our manufacturing process that may be necessary or desired;

 

third-party clinical investigators losing the licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, Good Clinical Practice or regulatory requirements or other third parties not performing data collection or analysis in a timely or accurate manner;

 

inspections of clinical trial sites by the FDA or the finding of regulatory violations by the FDA or an IRB that require us to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire trial or that prohibit us from using some or all of the data in support of our marketing applications;

 

third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications; or

 

one or more IRBs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing its approval of the trial.

Product development costs will increase if we have delays in testing or approval of any of our product candidates, or if we need to perform more or larger clinical trials than planned. Additionally, changes in regulatory requirements and policies may occur, and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of our clinical trials, or if we, the FDA or other regulatory authorities, the IRB, other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials, the commercial prospects for a product candidate may be harmed and our ability to generate product revenue will be delayed. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. If we make manufacturing or formulation changes to our product candidates, we may need to conduct additional studies to bridge our modified product candidates to earlier versions. Further, if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.

If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our products may be delayed and, as a result, our stock price may decline.

From time to time, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of, or the availability of data from, scientific studies and clinical trials and the submission of regulatory filings. From time to time, we may publicly announce the expected timing of some of these milestones. All of these milestones will be based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our stock price may decline.

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Final marketing approval for our product candidates by the FDA or other regulatory authorities for commercial use may be delayed, limited or denied, any of which would adversely affect our ability to generate operating revenue.

After the completion of our clinical trials and, assuming the results of the trials are successful, the submission of a BLA, we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates, and we cannot, therefore, predict the timing of any future revenue. We cannot commercialize our product candidates until the appropriate regulatory authorities have reviewed and approved the applicable applications. We cannot assure you that the regulatory agencies will complete their review processes in a timely manner or that we will obtain regulatory approval for our product candidates. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. If marketing approval for any product candidate is delayed, limited or denied, our ability to market the product candidate, and our ability to generate product sales, would be adversely affected.

Even if we obtain marketing approval for any of our product candidates, they could be subject to restrictions or withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.

Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product’s indicated uses, marketing or distribution or impose ongoing requirements for potentially costly and time consuming post-approval studies, post-market surveillance or clinical trials. Following approval, if at all, of any of our product candidates, such candidate will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requesting recall or withdrawal of the product from the market or suspension of manufacturing.

If we or the manufacturing facilities for any product candidate that may receive regulatory approval fail to comply with applicable regulatory requirements, a regulatory agency may:

 

issue warning letters or untitled letters;

 

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

 

suspend or withdraw regulatory approval;

 

suspend any ongoing clinical trials;

 

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

 

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

 

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

The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue. The FDA has the authority to require a risk evaluation and mitigation strategy plan as part of a BLA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry.

In addition, if any of our product candidates is approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for a product candidate, physicians may nevertheless prescribe it to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. 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 sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

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Even if we receive regulatory approval we still may not be able to successfully commercialize any of our product candidates, and the revenue that we generate from its sales, if any, could be limited.

Even if any of our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payers or the medical community. Coverage and reimbursement of our product candidates by third-party payers, including government payers, is also generally necessary for commercial success. The degree of market acceptance of our product candidates will depend on a number of factors, including:

 

demonstration of clinical efficacy and safety compared to other more-established products;

 

the limitation of our targeted patient population and other limitations or warnings contained in any FDA-approved labeling;

 

acceptance of new therapeutic options by health care providers and their patients;

 

the prevalence and severity of any adverse effects;

 

new procedures or methods of treatment that may be more effective in treating or may reduce the incidences of wAMD, A1AT deficiency, HAE or other conditions for which our products are intended to treat;

 

pricing and cost-effectiveness;

 

the effectiveness of our or any future collaborators’ sales and marketing strategies;

 

our ability to obtain and maintain sufficient third-party coverage and reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payers;

 

unfavorable publicity relating to the product candidate; and

 

the willingness of patients to pay out-of-pocket in the absence of third-party coverage and reimbursement.

If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payers or patients, we may not generate sufficient revenue from that product candidate and may not become or remain profitable. Our efforts to educate the medical community and third-party payers on the benefits of such a product candidate may require significant resources and may never be successful. In addition, our ability to successfully commercialize any of our product candidates will depend on our ability to manufacture our products, differentiate our products from competing products and defend and enforce our intellectual property rights relating to our products.

If the market for the treatment of wAMD is smaller than we believe it is, our future revenue may be adversely affected, and our business may suffer.

We are advancing the development of ADVM-022 for the treatment of wAMD, a disease we believe to be the most common cause of vision loss in adults over the age of 50 in developed countries. If the size of the market for wAMD is smaller than we anticipate, we may not be able to achieve profitability and growth. Our projections of the number of people who have wAMD, as well as the subset of people with these diseases who have the potential to benefit from treatment with wAMD, are based on estimates. These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient foundations and market research and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be lower than expected. The effort to identify patients with diseases we seek to treat is in early stages, and we cannot accurately predict the number of patients for whom treatment might be possible. Additionally, the potentially addressable patient population may be limited or may not be amenable to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business.

Because the target patient populations of ADVM-043 and ADVM-053 are relatively small, we must be able to successfully identify patients and achieve a significant market share to maintain profitability and growth. If the market opportunities for these product candidates are smaller than we believe they are, our future revenue may be adversely affected, and our business may suffer.

ADVM-043 and ADVM-053 are designed to treat rare genetic diseases. ADVM-043 is designed to treat A1AT deficiency, which impacts approximately 100,000 individuals in the U.S. ADVM-053 is designed to treat HAE, which impacts approximately 8,000 individuals in the U.S. Our estimates of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with these product candidates, may prove to be incorrect. The number of patients in the U.S. and elsewhere may turn out to be lower than expected, may not be otherwise amenable to treatment with these products, or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business. Further, even if we obtain significant market share for our product candidates, because the potential target populations are very small, we may never achieve profitability despite obtaining such significant market share.

Additionally, because the target patient populations for these product candidates are relatively small, the pricing and reimbursement of these product candidates, if approved, must be adequate to support commercial infrastructure. If we are unable to obtain adequate levels of reimbursement, our ability to successfully market and sell these product candidates will be adversely affected. The manner and level at which reimbursement is provided for services related to these product candidates (e.g., for administration of such product to patients) is also important. Inadequate reimbursement for such services may lead to physician resistance and adversely affect our ability to market or sell these products.

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We may be unable to obtain orphan drug designation or exclusivity for ADVM-043, ADVM-053 or certain of our other product candidates. If our competitors are able to obtain orphan drug exclusivity for products that constitute the same drug and treat the same indications as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.

Regulatory authorities in some jurisdictions, including the U.S. and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is defined under the Food, Drug and Cosmetic Act as having a patient population of fewer than 200,000 individuals in the U.S., or a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the U.S. In the European Union, following the opinion of the EMA’s Committee for Orphan Medicinal Products, the European Commission grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union. Additionally, orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biologic product.

Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the European Commission from approving another marketing application for a product that constitutes the same drug treating the same indication for that marketing exclusivity period, except in limited circumstances. If another sponsor receives such approval before we do (regardless of our orphan drug designation), we will be precluded from receiving marketing approval for our product for the applicable exclusivity period. The applicable period is seven years in the U.S. and 10 years in the European Union. The exclusivity period in the U.S. can be extended by six months if the BLA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The exclusivity period in the European Union can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be revoked if any regulatory agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

We intend to request orphan drug designation for ADVM-043, ADVM-053 or any of our other product candidates that we believe could qualify, but there can be no assurances that the FDA or the European Commission will grant any of such requests. Additionally, the designation of any of our product candidates as an orphan product does not guarantee that any regulatory agency will accelerate regulatory review of, or ultimately approve, that product candidate, nor does it limit the ability of any regulatory agency to grant orphan drug designation to product candidates of other companies that treat the same indications as our product candidates prior to our product candidates receiving exclusive marketing approval.

Even if we obtain orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same condition. In the U.S., even after an orphan drug is approved, the FDA may subsequently approve another drug for the same condition if the FDA concludes that the latter drug is not the same drug as the first or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care as compared to the first. In the European Union, marketing authorization may be granted to a similar medicinal product for the same orphan indication if:

 

the second applicant can establish in its application that its medicinal product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior;

 

the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or

 

the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of orphan medicinal product.

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 product candidates profitably.

Market acceptance and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payers for any of our product candidates and may be affected by existing and future health care reform measures. Government authorities and third-party payers, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Reimbursement by a third-party payer may depend upon a number of factors including the third-party payer’s determination that use of a product candidate is:

 

a covered benefit under its health plan;

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safe, effective and medically necessary;

 

appropriate for the specific patient;

 

cost-effective; and

 

neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product candidate from a government or other third-party payer is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of the applicable product candidate to the payer. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. While there is no uniform coverage and reimbursement policy among payers in the United States, private payers often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Further, reimbursement amounts may reduce the demand for, or the price of, our product candidates. If reimbursement is not available or is available only in limited levels, we may not be able to commercialize certain of our product candidates profitably, or at all, even if approved.

A number of gene therapy products have been approved over the past year by the FDA. Although the U.S. Center for Medicare & Medicaid Services (“CMS”) subsequently approved its first method of coverage and reimbursement for one such product, the methodology has been subject to challenge by members of Congress. CMS’s decision as to coverage and reimbursement for one product does not mean that all similar products will be eligible for analogous coverage and reimbursement. As there is no uniform policy for coverage and reimbursement amongst third-party payors in the United States, even if CMS approves coverage and reimbursement for any of our product candidates, it is unclear what affect, if any, such a decision will have on our ability to obtain and maintain coverage and adequate reimbursement from other private payors.

As a result of legislative proposals and the trend toward managed health care in the U.S., third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. By way of example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, was enacted with a goal of reducing the cost of healthcare and substantially changing the way healthcare is financed by both government and private insurers. The Affordable Care Act, among other things, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, extended the rebate program to individuals enrolled in Medicaid managed care organizations and established annual fees and taxes on manufacturers of certain prescription drugs.

Some of the provisions of the Affordable Care Act have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay, circumvent or loosen the implementation of certain provisions requirements mandated by the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 23, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Congress may consider other legislation to repeal or replace elements of the Affordable Care Act.

Other legislative changes have also been proposed and adopted in the U.S. since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This included aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will stay in effect through 2024 unless additional Congressional action is taken.

These cost reduction initiatives could decrease the coverage and reimbursement that we receive for any approved products, and could seriously harm our business. We expect that additional healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal, state and foreign governments will pay for healthcare products and services, which could result in reduced demand for our products, if approved, or additional pricing pressures.

Recently there has been heightened governmental scrutiny over pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level,

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Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of health care may adversely affect:

 

the demand for any product candidates for which we may obtain regulatory approval;

 

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

 

our ability to generate revenue and achieve or maintain profitability;

 

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

 

the availability of capital.

Due to the novel nature of our technology and the potential for our product candidates to offer therapeutic benefit in a single administration, we face uncertainty related to pricing and reimbursement for these product candidates.

Our product candidates are designed to provide potential therapeutic benefit after a single administration and, therefore, the pricing and reimbursement of our product candidates, if approved, must be adequate to support commercial infrastructure. If we are unable to obtain adequate levels of reimbursement, our ability to successfully market and sell our product candidates will be adversely affected. The manner and level at which reimbursement is provided for services related to our product candidates (e.g., for administration of our product to patients) is also important. Inadequate reimbursement for such services may lead to physician resistance and adversely affect our ability to market or sell our products.

We are subject to many manufacturing risks, any of which could substantially increase our costs and limit supply of our products. The process of manufacturing our products is complex, highly regulated and subject to several risks, including:

 

The manufacturing of biologics is extremely susceptible to product loss due to contamination, equipment failure, improper installation or operation of equipment or vendor or operator error. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our products or in the manufacturing facility in which our products are made, such manufacturing facility may need to be closed for an extended period of time to investigate and remedy the contamination.

 

The manufacturing facilities in which our products are made could be adversely affected by equipment failures, labor shortages, contaminants, raw materials shortages, natural disasters, power failures and numerous other factors.

 

We and our contract manufacturers must comply with the FDA’s cGMP regulations and guidelines. We and our contract manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. We and our contract manufacturers are subject to inspections by the FDA and comparable agencies in other jurisdictions to confirm compliance with applicable regulatory requirements. Any failure to follow cGMP or other regulatory requirements or any delay, interruption or other issues that arise in the manufacture, fill-finish, packaging or storage of our products as a result of a failure of our facilities or the facilities or operations of third parties to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop and commercialize our products. This may lead to significant delays in the availability of products for our clinical trials or the termination or hold on a clinical trial, or the delay or prevention of a filing or approval of marketing applications for our product candidates. Significant noncompliance could also result in the imposition of sanctions, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could be costly and damage our reputation. If we are not able to maintain regulatory compliance, we may not be permitted to market our products and/or may be subject to product recalls, seizures, injunctions or criminal prosecution.

 

Our product candidates are biologics and require processing steps that are more complex than those required for most chemical pharmaceuticals. Moreover, unlike chemical pharmaceuticals, the physical and chemical properties of a biologic such as our product candidates generally cannot be adequately characterized prior to manufacturing the final product. As a result, an assay of the finished product is not sufficient to ensure that the product will perform in the intended manner. Accordingly, we expect to employ multiple steps to attempt to control our manufacturing process to assure that the process works and the product or product candidate is made strictly and consistently in compliance with the process.

 

Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient inventory.

 

Some of the raw materials required in our manufacturing process are derived from biological sources. Such raw materials are difficult to procure and may also be subject to contamination or recall. A material shortage, contamination, recall or

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restriction on the use of biologically derived substances in the manufacture of our product candidates could adversely impact or disrupt commercialization.

 

Any adverse developments affecting manufacturing operations for our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. We may encounter problems achieving adequate or clinical-grade materials that meet FDA, EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.

We may not be successful in establishing and maintaining development or other strategic collaborations, which could adversely affect our ability to develop and commercialize product candidates and receive potential milestone payments.

We have entered into development or other strategic collaborations with major biotechnology or pharmaceutical companies. For example, our research collaboration and license agreement with Regeneron, which was announced in May 2014, covers up to eight distinct therapeutic targets, in which we could earn up to $80.0 million in development and regulatory milestones for product candidates directed toward each therapeutic target, for a combined total of up to $640.0 million in potential milestone payments for product candidates directed toward all eight therapeutic targets, and low- to mid-single digit royalties on worldwide net sales of collaboration product candidates. For any two therapeutic targets, we have an option to share up to 35% of the worldwide product candidate development costs and profits. Additionally, in August 2016, we entered into a collaboration, option and license agreement with Editas Medicine, pursuant to which we and Editas will collaborate on certain studies using AAV vectors in connection with Editas’ genome editing technology and we will grant to Editas an exclusive option to obtain certain exclusive rights to use our proprietary vectors in up to five ophthalmic indications. If Editas elects to develop a product using certain of our proprietary vectors, we will be eligible to receive up to $5.5 million in development milestone payments and $10.0 million in commercialization milestone payments for such product, and tiered royalties between the mid-single digits and low teens on net sales of such product, subject to certain adjustments.

Research activities under our collaboration agreements are subject to mutually agreed-on research plans and budgets, and if we and our strategic partners are unable to agree on the research plan or research budget in a timely fashion or at all, performance of research activities will be delayed. In addition, some of our strategic partners may terminate any agreements they enter into with us or allow such agreements to expire by their terms. Furthermore, our strategic partners have negotiated for certain rights to control decisions regarding the development and commercialization of our product candidates, if approved, and may not conduct those activities in the same manner as we do.

Moreover, if we fail to maintain development or other strategic collaborations related to our product candidates that we may choose to enter into:

 

the development of certain of our current or future product candidates may be terminated or delayed;

 

our cash expenditures related to development of certain of our current or future product candidates would increase significantly, and we may need to seek additional financing;

 

we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted; and

 

we will bear all of the risk related to the development of any such product candidates.

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

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business, including for the continued development or commercialization of our product candidates. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because third parties may view the risk of failure in future clinical trials as too significant or the commercial opportunity for our product candidate as too limited. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Even if we are successful in our efforts to establish development partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain such development partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into development partnership agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market.

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If our competitors develop treatments for the target indications of our product candidates that are approved more quickly than ours, marketed more successfully or demonstrated to be safer or more effective than our product candidates, our commercial opportunity will be reduced or eliminated.

We operate in highly competitive segments of the biopharmaceutical markets. We face competition from many different sources, including larger and better-funded pharmaceutical, specialty pharmaceutical, biotechnology and gene therapy companies, as well as from academic institutions, government agencies and private and public research institutions. Our product candidates, if successfully developed and approved, will compete with established therapies as well as with new treatments that may be introduced by our competitors. There are a variety of drug candidates and gene therapies in development or being commercialized by our competitors for the indications that we intend to test. Many of our competitors have significantly greater financial, product candidate development, manufacturing and marketing resources than we do. Large pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, universities and private and public research institutes may be active in our target disease areas, and some could be in direct competition with us. We also may compete with these organizations to recruit management, scientists and clinical development personnel. We will also face competition from these third parties in establishing clinical trial sites, registering subjects for clinical trials and in identifying and in-licensing new product candidates. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

 

New developments, including the development of other biotechnology and vectorology technologies and methods of treating disease, occur in the pharmaceutical, biotechnology and gene therapy industries at a rapid pace. Developments by competitors may render our product candidates obsolete or noncompetitive. Competition in drug development is intense. We anticipate that we will face intense and increasing competition as new treatments enter the market and advanced technologies become available.

Even if we obtain regulatory approval for our product candidates, the availability and price of our competitors’ products could limit the demand, and the price we are able to charge, for our product candidates. For example, EYLEA is currently available in the U.S. for treatment of wAMD and macular edema following central retinal vein occlusion (“CRVO”), and in the United Kingdom, Germany, Switzerland, Australia, Japan and certain other countries for the treatment of wAMD. Additionally, marketing approval has been obtained in the EU for EYLEA for the treatment of visual impairment due to macular edema secondary to CRVO. We will not achieve our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug products or choose to reserve our product candidates for use in limited circumstances. Our inability to compete with existing or subsequently introduced drug products or other therapies would have a material adverse impact on our business, prospects, financial condition and results of operations.

Our potential competitors in these diseases may be developing novel immune modulating therapies that may be safer or more effective than our product candidates, including ADVM-022. For example, if we continue clinical development of, and seek to commercialize, ADVM-022, it will compete with a variety of therapies currently marketed and in development for wAMD, using therapeutic modalities such as biologics, small molecules and gene therapy. Lucentis, EYLEA and Avastin are anti-VEGF therapies that are well established and widely accepted by physicians, patients and third-party payers as the standard of care for the treatment of wAMD. There are several other companies with marketed products or products in development for the treatment of wAMD, including Alcon, Allergan, Allegro Ophthalmics, LLC, Apellis Pharmaceuticals, Applied Genetic Technologies Corporation, Bayer, Hoffmann-La Roche Ltd., Iconic Therapeutics, Inc., Neurotech Pharmaceuticals, Inc., Novartis, Ocular Therapeutix, Inc., Ohr Pharmaceuticals, Inc., Ophthotech Corporation, Opthea Ltd., PanOptica Pharma, Genentech, SciFluor Life Science, LLC, Regeneron Pharmaceuticals, Inc., REGENXBIO Biosciences LLC, and Valeant Pharmaceuticals North America LLC.

For the treatment of A1AT deficiency and HAE, we know of a number of products currently in development that aim to reduce the frequency of injection, improve the route of administration, and deliver better efficacy compared to the standard-of-care treatments available today. There are several companies with products for A1AT deficiency in clinical development, including Applied Genetic Technologies Corporation and Kamada Ltd. For the treatment of HAE, there are several companies with products in clinical development, including CSL Behring, Biocryst Pharmaceuticals Inc., Ionis Pharmaceuticals, Inc., and Shire.

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

We have no internal sales, marketing or distribution capabilities. If any of our product candidates ultimately receive regulatory approval, we may not be able to effectively market and distribute the product candidate. We may 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 our product candidates will be approved, if at all. 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 revenue generated by any product candidates that we may develop, in-license or acquire; and

 

our direct sales and marketing efforts may not be successful.

Governments may impose price controls, which may adversely affect our future profitability.

We intend to seek approval to market our product candidates in both the U.S. and in foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product candidates. In some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

Risks Related to Our Business Operations

Negative public opinion and increased regulatory scrutiny of gene therapy and genetic research may damage public perception of our product candidates or adversely affect our ability to conduct our business or obtain marketing approvals for our product candidates.

Public perception may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. In particular, our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing symptomatic treatments they are already familiar with and for which greater clinical data may be available.

More restrictive government regulations or negative public opinion would have a negative effect on our business or financial condition and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop. For example, in 2003, trials using early versions of murine gamma-retroviral vectors, which integrate with, and thereby alter, the host cell’s DNA, have led to several well-publicized adverse events, including reported cases of leukemia. Although none of our current product candidates utilize murine gamma-retroviral vectors, our product candidates use a viral delivery system. Adverse events in our clinical trials, even if not ultimately attributable to our product candidates, and the resulting publicity could result in increased governmental regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates. Although none of our current product candidates utilize the gamma-retroviruses used in the 2003 studies, our product candidates do use a viral vector delivery system. The risk of cancer remains a concern for gene therapy and we cannot assure that it will not occur in any of our future clinical trials. In addition, there is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biological activity of the genetic material or other components of products used to carry the genetic material.

Adverse events in trials or studies conducted by us or other parties, in particular involving the same or similar AAVs to the ones we are using, even if not ultimately attributable to our product candidates, and resulting publicity, could result in increased governmental regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our potential product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates. If any such adverse events occur, development and commercialization of our product candidates or advancement of any potential clinical trials could be halted or delayed, which would have a material adverse effect on our business and operations.

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We are dependent on the services of our key executives and scientific staff, and if we are not able to retain these members of our management or recruit additional management, clinical and scientific personnel, our business will suffer.

We are dependent on the principal members of our management and scientific staff. The loss of service of any of our management could harm our business. In addition, we are dependent on our continued ability to attract, retain and motivate highly qualified additional management, clinical and scientific personnel. If we are not able to retain our management, and to attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow. Although we have executed employment agreements with each member of our current executive management team, these agreements are terminable at will with or without notice and, therefore, we may not be able to retain their services as expected.

We will need to expand and effectively manage our managerial, operational, financial, and other resources in order to successfully pursue our development and commercialization efforts. Our success also depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco Bay Area. Our industry has experienced a high rate of turnover of management and scientific personnel in recent years. If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

Additionally, we do not currently maintain “key person” life insurance on the lives of our executives or any of our employees. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.

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

We had 78 full-time employees as of February 28, 2018. We will need to grow our organization, or certain functions within our organization, substantially to continue development and pursue the potential commercialization of our product candidates, as well as function as a public company. As we seek to advance our product candidates, we may need to expand our financial, 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 and require us to retain or otherwise manage additional internal capabilities. 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 any additional management, clinical and regulatory, financial, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to so accomplish could prevent us from successfully growing our company.

If we fail to comply with applicable state and federal healthcare laws, we may be subject to civil or criminal penalties and/or exclusion from federal and/or healthcare programs.

In addition to FDA restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include anti-kickback, false claims, physician payment transparency and privacy and security laws and regulations. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formula managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Many states have similar laws that apply to their state health care programs as well as private payers.

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The federal Health Insurance Portability and Accountability Act of 1996 (“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 payers, 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. The Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal statute governing healthcare fraud statutes. 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.

Additionally, federal false claims laws and the civil monetary penalty law, including the False Claims Act, prohibits knowingly presenting or causing the presentation of a false, fictitious or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in significant monetary penalties and treble damages. The federal government is using the False Claims Act, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and biotechnology companies throughout the country, for example, in connection with the promotion of products for unapproved uses and other sales and marketing practices. The government has obtained multi-million and multi-billion dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The Affordable Care Act, among other things, imposes new reporting requirements on drug manufacturers, under the federal Physician Payments Sunshine Act, for payments made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $0.2 million per year (or up to an aggregate of $1.0 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Certain states also mandate implementation of commercial compliance programs, impose restrictions on drug manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians.

In the course of conducting our business, we may also obtain individually identifiable patient health information including retinal scans from subjects participating in our clinical trials. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), imposes, among other things, certain standards relating to the privacy, security, transmission and breach reporting of individually identifiable health information, upon certain health plans, healthcare clearinghouses and healthcare providers, and their respective business associates that perform services for them involving individually identifiable health information. In the event we are subject to HIPAA, and fail to properly maintain the privacy and security of certain individually identifiable health information, or we are responsible for an inadvertent disclosure or security breach of such individually identifiable health information, we could be subject to enforcement measures, including civil and criminal penalties and fines for violations of state and federal privacy or security standards, such as HIPAA and HITECH, and their respective implementing regulations. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. HIPAA, HITECH and comparable state laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. Any liability from failure to comply with the requirements of these laws, to the extent such requirements are deemed to apply to our operations, could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations.

The need to build and maintain a robust compliance program with different compliance and/or reporting requirements increases the possibility that a healthcare company may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs, imprisonment, and additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, any of which could adversely affect our ability to operate our business and our financial results.

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We and our development partners, third-party manufacturer 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 manufacturer 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 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.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our other 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 our product candidates. For example, we may be sued if our product candidates allegedly caused or cause injury or are 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 candidate, 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 or cease the 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:

 

decreased demand for our product candidates;

 

injury to our reputation;

 

withdrawal of clinical trial participants;

 

costs to defend the related litigation;

 

a diversion of management’s time and our resources;

 

substantial monetary awards to trial participants or patients;

 

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

 

loss of revenue;

 

the inability to commercialize our product candidates; and

 

a decline in our stock price.

We currently hold $5.0 million in product liability insurance, which may not adequately cover all liabilities that we may incur. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our inability 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 our product candidates. Although we plan to 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 will also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

We and any of our future development partners will be required to report to regulatory authorities if any of our approved products cause or contribute to adverse medical events, and any failure to do so would result in sanctions that would materially harm our business.

If we and any of our future development partners or CROs are successful in commercializing our products, the FDA and foreign regulatory authorities would require that we and any of our future development partners report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We and any of our future development partners may fail to report adverse events we become aware of within the prescribed timeframe. We and any of our

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future development partners may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we and any of our future development partners fail to comply with our or their reporting obligations, the FDA or a foreign regulatory authority could take action, including criminal prosecution, the imposition of civil monetary penalties, and seizure of our products or delay in approval or clearance of future products.

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

In the ordinary course of our business, we, our CROs, and other third parties on which we rely collect and store sensitive data, including legally protected patient health information, personally identifiable information about our employees, intellectual property, and proprietary business information. We manage and maintain our applications and data utilizing on-site systems. These applications and data encompass a wide variety of business critical information including research and development information and business and financial information.

The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Despite the implementation of security measures to protect against unauthorized access or disclosure, our internal computer systems and those of our current and any future CROs and other contractors, consultants and collaborators are vulnerable to damage or attacks from computer viruses, unauthorized access, breaches, interruptions due to employee error, malfeasance or other disruptions, lapses in compliance with privacy and security mandates, 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, any such event could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are designed to detect and respond to such security incidents and breaches of privacy and security mandates. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the HIPAA, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. 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. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidate could be delayed.

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

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We 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. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

Our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) FDA regulations, including those laws requiring the reporting of true, complete and accurate information to regulatory authorities, (2) manufacturing standards, (3) federal and state health care fraud and abuse laws and regulations or (4) laws that require the reporting of financial information or data accurately. Specifically, sales, marketing, and business arrangements in the health care industry are subject to extensive laws and regulations 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. Activities subject to these laws also involve 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 always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks

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or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. 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 civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Risks Relating to Our Intellectual Property

Our rights to develop and commercialize our product candidates are subject in part to the terms and conditions of licenses granted to us by other companies and universities.

We currently are heavily reliant upon licenses of certain patent rights and proprietary technology from third parties that are important or necessary to the development of our technology and products, including technology related to our manufacturing process and our gene therapy product candidates. These and other licenses may not provide adequate rights to use such intellectual property and technology in all relevant fields of use and in all territories in which we may wish to develop or commercialize our technology and products in the future, or may contain other limitations on our ability to use such intellectual property or technology. As a result, our ability to develop or commercialize our processes and product candidates may be limited by the terms of such agreements. In addition, we may not be able to prevent competitors from developing and commercializing competitive products to the extent our licenses to patents are non-exclusive or limited with respect to fields of use or territories.

Licenses to additional third-party technology that may be required for our development programs may not be available in the future or may not be available on commercially reasonable terms, which could have a material adverse effect on our business and financial condition, results of operations and prospects.

Our success depends on our ability to protect our intellectual property and our proprietary technologies.

Our commercial success depends in part on our ability to obtain and maintain patent protection and trade secret protection for our product candidates, proprietary technologies, and their uses as well as our ability to operate without infringing upon the proprietary rights of others. There can be no assurance that any of our product candidates will have patent protection, that our patent applications or those of our licensors will result in patents being issued or that issued patents, if any, will afford sufficient protection against competitors with similar technology, nor is there any assurance that the patents issued will not be infringed, designed around or invalidated by third parties. Even issued patents may later be found unenforceable or may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts. The degree of future protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep any competitive advantage. This failure to properly protect the intellectual property rights relating to our product candidates could have a material adverse effect on our business, financial condition, results of operations and prospects.

Composition-of-matter patents on the biological or chemical active pharmaceutical ingredient are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. We cannot be certain that the claims in our patent applications covering composition-of-matter of any of our product candidates will be considered patentable by the U.S. Patent and Trademark Office (“USPTO”) and courts in the U.S. or by the patent offices and courts in foreign countries, nor can we be certain that the claims in our issued composition-of-matter patents will not be found invalid or unenforceable if challenged.

Method-of-use patents protect the use of a product for the specified method or for treatment of a particular indication. However, methods of treating human diseases are considered unpatentable in many jurisdictions, and even where available this type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or any of our future development partners will be successful in protecting our product candidates by obtaining and defending patents. These risks and uncertainties include the following:

 

the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case;

 

patent applications may not result in any patents being issued;

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patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable or otherwise may not provide any competitive advantage;

 

our competitors, many of whom have substantially greater resources than we do and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that will limit, interfere with or eliminate our ability to make, use, and sell our potential product candidates;

 

there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection both inside and outside the U.S. for disease treatments that prove successful, as a matter of public policy regarding worldwide health concerns; and

 

countries other than the U.S. may have patent laws less favorable to patentees than those upheld by the U.S. courts, allowing foreign competitors a better opportunity to create, develop and market competing product candidates.

In addition, we rely on the protection of our trade secrets and know-how. Although we have taken steps to protect our trade secrets and know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants and advisors, we cannot provide any assurances that all such agreements have been duly executed, and third parties may still obtain this information or may come upon this or similar information independently.

Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating our trade secrets. If any of these events occurs or if we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.

Claims by third parties that we infringe their proprietary rights may result in liability for damages or prevent or delay our developmental and commercialization efforts.

The biotechnology industry has been characterized by frequent litigation regarding patent and other intellectual property rights. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the biotechnology industry expands, especially in the field of gene therapy, 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. Because patent applications are maintained in secrecy until the application is published, we may be unaware of third party patents that may be infringed by commercialization of our product candidates. Moreover, because patent applications can take many years to issue, there may be currently-pending patent applications that may later result in issued patents that our product candidates may infringe. In addition, identification of third party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Any claims of patent infringement asserted by third parties would be time consuming and could:

 

result in costly litigation;

 

divert the time and attention of our technical personnel and management;

 

cause development delays;

 

prevent us from commercializing our product candidates until the asserted patent expires or is held finally invalid or not infringed in a court of law;

 

require us to develop non-infringing technology, which may not be possible on a cost-effective basis; or

 

require us to enter into royalty or licensing agreements, which may not be available on commercially reasonable terms, or at all.

Although no third party has asserted a claim of patent infringement against us as of the date of this current report on Form 8-K, others may hold proprietary rights that could prevent our product candidates from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating to our product candidate or processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market our product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidate or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing our product candidates, which could harm our business, financial condition, results of operations and prospects.

The patent protection and patent prosecution for some of our product candidates may be dependent on third parties.

While we normally seek to obtain the right to control the prosecution and maintenance of the patents relating to our product candidates, there may be times when the filing and prosecution activities for platform technology patents that relate to our product candidates are controlled by our licensors. For example, we do not have the right to prosecute and maintain the patent rights licensed to us under agreements with Regents, Cornell University, and Virovek Corporation, and our ability to have input into such filing and prosecution activities is limited. If these licensors or any of our future licensors fail to appropriately prosecute and maintain patent protection for patents covering any of our product candidates or companion diagnostic, our ability to develop and commercialize those

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product candidates and companion diagnostic may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.

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 administratively or in court.

If we or any of our future development 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 and/or unenforceable in whole or in part. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could include 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 and/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. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. 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 and development programs, license necessary technology from third parties, or enter into development or manufacturing partnerships that would help us bring our product candidates to market.

Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.

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. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

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

On September 16, 2011, the Leahy-Smith America Invents Act (“Leahy-Smith Act”), was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the U.S. 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 we may become involved in 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 competitive position.

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We may not be successful in obtaining or maintaining necessary rights to our product candidates through acquisitions and in-licenses.

We currently have rights to intellectual property, through licenses from third parties and under patents that we own, to develop our product candidates. Because our programs may require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to acquire, in-license, or use these proprietary rights. For example, our product candidates may require specific formulations to work effectively and efficiently and the rights to these formulations may be held by others. We may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that we identify as necessary for our product candidates. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources, and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment.

We sometimes collaborate with U.S. and foreign academic institutions to accelerate our preclinical research or development under written agreements with these institutions. Typically, these institutions provide us with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such option, we may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our program.

If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of that program and our business, financial condition, results of operations and prospects could be materially and adversely affected.

We may fail to comply with any of our obligations under existing agreements pursuant to which we license or have otherwise acquired intellectual property rights or technology, which could result in the loss of rights or technology that are material to our business.

Licensing of intellectual property is of critical importance to our business and involves complex legal, business, and scientific issues. Disputes may arise regarding our rights to intellectual property licensed to us from a third party, including but not limited to:

 

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

 

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

 

the sublicensing of patent and other rights;

 

our diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

the ownership of inventions and know-how resulting from the creation or use of intellectual property by us, alone or with our licensors and collaborators;

 

the scope and duration of our payment obligations;

 

our rights upon termination of such agreement; and

 

the scope and duration of exclusivity obligations of each party to the agreement.

If disputes over intellectual property and other rights that we have licensed or acquired from third parties prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industry, in addition to our employees, we engage the services of consultants to assist us in the development of our product candidates. Many of our employees and consultants were previously employed at, or may have previously provided or may be currently providing consulting services to, other biotechnology or pharmaceutical companies including our competitors or potential competitors. We may become subject to claims that our company, our employees or a consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team.

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We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. We may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

If we do not obtain patent term extension and data exclusivity for our product candidates, our business may be materially harmed.

If we are able to secure FDA marketing approval for one of our product candidates that is covered by an issued U.S. patent, that patent may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984 (“Hatch-Waxman Act”). The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension 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, our competitors may obtain approval of competing products following our patent expiration, and our business, financial conditions and results of operations may be materially and adversely affected.

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 materially and adversely impact our business, financial condition, results of operations, or prospects.

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

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve a high degree of technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time consuming and inherently uncertain. In addition, Congress may pass patent reform legislation that is unfavorable to us. The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents we might obtain in the future.

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

Filing, prosecuting, obtaining and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S. 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 U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions in and into the U.S. or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as that in the U.S. 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.

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Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial 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.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

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

 

others may be able to make gene therapies that are similar to our product candidates but that are not covered by the claims of any patents that we own or have exclusively licensed;

 

we or our licensors or future collaborators might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;

 

we or our licensors or future collaborators might not have been the first to file patent applications covering certain of our inventions;

 

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

 

any patent applications that we have filed or may file in the future may not lead to issued patents;

 

any of the issued patents that we own or have exclusively licensed may be held invalid or unenforceable, as a result of legal challenges by our competitors;

 

our competitors might conduct research and development activities in countries where, or for products for which, we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

we may not develop additional proprietary technologies that are patentable; and

 

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

Should any of these events occur, they could significantly harm our business, financial condition, results of operations and prospects.

Known third party patent rights could delay or otherwise adversely affect our planned development and sale of several of our lead programs.

We are aware of patent rights held by third parties that could be construed to cover certain aspects of our lead product candidates. A patent holder has the right to prevent others from making, using, or selling a drug that incorporates the patented compositions while the patent remains in force. While we believe that third party patent rights will not affect our planned development, regulatory clearance, and eventual marketing, commercial production, and sale of our product candidates, there can be no assurance that this will be the case. In each case, the relevant patent expires before we expect to commercially introduce such product candidate. In addition, the Hatch-Waxman exemption provided by U.S. patent law permits uses of compounds and biologics in clinical trials and for other purposes reasonably related to obtaining FDA clearance of drugs and biologics that will be sold only after patent expiration, so our use of our product candidates in those FDA-related activities does not infringe any patent holder’s rights. However, were a patent holder to assert its rights against us before expiration of such patent holder’s patent for activities unrelated to FDA clearance, the development and ultimate sale of our lead product candidates could be significantly delayed, and we could incur the expense of defending a patent infringement suit and potential liability for damages for periods prior to the patent’s expiration.

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Risks Related to Our Common Stock

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to prepare accurate and timely consolidated financial statements being prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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 of 2002 (“Sarbanes-Oxley”), our management is required to report upon the effectiveness of our internal control over financial reporting. When we lose our status as an “emerging growth company”, unless we have become a smaller reporting company, our independent registered public accounting firm will also be required to attest to the effectiveness of our internal control over financial reporting, and the related report will also be required to be included in our annual reports filed with the SEC. However, for so long as we remain an emerging growth company, we intend to take advantage of an exemption available to companies meeting these criteria from these auditor attestation requirements. Sarbanes-Oxley Section 404 compliance requirements are complex and require significant documentation, testing, and possible remediation. If we (or our auditors if they are required to assess and attest to the effectiveness of our internal control over financial reporting) 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.

Although we have determined that our internal control over financial reporting was effective as of December 31, 2017, we cannot assure you that there will not be material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by The Nasdaq Stock Market, the SEC or other regulatory authorities. Failure to implement and maintain effective internal control over financial reporting, including failure to remediate any material weaknesses we or our auditors identify, could also restrict our future access to the capital markets.

The trading price of the shares of our common stock has been and could continue to be highly volatile, and purchasers of our common stock could incur substantial losses.

 

Our stock price has been and is likely to continue to be volatile. 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. The market price for our common stock may be influenced by many factors, including those discussed above and others such as:

 

our plans regarding further development of ADVM-043, ADVM-053, or ADVM-022;

 

our ability to enroll patients in any clinical trials that we plan in the future;

 

our ability to obtain regulatory approvals for our product candidates and delays or failure to obtain such approvals;

 

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

 

regulatory developments in the U.S. and foreign countries;

 

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;

 

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

 

failure to maintain our existing third party license and collaboration agreements;

 

delays in manufacturing adequate supply of our product candidates;

 

adverse publicity relating to the gene therapy market generally, including with respect to other products and potential products in such markets;

 

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

 

sales of our stock by insiders and stockholders;

 

trading volume of our common stock;

 

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.

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In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies’ stock, and similar litigation has been instituted against us. Such litigation 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, results of operations and prospects.

We and certain of our former officers have been named defendants in purported securities class action lawsuits. These, and any additional securities litigation, could result in substantial losses and may divert managements time and attention from our business.

On June 15, 2015, we announced the top-line results of our Phase 2a clinical trial for AVA-101. In July 2015, three purported securities class action lawsuits were commenced in the U.S. District Court for the Northern District of California, naming as defendants us and certain of our former officers. These lawsuits assert that the defendants violated the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Securities Act of 1933, as amended (“Securities Act”), and allege that the defendants made materially false and misleading statements and omitted allegedly material information related to, among other things, the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The plaintiffs seek unspecified damages, attorneys’ fees and other costs, each on behalf of a purported class of persons and entities who purchased or otherwise acquired our publicly traded securities between July 31, 2014 and June 15, 2015. It is possible that additional suits will be filed with respect to these same matters and also naming us and/or our officers and directors as defendants.

In addition, in December 2015, a putative securities class action lawsuit was filed against us, our board of directors, underwriters of our January 13, 2015, follow-on public stock offering, and two of our institutional stockholders, in the Superior Court of the State of California for the County of San Mateo. The complaint alleges that, in connection with our follow-on stock offering, the defendants violated the Securities Act by allegedly making materially false and misleading statements and by allegedly omitting material information related to the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The complaint seeks unspecified compensatory and rescissory damages, attorneys’ fees and other costs.

In March 2017, we reached an agreement to settle the asserted actions. The proposed aggregate amount of the settlement is $13.0 million, of which $1.0 million would be contributed by us to cover our indemnification obligations to the underwriters, and the remainder would be contributed by our insurers. Notice of the settlement was provided to stockholders in the fall of 2017, and no stockholder objected to the settlement. In January 2018, the San Mateo Superior Court entered a judgment and order finally approving the settlement and, in February 2018, the U.S. District Court dismissed the consolidated federal action with prejudice. If the settlement does not become effective and litigation resumes, following an appeal or otherwise, adverse outcomes in the actions could result in substantial damages. We and the defendants have denied and continue to deny each and all of the claims alleged in the actions, and the settlement does not assign or reflect any admission of fault, wrongdoing or liability as to any defendant. If final court approval is not obtained with respect to the settlement or the settlement otherwise does not become effective and litigation resumes, adverse outcomes in the actions could result in substantial damages.

The current securities litigation and any future litigation of this type could result in diversion of management’s attention and resources, which could adversely impact our business. Monitoring and defending against legal actions is time-consuming for our management and detracts from our ability to focus fully on our business activities.

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;

 

any intellectual property infringement lawsuit in which we may become involved;

 

regulatory developments affecting our product candidates;

 

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

 

nature and terms of stock-based compensation grants; and

 

derivative instruments recorded at fair value.

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.

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If we sell shares of our common stock or securities convertible into or exercisable for shares of our common stock in future financings, licensing or collaboration arrangements, or acquisitions, or additional shares under our at-the-market sales agreement, stockholders may experience immediate dilution and, as a result, our stock price may decline.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, licensing, collaboration or similar arrangements, grants and debt financings. We do not have any committed external source of funds. As a result, we may from time to time issue additional shares of common stock or securities convertible into or exercisable for shares of our common stock. We filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective on August 22, 2017, pursuant to which we registered for sale up to $150.0 million of any combination of our common stock, preferred stock, debt securities, warrants, and/or units from time to time and at prices and on terms that we may determine, including up to $50.0 million of our common stock available for issuance pursuant to our sales agreement with Cowen. Pursuant to the sales agreement, we may offer and sell, from time to time at our discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Cowen as our sales agent. Under the sales agreement, Cowen may sell the shares by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act. We may seek to raise additional capital at any time. Further, pursuant to the aforementioned universal shelf registration statement, in February 2018, we completed the issuance of 10,222,235 shares of our common stock at $6.75 per share in an underwritten public offering for net proceeds to us of approximately $64.3 million. 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 of these securities may include liquidation or other preferences that adversely affect your rights as a holder of our common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends or other distributions. Furthermore, we may issue common stock as consideration in acquisitions. For example, in May 2016, we issued 14,087,246 shares of our common stock to Annapurna’s shareholders as consideration for all of the outstanding shares of Annapurna. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, our stock price may decline.

If we raise additional funds through licensing, collaboration or similar arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research and development programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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 may delay or prevent an acquisition of us or a change in our management. These provisions include:

 

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

 

the limitation of the removal of directors by the stockholders;

 

a staggered board of directors;

 

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

 

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

 

the ability of our board of directors to accelerate the vesting of outstanding option grants, restricted stock units or other equity awards upon certain transactions that result in a change of control; and

 

the establishment of advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

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. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

55


 

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 and do not anticipate declaring or paying any cash dividends for the foreseeable future. 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 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 JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation and our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company until the last day of the fiscal year 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 $700.0 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 Sarbanes-Oxley and reduced disclosure obligations regarding executive compensation and our 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.

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

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses. We are subject to the reporting requirements of the Exchange Act, which require, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business, results of operations and financial condition. In addition, Sarbanes-Oxley, as well as rules adopted by the SEC and The Nasdaq Global Market that implement provisions of Sarbanes-Oxley, impose 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 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 impact the manner in which we operate our business in ways we cannot currently anticipate.

The rules and regulations applicable to public companies have substantially increased our legal and financial compliance costs and make some activities more time-consuming and costly. To the extent 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 and prospects. 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 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. 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.

56


 

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 will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. 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.

The recently passed comprehensive tax reform bill could adversely affect our business, results of operations and financial condition.

On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended (the “Code”). The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including adoption of a flat 21% corporate tax rate, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction of net operating losses generated in tax years beginning after December 31, 2017 to 80% of taxable income and elimination of carrybacks of such net operating losses, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations for tax years beginning after January 1, 2018, mandatory capitalization of research and development expenses beginning in 2022, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, and our business, results of operations and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. Investors should consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

Our ability to use net operating loss carryforwards and other tax attributes may be limited by the Code.

We have incurred substantial losses during our history and do not expect to become profitable in the near future and we may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. As of December 31, 2017, we had U.S. federal net operating loss (“NOL”) carryforwards of approximately $53.2 million to offset future federal income. NOLs expire at various years beginning with 2036. As of December 31, 2017, we also had U.S. state NOL carryforwards of approximately $37.8 million to offset future state income. U.S. State NOLs expire at various years beginning with 2036. At December 31, 2017, we also had approximately $44.1 million of foreign net operating loss carryforwards which may be available to offset future foreign income; these carryforwards do not expire.

Under the newly enacted federal income tax law, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating NOLs is limited. It is uncertain if and to what extent various states will conform to the newly enacted federal tax law. In addition, under Section 382 of the Code, our ability to utilize NOL carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws. In connection with our acquisition of Annapurna in May 2016, we determined that certain NOLs for both federal and state purposes were severely limited and therefore we removed a significant amount of NOLs from our deferred tax assets. In addition, we may have experienced an ownership change as a result of the February 2018 underwritten public offering of our common stock, and may in the future experience ownership changes future offerings or other changes in the ownership of our stock. As a result, the amount of the NOLs and research and credit carryforwards presented in our financial statements could be limited and may expire unutilized.

Item 1B. Unresolved Staff Comments

Not applicable.

 

 

57


 

Item 2. Properties

Our corporate headquarters are located in Menlo Park, California, where we lease and occupy approximately 36,000 square feet of office space. The current term of our lease expires on May 8, 2020, with an option to extend the term through May 8, 2024. We believe that our existing facilities are adequate for our current needs. When our lease expires, we may exercise our renewal option or look for additional or alternate space for our operations and we believe that suitable additional or alternative space will be available in the future on commercially reasonable terms.

 

 

Item 3. Legal Proceedings

 

In July 2015, three securities class action lawsuits were filed against us and certain of our officers in the U.S. District Court for the Northern District of California (“U.S. District Court”), each on behalf of a purported class of persons and entities who purchased or otherwise acquired our publicly traded securities between July 31, 2014 and June 15, 2015. The lawsuits assert claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Securities Act of 1933, as amended (the “Securities Act”) and allege that the defendants made materially false and misleading statements and omitted allegedly material information related to, among other things, the Phase 2a clinical trial for AVA-101, a product candidate which is no longer being developed, and the prospects of AVA-101. The complaints seek unspecified damages, attorneys’ fees and other costs.

 

In December 2015, a putative securities class action lawsuit was filed against us, our board of directors, underwriters of our January 13, 2015, follow-on public stock offering, and two of our institutional stockholders, in the Superior Court of the State of California for the County of San Mateo (“San Mateo Superior Court”). The complaint alleges that, in connection with our follow-on stock offering, the defendants violated the Securities Act by allegedly making materially false and misleading statements and by allegedly omitting material information related to the Phase 2a clinical trial for AVA- 101 and the prospects of AVA-101. The complaint seeks unspecified compensatory and rescissory damages, attorneys’ fees and other costs. The plaintiff has dismissed the two institutional stockholder defendants.

 

On March 16, 2017, we reached an agreement to settle the asserted actions. The proposed aggregate amount of the settlement is $13.0 million, of which $1.0 million would be contributed by us to cover our indemnification obligations to the underwriters, and the remainder would be contributed by our insurers. We and the defendants have denied and continue to deny each and all of the claims alleged in the actions, and the settlement does not assign or reflect any admission of fault, wrongdoing or liability as to any defendant. Notice of the settlement was provided to shareholders in the fall of 2017, and no shareholder objected to the settlement. On January, 19, 2018, the San Mateo Superior Court entered a judgment and order finally approving the settlement. And on February 5, 2018, the U.S. District Court entered an order dismissing the consolidated federal action with prejudice. If the settlement does not become effective and litigation resumes, following an appeal or otherwise, adverse outcomes in the actions could result in substantial damages. We recorded $1.0 million as general and administrative expense during the three months ended March 31, 2017, when the amount and time of settlement became estimable and probable.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

 

58


 

PART II

 

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

Our common stock has been listed on The Nasdaq Global Market since July 31, 2014, and is currently listed under the symbol “ADVM”. Prior to July 31, 2014, there was no public trading market for our common stock. The following table sets forth for the periods indicated the high and low closing prices per share of our common stock as reported on The Nasdaq Global Market:

 

Year ended December 31, 2017

 

High

 

 

Low

 

First Quarter

 

$

3.35

 

 

$

2.55

 

Second Quarter

 

$

3.10

 

 

$

2.50

 

Third Quarter

 

$

3.65

 

 

$

2.45

 

Fourth Quarter

 

$

3.95

 

 

$

2.85

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

High

 

 

Low

 

First Quarter

 

$

8.80

 

 

$

4.15

 

Second Quarter

 

$

6.24

 

 

$

3.02

 

Third Quarter

 

$

4.76

 

 

$

3.04

 

Fourth Quarter

 

$

4.35

 

 

$

2.80

 

 

As of February 28, 2018, we had approximately 19 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

59


 

Stock Performance Graph

The following graph illustrates a comparison of the total cumulative stockholder return of an investment of $100 in cash on July 31, 2014, which is the date our common stock first began trading on the Nasdaq Global Market, through December 31, 2017 for (i) our common stock, (ii) the Nasdaq Composite Index and (iii) the Nasdaq Biotech Index. Pursuant to applicable SEC rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on our common stock to date. The stockholder return shown in the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns. This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

 

$100 investment in stock or index

 

July 31, 2014

 

 

December 31, 2014

 

 

December 31, 2015

 

 

December 31, 2016

 

 

December 31, 2017

 

Adverum Biotechnologies, Inc. (ADVM)

 

$

100.00

 

 

$

192.93

 

 

$

34.01

 

 

$

10.36

 

 

$

12.50

 

Nasdaq Composite Index (IXIC)

 

$

100.00

 

 

$

108.38

 

 

$

114.58

 

 

$

123.19

 

 

$

157.98

 

Nasdaq Biotech (NBI)

 

$

100.00

 

 

$

121.12

 

 

$

134.95

 

 

$

105.69

 

 

$

127.94

 

Recent Sales of Unregistered Securities

None.

60


 

Use of Proceeds

On August 5, 2014, we closed our IPO and issued 6,900,000 shares of our common stock at an initial offering price of $17.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1, as amended (File Nos. 333-197133 and 333-197739), which was declared effective by the SEC on July 30, 2014. The joint book-running managers for the IPO were Jefferies LLC, Cowen and Company, LLC and Piper Jaffray & Co. The aggregate offering price to the public for the shares sold in the IPO was $117.3 million. We received net proceeds from the IPO of approximately $106.5 million, after deducting underwriting discounts and commissions of approximately $8.2 million and expenses of approximately $2.6 million payable by us. None of the expenses associated with the IPO were paid to directors, officers, persons owning 10% or more of any class of equity securities, or to their associates, or to our affiliates.

We have discontinued development of AVA-101, and so we will not use approximately $20.0 million of our net proceeds from the IPO to fund Phase 3 research and development startup activities for our AVA-101 study, as we had described in our final prospectus filed with the SEC on July 31, 2014 pursuant to Rule 424(b) of the Securities Act. Instead, we have reallocated such proceeds to fund research and development expenses for additional preclinical studies relating to our wAMD gene therapies, ADVM-022 and ADVM-032 and for ADVM-043 for A1AT deficiency and for ADVM-053 for HAE.

Subsequent Stock Offerings

On January 13, 2015, we completed a follow-on offering of 2,369,375 shares of our common stock, which included 359,918 shares we issued pursuant to the underwriters’ exercise of their option to purchase additional shares, and we received net proceeds of approximately $130.6 million, after underwriting discounts, commissions and offering expenses.

In March 2015, (i) we received net proceeds of approximately $8.3 million, after discounts and other issuance costs, which resulted from the sale of 230,000 common shares, and (ii) we issued 230,000 common shares to a stockholder that exercised warrants prior to the IPO.

In August 2017, we entered into an at-the-market sales agreement with an agent for the sales of our common stock at market price (the “2017 stock offering agreement”). Under the terms and conditions of the 2017 stock offering agreement, we may offer to sell our common stock for an aggregate offering price of up to $50.0 million through the agent from time to time.  In January 2018, we sold a total of 1,419,893 shares of our common stock at market prices under the 2017 stock offering agreement and raised total net proceeds of $5.7 million, net of issuance costs. We have sold a total of 6,550,232 shares of our common stock at market prices pursuant to the 2017 stock offering agreement and have raised total net proceeds of approximately $22.5 million, net of issuance costs.

In February 2018, we completed an underwritten offering for the sale of 10,222,235 shares of our common stock and raised total net proceeds of approximately $64.3 million, after discounts and other issuance costs.

We invested the funds received in short-term, interest-bearing investment-grade securities and government securities.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

 

 

61


 

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and related notes, and other financial information included in this Annual Report on Form 10-K.

We derived the consolidated financial data for the years ended December 31, 2017, 2016 and 2015 and as of December 31, 2017 and 2016 from our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The consolidated financial data for the years ended December 31, 2014 and 2013 and as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in future periods.

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations and

   Comprehensive Loss Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license revenue

 

$

1,849

 

 

$

1,455

 

 

$

2,319

 

 

$

572

 

 

$

 

Government grant revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

480

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (1)

 

 

39,839

 

 

 

31,670

 

 

 

25,462

 

 

 

16,976

 

 

 

2,151

 

General and administrative (2)

 

 

20,857

 

 

 

24,355

 

 

 

22,107

 

 

 

7,998

 

 

 

1,783

 

Impairment of goodwill and intangible assets (3)

 

 

 

 

 

60,714

 

 

 

 

 

 

 

 

 

 

Restructuring charges (4)

 

 

 

 

 

 

 

 

2,573

 

 

 

 

 

 

 

Total operating expenses

 

 

60,696

 

 

 

116,739

 

 

 

50,142

 

 

 

24,974

 

 

 

3,934

 

Operating loss

 

 

(58,847

)

 

 

(115,284

)

 

 

(47,823

)

 

 

(24,402

)

 

 

(3,454

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

(73

)

Other income (expense), net

 

 

2,700

 

 

 

762

 

 

 

370

 

 

 

(21

)

 

 

(4

)

Changes in fair value of embedded derivative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Changes in fair value of warrant liabilities

 

 

 

 

 

 

 

 

 

 

 

(759

)

 

 

(92

)

Loss on extinguishment of related-party convertible notes

 

 

 

 

 

 

 

 

 

 

 

(204

)

 

 

(1,671

)

Total other income (expense), net

 

 

2,700

 

 

 

762

 

 

 

370

 

 

 

(1,002

)

 

 

(1,822

)

Net loss before income tax benefit

 

 

(56,147

)

 

 

(114,522

)

 

 

(47,453

)

 

 

(25,404

)

 

 

(5,276

)

Income tax benefit (5)

 

 

 

 

 

775

 

 

 

 

 

 

 

 

 

 

Net loss after income tax benefit

 

 

(56,147

)

 

 

(113,747

)

 

 

(47,453

)

 

 

(25,404

)

 

 

(5,276

)

Deemed dividend (6)