Item
1A. Risk Factors.
In
evaluating the Company and our business, careful consideration should be given to the following risk factors, in addition to the other
information set forth in this Quarterly Report on Form 10-Q and in other documents that we file with the SEC. Investing in our common
stock involves a high degree of risk. If any of the following risks and uncertainties actually occurs, our business, prospects, financial
condition or results of operations could be materially and adversely affected. The risks described below are not intended to be exhaustive
and are not the only risks facing the Company. New risk factors can emerge from time to time, and it is not possible to predict the impact
that any factor or combination of factors may have on our business, prospects, financial condition or results of operations.
Risks
Related to Our Limited Operating History, Financial Position, and Capital Requirements
We
are a clinical-stage biopharmaceutical company with a limited operating history.
We
are a clinical-stage biopharmaceutical company established in July 2018 with a limited operating history. Since our inception, we have
devoted substantially all of our efforts to organizing and staffing our company, research and development of AV-101, our initial product
candidate, business planning, raising capital, and providing general and administrative support for these operations. We have limited
experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered
by companies in new and rapidly evolving fields, particularly in the pharmaceutical industry. We have completed our Phase 1 clinical
trial of AV-101. We plan to initiate our Phase 2b/3 clinical trial for AV-101 in PAH patients in the second half of 2021. We may explore
additional indications for AV-101, but do not intend to conduct research on additional product candidates at this time. We have no products
approved for commercial sale and therefore have never generated any revenue from product sales, and we do not expect to in the foreseeable
future. We have no other experience as a company conducting clinical trials, submitting applications for regulatory approvals, such as
a new drug application, or NDA, or commercializing any products.
We
have incurred significant operating losses since our inception and anticipate that we will continue to incur losses for the foreseeable
future. We may never achieve or maintain profitability.
We
have incurred significant operating losses in each year since our incorporation in July 2018, do not expect to become profitable in the
near future, and may never achieve profitability. Our net losses were $14.7 million and $5.9 million for the nine months ended September
30, 2021 and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $28.2 million. Biopharmaceutical product
development is a highly speculative undertaking and involves a substantial degree of risk. We have no products approved for commercial
sale, have not generated any revenue from product sales and have incurred losses in each year since our inception in July 2018. Substantially
all of our operating losses have resulted from costs incurred in connection with our research and development program of AV-101 and from
general and administrative costs associated with our operations. AV-101 will require substantial additional development time and resources
before we would be able to apply for or receive regulatory approvals and begin generating revenue from product sales. We also do not
yet have a sales organization or commercial infrastructure and, accordingly, we will incur significant expenses to develop a sales organization
or commercial infrastructure in advance of generating any commercial product sales. In addition, as a public company, we will continue
to incur additional costs associated with operating that we did not incur as a private company. As a result, we expect to continue to
incur significant expenses and operating losses for the foreseeable future, and we anticipate these losses will increase as we continue
to develop AV-101 through clinical trials and regulatory submissions. Because of the numerous risks and uncertainties associated with
developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at
all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis. Our
prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit
and working capital.
The
amount of our future losses is uncertain and our quarterly and annual operating results may fluctuate significantly or may fall below
the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline. Our quarterly
and annual operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our
control and may be difficult to predict, including the following:
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the
timing and success or failure of the clinical development of AV-101, or any other change in the competitive landscape of our industry,
including consolidation among our competitors or partners;
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our
ability to successfully open clinical trial sites for AV-101 and recruit and retain subjects for clinical trials, and any delays
caused by difficulties in such efforts;
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our
ability to obtain regulatory approval for AV-101, and the timing and scope of any such approvals we may receive;
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the
timing and cost of, and level of investment in, research and development activities relating to AV-101, which may change from time
to time;
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the
cost of manufacturing AV-101, should it receive regulatory approval, which may vary depending on the quantity of production and the
terms of our agreements with manufacturers;
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the
experience of any delays or any issues with any of the above, including but not limited to failed studies, complex results, safety
issues or other regulatory challenges;
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our
ability to attract, hire and retain qualified personnel;
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the
establishment of a sales, marketing, access and distribution infrastructure and the scaling-up manufacturing capabilities, whether
alone or with third parties, to commercialize any product candidates for which we may obtain regulatory approval, if any;
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expenditures
that we will or may incur to pursue additional indications for AV-101 or develop or acquire additional product candidates;
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the
level of demand for AV-101, should it receive regulatory approval, which may vary significantly;
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the
risk/benefit profile, cost and reimbursement policies with respect to AV-101, if approved, and existing and potential future therapeutics
that compete with AV-101;
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the
changing and volatile United States and global economic environments, including as a result of the ongoing coronavirus disease 2019,
or COVID-19, pandemic;
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future
accounting pronouncements or changes in our accounting policies; and
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changes
to government policies and/or regulation impacting the commercialization of pharmaceutical products.
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The
cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results.
As a result, comparing our operating results on a period-to-period basis may not be meaningful. This variability and unpredictability
could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue
or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if
the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline
substantially. Such a stock price decline could occur even when we have met any previously publicly stated guidance we may provide.
We
have no products approved for commercial sale and have not generated any revenue from product sales.
Our
ability to become profitable depends upon our ability to generate revenue. To date, we have not generated revenue, and we do not expect
to generate any revenue in the near future. We do not expect to generate significant revenue unless and until we obtain regulatory approval
of, and begin to sell AV-101. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability
to:
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successfully
enroll subjects in, and complete, our ongoing and planned clinical trials for AV-101;
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obtain
sufficient safety data required to obtain United States and foreign regulatory approval for AV-101;
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timely
file and receive U.S. Food and Drug Administration, or FDA, acceptance of our NDA for AV-101 for review;
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receive
regulatory approvals from the FDA and foreign regulatory authorities for AV-101 in order to commence marketing of AV-101;
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establish
commercial manufacturing capabilities or make arrangements with third-party manufacturers for clinical supply and commercial manufacturing;
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obtain
and maintain patent and trade secret protection or non-patent regulatory exclusivity for AV-101;
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execute
a commercial launch of AV-101, if approved, whether alone or in collaboration with others;
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obtain
and maintain acceptance of AV-101, if and when approved, by patients, the medical community and third-party payors;
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position
AV-101 to effectively compete with other therapies;
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obtain
and maintain healthcare coverage and adequate reimbursement;
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enforce
and defend intellectual property rights and claims;
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implement
measures to help minimize the risk of COVID-19 or any of its variants to our employees as well as patients and subjects enrolled
in our clinical trials; and
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maintain
a continued acceptable safety profile of AV-101 following approval.
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If
we 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
successfully commercialize AV-101, which would materially harm our business. If we do not receive regulatory approvals for AV-101, we
may not be able to continue our operations.
We
will require additional capital to finance our operations, which may not be available on acceptable terms, or at all. If we are unable
to raise capital when needed, we would be forced to delay, reduce or terminate our product development or commercialization efforts.
Since
our inception, we have invested substantially all of our efforts and financial resources in the development of AV-101 to address the
core disease processes of PAH. We believe that we will continue to expend substantial resources for the foreseeable future in connection
with the clinical development of AV-101, including in connection with our Phase 2b/3 clinical trial. These expenditures will include
costs associated with clinical trials, obtaining regulatory approvals, manufacturing and supply, as well as commercializing AV-101, if
approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any clinical trial is highly uncertain, we
cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of AV-101.
As
of September 30, 2021, we had cash and cash equivalents of $180.9 million. On July 2, 2021, we completed our IPO, and expect the net
proceeds of approximately $126.9 million from the IPO, together with our existing cash will be sufficient to fund our planned operations
into the second half of 2025. However, our operating plans may change as a result of many factors currently unknown to us, and we may
need to seek additional funds sooner than planned. In addition, we may seek additional capital due to favorable market conditions or
strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
Our
future capital requirements depend on many factors, including:
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the
scope, timing, rate of progress, results and costs of our preclinical studies and clinical trials for AV-101;
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the
number and scope of additional product candidates we decide to pursue;
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the
extent to which we discover and develop additional product candidates;
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the
scope and costs of manufacturing development and commercial manufacturing activities;
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the
cost, timing and outcome of regulatory review of AV-101 and any additional product candidates;
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the
cost of building a medical affairs and commercial organization including a sales force in anticipation of commercialization of AV-101
and any additional product candidates;
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the
cost and timing associated with commercializing AV-101 and any additional product candidates, if approved;
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the
costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
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any
product liability or other lawsuits related to AV-101 and any additional product candidates;
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our
efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support
the development of AV-101 and any additional product candidates;
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the
extent to which we pursue additional indications for AV-101;
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the
extent to which we acquire or in-license other product candidates;
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our
ability to establish and maintain collaborations on favorable terms, if at all;
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the
costs associated with being a public company;
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the
potential additional expenses attributable to adjusting our development plans (including any supply related matters) to the ongoing
COVID-19 pandemic; and
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the
timing, receipt and amount of sales of AV-101 and any additional product candidates, if approved.
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Additional
funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us
on a timely basis, we may be required to:
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delay,
limit, reduce or terminate clinical studies or other medical and development activities for AV-101; or
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delay,
limit, reduce or terminate our efforts to establish manufacturing and sales and marketing capabilities or other activities that may
be necessary to commercialize AV-101, or reduce our flexibility in developing or maintaining our sales and marketing strategy.
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We
also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some
of our technologies or AV-101 that we would otherwise pursue on our own. We do not expect to realize revenue from sales of AV-101 in
the foreseeable future, if at all, and unless and until AV-101 is clinically tested, approved for commercialization and successfully
marketed. To date, we have funded our operations through private placements of convertible preferred stock, convertible notes and proceeds
from our IPO. We will be required to seek additional funding in the future and currently intend to do so through public or private equity
offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources.
If
we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely
affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand,
and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive
covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid
before holders of our equity securities received any distribution of our corporate assets.
Our
ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond our control. Any additional
fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and
commercialize AV-101. Disruptions in the financial markets in general, and more recently due to the ongoing COVID-19 pandemic, may make
equity and debt financing more difficult to obtain, and may have a material adverse effect on our ability to meet our fundraising needs.
We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.
Our
recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our
ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.
We
have incurred significant operating losses since our inception and have never generated product revenue, and it is possible we will never
generate product revenue or profit. Meaningful revenues will likely not be available until and unless AV-101 is approved by the FDA or
comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome which may not occur.
In its report on our financial statements for the year ended December 31, 2020, our independent registered public accounting firm included
an explanatory paragraph stating that our recurring losses from operations and net capital deficiency raise substantial doubt about our
ability to continue as a going concern. In our unaudited condensed financial statements for the period ended September 30, 2021, after
considering the additional proceeds from our IPO and existing cash on-hand, we concluded that we will have sufficient working capital
on-hand to fund operations for at least 12 months from the date the unaudited condensed financial statements are issued. However, the
perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about
our ability to meet our contractual obligations.
Our
ability to continue as a going concern requires that we obtain sufficient funding to finance our operations. If we are unable to obtain
sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected
and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets
and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors
will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there
remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to
provide additional funding to us on commercially reasonable terms or at all.
Risks
Related to the Development of AV-101
Our
business is entirely dependent on the successful development, regulatory approval and commercialization of AV-101, our only product candidate
under development.
We
have invested substantially all of our efforts and financial resources in the development of AV-101 for the treatment of PAH, which has
not been approved for sale or commercial use. Currently, AV-101 is our only product candidate and we have not licensed, acquired, or
invented any other product candidates for preclinical or clinical evaluation. This may make an investment in our company riskier than
similar companies that have multiple product candidates in active development and that therefore may be able to better sustain a failure
of a lead candidate. The success of our business, including our ability to finance our company and generate any revenue in the future,
will, at this point, depend entirely on the successful development, regulatory approval and commercialization of AV-101, which may never
occur. We may have inadequate financial or other resources to advance AV-101 through the clinical trial process, depending on the requirements
of the FDA and similar foreign regulatory agencies. In addition, our clinical development program for AV-101 may not lead to regulatory
approval from the FDA and similar foreign regulatory agencies if we fail to demonstrate that AV-101 is safe and effective in our planned
Phase 2b/3 clinical trial, and we may therefore fail to commercialize AV-101. Further, AV-101 may not receive regulatory approval even
if it is successful in planned and future clinical trials. Any failure to obtain regulatory approval of AV-101 would have a material
and adverse impact on our business. Even if we successfully obtain regulatory approvals to market AV-101, our revenue will be dependent,
in part, upon the size of the markets in the territories for which we gain regulatory approval. If the markets or patient subsets that
we are targeting are not as significant as we estimate, we may not generate significant revenues from sales of AV-101, even if approved.
We
plan to seek regulatory approval to commercialize AV-101 in the United States and in selected foreign countries. The clinical and commercial
success of AV-101 will depend on a number of factors, including the following:
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our
ability to raise any additional required capital on acceptable terms, or at all;
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timely
completion of our preclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate
and will depend substantially upon the performance of third-party contractors;
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whether
we are required by the FDA or similar foreign regulatory agencies to conduct additional clinical trials or other studies beyond those
planned to support approval of AV-101;
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our
ability to consistently manufacture AV-101 on a timely basis;
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our
ability, and the ability of any third parties with whom we contract, to remain in good standing with regulatory agencies and develop,
validate and maintain commercially viable manufacturing processes that are compliant with current Good Manufacturing Practices, or
current GMPs;
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our
ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities the safety, efficacy and acceptable
risk-benefit profile of AV-101;
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the
prevalence, duration and severity of potential side effects or other safety issues experienced with AV-101;
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the
timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;
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achieving
and maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual
obligations and with all regulatory requirements applicable to AV-101;
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the
differentiation of AV-101 from other available approved, or investigational, drugs and treatments of PAH, and the willingness of
physicians, operators of hospitals and clinics and patients to adopt and utilize AV-101 administered using a dry powder inhaler,
or DPI;
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our
ability to successfully develop a commercial strategy and thereafter commercialize AV-101 in the United States and internationally,
if approved for marketing, sale and distribution in such countries and territories, whether alone or in collaboration with others;
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the
availability of coverage and adequate reimbursement from managed care plans, private insurers, government payors (such as Medicare
and Medicaid and similar foreign authorities) and other third-party payors for AV-101;
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patients’
ability and willingness to pay out-of-pocket for AV-101 in the absence of coverage and/or adequate reimbursement from third-party
payor;
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the
convenience of the administration of AV-101 using our DPI;
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acceptance
by physicians, payors and patients of the benefits, safety and efficacy of AV-101, if approved;
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patient
demand for AV-101, if approved;
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our
ability to establish and enforce intellectual property rights in and to AV-101; and
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our
ability to avoid third-party patent interference, intellectual property challenges or intellectual property infringement claims.
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These
factors, many of which are beyond our control, could cause us to experience significant delays or an inability to obtain regulatory approvals
or commercialize AV-101. Even if regulatory approvals are obtained, we may never be able to successfully commercialize AV-101. Accordingly,
we cannot provide assurances that we will be able to generate sufficient revenue through the sale of AV-101 to continue our business
or achieve profitability.
While
the scope of regulatory approval generally is similar in other countries, in order to obtain separate regulatory approval in other countries
we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy. For example, European
regulatory authorities generally require a trial comparing the efficacy of the new drug to an existing drug prior to granting approval.
Other countries also have their own regulations governing, among other things, clinical trials and commercial sales, as well as pricing
and distribution of AV-101, and we may be required to expend significant resources to obtain regulatory approval and to comply with ongoing
regulations in these jurisdictions. Regulatory approval in one country does not ensure regulatory approval in another, but a failure
or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.
The
ongoing COVID-19 pandemic, or a similar pandemic, epidemic, or outbreak of an infectious disease, may materially and adversely affect
our business and our financial results and could cause a disruption to the development of AV-101. As a result of medical complications
associated with PAH, the patient populations that AV-101 targets may be particularly susceptible to COVID-19, which may make it more
difficult for us to identify patients able to enroll in our current and future clinical trials and may impact the ability of enrolled
patients to complete any such trials.
Public
health crises such as pandemics or similar outbreaks could adversely impact our business. In December 2019, a novel strain of a virus
named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes COVID-19, spread to most countries across
the world, including all 50 states within the United States. The COVID-19 pandemic is evolving, with new variants of the SARS-CoV-2 virus
identified, and has led to the implementation of various responses, including government-imposed quarantines, travel restrictions, vaccine
mandates and other public health safety measures. The extent to which the coronavirus impacts our operations or those of our third party
partners, including our preclinical studies or clinical trial operations, will depend on future developments, which are highly uncertain
and cannot be predicted with confidence, including the duration of the outbreak, developments or perceptions regarding the safety of
vaccines, new information concerning the severity of the coronavirus and any additional preventative and protective actions taken to
contain the coronavirus or treat its impact, among others. The continued spread of COVID-19 globally, including the identification of
new variants of COVID-19, could adversely impact our clinical trial operations, including our ability to recruit and retain patients
and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs
in their geography. Similar to other biopharmaceutical companies, we may experience protocol deviations or delays in initiating or completing
our planned Phase 2b/3 clinical trial of AV-101, enrolling our clinical trial, or dosing of patients in our clinical trial as well as
activating new trial sites. For example, we experienced a short delay in our Phase 1 trial when the study site shut down due to COVID-19.
COVID-19 may also affect the third-party manufacturers of AV-101 and the DPI we plan to use in our Phase 2b/3 clinical trial, which could
impact our ability to procure sufficient supplies and cause delays in our trial.
In
addition, as a result of medical complications associated with PAH, the patient populations that AV-101 targets may be particularly susceptible
to COVID-19, which may make it more difficult for us to identify patients able to enroll in our current and future clinical trials and
may impact the ability of enrolled patients to complete any such trials. Any negative impact the ongoing COVID-19 pandemic has to patient
enrollment or treatment or the execution of our AV-101 clinical trials could cause costly delays to clinical trial activities, which
could adversely affect our ability to obtain regulatory approval for and to commercialize AV-101, increase our operating expenses, and
have a material adverse effect on our financial results. Timely enrollment in planned clinical trials is dependent upon clinical trial
sites which could be adversely affected by global health matters, such as pandemics. We plan to conduct our Phase 2b/3 clinical trial
for AV-101 in geographies which are currently affected by the COVID-19 pandemic. Some factors from the ongoing COVID-19 pandemic that
have the potential to delay or otherwise adversely affect enrollment in the clinical trials of AV-101, as well as our business generally,
include:
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potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, including the
attention of physicians serving as our clinical trial investigators, hospitals serving as our clinical trial sites and hospital staff
supporting the conduct of our prospective clinical trials;
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limitations
on travel that could interrupt key trial and business activities, such as clinical trial site initiations and monitoring, domestic
and international travel by employees, contractors or patients to clinical trial sites, including any government-imposed travel restrictions
or quarantines that will impact the ability or willingness of patients, employees or contractors to travel to our clinical trial
sites or secure visas or entry permissions, a loss of face-to-face meetings and other interactions with potential partners, any of
which could delay or adversely impact the conduct or progress of our prospective clinical trials;
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the
potential negative affect on the operations of our third-party manufacturers;
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interruption
in global shipping affecting the transport of clinical trial materials, such as investigational drug product, our DPIs and other
supplies used in our clinical trials;
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business
disruptions caused by potential workplace, laboratory and office closures and an increased reliance on employees working from home,
disruptions to or delays in ongoing laboratory experiments;
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operations,
staffing shortages, travel limitations or mass transit disruptions, any of which could adversely impact our business operations or
delay necessary interactions with local regulators, ethics committees and other important agencies and contractors;
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changes
in local regulations as part of a response to the ongoing COVID-19 pandemic, which may require us to change the ways in which our
clinical trials are conducted, which may result in unexpected costs, or to discontinue such clinical trials altogether; and
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interruption
or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines.
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We
may be required to develop and implement additional clinical trial policies and procedures designed to help protect subjects from the
COVID-19 virus. For example, in March 2020, the FDA issued a guidance, which the FDA has continued to periodically revise, on conducting
clinical trials during the pandemic, which describes a number of considerations for sponsors of clinical trials impacted by the pandemic.
We cannot presently predict the scope and severity of the planned and potential shutdowns or disruptions of businesses and government
agencies, such as the SEC, or FDA.
These
and other factors arising from the ongoing COVID-19 pandemic could worsen in countries that are already afflicted with COVID-19, particularly
as new variants of the virus continue to be identified, or could continue to spread to additional countries. Any of these factors, and
other factors related to any such disruptions that are unforeseen, could have a material adverse effect on our business and our results
of operations and financial condition. Further, uncertainty around these and related issues could lead to adverse effects on the economy
of the United States and other economies, which could impact our ability to raise the necessary capital needed to develop and commercialize
AV-101. We will continue to monitor the latest developments, disruptions and uncertainties relating to the COVID-19 pandemic, including
the pace of vaccinations and the emergence of new and more contagious strains of the virus, and any resulting impact on our business,
financial condition, results of operations and prospects. Any resulting financial impact cannot be reasonably estimated at this time
and may have a material adverse impact on our business, financial condition and results of operations.
We
have only recently begun testing of AV-101, a dry powder formulation of imatinib for the treatment of PAH administered using a DPI, to
assess its safety and tolerability. Although we believe that AV-101 has therapeutic potential for PAH based on oral imatinib’s
results in the Phase 3 IMPRES trial, we are utilizing a novel dry powder formulation which may not achieve better or similar levels of
clinical activity or may have similar tolerability challenges as oral imatinib. The results of earlier studies and trials of oral imatinib
in PAH patients and our Phase 1 clinical trial of AV-101 may not be predictive of future trial results for AV-101.
The
results of our Phase 1 clinical trial, as well as clinical testing of oral imatinib in PAH patients by third-parties, may not be predictive
of the results of our planned Phase 2b/3 clinical trial. In the second half of 2021, we plan to initiate our Phase 2b/3 trial of AV-101
with a target enrollment of 200 patients in the Phase 2b portion and expect to report topline data from the Phase 2b portion of the trial
in the middle of 2023. Our belief that AV-101 has a potential therapeutic benefit for PAH patients is based in part on the Phase 3 IMPRES
trial conducted by Novartis AG, or Novartis, which showed oral administration of imatinib, marketed as Gleevec for multiple cancers,
led to statistically significant improvements across both primary and secondary endpoints in PAH patients on top of PAH standard of care
therapies. Despite the statistically significant improvements in 6MWD and hemodynamics, there was no difference between oral imatinib
and placebo in time to clinical worsening (TTCW), a composite endpoint consisting of death, hospitalization due to worsening PAH, worsening
functional class, and a 15% reduction in 6MWD. Oral imatinib was associated with significant adverse events that precluded its approval
as a therapy for PAH. AV-101 is our proprietary inhaled dry powder formulation of imatinib that delivers the medicine directly to the
lung tissues using a DPI. While we have completed a Phase 1 clinical trial in 82 healthy volunteers, in which AV-101 demonstrated lower
plasma levels of imatinib compared to 400 mg of oral imatinib and a favorable tolerability profile at a dose of up to 90 mg twice a day,
AV-101 has not yet been tested in any patients with PAH to assess its efficacy and AV-101 may not have the same clinical activity as
oral imatinib seen in the IMPRES trial. We also cannot be certain that AV-101 will continue to show similar tolerability when dosed in
PAH patients as it did in healthy volunteers, and we may not be able to demonstrate to the satisfaction of the FDA the safety, efficacy
and acceptable risk-benefit profile of AV-101 during our planned Phase 2b/3 clinical trial. As a result, even if AV-101 does achieve
lower imatinib plasma concentrations in our Phase 2b/3 clinical trial, there can be no assurance that AV-101 will exhibit similar tolerability
as compared to our Phase 1 trial or improved tolerability as compared to the IMPRES trial of oral imatinib. Product candidates in later
stages of clinical trials may fail to show the desired pharmacological properties or safety and efficacy traits despite having progressed
through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical and biotechnology industries, including
Novartis in the IMPRES trial of oral imatinib, have suffered significant setbacks in Phase 3 clinical trials, even after positive results
in earlier clinical trials. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were
underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Notwithstanding
any promising results in our Phase 1 clinical trial, we cannot be certain that we will not face similar setbacks.
Additionally,
we may utilize “open-label” trial designs or open-label extensions to our clinical trials in the future. An “open-label”
clinical trial is one where both the patient and investigator know whether the patient is receiving the investigational product candidate
or either an existing approved drug or placebo. Most typically, open-label clinical trials test only the investigational product candidate
and sometimes may do so at different dose levels. Open-label clinical trials are subject to various limitations that may exaggerate any
therapeutic effect as patients in open-label clinical trials are aware when they are receiving treatment. Open-label clinical trials
may be subject to a “patient bias” where patients perceive their symptoms to have improved merely due to their awareness
of receiving an experimental treatment. In addition, open-label clinical trials may be subject to an “investigator bias”
where those assessing and reviewing the physiological outcomes of the clinical trials are aware of which patients have received treatment
and may interpret the information of the treated group more favorably given this knowledge. The results from an open-label trial or extension
may not be predictive of future clinical trial results with AV-101 when studied in a controlled environment with a placebo or active
control.
As
a result of the foregoing, even if we are able to complete any planed and future clinical trials of AV-101, the results may not be sufficient
to obtain regulatory approval.
If
we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise
adversely affected.
The
timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient
number of patients who remain in the study until its conclusion. We may experience difficulties in patient enrollment in our clinical
trials for a variety of reasons. We plan to initiate our Phase 2b/3 clinical trial of AV-101 in the second half of 2021. The Phase 2b
portion of this trial will be a dose-ranging trial in which PVR will be the primary endpoint and will have a target enrollment of 200
patients. The Phase 3 portion of the trial will be based on the optimal dose selected in the Phase 2b portion with 6MWD as the primary
endpoint. The enrollment of patients depends on many additional factors, including:
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size
and nature of the patient population and process for identifying patients;
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the
severity of the disease under investigation;
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the
availability and efficacy of approved drugs for the disease under investigation;
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the
patient eligibility criteria defined in the protocol;
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the
impact of the ongoing COVID-19 pandemic on our ability to identify patients able to enroll in our clinical trials and the ability
of enrolled patients to complete our clinical trials;
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the
general willingness of patients to enroll in the trial;
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the
size of the patient population required for analysis of the trial’s primary endpoints;
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the
proximity of patients to trial sites;
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the
design of the trial;
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our
ability to recruit clinical trial investigators with the appropriate competencies and experience, and to obtain Investigational Review
Board, or IRB, approval to conduct our trial at U.S. sites, and similar approvals at sites outside the U.S.;
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the
patient referral practices of physicians;
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the
ability to monitor patients adequately during and after treatment;
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clinicians’
and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available
therapies, including any new therapies that may be approved for the indications we are investigating;
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competition
for patients from other investigational clinical trials in PAH being conducted at the same time as our Phase 2b/3 trial;
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the
clinical site’s ability to obtain and maintain patient consents;
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delays
in or temporary suspension of the enrollment of patients in our planned clinical trial due to the ongoing COVID-19 pandemic; and
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the
risk that patients enrolled in clinical trials will drop out of the trials before completion, including as a result of contracting
COVID-19 or other health conditions or being forced to quarantine.
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Enrollment
risks are heightened with respect to indications that are rare or orphan diseases, which may limit the pool of patients that may be enrolled
in our planned clinical trials. We are developing AV-101 for the treatment of PAH, which is an orphan disease and does not have a large
patient population. As a result, we may encounter difficulties enrolling subjects in our clinical trials evaluating AV-101 for the treatment
of PAH due, in part, to the small size of this patient population.
In
addition, our clinical trials may compete with other clinical trials for product candidates that seek to treat PAH, and this competition
will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may
instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited,
we may conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number
of patients who are available for our clinical trials in such clinical trial sites.
Delays
in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent
completion of these trials and adversely affect our ability to advance the development of AV-101.
Clinical
development involves a lengthy and expensive process with an uncertain outcome, and delays can occur for a variety of reasons outside
of our control.
Clinical
development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time
during the clinical trial process. We have completed our Phase 1 trial of AV-101 in healthy volunteers and expect to commence our Phase
2b/3 dose-ranging clinical trial in PAH patients in the second half of 2021. The FDA has agreed in principle with the proposed study
design of our Phase 2b/3 efficacy trial, dose strengths, statistical analysis and that a single efficacy study with strong results could
be sufficient to support a 505(b)(2) NDA. However, changes in regulatory requirements and guidance may occur and we may need to amend
our clinical trial protocol to reflect these changes with appropriate regulatory authorities. In addition, we may experience delays in
initiating or completing our planned studies and trials of AV-101. Furthermore, we cannot be certain that studies or trials for AV-101
will begin on time, not require redesign, enroll an adequate number of subjects on time or be completed on schedule, if at all. Clinical
trials can be delayed or terminated for a variety of reasons, including delays or failures related to:
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the
FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical trials;
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delays
in obtaining regulatory authorization to commence a trial;
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reaching
agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation
and may vary significantly among different CROs and trial sites;
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obtaining
institutional review board, or IRB, approval at each trial site;
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recruiting
an adequate number of suitable patients to participate in a trial;
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the
number of patients required for clinical trials of our product candidates may be larger than we anticipate;
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having
subjects complete a trial or return for post-treatment follow-up;
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clinical
sites deviating from trial protocol or dropping out of a trial;
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addressing
subject safety concerns that arise during the course of a trial;
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adding
a sufficient number of clinical trial sites; or
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obtaining
sufficient quantities of AV-101 for use in clinical trials from third-party suppliers on a timely basis.
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We
may experience numerous adverse or unforeseen events during, or as a result of, preclinical studies and clinical trials that could
delay or prevent our ability to receive marketing approval or commercialize AV-101, including:
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we
may receive feedback from regulatory authorities that requires us to modify the design of our clinical trials;
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clinical
trials of AV-101 may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional
clinical trials or abandon our development program for AV-101;
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the
number of patients required for clinical trials of AV-101 may be larger than we anticipate, enrollment in these clinical trials may
be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;
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we
or our third-party contractors may fail to comply with regulatory requirements, fail to maintain adequate quality controls, or be
unable to produce sufficient product supply to conduct and complete clinical trials of AV-101 in a timely manner, or at all;
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we
or our investigators might have to suspend or terminate clinical trials of AV-101 for various reasons, including non-compliance with
regulatory requirements, a finding that AV-101 has undesirable side effects or other unexpected characteristics, or a finding that
the participants are being exposed to unacceptable health risks;
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the
cost of clinical trials of AV-101 may be greater than we anticipate;
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the
quality of our active pharmaceutical ingredient or other materials necessary to conduct clinical trials of AV-101 may be insufficient
or inadequate;
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the
FDA may determine that we cannot rely on the Section 505(b)(2) approval pathway for AV-101, in which case we may be required to conduct
additional clinical trials and provide additional data and information and meet additional standards for product approval;
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the
FDA may determine that we have identified the wrong listed drug(s), or LD, or that approval of a Section 505(b)(2) application for
AV-101 is blocked by patent or non-patent exclusivity of the LD or LDs;
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regulators
may revise the requirements for approving AV-101, or such requirements may not be as we anticipate; and
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future
collaborators may conduct clinical trials in ways they view as advantageous to them but that are sub-optimal for us.
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If
we are required to conduct additional clinical trials or other testing of AV-101 beyond those that we currently contemplate, if we
are unable to successfully complete clinical trials of AV-101 or other testing, if the results of these trials or tests are not positive
or are only moderately positive or if there are safety concerns, we may:
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incur
unplanned costs;
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be
delayed in obtaining marketing approval for AV-101 or not obtain marketing approval at all;
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obtain
marketing approval in some countries and not in others;
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obtain
marketing approval for indications or patient populations that are not as broad as intended or desired;
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obtain
marketing approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;
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be
subject to additional post-marketing testing requirements, which could be expensive and time consuming; or
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have
the treatment removed from the market after obtaining marketing approval.
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We
could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or ethics committees of the institutions
in which such trials are being conducted, by the Safety Monitoring Committee, if any, for such clinical trial or by the FDA or other
regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct
the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations
or trial site or a manufacturing, processing or storage site by the FDA or other regulatory authorities resulting in the imposition of
a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes
in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
Further,
we plan to conduct our Phase 2b/3 clinical trial for AV-101 in PAH patients globally. This presents additional risks that may delay completion
of our clinical trial. These risks include the failure of enrolled patients in foreign countries to adhere to clinical protocol as a
result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign
regulatory schemes, as well as political and economic risks relevant to such foreign countries.
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 a regulatory authority concludes that the financial relationship may have affected the interpretation of the
trial, 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 the marketing application we submit. Any such delay or rejection
could prevent or delay us from commercializing AV-101.
If
any of our clinical trials of AV-101 are unsuccessful, delayed or terminated, its commercial prospects may be harmed, and our ability
to generate revenues from sales of AV-101 will be delayed or not realized at all. In addition, any delays in completing our clinical
trials may increase our costs, slow down our AV-101 development and approval process and jeopardize our ability to commence product sales
and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition,
many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to
the denial of regulatory approval of AV-101. If AV-101 generally proves to be ineffective, unsafe or commercially unviable, it would
have a material and adverse effect on our business, financial condition, results of operations and prospects.
AV-101
may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval, limit the commercial
profile of an approved label, or result in significant negative consequences following marketing approval, if any.
The
results of our preclinical studies or clinical trials may show that AV-101 may cause undesirable side effects, which could interrupt,
delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other regulatory authorities. In light of
widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Government
Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events
have resulted in the withdrawal of drug products, revisions to drug labeling or boxed warnings that further limit use of the drug products
and establishment of risk management programs that may, for instance, restrict distribution of drug products. The increased attention
to drug safety issues may result in a more cautious approach by the FDA to clinical trials. Data from clinical trials may receive greater
scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before
completion, or require longer or additional clinical trials that may result in substantial additional expense and a delay or failure
in obtaining approval or approval for a more limited indication than originally sought.
While
AV-101 was generally well-tolerated in our Phase 1 clinical trial, subjects treated with 90 mg of AV-101, the highest dose in this trial,
reported a higher frequency of adverse events, including cough at the time of inhalation of the dry powder and headache. However, all
adverse events were generally mild and transient with only one discontinuation due to vomiting. The only adverse events experienced by
subjects treated at lower doses of AV-101 in the Phase 1 MAD portion of the trial were cough at dosing (1 of 9 patients in the medium
dose and 1 of 9 patients at the low dose) and throat irritation (1 patient of 9 at the medium dose). In contrast, the Phase 3 IMPRES
trial of oral imatinib in PAH patients demonstrated significant AEs, including nausea, edema, vomiting and diarrhea. Despite the clinical
effects of oral imatinib on their disease, 26% of patients on oral imatinib and 7% of placebo patients discontinued due to AEs by 24
weeks of the trial. Further development of oral imatinib for the treatment of PAH was discontinued by Novartis. We believe that delivery
of imatinib directly to the lungs through our proprietary dry powder formulation has the potential to maximize the amount of drug in
the targeted tissues while minimizing systemic exposure and minimizing the potential for serious adverse events. Nevertheless, if unacceptable
side effects arise in our Phase 2b/3 clinical trial or other trials we may conduct, we, the FDA, or the IRBs at the institutions in which
our studies are conducted could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could
order us to cease clinical trials or deny approval of AV-101 for PAH.
If
AV-101 receives marketing approval and we or others later identify undesirable side effects caused by such product or by other imatinib
products, a number of potentially significant negative consequences could result, including:
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regulatory
authorities may withdraw, suspend or limit approvals of the product, or seek an injunction against its manufacture or distribution;
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we
may be required to recall a product or change the way such product is administered to patients or conduct additional clinical trials
or post-approval studies;
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additional
restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component
thereof;
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we
may be required to add additional warnings or boxed warnings to our drug labeling or issue safety alerts, Dear Healthcare Provider
letters, press releases or other communications containing warnings or other safety information about the product;
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we
may be required to implement a Risk Evaluation and Mitigation Strategy, or REMS, which may include distribution or use restrictions;
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we
could be sued and held liable for harm caused to patients;
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we
may be subject to fines, injunctions or the imposition of criminal penalties;
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we
could be sued and held liable for harm caused to patients;
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the
product may become less competitive; and
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our
reputation may suffer.
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Any
of the foregoing events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved,
and result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.
Interim,
topline and preliminary results from our preclinical studies and clinical trials that we announce or publish from time to time may change
as more data become available and are subject to audit and verification procedures that could result in material changes in the final
data.
From
time to time, we may publicly disclose preliminary, interim or topline data from our preclinical studies and clinical trials. These interim
updates are based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject
to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations,
calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully
evaluate all data. As a result, the topline results that we report may differ from future results of the same studies or trials, or different
conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also
remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary
data we previously published. As a result, topline data should be viewed with caution until the final data are available. In addition,
we may report interim analyses of only certain endpoints rather than all endpoints. Interim data from clinical trials that we may complete
are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient
data become available. Adverse changes between interim data and final data could significantly harm our business and prospects. Further,
additional disclosure of interim data by us or by our competitors in the future could result in volatility in the price of our common
stock.
In
addition, the information we choose to publicly disclose regarding a particular study or trial is typically selected from a more extensive
amount of available information. Investors may not agree with what we determine is the material or otherwise appropriate information
to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future
decisions, conclusions, views, activities or otherwise regarding a particular product candidate or our business. If the preliminary or
topline data that we report differ from late, final or actual results, or if others, including regulatory authorities, disagree with
the conclusions reached, our ability to obtain approval for, and commercialize, any of our product candidates may be harmed, which could
harm our business, financial condition, results of operations and prospects.
We
intend to use the 505(b)(2) regulatory pathway to seek regulatory approval of AV-101, but if the FDA concludes that our marketing application
no longer qualifies for the Section 505(b)(2) regulatory pathway, then our application may not be accepted by the FDA for review and
approval may be delayed.
We
intend to seek FDA approval for AV-101 for PAH through the Section 505(b)(2) regulatory pathway. Section 505(b)(2) of the Federal Food,
Drug, and Cosmetic Act, or FDCA, was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman
Amendments, and permits the submission of an NDA where at least some of the information required for approval comes from preclinical
studies or clinical trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The
FDA interprets Section 505(b)(2) of the FDCA to permit the applicant to rely upon the FDA’s previous findings of safety and efficacy
for an approved product. The FDA requires submission of information needed to support any changes to a previously approved drug, such
as published data or new studies conducted by the applicant or clinical trials demonstrating safety and efficacy. The FDA could require
additional information to sufficiently demonstrate safety and efficacy to support approval. If the FDA later determines AV-101 does not
meet the requirements of Section 505(b)(2), or that additional information is needed to support a marketing application for AV-101, we
could experience delays in submitting a marketing application or in obtaining marketing approval. Moreover, even if AV-101 is approved
under the Section 505(b)(2) regulatory pathway, the approval may be subject to limitations on the indicated uses for which it may be
marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor
the safety or efficacy of the products.
Risks
Related to Commercialization
We
face, and will continue to face, significant competition and our failure to effectively compete may prevent us from achieving significant
market penetration for AV-101, if approved. Most of our competitors have significantly greater resources than we do and we may not be
able to successfully compete.
The
pharmaceutical industry is highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller
companies. Many of these companies have greater financial resources, marketing capabilities and experience in obtaining regulatory approvals
for product candidates. There are several pharmaceutical companies, biotechnology companies, public and private universities, government
agencies and research organizations actively engaged in research and development of products to target PAH. We expect AV-101 to compete
on the basis of, among other things, efficacy, safety, convenience, price, and the availability of reimbursement from commercial, government
and other third-party payors. One or more of our competitors may develop products based upon the principles underlying our proprietary
technologies earlier than us, obtain approvals for such products from the FDA more rapidly than us or develop alternative products or
therapies that are safer, more effective and/or more cost effective than AV-101. We also expect to face competition in our efforts to
identify appropriate collaborators or partners to help commercialize AV-101 in our target commercial areas.
If
approved, AV-101 is expected to face competition from drug products that are already on the market, as well as those in clinical development.
In particular, we expect that AV-101 will face competition from prostanoids available in oral form as Orenitram (United Therapeutics
Corporation, or United Therapeutics) and Uptravi (Janssen Pharmaceuticals, Inc., or Janssen), by inhalation as Tyvaso (United Therapeutics),
and by infusion as Remodulin (United Therapeutics), which are existing drug products indicated for the treatment of PAH, potential new
entrants such as sotatercept (Acceleron Pharma, Inc.), rodatristat ethyl (Altavant Sciences, Inc.) and/or, seralutinib (Gossamer Bio,
Inc.), as well as generic equivalents of Tyvaso following the expiry of Tyvaso’s patent in 2018. On October 15, 2018, United Therapeutics
Corporation, or United Therapeutics, and MannKind closed their worldwide exclusive licensing and collaboration agreement for the development
and commercialization of a dry powder formulation of treprostinil, an investigational product currently being evaluated in clinical trials
for the treatment of PAH. Under the agreement, United Therapeutics will be responsible for global development, regulatory and commercial
activities. MannKind will manufacture clinical supplies and initial commercial supplies of the product while long-term commercial supplies
will be manufactured by United Therapeutics. United Therapeutics announced that they filed an NDA for the inhaled dry powder formulation
of treprostinil in April. Additionally, we are aware that Arena Pharmaceuticals, Inc., or Arena, has commenced a Phase 3 trial evaluating
ralinepag, an oral prostanoid product for the treatment of patients suffering from PAH. On January 24, 2019, Arena and United Therapeutics
closed on a global license agreement for ralinepag. Under the agreement, United Therapeutics is now responsible for the development,
manufacture and commercialization of ralinepag. These collaborations may accelerate competition for AV-101. Finally, we are aware that
Tenax Therapeutics, Inc. and Aerami Therapeutics, Inc. are developing imatinib for PAH and have initiated Phase 1 trials. We believe
that AV-101, if approved, could be used prior to or in combination with prostanoids, and in combination with existing front-line agents
such as the oral PDE5 inhibitors, including Revatio (Pfizer Inc.) and Adcirca (United Therapeutics); the sGC stimulator Adempas (Bayer
AG); and oral ERAs, including Tracleer (Janssen), Letairis (Gilead Sciences, Inc.) and Opsumit (Janssen). PAH is also an active indication
for investigational drugs, and we may face competition in the future from sotatercept (Acceleron Pharma, Inc.), rodatristat ethyl (Altavant
Sciences, Inc.) and/or, seralutinib (Gossamer Bio, Inc.). Many of our competitors have significantly greater financial, technical, manufacturing,
marketing, sales and supply resources and experience than we do. If we successfully obtain approval for AV-101, we will face competition
based on many different factors, including the safety and effectiveness of AV-101, the ease with which AV-101 can be administered and
the extent to which patients accept the inhaled route of administration, the timing and scope of regulatory approvals for AV-101, the
availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage and patent position. Competing
products could present superior treatment alternatives, by being more effective, safer, less expensive or marketed and sold more effectively
than AV-101. Competitive products may make any products we develop obsolete or noncompetitive before we recover the expense of developing
and commercializing AV-101. Such competitors could also recruit our employees, which could negatively impact our level of expertise and
our ability to execute our business plan.
If
the FDA or comparable regulatory authorities approve generic versions of AV-101, or do not grant AV-101 a sufficient period of market
exclusivity before approving its generic version, our ability to generate revenue may be adversely affected.
Once
a NDA is approved, including under the 505(b)(2) pathway, the product covered thereby becomes a “reference listed drug” in
the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” commonly known as the Orange
Book. Manufacturers may seek approval of generic versions of reference listed drugs through submission of abbreviated new drug applications,
or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical trials to assess safety and efficacy.
Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration
and conditions of use or labelling as the reference listed drug and that the generic version is bioequivalent to the reference listed
drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to
bring to market than the reference listed drug and companies that produce generic products are generally able to offer them at lower
prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference
listed drug is typically lost to the generic product.
Generic
drug manufacturers may seek to launch generic products following the expiration of any applicable exclusivity period we obtain if AV-101
is approved, even if we still have patent protection. Competition that AV-101 could face from generic versions could materially and adversely
affect our future revenue, profitability, and cash flows and substantially limit our ability to obtain a return on the investments we
have made in AV-101.
If
the market opportunity for AV-101 is smaller than we estimate or if any regulatory approval that we obtain is based on a narrower definition
of the patient population, our revenue and ability to achieve profitability will be adversely affected, possibly materially.
The
incidence and prevalence for target patient populations of AV-101 has not been established with precision. AV-101 is an inhaled dry powder
formulation of anti-proliferative imatinib for people who suffer from PAH. A DPI is used to deliver the medicine directly to lung tissues,
enabling treatment of the diseased tissues directly while reducing the amount of drug delivered to other organs in the body which can
cause unwanted adverse events. Our projections of both the number of people who have PAH, as well as the subset of people with PAH who
have the potential to benefit from AV-101, are based on our estimates.
The
total addressable market opportunity will ultimately depend upon, among other things, the patient criteria included in the final label,
the indications for which AV-101 is approved for sale, acceptance by the medical community and patient access, product pricing and reimbursement.
The number of patients with PAH for which AV-101 may be approved as treatment may turn out to be lower than expected, patients may not
be otherwise amenable to treatment with our 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. AV-101 is our only product candidate and therefore our
business is dependent on the market opportunity for our product.
The
successful commercialization of AV-101 will depend in part on the extent to which governmental authorities, private health insurers,
and other third-party payors provide coverage and adequate reimbursement levels. Failure to obtain or maintain coverage and adequate
reimbursement for AV-101, if approved, could limit our ability to market our product and decrease our ability to generate revenue.
In
the United States and markets in other countries, patients generally rely on third-party payors to be able to afford medical services
and pharmaceutical products that receive FDA approval. Our ability to successfully commercialize our product candidates will depend in
part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government
health administration authorities, private health insurers and other organizations. A decision by a third-party payor not to cover or
separately reimburse for AV-101, could reduce physician utilization if approved. Assuming there is coverage for AV-101 by a third-party
payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high.
We cannot be sure that coverage and reimbursement in the United States, the European Union, or EU, or elsewhere will be available for
AV-101 and any reimbursement that may become available may not be adequate or may be decreased or eliminated in the future.
No
uniform policy for coverage and reimbursement for products exists among third-party payors in the United States. Therefore, coverage
and reimbursement for products can differ significantly from payor to payor. Private third-party payors tend to follow Medicare coverage
policies and payment limitations in setting their own reimbursement rates to a substantial degree, but also have their own methods and
approval process apart from Medicare determinations. As a result, the coverage determination process is often a time-consuming and costly
process that may require us to provide scientific and clinical support for the use of AV-101 to each payor separately, with no assurance
that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Furthermore, rules and regulations
regarding reimbursement change frequently, in some cases on short notice, and we believe that changes in these rules and regulations
are likely. Factors payors consider in determining reimbursement are based on whether the product is: (i) a covered benefit under its
health plan; (ii) safe, effective and medically necessary; (iii) appropriate for the specific patient; (iv) cost-effective; and (v) neither
experimental nor investigational.
Moreover,
increasing efforts by governmental and other third-party payors in the United States and abroad to cap or reduce healthcare costs have
resulted in increasing challenges to prices charged for pharmaceutical products and services, and many third-party payors may refuse
to provide coverage and adequate reimbursement for particular drugs when an equivalent generic drug, biosimilar or a less expensive therapy
is available. Even if we show improved efficacy or improved convenience of administration with AV-101, pricing of existing third-party
therapeutics may limit the amount we will be able to charge for it. These third-party payors may deny or revoke the reimbursement status
of AV-101, if approved, or establish prices for it at levels that are too low to enable us to realize an appropriate return on our investment.
If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize AV-101.
Net
prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by
any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in
the United States. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from
list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any
product candidate that we commercialize and, if reimbursement is available, the level of reimbursement. In addition, many pharmaceutical
manufacturers must calculate and report certain price reporting metrics to the government, such as average sales price, or ASP, and best
price. Penalties may apply in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs may
be reduced by mandatory discounts or rebates required by government healthcare programs.
Outside
the United States, pharmaceutical products are generally subject to extensive governmental price controls and other market regulations,
and we believe the increasing emphasis on cost-containment initiatives in Europe and other countries will likely put pressure on the
pricing and usage of medical products. In many countries, the prices of medical products are subject to varying price control mechanisms
as part of national health systems. Other countries allow companies to fix their own prices for medical products, but monitor and control
company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able
to charge for AV-101. Accordingly, in markets outside the United States, the reimbursement for AV-101 may be reduced compared with the
United States and may be insufficient to generate commercially-reasonable revenue and profits.
Even
if AV-101 obtains regulatory approval, it may fail to achieve market acceptance.
Even
if AV-101 receives FDA or other regulatory approvals, its commercial success will depend significantly on its adoption and use by physicians
and patients for approved indications. The degree of market acceptance of AV-101, if approved, will depend on a number of factors, including:
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the
safety and efficacy of AV-101 as compared to other available treatments for PAH;
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patient
satisfaction with the results of AV-101 and overall treatment experience, including, the ease and convenience of administration of
AV-101;
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the
perceived advantages of AV-101 over alternative treatments, such as prostacylins;
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the
clinical indications for which AV-101 is approved and patient demand for approved products that treat those indications;
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our
ability to manufacture and release adequate commercial supplies on a timely basis;
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the
availability of coverage and adequate reimbursement from managed care plans, private insurers, government payors (such as Medicare
and Medicaid) and other third-party payors for AV-101;
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the
cost of treatment with AV-101 in relation to alternative treatments and patients’ ability and willingness to pay out-of-pocket
for the product, if approved, in the absence of coverage and/or adequate reimbursement from third-party payors;
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acceptance
by physicians, operators of hospitals and clinics and patients of the product as a safe, effective and easy to administer treatment;
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physician
and patient willingness to adopt a new therapy over other available therapies for treatment of PAH;
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the
prevalence and severity of side effects;
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the
effectiveness of our sales, marketing and distribution efforts;
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adverse
publicity about AV-101 or favorable publicity about competitive products;
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potential
product liability claims; and
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the
approval of other new therapies for the same indication.
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We
cannot assure you that AV-101, if approved, will achieve market acceptance among physicians and patients. Any failure by AV-101, if approved,
to achieve market acceptance or commercial success would adversely affect our results of operations.
We
currently have no sales organization. If we are unable to establish sales capabilities on our own or through third parties, we may not
be able to market and sell AV-101 effectively in the United States and foreign jurisdictions, if approved, or generate product revenue.
In
June 2021, we hired a Senior Vice President of Commercial but we currently do not have other employees in our commercial organization.
In order to commercialize AV-101, if approved, in the United States and foreign jurisdictions, we must build our marketing, sales, commercial
operations, access and distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform
these services, and we may not be successful in doing so. If AV-101 receives regulatory approval, we expect to establish a full commercial
organization in the United States with technical expertise and supporting marketing, sales, access and distribution capabilities to commercialize
it, which will be expensive and time consuming. As a company, Aerovate has no prior experience in the marketing, sale and distribution
of pharmaceutical products and there are significant risks involved in building and managing a sales organization, including our ability
to hire, retain, and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing
personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our
internal sales, marketing, commercial operations, access and distribution capabilities would adversely impact the commercialization of
AV-101. We may choose to collaborate with third parties that have commercial capabilities, either to augment our own commercial capabilities
or in lieu of Aerovate building certain capabilities such as those related to sales or distribution. If we are unable to enter into such
arrangements on acceptable terms or at all, we may not be able to successfully commercialize AV-101. If we are not successful in commercializing
AV-101, either on our own or through arrangements with one or more third parties, we may not be able to generate product revenue and
we would incur significant additional losses.
If
product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization
of AV-101.
We
face an inherent risk of product liability as a result of the planned clinical testing of AV-101 and will face an even greater risk if
we commercialize it. For example, we may be sued if AV-101 allegedly causes injury. Any such product liability claims may include allegations
of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and
a breach of warranty. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves
against product liability claims, we may incur substantial liabilities or be required to limit commercialization of AV-101. Even successful
defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims
may result in:
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decreased
demand for AV-101;
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injury
to our reputation;
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withdrawal
of clinical trial participants;
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costs
to defend the related litigation;
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a
diversion of management’s time and our resources;
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substantial
monetary awards to trial participants or patients;
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regulatory
investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;
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loss
of revenue; and
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the
inability to commercialize AV-101.
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Our
inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against
potential product liability claims could prevent or inhibit the commercialization of AV-101. We currently carry product liability insurance
covering our clinical trials, however, any claim that may be brought against us could result in a court judgment or settlement in an
amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance
policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage.
We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not
covered by our insurance, and we may not have, or be able to obtain, sufficient funds to pay such amounts. Moreover, in the future, we
may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when
we obtain approval for marketing any dose of AV-101, we intend to expand our insurance coverage to include its sale; however, we may
be unable to obtain this liability insurance on commercially reasonable terms or at all.
Risks
Related to Our Reliance on Third Parties
We
rely, and intend to continue to rely, on qualified third parties to supply all components of AV-101. As a result, we are dependent on
several third parties, some of which are sole source suppliers, for the manufacture of AV-101 and our supply chain, and if we experience
problems with any of these suppliers, or they fail to comply with applicable regulatory requirements or to supply sufficient quantities
at acceptable quality levels or prices, or at all, it would materially and adversely affect our business.
We
do not own or operate manufacturing facilities for clinical or commercial manufacture of either our proprietary dry-powder formulation
of imatinib or the DPI, including the drug substance and packaging. We have limited personnel with experience in drug-device product
manufacturing and we lack the capabilities to manufacture either the drug component of AV-101 or the DPI on a clinical or commercial
scale. We outsource all manufacturing and packaging of AV-101 to third parties and obtain the DPI from a sole source supplier, and we
do not plan to own or operate our own manufacturing and packaging facilities. There can be no assurance that our clinical development
product supplies will not be limited, interrupted, or of satisfactory quality or continue to be available at acceptable prices. For example,
since the beginning of the pandemic, three vaccines for COVID-19 have received Emergency Use Authorization by the FDA and one of those
later received marketing approval. Additional vaccines may be authorized or approved in the future. The resultant demand for vaccines
and potential for manufacturing facilities and materials to be commandeered under the Defense Production Act of 1950, or equivalent foreign
legislation, has placed strain on manufacturing supply chains and may make it more difficult to obtain materials or manufacturing slots
for the products needed for our clinical trials, which could lead to delays in these trials. In particular, any replacement of any of
our third-party suppliers could require significant effort and expertise because there may be a limited number of qualified replacements.
Certain
of our suppliers are subject to regulatory requirements covering manufacturing, testing, quality control and record keeping relating
to AV-101, and are subject to pre-approval and ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply
with applicable regulations may result in long delays and interruptions to our manufacturing capacity while we seek to secure another
supplier that meets all regulatory requirements.
Reliance
on third-party manufacturers entails risks that we would more directly manage and control, or to which we would not be subject, if we
manufactured AV-101 ourselves, including:
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reliance on the third parties for regulatory compliance, quality assurance and hazardous materials handling;
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the possible breach of the manufacturing and quality agreements by the third parties because of factors beyond our control;
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the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on their own business priorities;
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with respect to any manufacturers with which we do not have a long-term agreement, the possibility that the manufacturer decides to stop supplying to us or changes the price or other terms of supply; and
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Changes in the products produced by our suppliers, such that they satisfy specifications but have an unanticipated negative impact on the performance of AV-101.
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Any
of these factors could cause the delay of required approvals or commercialization of AV-101, could prevent us from commercializing it
successfully, could cause the suspension of initiation or completion of clinical trials and regulatory submissions, and could lead to
higher product costs.
In
addition, the facilities used by our contract manufacturing organizations, or CMOs to manufacture AV-101 are subject to various regulatory
requirements and may be subject to inspection by the FDA or other regulatory authorities. We do not directly control manufacturing at
our CMOs, and are completely dependent on them for compliance with current regulatory requirements. If our CMOs for AV-101 cannot successfully
manufacture components of finished product that conforms to our specifications and the regulatory requirements of the FDA or comparable
regulatory authorities in foreign jurisdictions, we may not be able to rely on them for the manufacture of AV-101. If we are required
to change CMOs for any reason, we will be required to verify that the new CMO maintains facilities and procedures that comply with quality
standards and with applicable regulations. We will also need to verify, such as through a manufacturing comparability study, that any
new manufacturing process will produce AV-101 according to the specifications previously submitted to the FDA or another regulatory authority.
In addition, changes in manufacturers often involve changes in manufacturing procedures and processes, which could require that we conduct
bridging studies between our prior clinical supply used in our clinical trials and that of any new manufacturer. We may be unsuccessful
in demonstrating the comparability of clinical supplies which could require the conduct of additional clinical trials. In addition, we
have limited control over the ability of our CMOs to maintain adequate quality control, quality assurance and qualified personnel. If
the FDA or a comparable foreign regulatory authority finds our facilities or those of our CMOs inadequate for the manufacture of AV-101
or if such facilities are subject to enforcement action in the future or are otherwise inadequate, we may need to find alternative manufacturing
facilities, which would significantly impact our ability to develop, obtain regulatory approval for or commercialize AV-101 and the timing
of any such approval and commercialization.
Additionally,
our CMOs may experience manufacturing difficulties due to resource constraints or as a result of labor shortages, disputes or unstable
political environments or on account of global pandemics or similar events, including the COVID-19 pandemic and its continued spread.
If our CMOs were to encounter any of these difficulties, our ability to provide AV-101 to patients in clinical trials, or to provide
product for the treatment of patients once approved, would be jeopardized.
We
rely, and intend to continue to rely, on third parties in the conduct of all of our clinical trials. If these third parties do not successfully
carry out their contractual duties, fail to comply with applicable regulatory requirements or meet expected deadlines, we may be unable
to obtain regulatory approval for AV-101.
We
currently do not have the ability to independently conduct any clinical trials. The FDA and comparable foreign regulatory authorities
in other jurisdictions require us to comply with regulations and standards, commonly referred to as good clinical practice, or GCP, requirements
for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are
scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical
trials. We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct
GCP-compliant clinical trials of AV-101 properly and on time. Our global Phase 2b/3 clinical trial will be managed by one CRO and carried
out in over 20 countries and numerous clinical sites. While we have agreements with these third parties, we monitor and control only
certain aspects of their activities and have limited influence over their actual performance and the amount or timing of resources that
they devote to our programs. Third parties with whom we contract may also have relationships with other commercial entities, including
our competitors, for whom they may also be conducting clinical trials or other drug development activities that could harm our competitive
position. The third parties with whom we contract for execution of our clinical trials play a significant role in the conduct of these
trials and the subsequent collection and analysis of data. Although we rely on these third parties to conduct our clinical trials, we
remain responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol
and applicable laws and regulations, and our reliance on these third parties does not relieve us of our regulatory responsibilities.
If
the third parties conducting our clinical trials do not adequately perform their contractual duties or obligations, experience significant
business challenges, disruptions or failures, do not meet expected deadlines, terminate their agreements with us or need to be replaced,
or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our protocols or to GCPs, or for
any other reason, we may need to enter into new arrangements with alternative third parties. This could be difficult, costly or impossible,
and clinical trials may need to be extended, delayed, terminated or repeated. As a result, we may not be able to obtain regulatory approval
in a timely fashion, or at all, for AV-101, our results our business and results of operations and the commercial prospects for AV-101
would be harmed, our costs could increase, and our ability to generate revenues could be delayed.
We
rely on third parties to supply the raw materials to produce AV-101.
We
will rely on independent third parties to supply the raw materials that we use to produce AV-101. As such, we will be dependent upon
their services and will not be in a position to control their operations as we might if we directly produced these raw materials. We
do not have supplier contracts with these third parties. Although we believe the raw materials used to manufacture our products are readily
available and can be obtained from multiple reliable sources on a timely basis, circumstances outside our control may impair our ability
to have an adequate supply of raw materials to produce AV-101 which could lead to production delays, interruptions or the need to identify
and qualify new raw materials in the production of AV-101.
We
may seek to establish collaborations, and, if we are not able to establish them on commercially reasonable terms, or at all, we may have
to alter our development and commercialization plans.
Our
product development program and the potential commercialization of AV-101 will require substantial cash to fund expenses. We may decide
to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of AV-101.
We
face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend,
among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed
collaboration and the proposed collaborator’s own evaluation of a potential collaboration. Such factors a potential collaborator
will use to evaluate a collaboration may include the design or results of clinical trials, the likelihood of approval by the FDA or comparable
foreign regulatory authorities, the potential market for AV-101, the costs and complexities of manufacturing and delivering AV-101 to
patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist
if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally.
The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate
on and whether such a collaboration could be more attractive than the one with us for AV-101. The terms of any additional collaborations
or other arrangements that we may establish may not be favorable to us.
We
may also be restricted under collaboration agreements from entering into future agreements on certain terms with potential collaborators.
Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent
business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We
may not be able to negotiate additional collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so,
we may have to curtail the development of AV-101 for which we are seeking to collaborate, reduce or delay its development program, delay
its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake
development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization
activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we
do not have sufficient funds, we may not be able to further develop AV-101 or bring it to market and generate product revenue.
In
addition, any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend
heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts
and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical
development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate
and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties
has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are
terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could
harm our business reputation.
Risks
Related to Our Intellectual Property
We
have many pending patent applications with respect to AV-101, but do not own any issued patents. We can provide no assurance that any
of our current or future patent applications will result in issued patents. If we cannot protect our patent rights or our other proprietary
rights, others may develop products similar or identical to ours, and we may not be able to compete effectively in our market or successfully
commercialize any product candidates we may develop.
Our
success depends to a significant degree upon whether we can continue to secure, enforce and defend intellectual property rights that
protect our AV-101 product candidate and to operate our business without infringing, misappropriating or otherwise violating the intellectual
property rights of others. If we are unable to obtain and maintain sufficient intellectual property protection for AV-101 or other product
candidates that we may identify, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors
and other third parties could develop and commercialize product candidates similar or identical to ours, and our ability to successfully
commercialize AV-101 and other product candidates that we may pursue may be impaired. We do not own any issued patents with respect to
AV-101, and we can provide no assurance that any of our current or future patent applications will result in issued patents or that any
issued patents will provide us with any competitive advantage. Failure to obtain such issued patents could have a material adverse effect
on our ability to develop and commercialize our product candidates. Furthermore, other parties may successfully challenge, invalidate
or circumvent our issued patents so that our patent rights do not create an effective competitive barrier or revenue source.
We
seek to protect our proprietary position by, among other things, filing patent applications in the United States and abroad related to
our proprietary technologies, development programs and product candidates. The patent prosecution process is expensive and time-consuming,
and we may not be able to file and prosecute all necessary or desirable patent applications or to maintain, defend and enforce any patents
that may issue from such patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify
patentable aspects of our research and development output before it is too late to obtain patent protection. We currently own a number
of U.S. provisional patent applications. U.S. provisional patent applications are not eligible to become issued patents until, among
other things, we file a non-provisional patent application within 12 months of filing of one or more of our related provisional patent
applications. With regard to such U.S. provisional patent applications, if we do not timely file any non-provisional patent applications,
we may lose our priority date with respect to our provisional patent applications and any patent protection on the inventions disclosed
in our provisional patent applications. Further, in the event that we do timely file non-provisional patent applications relating to
our provisional patent applications, we cannot predict whether any such patent applications will result in the issuance of patents or
if such issued patents will provide us with any competitive advantage.
Further,
any of our provisional or non-provisional patent applications may fail to result in issued patents with claims that cover our proprietary
products and technology, including our AV-101 product candidate or any other product candidate in the United States or in other foreign
countries, in whole or in part. Although we enter into non-disclosure and confidentiality agreements with parties who have access to
patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators,
contract research organizations, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach
these agreement and disclose such results before a patent application is filed, thereby jeopardizing our ability to seek patent protection.
The
patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal, technological and
factual questions and has, in recent years, been the subject of much debate and litigation throughout the world. In addition, the laws
of foreign countries may not protect our rights to the same extent as the laws of the United States, or vice versa. As a result, the
issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. The subject matter claimed
in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance.
Therefore, our pending and future patent applications may not result in patents being issued in relevant jurisdictions that protect our
product candidates, in whole or in part, or which effectively prevent others from commercializing competitive product candidates, and
even if our patent applications issue as patents in relevant jurisdictions, they may not issue in a form that will provide us with any
meaningful protection for our product candidates or technology, prevent competitors from competing with us or otherwise provide us with
any competitive advantage. Additionally, our competitors may be able to circumvent our patents by developing similar or alternative product
candidates or technologies in a non-infringing manner.
In
the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however,
the life of a patent, and the protection it affords, is limited. Without patent protection for our current or future product candidates,
we may be open to competition from generic versions of such products. Given the amount of time required for the development, testing
and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates
are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing
products similar or identical to ours.
The
issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in
the courts or patent offices in the United States and abroad. We may be subject to a third-party preissuance submission of prior art
to the United States Patent and Trademark Office, or the USPTO, or become involved in opposition, derivation, revocation, reexamination,
inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others,
or other proceedings in the USPTO or applicable foreign offices that challenge priority of invention or other features of patentability.
An adverse determination in any such submission, proceeding or litigation could result in loss of exclusivity or freedom to operate,
patent claims being narrowed, invalidated or held unenforceable, in whole or in part, limit the scope or duration of the patent protection
of AV-101, all of which could limit our ability to stop others from using or commercializing similar or identical product candidates
or technology to compete directly with us, without payment to us, or result in our inability to manufacture or commercialize product
candidates or approved products (if any) without infringing third-party patent rights. In addition, if the breadth or strength of protection
provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating
with us to license, develop or commercialize current or future product candidates, or could have a material adverse effect on our ability
to raise funds necessary to continue our research programs or clinical trials. Such proceedings also may result in substantial cost and
require significant time from our scientists and management, even if the eventual outcome is favorable to us.
We
cannot be certain that the USPTO and courts in the United States or the patent offices and courts in foreign countries will consider
the claims in our patents and applications covering our AV-101 product candidate and possible future product candidates as patentable.
Method-of-use patents protect the use of a product for the specified method. 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, including through legal action.
If
we lose or cannot obtain patent protection for our AV-101 product candidate or other future product candidates it could have a material
adverse impact on our business.
Intellectual
property litigation could cause us to spend substantial resources and prevent us from pursuing our programs.
From
time to time we may have to defend our intellectual property rights. If we are involved in an intellectual property dispute, we may need
to litigate to defend our rights or assert them against others. Disputes can involve arbitration, litigation or proceedings declared
by the USPTO or the International Trade Commission or foreign patent authorities. Even if resolved in our favor, litigation or other
legal proceedings relating to intellectual property claims 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 adequately conduct such litigation or proceedings. 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
and more mature and developed intellectual property portfolios.
If
we were to initiate legal proceedings against a third party to enforce a patent covering our product candidate, the defendant could counterclaim
that our patent is invalid or unenforceable. In patent litigation in the United States and in Europe, defendant counterclaims alleging
invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory
requirements, for example, lack of novelty, obviousness or non-enablement. Third parties might allege unenforceability of our patents
because during prosecution of the patent an individual connected with such prosecution withheld relevant information or made a misleading
statement. The outcome of proceedings involving assertions of invalidity and unenforceability during patent litigation is unpredictable.
With respect to the validity of patents, for example, we cannot be certain that there is no invalidating prior art of which we and the
patent examiner were unaware during prosecution, but that an adverse third party may identify and submit in support of such assertions
of invalidity. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and
perhaps all, of the patent protection on our product candidate. Our patents and other intellectual property rights also will not protect
our technology if competitors design around our protected technology without infringing our patents or other intellectual property rights.
Because
of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.
Because
of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patent, any patents
that may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted
cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders.
In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other
non-litigious action or solution.
Third
parties may initiate or threaten legal proceedings alleging that we are infringing their intellectual property rights, the outcome of
which would be uncertain and could have a material adverse effect on the success of our business.
Our
commercial success depends upon our ability and the ability of our strategic partners to develop, manufacture, market and sell our drugs
and use our proprietary technologies without infringing the proprietary rights and intellectual property of third parties. Extensive
litigation regarding patents and other intellectual property rights is common in the biotechnology and pharmaceutical industries. We
may in the future become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with
respect to our drugs and technology, including interference, derivation, reexamination, post-grant review, opposition, cancellation or
similar proceedings before the USPTO or its foreign counterparts. Third parties may assert infringement claims against us based on existing
patents or patents that may be granted in the future, resulting in payment of damages. These damages potentially include increased damages
and attorneys’ fees if we are found to have infringed such rights willfully. Parties making claims against us may seek and obtain
injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our product candidates.
We may not be aware of all such intellectual property rights potentially relating to our drugs and their uses. If a third party claims
that our AV-101 product candidate or our technology infringe its patents or other intellectual property rights, we or our partners may
have to discontinue an important product or product line, alter our products and processes, pay license fees or cease certain activities.
We could be required to obtain a license from such third party in order to continue developing and commercializing AV-101 or other product
candidates. However, we may not be able to obtain a license to needed intellectual property on commercially reasonable terms, if at all.
Even if a license can be obtained on reasonable terms, the rights may be nonexclusive, which would give our competitors access to the
same intellectual property rights. We might also be forced to redesign or modify our product candidates so that we no longer infringe
the third-party intellectual property rights, which may result in significant cost or delay to us, or which redesign or modification
could be impossible or technically infeasible. There are many patents issued or applied for in the biotechnology industry, and we may
not be aware of patents or patent applications held by others that relate to our business. This is especially true since patent applications
in the United States are filed confidentially for the first 18 months. Moreover, the validity and breadth of biotechnology patents involve
complex legal and factual questions for which important legal issues remain. Thus, we do not know with certainty that our drugs or our
intended commercialization thereof, does and will not infringe or otherwise violate any third party’s intellectual property.
We
will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately
enforce our intellectual property rights even in the jurisdictions where we seek protection.
Filing,
prosecuting and defending patents on drugs in all countries and jurisdictions throughout the world would be prohibitively expensive,
and our intellectual property rights in some countries outside the United States could be less extensive than those we could obtain in
the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as
laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries
outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.
Competitors
may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products. In addition,
competitors may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong
as that in the United States. These products may compete with our products and our patent rights or other intellectual property rights
may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions,
our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.
The
laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many
companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions.
The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual
property protection, especially those relating to biotechnology. This could make it difficult for us to stop competitors from infringing
our patent rights or misappropriating our other intellectual property rights. For example, many foreign countries have compulsory licensing
laws under which a patent owner must grant licenses to third parties. In addition, many countries limit our right to enforce our patent
rights against third parties, including government agencies, government contractors, or doctors. In these countries, patents may provide
limited or no benefit. We must ultimately seek patent protection on a country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have
the benefit of patent protection in such countries.
In
addition, 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 patent rights at risk of being invalidated or interpreted narrowly, could
put 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.
If
we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent protection
for AV-101, our business may be materially harmed.
Depending
upon the timing, duration and specifics of the first FDA marketing authorization of AV-101, a United States patent that we own may be
eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as
the Hatch-Waxman Amendments. The Hatch-Waxman Amendments allow the owner of an approved product to extend patent protection for up to
five years as compensation for patent term lost during product development and the FDA regulatory review process. During this period
of extension, the scope of protection is limited to the approved product and approved uses.
Although
we plan on seeking patent term restoration for our products, we may not succeed if, for example, we fail to apply within applicable deadlines,
fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the applicable
time period or the scope of patent protection afforded could be less than we request. If we cannot obtain patent term restoration or
the term of any such patent restoration is less than we request, our competitors may enter the market and compete against us sooner than
we anticipate, and our ability to generate revenue could be materially adversely affected.
We
may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent
which might adversely affect our ability to develop, manufacture and market our product candidate.
We
cannot guarantee that any of our patent searches or analyses, including but not limited to the identification of relevant patents, analysis
of the scope of relevant patent claims or determination of the expiration of relevant patents, are complete or thorough, nor can we be
certain that we have identified each and every third-party patent and pending application in the United States, Europe and elsewhere
that is relevant to or necessary for the commercialization of AV-101 in any jurisdiction. For example, in the United States, applications
filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain
confidential until patents issue. Patent applications in the United States, EU and elsewhere are published approximately 18 months after
the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore,
patent applications covering our product candidates could be filed by others without our knowledge. Additionally, pending patent applications
that have been published can, subject to certain limitations, be later amended in a manner that could cover AV-101 or the use of AV-101.
After issuance, the scope of patent claims remains subject to construction as determined by an interpretation of the law, the written
disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a
pending application may be incorrect, which may negatively impact our ability to market our product candidates. We may incorrectly determine
that AV-101 is not covered by a third-party patent or may incorrectly predict whether a third party’s pending application will
issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States, the EU or elsewhere
that we consider relevant may be incorrect, which may negatively impact our ability to develop and market AV-101. Our failure to identify
and correctly interpret relevant patents may negatively impact our ability to develop and market AV-101.
If
we fail to correctly identify or interpret relevant patents, we may be subject to infringement claims. We cannot guarantee that we will
be able to successfully settle or otherwise resolve such infringement claims. If we fail in any such dispute, in addition to being forced
to pay monetary damages, we may be temporarily or permanently prohibited from commercializing AV-101. We might, if possible, also be
forced to redesign AV-101 in a manner that no longer infringes third-party intellectual property rights. Any of these events, even if
we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able
to devote to our business.
Changes
in United States patent law could diminish the value of patents in general, thereby impairing our ability to protect AV-101.
Recent
court rulings, including rules from the United States Supreme Court, have narrowed the scope of patent protection available in certain
circumstances and weakened 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 United States 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 that we might obtain in the future.
In
addition, the America Invents Act, or the AIA, which was passed in September 2011, resulted in significant changes to the U.S. patent
system. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned from a “first-to-invent”
to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are
filed by different parties claiming the same invention. Under a “first-to-file” system, assuming the other requirements for
patentability are met, the first inventor to file a patent application generally will be entitled to a patent on the invention regardless
of whether another inventor had made the invention earlier. A third party that files a patent application in the USPTO after that date
but before us could therefore be awarded a patent covering an invention of ours even if we made the invention before it was made by the
third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application and diligent
in filing patent applications, but circumstances could prevent us from promptly filing patent applications on our inventions.
Among
some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing
opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued
before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal
courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for
the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a
district court action.
Accordingly,
a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged
by the third party as a defendant in a district court action. It is not clear what, if any, impact the AIA will have on the operation
of our business. However, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our
patent applications and the enforcement or defense of our issued patents.
We
may become involved in opposition, interference, derivation, inter partes review or other proceedings challenging our patent rights,
and the outcome of any proceedings are highly uncertain. An adverse determination in any such proceeding could reduce the scope of, or
invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without
payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.
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 United States for disease treatments that prove successful, as a matter of public policy regarding worldwide health
concerns.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The
USPTO and European and other patent agencies require compliance with a number of procedural, documentary, fee payment and other similar
provisions during the patent application process. In addition, periodic maintenance and annuity fees on any issued patent are due to
be paid to the USPTO and European and other patent agencies over the lifetime of a patent. While an inadvertent failure to make payment
of such fees or to comply with such provisions can in many cases be cured by additional payment of a late fee or by other means in accordance
with the applicable rules, there are situations in which non-compliance with such provisions will result in the abandonment or lapse
of the patent or patent application, and the partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events
that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed
time limits, non-payment of fees and failure to properly legalize and submit formal documents within prescribed time limits. If we fail
to maintain the patents and patent applications covering AV-101 or if we otherwise allow our patents or patent applications to be abandoned
or lapse, it can create opportunities for competitors to enter the market, which would hurt our competitive position and could impair
our ability to successfully commercialize our product candidates in any indication for which they are approved.
We
may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We
generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and contractors.
These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive
property. However, those agreements may not be honored and may not effectively assign intellectual property rights to us. Moreover, there
may be some circumstances, where we are unable to negotiate for such ownership rights. Disputes regarding ownership or inventorship of
intellectual property can also arise in other contexts, such as collaborations and sponsored research. If we are subject to a dispute
challenging our rights in or to patents or other intellectual property, such a dispute could be expensive and time consuming. If we were
unsuccessful, we could lose valuable rights in intellectual property that we regard as our own. The issuance of a patent is not conclusive
as to its inventorship.
We
may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information
of third parties.
We
could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets
or other confidential information of former employers or competitors. Although we try to ensure that our employees and consultants do
not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may become subject
to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement, or that we or these
individuals have, inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of a former
employer or competitor.
While
we may litigate to defend ourselves against these claims, even if we are successful, litigation could result in substantial costs and
could be a distraction to management. If our defenses to these claims fail, in addition to requiring us to pay monetary damages, a court
could prohibit us from using technologies or features that are essential to our product candidates, if such technologies or features
are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. Moreover, any
such litigation or the threat thereof may adversely affect our reputation, our ability to form strategic alliances or sublicense our
rights to collaborators, engage with scientific advisors or hire employees or consultants, each of which would have an adverse effect
on our business, results of operations and financial condition.
If
we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
We
rely on trade secrets and confidentiality agreements to protect our unpatented know-how, technology and other proprietary information
and to maintain our competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets
and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access
to them, such as our employees, collaborators consultants, advisors and other third parties. We also enter into confidentiality and invention
or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with
each party that may have or has had access to our trade secrets or proprietary technology and processes. Despite these efforts, any of
these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able
to obtain adequate remedies for such breaches. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our
product candidates that we consider proprietary. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether
the steps we have taken to protect our proprietary information will be effective.
We
also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security
of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures
could be breached. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming,
and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect
trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party,
we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were
to be disclosed to or independently developed by a competitor or other third party, our competitive position would be materially and
adversely harmed.
If
we and our partners do not adequately protect the trademarks and trade names for our products, then we and our partners may not be able
to build name recognition in our markets of interest and our business may be adversely affected.
Our
competitors or other third parties may challenge, infringe or circumvent the trademarks or trade names for our products. We and our partners
may not be able to protect these trademarks and trade names. In addition, if the trademarks or trade names for one of our products infringe
the rights of others, we or our partners may be forced to stop using the trademarks or trade names, which we need for name recognition
in our markets of interest. If we cannot establish name recognition based on our trademarks and trade names, we and our partners may
not be able to compete effectively and our business may be adversely affected.
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. The following examples are illustrative:
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others
may make drug products that are similar to AV-101 but that are not covered by the claims of our patents;
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we,
or current or future strategic partners, might not have been the first to make the inventions covered by our issued patent or pending
patent applications;
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we,
or current or future strategic partners, might not have been the first to file patent applications covering our inventions;
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others
may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
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our
pending and future patent applications may not lead to issued patents;
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issued
patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors;
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our
competitors might conduct research and development activities in countries where we do not have patent rights and then use the information
learned from such activities to develop competitive products for sale in our major commercial markets;
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we
may not develop additional proprietary technologies that are patentable; and
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the
patents of others may have an adverse effect on our business.
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Should
any of these events occur, they could significantly harm our business, results of operations and prospects.
Risks
Related to Government Regulation
We
may be unable to obtain regulatory approval for AV-101 under applicable regulatory requirements. The denial or delay of any such approval
would delay commercialization of AV-101 and adversely impact our potential to generate revenue, our business and our results of operations.
We
have not previously submitted an NDA or any other marketing application to the FDA or similar filings to comparable foreign regulatory
authorities. An NDA or other similar regulatory filing requesting approval to market a product candidate must include extensive preclinical
and clinical data and supporting information to establish that the product candidate is safe, effective, pure and potent for each desired
indication. The NDA or other similar regulatory filing must also include significant information regarding the chemistry, manufacturing
and controls for the product.
The
research, testing, manufacturing, labeling, approval, sale, marketing and distribution of pharmaceutical products are subject to extensive
regulation by the FDA and other regulatory authorities in the United States and other countries, and such regulations differ from country
to country. We are not permitted to market AV-101 in the United States or in any foreign countries until it receives the requisite approval
from the applicable regulatory authorities of such jurisdictions.
The
FDA or any foreign regulatory bodies can delay, limit or deny approval of AV-101 for many reasons, including:
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our
inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that AV-101 is safe and effective
for the requested indication;
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the
FDA’s or the applicable foreign regulatory agency’s disagreement with our trial protocol or the interpretation of data
from preclinical studies or clinical trials;
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our
inability to demonstrate that the clinical and other benefits of AV-101 outweigh any safety or other perceived risks;
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the
FDA’s or the applicable foreign regulatory agency’s requirement for additional preclinical studies or clinical trials;
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the
FDA’s or the applicable foreign regulatory agency’s non-approval of the formulation, labeling or specifications of AV-101;
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the
FDA’s or the applicable foreign regulatory agency’s failure to approve our manufacturing processes and facilities or
the facilities of third-party manufacturers upon which we rely; or
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the
potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in
a manner rendering our clinical data insufficient for approval.
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Of
the large number of pharmaceutical products in development, only a small percentage successfully complete the FDA or other regulatory
bodies’ approval processes and are commercialized.
Even
if we eventually complete clinical testing and receive approval from the FDA or applicable foreign agencies for AV-101, the FDA or the
applicable foreign regulatory agency may grant approval contingent on the performance of costly additional clinical trials which may
be required after approval. The FDA or the applicable foreign regulatory agency also may approve AV-101 for a more limited indication
or a narrower patient population than we originally requested, and the FDA, or applicable foreign regulatory agency, may not approve
it with the labeling that we believe is necessary or desirable for the successful commercialization.
Any
delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of AV-101 and would
materially adversely impact our business and prospects.
AV-101
is a drug-device combination product, which may result in additional regulatory risks.
Our
finished drug product, a proprietary inhaled dry powder formulation and DPI, will be regulated as a drug-device combination product.
The DPI we use to administer AV-101 is currently CE marked and used outside the United States but AV-101 would be the first drug to obtain
approval with this DPI in the United States. We believe the delivery device we selected will work well with AV-101; however, the Phase
2b trial will be the first time we use the device in a clinical trial, and the capsules we use with the DPI in Phase 2b will be filled
with higher amounts of active pharmaceutical ingredient compared to the Phase 1 trial. There may be additional regulatory risks for drug-device
combination products. We may experience delays in obtaining regulatory approval of AV-101 given the increased complexity of the review
process when approval of the product and a delivery device is sought under a single marketing application. In the United States, each
component of a combination product is subject to the requirements established by the FDA for that type of component, whether a drug,
biologic or device. The DPI will be subject to FDA design control device requirements which comprise among other things, design verification,
design validation (including human factors testing), and testing to assess performance, cleaning, and robustness. Delays in or failure
of the studies conducted by us, or failure of our company, our collaborators, if any, or our third-party providers or suppliers to maintain
compliance with regulatory requirements could result in increased development costs, delays in or failure to obtain regulatory approval,
and associated delays in AV-101 reaching the market.
We
plan to conduct clinical trials for AV-101 outside the United States, and the FDA, EMA and applicable foreign regulatory authorities
may not accept data from such trials.
We
plan to conduct our Phase 2b/3 clinical trial of AV-101 in PAH patients globally. The acceptance of trial data from clinical trials conducted
outside the United States by the FDA, EMA, or applicable foreign regulatory authority may be subject to certain conditions. In cases
where data from foreign clinical trials are intended to serve as the basis for marketing approval in the United States, the FDA will
generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the United States population
and United States medical practice; and (ii) the trials were performed by clinical investigators of recognized competence and pursuant
to GCP regulations. Additionally, the FDA’s clinical trial requirements, including sufficient size of patient populations and statistical
powering, must be met. Many foreign regulatory bodies have similar approval requirements.
In
addition, such foreign trials will be subject to the applicable local laws of the foreign jurisdictions where the trials are conducted.
There can be no assurance that the FDA, EMA, or any applicable foreign regulatory authority will accept data from trials conducted outside
of the United States. If the FDA, EMA, or any applicable foreign regulatory authority does not accept such data, it would result in the
need for additional trials, which would be costly and time-consuming and delay aspects of our business plan, and which may result in
AV-101 not receiving approval or clearance for commercialization in the applicable jurisdiction.
Even
if we obtain regulatory approval for AV-101, we will be subject to ongoing regulatory requirements, which may result in significant additional
expenses. Additionally, AV-101, if approved, could be subject to labeling and other restrictions, and we may be subject to penalties
if we fail to comply with regulatory requirements or experience unanticipated problems with AV-101.
If
AV-101 is approved by the FDA or a comparable foreign regulatory authority, it will be subject to extensive and ongoing regulatory requirements
for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies,
and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States
and requirements of comparable foreign regulatory authorities. These requirements include submissions of safety and other post-marketing
information and reports, establishment registration and listing, as well as continued compliance with current GMPs, and Good Manufacturing
Practices, or GMPs, for any clinical trials that we conduct post-approval. Any regulatory approvals that we receive for our product candidates
may also be subject to limitations on the approved indicated uses, including the duration of use, for which the product may be marketed
or to the conditions of approval, or contain requirements for potentially costly post-marketing studies, including Phase 4 clinical trials,
and surveillance to monitor the safety and efficacy of the product. The FDA may also require a REMS in order to approve AV-101, which
could entail requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted
distribution methods, patient registries and other risk minimization tools.
Manufacturers
and manufacturers’ facilities are required to comply with extensive FDA and comparable foreign regulatory authority requirements,
including ensuring that quality control and manufacturing procedures conform to current GMP regulations and implementing tracking and
tracing requirements for certain prescription pharmaceutical products. As such, we and our contract manufacturers will be subject to
continual review and inspections to assess compliance with current GMP and adherence to commitments made in any approved marketing application.
Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including
manufacturing, production, and quality control.
We
will have to comply with requirements concerning advertising and promotion for AV-101. Promotional communications with respect to prescription
drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s
approved label. As such, we may not promote AV-101 for indications or uses for which they do not have approval. However, companies may
share truthful and not misleading information that is otherwise consistent with a product’s FDA approved labeling. We also must
submit new or supplemental applications and obtain approval for certain changes to AV-101, if approved, product labeling, or manufacturing
process.
If
we discover previously unknown problems with AV-101, such as adverse events of unanticipated severity or frequency, or problems with
the facility where AV-101 is manufactured, or if the FDA disagrees with the promotion, marketing or labeling of AV-101, the FDA may impose
restrictions on it or us, including requiring withdrawal of it from the market. If we fail to comply with applicable regulatory requirements,
the FDA and other regulatory authorities may, among other things:
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issue
warning letters or other regulatory enforcement action;
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impose
injunctions, fines or civil or criminal penalties;
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suspend
or withdraw regulatory approval;
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suspend
any of our ongoing clinical studies;
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refuse
to approve pending applications or supplements to approved applications;
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require
revisions to the labeling, including limitations on approved uses or the addition of additional warnings, contraindications or other
safety information, including boxed warnings;
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impose
a REMS which may include distribution or use restrictions;
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require
the conduct of an additional post-market clinical trial or trials to assess the safety of the product;
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impose
restrictions on our operations, including closing our contract manufacturers’ facilities where regulatory inspections identify
observations of noncompliance requiring remediation; or
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restrict
the marketing of the product, require a product recall, seizure or detention, or refuse to permit the import or export of the product.
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Any
government action or investigation of alleged violations of law could require us to expend significant time and resources in response,
and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect
our ability to commercialize and generate revenue from AV-101. If regulatory sanctions are applied or if regulatory approval is withdrawn,
the value of our company and our operating results will be adversely affected.
Moreover,
the policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could
prevent, limit or delay regulatory approval of AV-101. We cannot predict the likelihood, nature or extent of government regulation that
may arise from future legislation or administrative or executive action, either in the United States or abroad. In addition, if we are
slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to
maintain regulatory compliance, we may be subject to enforcement action and we may not achieve or sustain profitability.
We
may seek priority review designation for AV-101, but we might not receive such designation, and even if we do, such designation may not
lead to a faster regulatory review or approval process.
If
the FDA determines that a product candidate offers a treatment for a serious condition and, if approved, the product would provide a
significant improvement in safety or effectiveness, the FDA may designate the product candidate for priority review. A priority review
designation means that the goal for the FDA to review an application is six months, rather than the standard review period of ten months.
We may request priority review for AV-101 for the treatment of PAH. The FDA has broad discretion with respect to whether or not to grant
priority review status to a product candidate, so even if we believe AV-101 is eligible for such designation or status, the FDA may decide
not to grant it. Moreover, a priority review designation does not necessarily result in an expedited regulatory review or approval process
or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Receiving priority review from
the FDA does not guarantee approval within the six-month review cycle or at all.
We
have received orphan drug designation from the FDA and EMA for AV-101 for treatment of PAH, but we may be unable to obtain such designations
or unable to maintain the benefits associated with orphan drug status, including the potential for non-patent market exclusivity.
We
have obtained orphan drug designation for AV-101 in the United States from the FDA and in the European Union from the EMA. We may not
be able to obtain or maintain the benefits associated with orphan drug designation, including the potential for non-patent market exclusivity.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient
populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a drug or biologic as an orphan drug if it is a product
intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually
in the United States, or a patient population of 200,000 or more in the United States where there is no reasonable expectation that the
cost of developing the product will be recovered from sales in the United States. In the United States, orphan drug designation entitles
a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.
Similarly,
in the European Union, the European Commission, upon the recommendation of the EMA’s Committee for Orphan Medicinal Products, grants
orphan drug designation to promote the development of drugs that are intended for the diagnosis, prevention or treatment of life-threatening
or chronically debilitating conditions and either (i) such condition affects not more than 5 in 10,000 persons in the European Union
or (ii) without incentives, it is unlikely that the marketing of the drug in the European Union would be sufficient to justify the necessary
investment in its development, and, in each case, for which no satisfactory method of diagnosis, prevention, or treatment has been authorized
(or the product would be a significant benefit to those affected). In the European Union, orphan drug designation entitles a party to
financial incentives such as reduction of fees or fee waivers.
Generally,
if a product with an orphan drug designation subsequently receives the first regulatory 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 EMA from approving another
marketing application for the same product and indication for that time period, except in limited circumstances. The applicable period
is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if, at the end
of the fifth year, it is established that a product no longer meets the criteria for orphan drug designation, including if the product
is sufficiently profitable so that market exclusivity is no longer justified.
Even
if we obtain orphan drug exclusivity for AV-101, that exclusivity may not effectively protect AV-101 from competition because different
products can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same product
for the same condition if the FDA concludes that the later product is clinically superior in that it is shown to be safer, more effective
or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is
approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing
rights in the United States may be lost if the FDA later 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
or if another product with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient
care. Orphan drug designation neither shortens the development time or regulatory review time of a product nor gives the product any
advantage in the regulatory review or approval process. Although we have received orphan drug designation from the EMA, there is no guarantee
that we will enjoy the benefits of such designation.
A
fast track designation by the FDA, even if granted for AV-101, may not lead to a faster development or regulatory review or approval
process, and does not increase the likelihood that our product candidates will receive marketing approval.
If
a product candidate is intended for the treatment of a serious or life-threatening condition and the product candidate demonstrates the
potential to address unmet medical needs for this condition, the sponsor may apply for fast track designation by FDA for a particular
indication. We may seek fast track designation for AV-101, but there is no assurance that the FDA will grant this status to AV-101. The
FDA has broad discretion whether or not to grant fast track designation, so even if we believe AV-101 is eligible for this designation,
there can be no assurance that the FDA would decide to grant it. Even if we do receive fast track designation, we may not experience
a faster development process, review or approval compared to conventional FDA procedures, and receiving a fast track designation does
not provide assurance of ultimate FDA approval. In addition, the FDA may withdraw fast track designation at any time if it believes that
the designation is no longer supported by data from our clinical development program.
A
breakthrough therapy designation by the FDA, even if granted for AV-101, may not lead to a faster development, regulatory review or approval
process, and each designation does not increase the likelihood that AV-101 will receive regulatory approval in the United States.
We
may seek a breakthrough therapy designation for AV-101 for treatment of PAH. A breakthrough therapy is defined as a drug or biologic
that is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening disease or
condition and preliminary clinical evidence indicates that the drug or biologic may demonstrate substantial improvement over existing
therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
For product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor
of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in
ineffective control regimens. Products designated as breakthrough therapies by the FDA may also be eligible for priority review and accelerated
approval. Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe AV-101 meets the
criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event,
the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval
compared to therapies considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In
addition, even if AV-101 qualifies as a breakthrough therapy, the FDA may later decide that it no longer meets the conditions for qualification
or decide that the time period for FDA review or approval will not be shortened.
Even
if we obtain FDA approval for AV-101 in the United States, we may never obtain approval for or successfully commercialize AV-101 outside
of the United States, which would limit our ability to realize its full market potential.
In
order to market AV-101 outside of the United States, we must obtain marketing authorizations and comply with numerous and varying regulatory
requirements of other countries regarding quality, safety and efficacy. Clinical trials conducted in one country may not be accepted
by foreign regulatory authorities, and regulatory approval in one country does not mean that regulatory approval will be obtained in
any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative
review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical
studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country
and could delay or prevent the introduction of AV-101 in those countries. We, as a company, do not have experience in obtaining regulatory
approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain
required approvals, or if regulatory approval in international markets is delayed, our target market for AV-101 will be reduced and we
would not be able to realize the full market potential of AV-101.
Our
business operations and current and future relationships with investigators, healthcare professionals, consultants, third-party payors,
patient organizations and customers will be subject to applicable healthcare regulatory laws, which could expose us to penalties.
Our
business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors,
patient organizations and customers, may expose us to broadly applicable fraud and abuse and other healthcare laws. These laws may constrain
the business or financial arrangements and relationships through which we conduct our operations, including how we research, market,
sell and distribute AV-101, if approved. Such laws include, but are not limited to:
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the United States federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration (including any kickback, bribe, or certain rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under any United States federal healthcare program, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Violations are subject to civil and criminal fines and penalties for each violation, plus up to three times the remuneration involved, imprisonment, and exclusion from government healthcare programs. In addition, 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 federal False Claims Act or federal civil money penalties;
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the United States federal civil monetary penalty and civil and criminal false claims laws, including the civil federal False Claims Act, which can be enforced through civil whistleblower or qui tam actions, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the United States federal government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the United States federal government. Pharmaceutical manufacturers can cause false claims to be presented to the United States federal government by engaging in impermissible marketing practices, such as the off-label promotion of a product for an indication for which it has not received FDA approval. In addition, the government may assert that a claim including items and services resulting from a violation of the United States federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit a person from knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false, fictitious, or fraudulent statements or representations in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
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the
FDCA, which prohibits, among other things, the adulteration or misbranding of drugs, biologics and medical devices;
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HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing
regulations, including the Final Omnibus Rule published in January 2013, which impose requirements on certain covered healthcare
providers, health plans, and healthcare clearinghouses as well as their respective business associates, independent contractors or
agents of covered entities, that perform services for them that involve the creation, maintenance, receipt, use, or disclosure of,
individually identifiable health information relating to the privacy, security and transmission of individually identifiable health
information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly
applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions
in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil
actions. In addition, there may be additional federal, state and non-U.S. laws which govern the privacy and security of health and
other personal 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;
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the
United States Physician Payments Sunshine Act and its implementing regulations, which requires certain manufacturers of drugs, devices,
biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program,
with specific exceptions, to report annually to the government information related to certain payments and other transfers of value
to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other health care professionals
beginning in 2022 (physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists
& anesthesiologist assistants, and certified nurse-midwives), and teaching hospitals, as well as ownership and investment interests
held by the physicians described above and their immediate family members;
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federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
consumers;
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analogous
United States state laws, including: state anti-kickback and false claims laws, which may apply to our business practices, including
but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed
by any third-party payor, including private 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 United States 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 file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration
and items of value provided to healthcare professionals and entities; and state and local laws requiring the registration of pharmaceutical
sales representatives;
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the
United States Foreign Corrupt Practices Act of 1977, as amended, which prohibits, among other things, United States companies and
their employees and agents from authorizing, promising, offering, or providing, directly or indirectly, corrupt or improper payments
or anything else of value to foreign government officials, employees of public international organizations and foreign government
owned or affiliated entities, candidates for foreign political office, and foreign political parties or officials thereof; and
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similar
healthcare laws in the European Union and other jurisdictions, including reporting requirements detailing interactions with and payments
to healthcare providers and laws governing privacy and security of health information, many of which differ from each other in significant
ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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Ensuring
that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations
will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply
with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws.
If our operations are found to be in violation of any of the laws described above or any other governmental laws that may apply to us,
we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from government-funded
healthcare programs, such as Medicare and Medicaid or similar programs in other countries or jurisdictions, integrity oversight and reporting
obligations to resolve allegations of non-compliance, disgorgement, imprisonment, contractual damages, reputational harm, diminished
profits and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we
expect to do business are found to not be in compliance with applicable laws, they may be subject to significant criminal, civil or administrative
sanctions, including exclusions from government funded healthcare programs and imprisonment, which could affect our ability to operate
our business. Further, defending against any such actions can be costly, time-consuming and may require significant personnel resources.
Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
Healthcare
legislative reform measures may have a material adverse effect on our business and results of operations.
The
United States and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system
that could prevent or delay regulatory approval of our current or future product candidates or any future product candidates, restrict
or regulate post-approval activities and affect our ability to profitably sell a product for which we obtain regulatory approval. Changes
in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example:
(i) changes to our manufacturing arrangements, (ii) additions or modifications to product labeling, (iii) the recall or discontinuation
of our products or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the
operation of our business.
In
the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in
March 2010, the Patient Protection and Affordable Care Act, or the ACA, was passed, which substantially changed the way healthcare is
financed by both governmental and private insurers, and significantly impacted the United States pharmaceutical industry. The ACA, among
other things, subjected biological products to potential competition by lower-cost biosimilars, 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 and extended the rebate
program to individuals enrolled in Medicaid managed care organizations, established annual fees and taxes on manufacturers of certain
branded prescription drugs, and created a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer
50% (increased to 70% pursuant to the Bipartisan Budget Act of 2018, effective as of 2019) point-of-sale discounts off negotiated prices
of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient
drugs to be covered under Medicare Part D. Since then, the ACA risk adjustment program payment parameters have been updated annually.
Since
its enactment, there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA.
On December 20, 2019, former President Trump signed into law the Further Consolidated Appropriations Act (H.R. 1865), which repealed
the Cadillac tax, the health insurance provider tax, and the medical device excise tax. On June 17, 2021, the U.S. Supreme Court dismissed
the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA.
Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special enrollment period from February
15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order
also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare,
including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies
that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how other
healthcare reform measures of the Biden administration or other efforts, if any, to challenge, repeal or replace the ACA will impact
our business.
Other
legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control
Act of 2011, among other things, included aggregate reductions of Medicare payments to providers of 2% per fiscal year, and, due to subsequent
legislative amendments, will remain in effect through 2030, unless additional Congressional action is taken. However, pursuant to the
Coronavirus Aid, Relief and Economic Security Act, or CARES Act, and subsequent legislation, these Medicare sequester reductions have
been suspended from May 1, 2020 through December 31, 2021 due to the COVID-19 pandemic. In addition, the American Taxpayer Relief Act
of 2012, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment
centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Additionally, in May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step therapy for Part B drugs
beginning January 1, 2020. However, it is unclear whether the Biden administration will challenge, reverse, revoke or otherwise modify
these executive and administrative actions after January 20, 2021.
There
has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically,
there have been several recent United States Congressional inquiries and proposed federal and state legislation designed to, among other
things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between
pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At a federal level, President
Biden signed an Executive Order on July 9, 2021 (i) directing the FDA to, among other things, work with states and tribes to safely import
prescription drugs from Canada, continue to clarify and improve the approval framework for generic drugs and identify and address any
efforts to impede generic drug competition; and (ii) affirming the administration’s policy to support the enactment of a public
health insurance option. Among other things, the Executive Order also directs HHS to provide a report on actions to combat excessive
pricing of prescription drugs, enhance the domestic drug supply chain, reduce the price that the Federal government pays for drugs, and
address price gouging in the industry; and directs the FDA to work with states and Indian Tribes that propose to develop section 804
Importation Programs in accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and the FDA’s
implementing regulations. FDA released such implementing regulations on September 24, 2020, which went into effect on November 30, 2020,
providing guidance for states to build and submit importation plans for drugs from Canada. On September 25, 2020, CMS stated drugs imported
by states under this rule will not be eligible for federal rebates under Section 1927 of the Social Security Act and manufacturers would
not report these drugs for “best price” or Average Manufacturer Price purposes. Since these drugs are not considered covered
outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost for these drugs. Further, on November
20, 2020 CMS issued an Interim Final Rule implementing the Most Favored Nation, or MFN, Model under which Medicare Part B reimbursement
rates would have been calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization
for Economic Cooperation and Development countries with a similar gross domestic product per capita. However, on August 6, 2021 CMS announced
a proposed rule to rescind the Most Favored Nations rule. Additionally, on November 30, 2020, HHS published a regulation removing safe
harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy
benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected
at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers.
Pursuant to court order, the removal and addition of the aforementioned safe harbors have been delayed until January 1, 2023. Further,
implementation of this change and new safe harbors for point-of-sale reductions in price for prescription pharmaceutical products and
pharmacy benefit manager service fees are currently under review by the Biden administration and may be amended or repealed. Although
a number of these and other proposed measures may require authorization through additional legislation to become effective, and the Biden
administration may reverse or otherwise change these measures, both the Biden administration and Congress have indicated that it will
continue to seek new legislative measures to control drug costs.
Further,
on May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients
to access certain investigational new product candidates that have completed a Phase 1 clinical trial and that are undergoing investigation
for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without
obtaining FDA permission under the FDA expanded access program. There is no obligation for a pharmaceutical manufacturer to make its
product candidates available to eligible patients as a result of the Right to Try Act.
At
the state level, individual states are increasingly active in passing legislation and implementing 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. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to
determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs.
These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing.
We
expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our current
or future product candidates or additional pricing pressures. In particular any policy changes through CMS as well as local state Medicaid
programs could have a significant impact on our business.
Our
revenue prospects could be affected by changes in healthcare spending and policy in the United States and abroad. We operate in a highly
regulated industry and new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions,
related to healthcare availability, the method of delivery or payment for healthcare products and services could negatively impact our
business, operations and financial condition.
There
have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at
broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may
be adopted in the future, including repeal, replacement or significant revisions to the ACA. The continuing efforts of the government,
insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or
impose price controls may adversely affect:
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demand for our current or future product candidates, if we obtain regulatory approval;
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our
ability to set a price that we believe is fair for our products;
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our
ability to obtain coverage and reimbursement approval for a product;
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our
ability to generate revenue and achieve or maintain profitability;
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the
level of taxes that we are required to pay; and
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the
availability of capital.
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Any
reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors,
which may adversely affect our future profitability.
The
FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.
If
AV-101 is approved and we are found to have improperly promoted off-label uses of this product, we may become subject to significant
liability. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products,
if approved. In particular, while the FDA permits the dissemination of truthful and non-misleading information about an approved product,
a manufacturer may not promote a product for uses that are not approved by the FDA or such other regulatory agencies as reflected in
the product’s approved labeling. If we are found to have promoted such off-label uses, we may become subject to significant liability.
The federal government has levied large civil and criminal fines against companies for alleged improper promotion of off-label use and
has enjoined several companies from engaging in off-label promotion. The government has also imposed consent decrees, corporate integrity
agreements or permanent injunctions under which specified promotional conduct must be changed or curtailed. If we cannot successfully
manage the promotion of our product candidates, if approved, we could become subject to significant liability, which would materially
adversely affect our business and financial condition.
Inadequate
funding for the FDA, the SEC and other government agencies, including from government shut downs, or other disruptions to these agencies’
operations, could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from
being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on
which the operation of our business may rely, which could negatively impact our business.
The
ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding
levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory and policy changes. Average
review times at the agency have fluctuated in recent years as a result. Disruptions at the FDA and other agencies may also slow the time
necessary for new product candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect our
business. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those
that fund research and development activities, is subject to the political process, which is inherently fluid and unpredictable.
Disruptions
at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary
government agencies, which would adversely affect our business. For example, over the last several years the United States government
has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and
other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the
ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Further, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly
capitalize and continue our operations.
Separately,
since March 2020 when foreign and domestic inspections were largely placed on hold due to the COVID-19 pandemic, the FDA has been working
to resume routine surveillance, bioresearch monitoring and pre-approval inspections on a prioritized basis. The FDA has developed a rating
system to assist in determining when and where it is safest to conduct prioritized domestic inspections. As of May 2021, certain inspections,
such as foreign preapproval, surveillance, and for-cause inspections that are not deemed mission-critical, remain temporarily postponed.
In April 2021, the FDA issued guidance for industry formally announcing plans to employ remote interactive evaluations, using risk management
methods, to meet user fee commitments and goal dates, and in May 2021 announced plans to continue progress toward resuming standard operational
levels. Should FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the review cycle
due to restrictions on travel, and the FDA does not determine a remote interactive evaluation to be adequate, the agency has stated that
it generally intends to issue a complete response letter or defer action on the application until an inspection can be completed. In
2020 and 2021, a number of companies announced receipt of complete response letters due to the FDA’s inability to complete required
inspections for their applications. Regulatory authorities outside the U.S. may adopt similar restrictions or other policy measures in
response to the COVID-19 pandemic and may experience delays in their regulatory activities. If a prolonged government shutdown or other
disruption occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which
could have a material adverse effect on our business. Future shutdowns or other disruptions could also affect other government agencies
such as the SEC, which may also impact our business by delaying review of our public filings, to the extent such review is necessary,
and our ability to access the public markets.
Risks
Relating to Employee Matters and Managing Growth
We
will need to increase the size of our organization, and we may experience difficulties in managing growth.
As
of September 30, 2021, we had eight full-time employees. We will need to continue to expand our managerial, operational, finance and
other resources in order to manage our operations and clinical trials, continue our development activities and commercialize AV-101.
Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to
effectively execute our growth strategy requires that we:
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effectively
manage our clinical trials and the development of AV-101;
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identify,
recruit, retain, incentivize and integrate additional employees, including sales personnel;
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manage
our internal development and operational efforts effectively while carrying out our contractual obligations to third parties; and
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continue
to improve our operational, financial and management controls, reports systems and procedures.
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may be unable to successfully implement these tasks, which could have a material adverse effect on our business, results of operations,
financial condition, prospects and stock price.
We
are highly dependent on our key personnel and anticipate hiring new key personnel. If we are not successful in attracting and retaining
highly qualified personnel, our business may be materially and adversely affected.
Our
success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific
personnel. We are highly dependent upon our senior management, as well as other members of our management team. The loss of services
of any of these individuals could delay or prevent the successful development of AV-101, initiation or completion of our planned clinical
trials or the commercialization of AV-101.
Competition
for qualified personnel in the pharmaceutical and biotechnology fields is intense due to the limited number of individuals who possess
the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and
if we initiate commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition,
to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they
have divulged proprietary or other confidential information, or that their former employers own their research output.
Our
insurance policies may be inadequate and potentially expose us to unrecoverable risks.
We
have limited director and officer insurance and product liability insurance policies. Any significant insurance claims would have a material
adverse effect on our business, financial condition and results of operations. Insurance availability, coverage terms, including deductibles
and pricing, continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we
identify; however, we may fail to correctly anticipate or quantify insurable risks, we may not be able to obtain appropriate insurance
coverage, and insurers may not respond as we intend to cover insurable events that may occur. We have observed rapidly changing conditions
in the insurance markets relating to nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium
costs, higher policy deductibles and lower coverage limits. For some risks, we may not have or maintain insurance coverage because of
cost or availability.
We
may be unable to adequately protect our information systems from cyberattacks, which could result in the disclosure of confidential or
proprietary information, including personal data, damage our reputation, and subject us to significant financial and legal exposure.
We
rely on information technology systems that we or our third-party providers operate to process, transmit and store electronic information
in our day-to-day operations. In connection with our product discovery efforts, we may collect and use a variety of personal data, such
as names, mailing addresses, email addresses, phone numbers and clinical trial information. A successful cyberattack could result in
the theft or destruction of intellectual property, data, or other misappropriation of assets, or otherwise compromise our confidential
or proprietary information and disrupt our operations. Cyberattacks are increasing in their frequency, sophistication, level of persistence
and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise.
Cyberattacks could include wrongful conduct by hostile foreign governments, industrial espionage, wire fraud and other forms of cyber
fraud, the deployment of harmful malware, denial-of-service, social engineering fraud or other means to threaten data security, confidentiality,
integrity and availability. We may also face increased cybersecurity risks due to our reliance on internet technology and the number
of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore,
because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized
until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may
also experience security breaches that may remain undetected for an extended period. A successful cyberattack could cause serious negative
consequences for us, including, without limitation, the disruption of operations, the misappropriation of confidential business information,
including financial information, trade secrets, financial loss and the disclosure of corporate strategic plans. Although we devote resources
to protect our information systems, we realize that cyberattacks are a threat, and there can be no assurance that our efforts will prevent
information security breaches that would result in business, legal, financial or reputational harm to us, or would have a material adverse
effect on our results of operations and financial condition. Any failure to prevent or mitigate security breaches or improper access
to, use of, or disclosure of our clinical data or patients’ personal data could result in significant liability under state (e.g.,
state breach notification laws), federal, and international law and may cause a material adverse impact to our reputation, affect our
ability to conduct new studies and potentially disrupt our business.
We
rely on our third-party providers to implement effective security measures and identify and correct for any such failures, deficiencies
or breaches. If we or our third-party providers fail to maintain or protect our information technology systems and data integrity effectively
or fail to anticipate, plan for or manage significant disruptions to our information technology systems, we or our third-party providers
could have difficulty preventing, detecting and controlling such cyber-attacks and any such attacks could result in the losses described
above as well as disputes with physicians, patients and our partners, regulatory sanctions or penalties, increases in operating expenses,
expenses or lost revenues or other adverse consequences, any of which could have a material adverse effect on our business, results of
operations, financial condition, prospects and cash flows. Any failure by such third parties to prevent or mitigate security breaches
or improper access to or disclosure of such information could have similarly adverse consequences for us. If we are unable to prevent
or mitigate the impact of such security or data privacy breaches, we could be exposed to litigation and governmental investigations,
which could lead to a potential disruption to our business. By way of example, the California Consumer Privacy Act, or CCPA, which went
into effect on January 1, 2020, creates individual privacy rights for California consumers and increases the privacy and security obligations
of entities handling certain personal data. The CCPA provides for civil penalties for violations, as well as a private right of action
for data breaches that is expected to increase data breach litigation. In March 2020, the California State Attorney General has proposed
varying versions of companion draft regulations which are not yet finalized. Despite the delay in adopting regulations, the California
State Attorney General will commence enforcement actions against violators beginning July 1, 2020. The CCPA may increase our compliance
costs and potential liability, and many similar laws have been proposed at the federal level and in other states.
Risks
Related to Ownership of Our Common Stock
Our
ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
Under
Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change”
(generally defined as a greater than 50 percentage point change (by value) in the ownership of its equity over a three year period),
the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to
offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership
changes in the future or subsequent shifts in our stock ownership, some of which are outside our control. As of December 31, 2020, the
Company had federal net operating loss carryforwards of approximately $12.0 million and is accruing additional net operating losses in
calendar year 2021, which will be added to the net operating loss carryover balance once the current year is completed. Our ability to
utilize our net operating loss carryforwards could be limited by an “ownership change” as described above, which could result
in increased tax liability to us. Furthermore, our ability to utilize our NOLs or credits is conditioned upon our attaining profitability
and generating United States federal and state taxable income. As a result, the amount of the net operating loss and tax credit carryforwards
presented in our financial statements could be limited and may expire unutilized. Federal net operating loss carryforwards generated
since our incorporation in July 2018 will not be subject to expiration. However, any such net operating loss carryforwards may only offset
80% of our annual taxable income in taxable years beginning after December 31, 2020.
Comprehensive
tax reform legislation could adversely affect our business and financial condition.
The
rules dealing with United States federal, state and local income taxation are constantly under review by persons involved in the legislative
process and by the Internal Revenue Service, or IRS, and the United States Treasury Department. Changes to tax laws (which changes may
have retroactive application) could adversely affect us or holders of our common stock. In recent years, many such changes have been
made and changes are likely to continue to occur in the future. For example, the TCJA was enacted in 2017 and made significant changes
to corporate taxation, including the reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, the limitation
of the tax deduction for net interest expense to 30% of adjusted taxable income (except for certain small businesses), the limitation
of the deduction for net operating losses from taxable years beginning after December 31, 2017 to 80% of current year taxable income
and the elimination of net operating loss carrybacks generated in taxable years ending after December 31, 2017 (though any such net operating
losses may be carried forward indefinitely), and the modification or repeal of many business deductions and credits.
Additionally,
on March 27, 2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, which, among other
things, suspends the 80% limitation on the deduction for net operating losses in taxable years beginning before January 1, 2021, permits
a 5-year carryback of net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, and
generally caps the limitation on the deduction for net interest expense at 50% of adjusted taxable income for taxable years beginning
in 2019 and 2020.
The
recent presidential and congressional elections in the United States could also result in significant changes in, and uncertainty with
respect to, tax legislation, regulation and government policy directly affecting us and our business. For example, the United States
government may enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate
income tax rate, an increase in the tax rate applicable to the global intangible low-taxed income and elimination of certain exemptions,
and the imposition of minimum taxes or surtaxes on certain types of income. The likelihood of these changes being enacted or implemented
is unclear.
It
cannot be predicted whether, when, in what form, or with what effective dates, new tax laws may be enacted, or regulations and rulings
may be promulgated or issued under existing or new tax laws, which could result in an increase in our or our stockholders’ tax
liability or require changes in the manner in which we operate in order to minimize or mitigate any adverse effects of changes in tax
law or in the interpretation thereof.
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.
Our
second amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent
a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these
provisions include:
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board of directors divided into three classes serving staggered three-year terms, such that not all members of the board of directors
will be elected at one time;
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a
prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our
stockholders;
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requirement that special meetings of the stockholders may be called only by the board of directors acting pursuant to a resolution
approved by the affirmative vote of a majority of the directors then in office, and special meetings of stockholders may not be called
by any other person or persons;
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advance
notice requirements for stockholder proposals and nominations for election to our board of directors;
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requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition
to any other vote required by law, upon the approval of not less than two-thirds (2/3) of all outstanding shares of our voting stock
then entitled to vote in the election of directors;
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requirement of approval of not less than a majority of all outstanding shares of our voting stock to amend any bylaws by stockholder
action and not less than two-thirds (2/3) of all outstanding shares of our voting stock to amend specific provisions of our second
amended and restated certificate of incorporation; and
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the
authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval,
which preferred stock may include rights superior to the rights of the holders of common stock.
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addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate
Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover
provisions and other provisions in our second amended and restated certificate of incorporation and amended and restated bylaws could
make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are
opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company.
These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of
your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes
in our board of directors could cause the market price of our common stock to decline.
Our
amended and restated bylaws designate certain courts as the sole and exclusive forum for certain types of actions and proceedings that
may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers, or employees.
Our
amended and restated bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of
Delaware will be the sole and exclusive forum for any state law claim for (i) any derivative action or proceeding brought on our behalf,
(ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, and employees to us or our stockholders,
(iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our second amended and
restated certificate of incorporation or our amended and restated bylaws (including the interpretation, validity or enforceability thereof)
or (iv) any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery
having personal jurisdiction over the indispensable parties named as defendants therein, or the Delaware Forum Provision. The Delaware
Forum Provision will not apply to any causes of action arising under the Securities Act or the Exchange Act. Our amended and restated
bylaws further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the
United States shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities
Act, or the Federal Forum Provision. In addition, our bylaws provide that any person or entity purchasing or otherwise acquiring any
interest in shares of our common stock is deemed to have notice of and consented to the foregoing provisions; provided, however, that
stockholders cannot and will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations
thereunder.
We
recognize that the Delaware Forum Provision in our amended and restated bylaws may impose additional litigation costs on stockholders
in pursuing any such claims, particularly if the stockholders do not reside in or near the State of Delaware. Additionally, the forum
selection clauses in our amended and restated bylaws may limit our stockholders’ ability to bring a claim in a forum that they
find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors,
officers and employees even though an action, if successful, might benefit our stockholders. In addition, while the Delaware Supreme
Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in
federal court were “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our
Federal Forum Provision. If the Federal Forum Provision is found to be unenforceable, we may incur additional costs associated with resolving
such matters. The Federal Forum Provision may also impose additional litigation costs on stockholders who assert that the provision is
not enforceable or invalid. The Court of Chancery of the State of Delaware and the federal district courts of the United States may also
reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located
or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.
General
Risk Factors
Unfavorable
global economic or political conditions could adversely affect our business, financial condition or results of operations.
Our
results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. A
global financial crisis or a global or regional political disruption could cause extreme volatility in the capital markets and lead to
diminished liquidity and credit availability, declines in consumer confidence and economic growth, increases in unemployment rates and
uncertainty about economic stability. For instance, the ongoing COVID-19 pandemic has led to a period of considerable uncertainty and
volatility. A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including
weakened demand for AV-101, if approved, and our ability to raise additional capital when needed on acceptable terms, if at all. A weak
or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in supply disruption,
or resulting in the inability of any future customers to pay for AV-101, if approved. Any of the foregoing could harm our business and
we cannot anticipate all of the ways in which the political or economic climate and financial market conditions could adversely impact
our business.
Our
employees and independent contractors, including principal investigators, consultants, commercial collaborators, service providers and
other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements,
which could have an adverse effect on our results of operations.
We
are exposed to the risk that our employees and independent contractors, including principal investigators, consultants, any future commercial
collaborators, service providers and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties could
include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the laws and regulations of the
FDA and other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to
such regulatory bodies; manufacturing standards; United States federal and state fraud and abuse laws, data privacy and security laws
and other similar non-United States laws; or laws that require the true, complete and accurate reporting of financial information or
data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical
trials, the creation of fraudulent data in our preclinical studies or clinical trials, or illegal misappropriation of product, which
could result in regulatory sanctions and cause 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 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. In addition, we are subject to the risk that a person or government could
allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful
in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results,
including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement,
possible exclusion from participation in Medicare, Medicaid and other United States federal healthcare programs or healthcare programs
in other jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, imprisonment, other sanctions,
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.
Actual
or perceived failures to comply with United States and foreign privacy and data protection laws, regulations and standards may adversely
affect our business, operations and financial performance.
We
are subject to or affected by numerous federal, state and foreign laws and regulations, as well as regulatory guidance, governing the
collection, use, disclosure, retention, and security of personal data, such as information that we collect about patients and healthcare
providers in connection with clinical trials in the United States and abroad. The global data protection landscape is rapidly evolving,
and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. This evolution may
create uncertainty in our business, affect our or any service providers’, contractors’ or future collaborators’ ability
to operate in certain jurisdictions or to collect, store, transfer use and share personal information, necessitate the acceptance of
more onerous obligations in our contracts, result in liability or impose additional costs on us. The cost of compliance with these laws,
regulations and standards is high and is likely to increase in the future. Any failure or perceived failure by us or our collaborators,
service providers and contractors to comply with federal, state or foreign laws or regulation, our internal policies and procedures or
our contracts governing processing of personal information could result in negative publicity, diversion of management time and effort
and proceedings against us by governmental entities or others. In many jurisdictions, enforcement actions and consequences for noncompliance
are rising.
As
our operations and business grow, we may become subject to or affected by new or additional data protection laws and regulations and
face increased scrutiny or attention from regulatory authorities. In the United States, HIPAA imposes, among other things, certain standards
relating to the privacy, security, transmission and breach reporting of individually identifiable health information. Certain states
have also adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. Such 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. For example, the California Consumer Privacy Act, or the CCPA,
went into effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information,
opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA
provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data
breach litigation. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could
mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability
and adversely affect our business. Further, on November 3, 2020, the California Privacy Rights Act, or the CPRA, was voted into law by
California residents. The CPRA significantly amends the CCPA, and imposes additional data protection obligations on companies doing business
in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new
California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny
of California businesses in the areas of data protection and security. The substantive requirements for businesses subject to the CPRA
will go into effect on January 1, 2023, and become enforceable on July 1, 2023.
Our
operations abroad may also be subject to increased scrutiny or attention from data protection authorities. Many countries in these regions
have established or are in the process of establishing privacy and data security legal frameworks with which we, our collaborators, service
providers, including our CROs, and contractors must comply. For example, the European Union General Data Protection Regulation, or the
GDPR, went into effect in May 2018 and imposes strict requirements for processing the personal information of individuals within the
European Economic Area, or the EEA, including clinical trial data. The GDPR has and will continue to increase compliance burdens on us,
including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control how we
collect, use, disclose, retain and process information about them. The processing of sensitive personal data, such as physical health
condition, may impose heightened compliance burdens under the GDPR and is a topic of active interest among foreign regulators. The GDPR
also increases the scrutiny of transfers of personal data from the EEA to the United States and other jurisdictions that the European
Commission does not recognize as having “adequate” data protection laws; in July 2020, the Court of Justice of the European
Union limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the EU-US Privacy
Shield and imposing further restrictions on use of the standard contractual clauses, which could increase our costs and our ability to
efficiently process personal data from the EEA. In addition, the GDPR provides for more robust regulatory enforcement and fines of up
to €20 million or 4% of the annual global revenue of the noncompliant company, whichever is greater. Relatedly, following the United
Kingdom’s withdrawal from the EEA and the EU, and the expiry of the transition period, companies will have to comply with the GDPR
and the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater
of £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the EU in relation to certain aspects
of data protection law remains unclear. It is unclear how United Kingdom data protection laws and regulations will develop in the medium
to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. These changes will lead to
additional costs and increase our overall risk exposure. Currently there is a four to six-month grace period agreed in the EU and United
Kingdom Trade and Cooperation Agreement, ending June 30, 2021 at the latest, whilst the parties discuss an adequacy decision. The European
Commission published a draft adequacy decision on February 19, 2021. If adopted, the decision will enable data transfers from EU member
states to the United Kingdom for a four-year period, subject to subsequent extensions.
Although
we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements
are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict
with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives,
contractors, consultants, collaborators, or other third parties to comply with such requirements or adequately address privacy and security
concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business
and results of operations.
We
are an “emerging growth company” as defined in the JOBS Act and a “smaller reporting company” as defined in the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be able to avail ourselves of reduced disclosure requirements
applicable to emerging growth companies and smaller reporting companies, which could make our common stock less attractive to investors
and adversely affect the market price of our common stock.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will
remain an emerging growth company until the earlier of (i) the last day of the fiscal year in which we have total annual gross revenues
of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO;
(iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date
on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, which means the market
value of our common stock that is held by non-affiliates exceeds $700 million as of June 30th. For so long as we remain an emerging growth
company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies
that are not emerging growth companies. These exemptions include:
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not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404;
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not
being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory
audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements;
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providing
only two years of audited financial statements in addition to any required unaudited interim financial statements and a correspondingly
reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
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the
requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Exchange Act
and instead provide a reduced level of disclosure regarding executive compensation; and
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of executive
officers.
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Although
we are still evaluating the JOBS Act, we currently intend to take advantage of some, but not all, of the available exemptions available
to us so long as we qualify as an “emerging growth company.” We have taken advantage of reduced reporting burdens in this
Quarterly Report on form 10-Q. In particular, we have provided only two years of audited financial statements and have not included all
of the executive compensation information that would be required if we were not an emerging growth company. We cannot predict whether
investors will find our common stock less attractive if we 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.
In
addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with
new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until
those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period,
which means that when a standard is issued or revised and it has different application dates for public or private companies, we will
adopt the new or revised standard at the time public companies adopt the new or revised standard.
As
a result, changes in rules of United States generally accepted accounting principles or their interpretation, the adoption of new guidance
or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.
In addition, our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness
of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase
the risk that material weaknesses or significant deficiencies in our internal control over financial reporting go undetected. Likewise,
so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including
certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have
been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate
our company. We cannot predict if investors will find our common stock less attractive because we 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 and may decline.
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 continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive
compensation in 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.
Because
we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be
your sole source of gain.
We
have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying
dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
We
will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time
to new compliance initiatives.
As
a public company, and particularly after we are no longer an “emerging growth company,” we have begun and will continue to
incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act
of 2002 and rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including establishment
and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel
will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase
our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these
rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
Pursuant
to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including
an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However,
while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial
reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period,
we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging.
In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed
work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes
as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement
process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered
public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is
effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in
the reliability of our financial statements. In addition, if we are not able to continue to meet these requirements, we may not be able
to remain listed on Nasdaq.
If
we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability
to operate our business could be harmed.
Ensuring
that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements
on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with generally accepted accounting principles. We have begun the process of documenting, reviewing
and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which will require annual
management assessment of the effectiveness of our internal control over financial reporting. We have also begun recruiting additional
finance and accounting personnel with certain skill sets that we need as a public company.
Implementing
any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing
processes, and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal
controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis,
could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate
or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult
for us to effectively market and sell our service to new and existing customers.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We
are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. We designed our disclosure
controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is
accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how
well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or
more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements
due to error or fraud may occur and not be detected.
If
securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price
of our stock could decline.
The
trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us
or our business. We do not have control over these analysts. There can be no assurance that existing analysts will continue to provide
research coverage or that new analysts will begin to provide research coverage. Although we have obtained analyst coverage, if one or
more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or
more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our
stock price to decline.
We
may be subject to securities litigation, which is expensive and could divert management attention.
The
market price of our common stock may be volatile. The stock market in general, and Nasdaq and biopharmaceutical companies in particular,
have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance
of these companies. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities
class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result
in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.