Dividend
Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock. We have no present intention to pay cash dividends and, even if we change that policy, we may be restricted from payingnever declared or paid any cash dividends on our common stock.
We do not intend to pay cash dividends for the foreseeable future. We currently expect to retain all future earnings, if any, for use in the development, operation and expansion of our business. Any determination to pay cash dividends in the future will depend upon, among other things, our results of operations, plans for expansion, tax considerations, available net profits and reserves, limitations under law, financial condition, capital requirements and other factors that our board of directors considers to be relevant. See “Dividend Policy”.
Provisions in our corporate charter documentsWarrants
The following summary of certain terms and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for the offered securities, thereby depressing the market prices of the Class E warrants and the Class F warrants, referred to herein collectively as the Public Warrants, that are being offered securities. In addition, because our board of directorshereby is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholdersnot complete and is subject to, replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
allow the authorized number of our directors to be changed only by resolution of our board of directors;
limit the mannerand qualified in which stockholders can remove directors from the board of directors;
establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;
require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
limit who may call stockholder meetings;
authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a shareholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.
Moreover, because we are incorporated in Delaware, we are governedits entirety by, the provisions of Section 203the applicable Public Warrants, the form of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements in this prospectus and the appendices attached hereto constitute forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, plans and prospects, timing of the commencement or completion of clinical trials, projected revenue or costs and objectives of management for future research, development or operations, are forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and may contain the words “estimate,” “project,” “intend,” “forecast,” “potential,” “anticipate,” “plan,” “planning,” “expect,” “believe,” “will,” “will likely,” “should,” “could,” “would,” “may” or words or expressions of similar meaning. All such forward-looking statements involve significant risks and uncertainties, including, but not limited to, statements regarding:
our research and development, marketing and sales programs (including statements about the regulatory status of our lead product candidate CF-301, which is currently on clinical hold by the FDA);
our ability to advance into and through clinical development and ultimately obtain FDA approval for our product candidates;
our expectations regarding the commercial market for our product candidates;
the effect of competition and proprietary rights of third parties;
the availability of additional financing;
the effects of existing and future federal, state and foreign regulations;
the seeking of joint development, licensing or distribution and collaboration and marketing arrangements with third parties; and
the period of time for which the proceeds of this offering will enable us to fund our operations.
As more fully described in this prospectus under the heading “Risk Factors,” many important factors affect our ability to achieve our stated objectives and to develop and commercialize any product candidates, including, among other things, our ability to:
obtain substantial additional funds;
obtain and maintain all necessary patents or licenses;
demonstrate the safety and efficacy of product candidates at each stage of development;
meet applicable regulatory standards and receive required regulatory approvals;
meet obligations and required milestones under agreements;
retain key executives and to attract, retain and motivate qualified personnel;
be capable of manufacturing and distributing products in commercial quantities at reasonable costs; and
compete against other products and to market our products in a profitable manner.
Therefore, prospective investors are cautioned that there can be no assurance that the forward-looking statements included in this prospectus will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation or warranty by the Company or any other person that the objectives and plans of the Company will be achieved in any specified time frame, if at all. Except to the extent required by applicable laws or rules, the Company does not undertake any obligation to update any forward-looking statements or to announce revisions to any of the forward-looking statements.
We caution you that the important factors described in the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not be all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially and adversely from those contained in any forward-looking statements we may make. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
USE OF PROCEEDS
We estimate that the net proceeds to us from our issuance and sale of 5,454,545 units in this offering will be approximately $24.9 million, assuming an initial public offering price of $5.50 per unit, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We cannot predict when the Warrants will be exercised. If all of the Warrants sold in this offering are exercised for cash, then we will receive an additional $37.1 million of proceeds. It is possible that all or a portion of the Warrants may expire prior to being exercised, in which case we will not receive any additional proceeds.
A $1.00 increase (decrease) in the assumed initial public offering price of $5.50 per unit, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by approximately $5.0 million, assuming that the number of units offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:
approximately $12.9 million to fund the costs of pre-clinical and early stage clinical development of CF-301 for the treatment of Staph aureus bacteremia and CF-404, our antibody combination for the treatment of influenza;
approximately $4.8 million to fund research and development, to build our product platform and advance other research programs from our lysin portfolio; and
the remainder for working capital and other general corporate purposes, including the additional costs associated with being a public company and the $1.4 million settlement payment to MorphoSys described under “Business—Legal Proceedings.”
We intend to use any additional proceeds that we receive upon exercise of the Class A Warrants and Class B Warrants for clinical development, research and general corporate purposes.
This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties for our product candidates, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.
We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
Preferred Stock Dividend
On May 28, 2014, our Board of Directors declared a dividend to be paid in-kind to the holders of our preferred stock in accordance with our Fourth Amended and Restated Certificate of Incorporation, whereby each holder of shares of preferred stock will be entitled to a number of additional shares of the applicable series of preferred stock equal to the amount of the accrued and unpaid dividend on such holder’s shares (the “Dividend”). We will issue 605,645 shares of Series A preferred stock, 1,172,645 shares of Series B preferred stock, 1,379,388 shares of Series C preferred stock and 2,395 shares ofSeries C-1 preferred stock in payment of the Dividend prior to the conversion of the preferred stock prior to the effectiveness of the registration statement of which this prospectus forms a part.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2014:
on an actual basis;
on a pro forma basis to give effect to:
| (1) | the issuance of 81,947 shares of common stock as consideration for the interest due on our outstanding Convertible Notes due 2015 on May 31, 2014, and the incremental $0.2 million non-cash charge to interest expense; |
| (2) | the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 6,947,562 shares of our common stock upon the closing of this offering, including the 605,645 shares of Series A preferred stock, 1,172,645 shares of Series B preferred stock, 1,379,388 shares of Series C preferred stock and 2,395 shares of Series C-1 preferred stock issued as payment of the Dividend in the associated amount of $4.2 million; |
| (3) | the automatic conversion of all our outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of 5,539,283 shares of our common stock upon the closing of this offering; |
| (4) | the issuance of 253,858 shares of our common stock upon the closing of this offering, pursuant to grants made under our retention bonus plan, and the associated $1.0 million non-cash charge to compensation expense; and |
| (5) | in conjunction with the conversion of our Convertible Notes due 2015: (i) the accelerated amortization of $2.3 million of unamortized debt discount and $1.0 million of unamortized debt issuance costs and (ii) the reclassification of the warrant and embedded derivatives liabilities to additional paid-in capital as, upon completion of this offering, neither is subject to remeasurement. |
on a pro forma as adjusted basis to give further effect to our issuance and sale of 5,454,545 units in this offering at an assumed initial public offering price of $5.50 per unit, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, payment of accrued financing costs, and the reclassification of deferred financing costs to additional paid-in capital. Additionally, the pro forma as adjusted basis assumes the Warrants sold in this offering will be accounted for as part of stockholders’ equity. Our final determination will occur after the close of this offering.
The pro forma and pro forma as adjusted information presented below is for illustrative purposes and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our financial statements and the related notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| | | | | | | | | | | | |
| | | As of March 31, 2014 | |
| | | Actual | | | Pro Forma | | | Pro Forma
As
Adjusted (1) | |
Cash and cash equivalents | | $ | 2,537,535 | | | $ | 4,418,885 | | | $ | 29,286,385 | |
| | | | | | | | | | | | |
Total debt (2) | |
| 10,832,831
|
| | | — | | | | — | |
Series A preferred stock, par value $0.0002 per share; 2,800,000 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted | | | 1,964,283 | | | | — | | | | — | |
Series B preferred stock, par value $0.0002 per share; 5,600,000 shares authorized, 4,651,163 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted | | | 10,175,750 | | | | — | | | | — | |
Series C preferred stock, par value $0.0002 per share; 9,090,909 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted | | | 27,752,294 | | | | — | | | | — | |
Series C-1 preferred stock, par value $0.0002 per share; 6,060,607 shares authorized, 151,515 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted | | | 500,000 | | | | — | | | | — | |
Stockholders’ equity: | | | | | | | | | | | | |
Common stock, par value $0.0001 per share; 28,571,429 shares authorized, 1,011,997 shares issued and outstanding, actual; 125,000,000 shares authorized, pro forma and pro forma as adjusted; 13,834,646 shares issued and outstanding, pro forma; 19,289,191 shares issued and outstanding, pro forma as adjusted | | | 101 | | | | 1,383 | | | | 1,929 | |
Additional paid-in capital | | | 5,085,149 | | | | 72,771,751 | | | | 97,430,045 | |
Accumulated deficit during the development stage | | | (63,053,723 | ) | | | (71,702,490 | ) | | | (71,702,490 | ) |
| | | | | | | | | | | | |
Total stockholders’ (deficit) equity | | | (57,968,473 | ) | | | 1,070,644 | | | | 25,729,484 | |
| | | | | | | | | | | | |
Total capitalization | | $ | (6,743,315 | ) | | $ | 1,070,644 | | | $ | 25,729,484 | |
| | | | | | | | | | | | |
* | Authorized shares of the Company’s preferred stock gives effect to the increases in authorized shares pursuant to the fifth amended and restated certificate of incorporation |
(1) | A $1.00 increase (decrease) in the assumed initial public offering price of $5.50 per unit, the midpoint of the price range listed on the front cover of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $5.0 million, assuming that the number of units offered by us, as set forth on the cover page of this prospectus, and the number of shares of our common stock outstanding immediately before this offering, both remain the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Amounts do not give effect to the payment of approximately $1.4 million in settlement of our dispute with MorphoSys, which payment is expected to be made on or before August 15, 2014. See “Business—Legal Proceedings.” |
(2) | Total debt as of March 31, 2014 includes the carrying amount of our Convertible Notes due 2015. |
The table above does not include:
2,813,997 shares of our common stock issuable upon exercise of stock options outstanding as of the date of this prospectus at a weighted average exercise price of $5.07 per share;
4,318,793 shares of our common stock issuable upon the exercise of warrants outstanding as of the date of this prospectus at a weighted average exercise price of $3.38 per share;
225,300 additional shares of our common stock available for issuance as of the date of this prospectus under our existing equity incentive plan;
571,429 additional shares of our common stock available for future issuance under our 2014 equity incentive plan, which will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part;
the 8,181,817 shares of our common stock issuable upon exercise of the Warrants sold in this offering;
the 272,727 shares of our common stock issuable upon exercise of the representative’s warrant to be received by the underwriters in connection with this offering (or 313,636 shares, assuming the over-allotment option is fully exercised); and
any non-cash beneficial conversion charge upon the conversion of our Convertible Notes due 2015.
DILUTION
If you invest in the units in this offering, your ownership interest in our common stock will be diluted immediately to the extent of the difference between the public offering price per unit and the pro forma net tangible book value per share of our common stock after this offering.
Our historical net tangible book value as of March 31, 2014 was $(60.2) million, or $(59.53) per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding.
Our pro forma net tangible book value as of March 31, 2014 was $(0.2) million, or $(0.02) per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding after giving effect to the issuance of 81,947 shares of common stock as consideration for the interest due on our outstanding Convertible Notes due 2015 on May 31, 2014, the automatic conversion upon the closing of this offering of all outstanding shares of our preferred stock into 6,947,562 shares of our common stock, including the 605,645 shares of Series A preferred stock, 1,172,645 shares of Series B preferred stock, 1,379,388 shares of Series C preferred stock and 2,395 shares of Series C-1 preferred stock issued as payment of the Dividend, the automatic conversion of all our outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of 5,539,283 shares of our common stock upon the closing of this offering, and the issuance of 253,858 shares of our common stock upon the closing of this offering pursuant to grants made under our retention bonus plan.
After giving effect to our issuance and sale of 5,454,545 units in this offering at an assumed initial public offering price of $5.50 per unit, the midpoint of the price range set forth on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of March 31, 2014 would have been $25.7 million, or $1.33 per share. This represents an immediate increase in pro forma net tangible book value per share of $1.35 to existing stockholders and immediate dilution of $4.17 in pro forma net tangible book value per share to new investors purchasing units in this offering. These effects on pro forma net tangible book values assume the Warrants sold in this offering will be accounted for as part of stockholders’ equity. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per unit, paid by new investors. The following table illustrates this dilution on a per share basis:
| | | | | | | | |
Assumed initial public offering price per unit | | | | | | $ | 5.50 | |
Historical net tangible book value per share as of March 31, 2014 | | $ | (59.53 | ) | | | | |
Increase attributable to the pro forma transactions described in preceding paragraphs | | $ | 59.51 | | | | | |
| | | | | | | | |
Pro forma net tangible book value per share as of March 31, 2014 | | $ | (0.02 | ) | | | | |
Increase in net tangible book value per share attributable to new investors | | $ | 1.35 | | | | | |
| | | | | | | | |
Pro forma net tangible book value per share after this offering | | | | | | $ | 1.33 | |
| | | | | | | | |
Dilution per share to new investors | | | | | | $ | 4.17 | |
| | | | | | | | |
A $1.00 increase or decrease in the assumed initial public offering price of $5.50 per unit would increase or decrease our pro forma net tangible book value by approximately $5.0 million, our pro forma net tangible book value per share by approximately $0.26 and dilution per share to new investors by approximately $0.74, assuming that the number of units offered by us, as set forth on the cover page of this prospectus and the number of shares of our common stock outstanding immediately before this offering, both remain the same.
You will experience further dilution if the underwriters exercise their over-allotment option, if any additional shares are issued in connectionfiled with the exercise of options and when the Warrants, the representative’s warrant and other outstanding warrants are exercised.
The following table summarizes, on a pro forma basis as of March 31, 2014, the total number of units purchased from us, the total consideration paid, or to be paid, and the average price per unit paid, or to be paid, by existing stockholders and by new investors in this offering at an assumed initial public offering price of $5.50 per unit, the midpoint of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us. As the table shows, new investors purchasing units will pay an average price per share substantially higher than our existing stockholders paid.
| | | | | | | | | | | | | | | | | | | | |
| | | Shares/Units Purchased | | | Total Consideration | | | Average Price
Per Share/
Unit | |
| | | Number | | | Percentage | | | Amount | | | Percentage | | |
Existing stockholders | | | 13,834,646 | | | | 72 | % | | $ | 59,612,658 | | | | 67 | % | | $ | 4.31 | |
New investors | | | 5,454,545 | | | | 28 | % | | | 30,000,000 | | | | 33 | % | | | 5.50 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | 19,289,191 | | | | 100 | % | | $ | 89,612,658 | | | | 100 | % | | | | |
| | | | | | | | | | | | | | | | | | | | |
A $1.00 increase or decrease in the assumed initial public offering price of $5.50 per unit, would increase or decrease the total consideration paid by new investors by $5.5 million and increase or decrease the percentage of total consideration paid by new investors by approximately 4%, assuming that the number of units, as set forth on the cover page of this prospectus, remains the same.
The table above is based on shares outstanding as of March 31, 2014 and includes issuance of 81,947 shares of common stock as consideration for the interest due on our outstanding Convertible Notes due 2015 on May 31, 2014, the automatic conversion upon the closing of this offering of all outstanding shares of our preferred stock into 6,947,562 shares of our common stock, including the 605,645 shares of Series A preferred stock, 1,172,645 shares of Series B preferred stock, 1,379,388 shares of Series C preferred stock and 2,395 shares of Series C-1 preferred stock issued as payment of the Dividend, the automatic conversion of all our outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of 5,539,283 shares of our common stock upon the closing of this offering, and the issuance of 253,858 shares of our common stock upon the closing of this offering pursuant to grants made under our retention bonus plan.
The table above excludes:
2,813,997 shares of our common stock issuable upon the exercise of stock options outstanding as of the date of this prospectus at a weighted average exercise price of $5.07 per share;
4,318,793 shares of our common stock issuable upon the exercise of warrants outstanding as of the date of this prospectus at a weighted average exercise price of $3.38 per share;
225,300 additional shares of our common stock available for future issuance under our equity compensation plans as of the date of this prospectus;
an additional 571,429 shares of our common stock that will be made available for future issuance under our 2014 equity compensation plan upon the closing of this offering;
the 8,181,817 shares of our common stock issuable upon exercise of the Warrants sold in this offering; and
the 272,727 shares of our common stock issuable upon exercise of the representative’s warrant to be received by the underwriters in connection with this offering (or 313,636 shares, assuming the over-allotment option is fully exercised).
To the extent that outstanding stock options and warrants are subsequently exercised, there will be further dilution to new investors.
If the underwriters exercise their over-allotment option in full, the following will occur:
the percentage of shares of our common stock held by existing stockholders will decrease to approximately 69% of the total number of shares of our common stock outstanding after this offering; and
the number of shares of our common stock held by new investors will increase to approximately 31% of the total number of shares of our common stock outstanding after this offering.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the information set forth in our financial statements and the notes to those statements included elsewhere in this prospectus. The statements in this discussion regarding our expectations of future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
We are a biotechnology company focused on discovering and developing therapeutic protein and antibody products for life-threatening, drug-resistant infectious diseases, particularly those treated in hospital settings. Due to drug-resistant and newly emerging pathogens, hospital acquired infections are currently the fourth leading cause of death in the United States, following heart disease, cancer and stroke. We intend to address drug-resistant infections using our therapeutic product candidates from our lysin and monoclonal antibody platforms to target conserved regions of either bacteria or viruses. Lysins are enzymes that are produced in the life cycle stage of a bacteriophage, a virus that infects and kills bacteria. Lysins can digest bacterial cell walls and are fundamentally different than antibiotics because they kill bacteria immediately upon contact. We believe the properties of our lysins make them suitable for the treatment of antibiotic-resistant organisms that can cause serious infections such as Staph aureus bacteremia, pneumonia and osteomyelitis, and the treatment of biofilm-related indications for infected prosthetic joints, indwelling devices and catheters. In addition to our lysins, we are exploring therapies using mAbs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the body’s natural immune response. Our product candidates have not yet entered clinical trials. Our most advanced product candidates are CF-301, a lysin for the treatment of Staph aureus bacteremia, and CF-404, a combination of mAbs for the treatment of life-threatening seasonal and pandemic varieties of influenza.
We are a development stage company. Since our inception we have devoted substantially all of our resources to developing our product candidates and our platform technology, building our intellectual property portfolio, business planning, raising capital, and providing general and administrative support for these operations. We have not generated any revenues and, to date, have funded our operations primarily through sales of common stock and convertible preferred stock and issuances of convertible debt to our investors. From inception through March 31, 2014, we have received proceeds of $0.2 million from the sale of common stock, $44.2 million from the sale of convertible preferred stock and $15.0 million from the issuance of our Convertible Notes due 2015.
We have never generated revenue or have been profitable and, from inception through March 31, 2014, our net losses from operations have been $63.1 million. Our net loss from operations was $23.6 million and $19.3 million for the years ended December 31, 2013 and 2012, respectively, and excluding non-cash share-based compensation was $21.3 million and $19.1 million for the years ended December 31, 2013 and 2012, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we advance our product candidates through pre-clinical activities and clinical trials to seek regulatory approval and, if approved, commercialize such product candidates. Furthermore, upon the closing of this offering, we will record non-cash expense associated with the effect of the beneficial conversion charge upon the conversion of our Convertible Notes due 2015. Additionally, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity, equity-linked or debt financings, research grants or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.
Financial Operations Overview
Revenue
We have not generated any revenue to date. In the future, we may generate revenue from product sales. In addition, to the extent we enter into licensing or collaboration arrangements, we may have additional sources of revenue. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the amount and timing of payments that we may recognize upon the sale of our products, to the extent that any products are successfully commercialized, and the amount and timing of fees, reimbursements, milestone and other payments received under any future licensing or collaboration arrangements. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Research and Development Expenses
Research and development expenses consist of costs associated with our research activities and the development of CF-301 and CF-404. Our research and development expenses consist of:
employee-related expenses, including salaries, benefits, travel and share-based compensation expense;
external research and development expenses incurred under arrangements with third parties such as contract research organizations, or CROs, contract manufacturers, consultants and academic institutions; and
facilities and laboratory and other supplies.
We expense research and development costs to operations as incurred. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.
To date, a large portion of our research and development work has related to the establishment of both our lysin and antibody platform technologies, the advancement of our research projects to discovery of clinical candidates and testing to support our IND application for CF-301. In the future, we intend to continue using our employee and infrastructure resources across multiple development as well as research projects. In the years ended December 31, 2012 and 2013, we recorded approximately $13.2 million and $9.1 million, respectively, of research and development expenses. A breakdown of our research and development expenses by category is shown below. We do not currently utilize a formal time or laboratory project expense allocation system to allocate employee-related expenses, laboratory costs or depreciation to any particular project. Accordingly, we do not allocate these expenses to individual projects or product candidates. However, we do allocate some portions of our research and development expenses in the product development, external research and licensing and professional fees, by project, including CF-301, as shown below.
The following table summarizes our research and development expenses by category for the years ended December 31, 2012 and 2013:
| | | | | | | | |
| | | Year Ended
December 31, | |
| | | 2012 | | | 2013 | |
Personnel related | | $ | 2,978,817 | | | $ | 3,182,153 | |
Product development | | | 4,913,864 | | | | 2,044,774 | |
Laboratory costs | | | 2,586,655 | | | | 1,908,789 | |
External research and licensing costs | | | 2,209,690 | | | | 1,175,221 | |
Professional fees | | | 475,511 | | | | 591,609 | |
Share-based compensation | | | 46,574 | | | | 230,629 | |
| | | | | | | | |
| | $ | 13,211,111 | | | $ | 9,133,175 | |
| | | | | | | | |
The following table summarizes our research and development expenses by category for the three months ended March 31, 2013 and 2014:
| | | | | | | | |
| | | Three Months Ended
March 31, | |
| | | 2013 | | | 2014 | |
Personnel related | | $ | 864,569 | | | $ | 694,244 | |
Product development | | | 331,726 | | | | 207,422 | |
Laboratory costs | | | 610,756 | | | | 320,165 | |
External research and licensing costs | | | 292,787 | | | | 1,296,376 | |
Professional fees | | | 214,715 | | | | 107,529 | |
Share-based compensation | | | 28,922 | | | | 39,603 | |
| | | | | | | | |
| | $ | 2,343,475 | | | $ | 2,665,339 | |
| | | | | | | | |
The following table summarizes our research and development expenses by program for the years ended December 31, 2012 and 2013:
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2013 | |
CF-301 | | $ | 5,136,801 | | | $ | 2,567,138 | |
Other research and development | | | 5,048,919 | | | | 3,153,255 | |
Personnel related and share-based compensation | | | 3,025,391 | | | | 3,412,782 | |
| | | | | | | | |
| | $ | 13,211,111 | | | $ | 9,133,175 | |
| | | | | | | | |
The following table summarizes our research and development expenses by program for the three months ended March 31, 2013 and 2014:
| | | | | | | | |
| | | Three Months Ended
March 31, | |
| | | 2013 | | | 2014 | |
CF-301 | | $ | 496,230 | | | $ | 219,470 | |
CF-404 | | | — | | | | 1,200,000 | |
Other research and development | | | 953,754 | | | | 512,022 | |
Personnel related and share-based compensation | | | 893,491 | | | | 733,847 | |
| | | | | | | | |
| | $ | 2,343,475 | | | $ | 2,665,339 | |
| | | | | | | | |
We anticipate that our research and development expenses will increase substantially in connection with the commencement of clinical trials for our product candidates. However, the successful development of future product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
the scope, rate of progress and expense of our research and development activities;
clinical trial results;
the terms and timing of regulatory approvals;
our ability to market, commercialize and achieve market acceptance for our product candidates in the future; and
the expense, filing, prosecuting, defending and enforcing of patent claims and other intellectual property rights.
A change in the outcome of any of these variables with respect to the development of CF-301 or any other product candidate that we may develop could mean a significant change in the costs and timing associated with the development of CF-301 or such product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of CF-301 or if we experience significant delays in enrollment in any clinical trials of CF-301, we could be required to expend significant additional financial resources and time on the completion of the clinical development of CF-301.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, in our executive, finance and business development functions. Other general and administrative expenses include facility costs, insurance expenses and professional fees for legal, consulting and accounting services.
We anticipate that our general and administrative expenses will increase in future periods to support increases in our research and development activities and as a result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.
Interest Income
Interest income consists of interest earned on our cash and cash equivalents.
Interest Expense
Interest expense consists primarily of cash and non-cash interest costs, including the accretion of the carrying value of our Convertible Notes due 2015 to face value and the estimated value of equity linked securities issued in conjunction with the issuance of these notes, related to our outstanding debt. We capitalize costs incurred in connection with the issuance of debt. We amortize these costs over the life of our debt agreements as interest expense in our statement of operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation described in greater detail below. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this prospectus. However, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations:
accrual of research and development expenses; and
share-based compensation.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses are related to fees paid to CROs in connection with research and development activities for which we have not yet been invoiced.
We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepayment expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. Differences between our estimates and amounts actually incurred to date, and any resulting adjustments, have not been material.
Share-Based Compensation
As we continue to expand our headcount, we expect to make additional stock option grants, which will result in additional share-based compensation expense. Accordingly, we describe below the methodology we have employed to date in measuring such expenses. Following the closing of this offering, stock option values will be determined based on the market price of our common stock.
We apply the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“ASC 718”). Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. Share-based compensation expense is recognized ratably over the requisite service period, which in most cases is the vesting period of the award. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Because we are a privately-held company with a limited operating history, we utilize data from a representative group of companies to estimate expected stock price volatility. We selected companies from the biopharmaceutical industry with similar characteristics to us, including those in the early stage of product development and with a therapeutic focus. We use the simplified method as prescribed by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. We estimated the fair value of options as of their grant date using a Black-Scholes option pricing model with the following weighted average assumptions:
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2012 | | | 2013 | | | 2013 | | | 2014 | |
| | | | | | | | | (unaudited) | |
Risk-free interest rate | | | 1.03 | % | | | 1.21 | % | | | 1.20 | % | | | 1.87 | % |
Expected volatility | | | 76.0 | % | | | 73.2 | % | | | 73.2 | % | | | 73.8 | % |
Expected term | | | 6.19 years | | | | 6.22 years | | | | 6.31 years | | | | 5.75 years | |
The following table sets forth information regarding equity based awards during the years ended December 31, 2012 and 2013 and through the date of this prospectus:
| | | | | | | | | | | | |
| | | Number of
Shares
Underlying
Options
Granted | | | Exercise Price
Per Share | | | Estimated
Fair Value
Per Common
Share at
Grant Date | |
January 2012 | | | 142,854 | | | $ | 11.55 | | | $ | 1.96 | |
March 2012 | | | 17,856 | | | | 11.55 | | | | 1.96 | |
April 2012 | | | 31,285 | | | | 11.55 | | | | 1.96 | |
May 2012 | | | 71,428 | | | | 11.55 | | | | 1.96 | |
June 2012 | | | 58,570 | | | | 11.55 | | | | 1.96 | |
August 2012 | | | 93,996 | | | | 11.55 | | | | 1.96 | |
September 2012 | | | 2,857 | | | | 3.50 | | | | 2.24 | |
November 2012 | | | 21,428 | | | | 3.50 | | | | 2.24 | |
December 2012 | | | 42,857 | | | | 3.50 | | | | 2.24 | |
February 2013 | | | 647,247 | | | | 3.50 | | | | 3.50 | |
March 2013 | | | 1,428 | | | | 3.50 | | | | 3.50 | |
May 2013 | | | 19,285 | | | | 3.50 | | | | 3.50 | |
December 2013 . | | | 35,714 | | | | 6.02 | | | | 4.27 | |
March 2014 | | | 114,280 | | | | 4.27 | | | | 4.27 | |
April 2014 | | | 559,278 | | | | 4.27 | | | | 4.27 | |
As of the date of this prospectus, options to purchase 2,813,997 shares of the common stock were outstanding. The aggregate intrinsic value of these options was $0.3 million based on the initial public offering price of $5.50 per unit.
Determination of the Fair Value of Common Stock
As there was no public market for our common stock, our board of directors determined the estimated fair value of our common stock for purposes of determining an appropriate exercise price for option grants, taking into consideration various objective and subjective factors, including:
estimates and analysis provided by contemporaneous independent valuations performed by an unrelated valuation specialist as of September 30, 2011, September 30, 2012, June 30, 2013 and December 31, 2013;
prices at which we sold shares of preferred stock to third-party investors;
comparative rights and preferences of the security being granted compared to the rights and preferences of our other outstanding equity;
comparative values of public companies discounted for the risk and limited liquidity provided for in the shares we are issuing;
our historical operating and financial performance;
the status of our research and development efforts;
the likelihood of achieving a liquidity event, such as an initial public offering, or initial public offering, or sale of our company;
estimates and analysis provided by management;
external market conditions affecting the biopharmaceutical industry; and
the state of the IPO market for similarly situated privately held biotechnology companies.
Our assessment analyses were based on methodologies that first estimated the fair value of our business as a whole, or our enterprise value. Once we determined the expected enterprise value we then adjusted for expected cash and debt balances, allocated value to the various stockholders, adjusted to present value and discounted for lack of marketability.
There are significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event and the determination of the appropriate valuation methods. If we had made different assumptions, our share-based compensation expense, net loss and net loss per common share could have been significantly different.
Valuation Methodologies
We utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid,Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common stock as of each date an independent valuation was performed. The methodologies included (1) for options granted during the period from January 1, 2012 to May 6, 2013, an option pricing method to estimate our common stock and other equity values and (2) for options granted from June 30, 2013 to March 31, 2014, a probability-weighted expected return methodology (“PWERM”) that determined estimated values under IPO and sale scenarios based upon an assessment of the probability of occurrence of each scenario. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates include assumptions regarding future performance, including the successful completion of pre-clinical studies and clinical trials and the time to completing an IPO or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.
Key variables in the methodologies were as follows:
Underlying equity value—to estimate the value of our total equity, including both common and preferred equity, we utilized the marketable equity value based on the most recent round of preferred stock financing, our series B and C preferred stock financings, with a price of $2.58 per share and $3.30 per share, respectively, which we believed to be the most indicative of our value.
Volatility—volatility was estimated based on comparable publicly-traded companies over the period that matches the estimated time to liquidity.
Time to liquidity—we estimated time to a liquidity event based on the projected time to significant clinical or business development events that we believed could lead to an initial public offering or a company sale. Our estimates were based on our expectations of when we would have completed development or licensing milestones of CF-301 or our antibody combination for influenza. At that time, we believed that an initial public offering or other liquidity event could occur.
Risk-free interest rate—we determined the risk-free interest rate based on the yield of a U.S. Treasury bill with a maturity date closest to the estimated time to a liquidity event for our stockholders.
Discounts for lack of marketability—because we are a privately-held company, shares of our common stock are highly illiquid and, as such, warrant a discount in value from their estimated “marketable” price. We use a discount factor up to 35% for illiquidity using legal guidelines from U.S. Tax Court cases regarding privately-held business valuations, fundamental business factors and empirical studies on the discount for lack of marketability. We corroborated the discount factor based on the value of a put option compared to the value of common stock using a Black-Scholes option pricing model. We also considered that our preferred stock has rights that our common stock does not have, including anti-dilution protection, redemption rights and protective provisions in our certificate of incorporation. Our preferred stockholders have control and influence over the enterprise, which provides them with the optionality over future liquidity, financing and other decisions that the common stock option holders do not control.
At each valuation date, we used our historical financial performance and the then current budget or forecast as approved by our board of directors, to determine our estimated financing needs and forecasted cash balances for each exit scenario and exit date. We then estimated the probability and timing of each potential liquidity event based on management’s best estimate taking into consideration all available information as of the valuation date, including the stage of development of our product candidates, industry clinical success rates, our expected near-term and long-term funding requirements, and an assessment of the current financing and biopharmaceutical industry environments at the time of the valuation.
Discussion of Specific Valuation Inputs
The discussion below highlights the methodology and significant assumptions utilized to value our common stock for share-based compensation during the period January 2011 to March 2014.
September 30, 2011 valuation. The common stock fair value as of September 30, 2011 was estimated to be $1.96 per share. During the period between January 1, 2011 and August 31, 2011, the following developments affected our business and the value of the shares: we hired our Chief Medical Officer and Vice President of product development, completed two additional licensing agreements with The Rockefeller University, including the license to CF-301, and established a license agreement with MorphoSys AG, enabling an antibody discovery platform (such license with MorphoSys terminates on August 15, 2014). In August and September 2011, we issued 4,429,707 shares of our Series C preferred stock at $3.30 per share to investors for proceeds of approximately $14.6 million.
The option pricing method was utilized to calculate an implied enterprise value using a Black-Scholes model, which was then allocated across the various classes of investors, ultimately resulting in a per share price for our common stock. In selecting the option pricing method, it was determined to be the most reliable given the
expectation of various potential liquidity outcomes and the difficulty of supporting estimated exit values given our stage of development and financial position. The potential liquidity events used in the September 30, 2011 valuation had an estimated average time to occurrence of the event of 3 years. Other inputs into the model were a risk-free rate of 0.42%, volatility of 82% based on a group of comparable publicly traded companies, and a dividend yield of 0%. We applied a discount for lack of marketability, or DLOM, of 35% in determining the value of our common stock based on multiple mathematical models for calculating illiquidity discounts. We used the estimated fair value of a share of our common stock of $1.96 for purposes of determining our share-based compensation for all awards granted from September 1, 2011 through August 31, 2012.
September 30, 2012 valuation. The common stock fair value as of September 30, 2012 was estimated to be $2.24 per share. During the period between October 1, 2011 and September 30, 2012, the following developments affected our business and the value of the shares: we hired our Chief Financial Officer, opened our new headquarters and research laboratory in Yonkers, New York, and selected our first clinical candidate, CF-301, for advancement into IND enabling studies and manufacturing. We also completed the $30 million of Series C preferred stock financing, issuing 4,630,899 shares of our Series C preferred stock at $3.30 per share to investors for proceeds of approximately $15.3 million.
We continued to utilize the option pricing method to calculate an implied enterprise value and then allocated that value across the various classes of investors, ultimately resulting in a per share price for our common stock. The potential liquidity events used in the September 30, 2012 valuation had an estimated average time to occurrence of the event of 2.5 years. Other inputs into the model were a risk-free rate of 0.27%, volatility of 98% based on a group of comparable publicly traded companies, a dividend yield of 0% and a DLOM of 35%, in determining the value of our common stock. We used an estimated fair value of a share of our common stock of $2.24 for purposes of determining our share-based compensation for all awards granted from September 1, 2012 through February 26, 2013.
By February 27, 2013, we had completed our planned IND enabling studies of CF-301, manufactured clinical trial materials of CF-301 for use in early stage clinical trials and prepared our initial IND submission for CF-301. On February 27, 2013, we awarded options to purchase 647,247 shares of our common stock to our employees and directors under the amended and restated 2008 equity incentive plan (the “Amended 2008 Plan”). Our board of directors also approved an option exchange offer (the “Exchange Offer”) for eligible option holders with outstanding options with an exercise price in excess of $3.50 per share. The offering period for the Exchange Offer commenced on March 11, 2013 and expired on April 9, 2013. Participation in the Exchange Offer was voluntary. Options to purchase 647,521 shares of our common stock were exchanged under the tender offer. Both the new options grants and the exchange option grants were granted at an exercise price of $3.50 per share. We used an estimated fair value of a share of our common stock of $3.50 for purposes of determining our share-based compensation for all of the new and exchanged awards.
June 30, 2013 valuation. The common stock fair value as of June 30, 2013 was estimated to be $6.02 per share. During the period between February 28, 2013 and June 30, 2013, the following developments affected our business and the value of our shares: we filed our first IND for clinical candidate CF-301, received correspondence from the FDA that CF-301 was placed on clinical hold and identified two of the three antibodies in our combination therapy for influenza. We also completed the sale of $10.0 million of our Convertible Notes due 2015.
To value our common stock, and in consideration of the potential liquidity events that might have become available to us, including a potential IPO, we utilized a PWERM to determine the per share common stock value. As part of the analysis of potential liquidity scenarios, we utilized the guideline public company market approach, which estimates the value of a business by comparing a company to similar publicly-traded companies. We used the following probability weighted liquidity event scenarios:
| | | | |
Scenarios
| | Probability
Weighting | |
High IPO
| | | 10 | % |
Low IPO
| | | 10 | % |
Delayed IPO
| | | 30 | % |
Dissolution or Sale
| | | 50 | % |
The introduction of an IPO as a potential liquidity event resulted in a lower DLOM of 20% in determining the value of our common stock. The estimated fair value of a share of our common stock was $6.02 for the period from July 1, 2013 through December 24, 2013. We did not grant any share-based compensation awards during this period.
December 31, 2013 valuation. The common stock fair value as of December 31, 2013 was estimated to be $4.27 per share. During the period between July 1, 2013 and December 31, 2013, the following developments affected our business and the decrease in value of our shares: CF-301 remained on clinical hold, we initiated additional pre-clinical studies of CF-301, MorphoSys initiated arbitration proceedings against us, and our founder and former chief executive officer, Dr. Robert Nowinski, departed from the Company. Additionally, we completed the sale of $2.0 million of additional Convertible Notes due 2015 and initiated in-licensing activities for our mAbs for the treatment of influenza with Trellis. We settled our arbitration with MorphoSys in June 2014.
To value our common stock, we continued to utilize a PWERM to determine the per share common stock value. As part of the analysis of potential liquidity scenarios, we also continued to utilize the guideline public company market approach. We used the following probability weighted liquidity event scenarios:
| | | | | | | | |
Scenarios | | Probability
Weighting | | | DLOM | |
Early IPO | | | 20 | % | | | 10 | % |
Delayed IPO | | | 40 | % | | | 15 | % |
Dissolution or Sale | | | 40 | % | | | 30 | % |
The overall probability of an IPO as a potential liquidity event increased and we determined that using a separate DLOM for each liquidity scenario was appropriate in determining the value of our common stock. We used an estimated fair value of a share of our common stock of $4.27 for purposes of determining our share-based compensation for all awards granted from December 25, 2013 through the date of this prospectus.
Total share-based compensation expense was $0.2 million for the year ended December 31, 2012 and $2.3 million for the year ended December 31, 2013. As of December 31, 2013, we had $0.6 million of total unrecognized share-based compensation expense, which we expect to recognize over a weighted average remaining service period of approximately 2.15 years. We expect the expense to grow in future periods due to the potential increases in the value of our common stock and headcount.
There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance, including the successful completion of our clinical trials and the time to complete an initial public offering or sale, as well as the determination of the appropriate valuation methods at each valuation date. If we had made different assumptions, our share-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of our future stock price.
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated.
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2012 | | | 2013 | | | 2013 | | | 2014 | |
| | | | | | | | | (unaudited) | |
Operating expenses: | | | | | | | | | | | | | | | | |
Research and development expenses | | $ | 13,211,111 | | | $ | 9,133,175 | | | $ | 2,343,475 | | | $ | 2,665,339 | |
General and administrative expenses | | $ | 5,943,062 | | | $ | 10,163,259 | | | $ | 2,029,989 | | | $ | 2,122,625 | |
Other income (expense) | | $ | (129,281 | ) | | $ | (4,324,268 | ) | | $ | (30,745 | ) | | $ | (424,848 | ) |
Year ended December 31, 2013 compared to year ended December 31, 2012
Research and Development Expenses
Research and development expense was $9.1 million for the year ended December 31, 2013, compared with $13.2 million for the year ended December 31, 2012, a decrease of $4.1 million, or 31%. This decrease was primarily attributable to a $2.7 million decrease in spending on our lead product, CF-301, as we experienced delays entering clinical studies, a $1.0 million decrease in costs related to the MorphoSys antibody library due to non-recurring fees incurred in 2012, and a $0.4 million decrease in costs related to the support of our research efforts as we controlled spending throughout the year.
General and Administrative Expenses
General and administrative expense was $10.2 million for the year ended December 31, 2013 compared with $5.9 million for the year ended December 31, 2012, an increase of $4.3 million, or 71%. This increase was primarily attributable to $3.6 million in severance related charges for the termination of the former CEO’s employment agreement, including $1.0 million of non-cash share based compensation expense, and a $0.7 million increase in personnel costs and legal and professional fees.
Other income (expense)
Other expense was $4.3 million for the year ended December 31, 2013 compared with $0.1 million for the year ended December 31, 2012, an increase of $4.2 million, or 3,245%. This increase was due primarily to the non-cash interest charges of $1.6 million associated with our Convertible Notes due 2015 and the change in fair value measurement of $2.6 million of our warrant and embedded derivative liabilities.
Three months ended March 31, 2014 compared to three months ended March 31, 2013
Research and Development Expenses
Research and development expense was $2.7 million for the three months ended March 31, 2014, compared with $2.3 million for the three months ended March 31, 2013, an increase of $0.4 million, or 14%. This increase was primarily attributable to the $1.0 million in non-cash licensing costs related to our license agreement with Trellis. This increase was partially offset by a $0.5 million decrease in salaries and benefits as well as related consulting and laboratory costs due to lower headcount supporting our research and development efforts and a $0.1 million decrease in external costs related to the development ofCF-301.
General and Administrative Expenses
General and administrative expense was $2.1 million for the three months ended March 31, 2014, compared with $2.0 million for the three months ended March 31, 2013, an increase of $0.1 million, or 5%. This increase was primarily attributable to $0.8 million in settlement costs and legal fees associated with our arbitration with MorphoSys, which was settled in June 2014, and an increase of $0.1 million in professional fees compared to the prior period. This increase was partially offset by a $0.8 million decrease in salaries and benefits costs related to lower headcount in the current period as compared to the prior period and the incurrence of severance charges in the prior period.
Other income (expense)
Other expense was $0.4 million for the three months ended March 31, 2014, compared with less than $0.1 million for the three months ended March 31, 2013, an increase of $0.4 million, or 1,282%. This increase was due primarily to the non-cash interest charges of $0.8 million associated with our Convertible Notes due 2015. This increase was partially offset by the receipt of $0.3 million in refundable state tax credits and the change in fair value measurement of $0.1 million of our warrant and embedded derivative liabilities.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations to date primarily through proceeds from sales of common stock and convertible preferred stock and issuances of convertible debt. To date, we have not generated any revenue from the sale of products. We have incurred losses and generated negative cash flows from operations since inception.
From inception through the date of this prospectus, we have received gross proceeds of $0.2 million from the sale of common stock, $44.2 million from the sale of convertible preferred stock and $15.0 million from the issuance of our Convertible Notes due 2015.
As of March 31, 2014, our cash and cash equivalents totaled $2.5 million. We primarily invest our cash and cash equivalents in commercial savings accounts. We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, will be sufficient to fund our operations and our capital expenditures for at least the next 12 months. For more information on how we believe the proceeds of this offering will impact our liquidity, see “Use of Proceeds”. The following table summarizes our cash flow activity for each of the periods set forth below:
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2012 | | | 2013 | | | 2013 | | | 2014 | |
| | | | | | | | | (unaudited) | |
Net cash used in operating activities | | $ | (16,310,865 | ) | | $ | (14,056,424 | ) | | $ | (3,911,847 | ) | | $ | (2,762,735 | ) |
Net cash (used in) provided by investing activities | | $ | (158,917 | ) | | $ | 1,588,570 | | | $ | (274,717 | ) | | $ | — | |
Net cash (used in) provided by financing activities | | $ | 8,459,082 | | | $ | 8,726,860 | | | $ | (259,653 | ) | | $ | 1,155,000 | |
Operating Activities
Net cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and favorable changes in the components of working capital. Net cash used in operating activities decreased in 2013, as compared to 2012, due to the decrease in costs associated with the development of our lead product candidate, CF-301. Accounts payable and accrued liabilities increased $2.0 million in 2013, as compared to 2012, due to the increase in our accrued liabilities associated with the severance charges recorded in conjunction with the departure of our former Chief Executive Officer. This increase was partially offset by the decrease in the amount of outstanding accounts payable for services completed by contract organizations for manufacturing and pre-clinical studies of CF-301. We capitalized deferred financing costs of $1.2 million in 2013, resulting in an equivalent increase in both other assets and accrued liabilities that have been offset in our presentation of the cash flows from operating activities for the year ended December 31, 2013. These costs will be netted against the proceeds of this offering and included in our presentation of the cash flows from financing activities for the period in which this offering closes. Net cash used in operating activities decreased approximately $1.1 million in the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, due to the non-cash charges incurred for the technology we licensed from Trellis of $1.0 million and the amortization of debt issuance costs and the discount on our Convertible Notes due 2015 of $0.6 million.
Investing Activities
Net cash provided by investing activities in the year ended December 31, 2013 as compared to net cash used by investing activities in the year ended December 31, 2012 resulted from the elimination of the restricted cash account necessary to secure the capital lease that funded purchases of our equipment in prior years. Net cash used by investing activities in the three months ended March 31, 2013 resulted from the net increase in the amount of restricted cash necessary to secure both the capital lease and the note payable which were outstanding at that time. The capital lease and note payable were repaid in September 2013 and October 2013, respectively. Additionally, we did not acquire any equipment in the year ended December 31, 2013 or three months ended March 31, 2014.
Financing Activities
Net cash provided by financing activities in the years ended December 31, 2013 and 2012 primarily resulted from the issuance of an aggregate of $12.0 million of our Convertible Notes due 2015, less $1.3 million of issuance costs and $1.9 million for the repayment of debt in the year ended December 31, 2013 and the issuance of an aggregate of $9.6 million of Series C Convertible Preferred Stock, less $0.2 million in issuance costs, and $1.0 million for the repayment of debt in the year ended December 31, 2012. Net cash used by financing activities in the three months ended March 31, 2013 resulted from the principal payments on both the capital lease and the note payable, as compared to net cash provided by financing activities in the three months ended March 31, 2014 resulted from the issuance of an aggregate of approximately $1.2 million of our Convertible Notes due 2015.
Convertible Notes due 2015
From June 18, 2013 through June 20, 2014, we issued approximately $15.0 million aggregate principal amount of our 8.00% Convertible Notes due May 31, 2015 (the “Convertible Notes due 2015”). The principal amount of the Convertible Notes due 2015 and all accrued and unpaid interest thereon will automatically convert into shares of our common stock upon the closing of this offering. The conversion price of the Convertible Notes due 2015 will be a 25% discount to the initial public offering price for the shares of common stock offered hereby, or $11.55, whichever is lower, subject in each case to adjustment.
Purchasers of the Convertible Notes due 2015 also received warrants to purchase 50% of the total number of common shares into which the note purchased by the holder is convertible. The exercise price of the warrants will be a 25% discount to the initial public offering price for the shares of common stock offered hereby, or $10.50 in the event there is no initial public offering by April 18, 2014, whichever is lower, subject in each case to adjustment.
The placement agent for the sale of the Convertible Notes due 2015 also received warrants to purchase 10% of the total number of common shares into which all notes purchased by the holders are convertible. In connection with this offering, the placement agent has forfeited the warrants it received in connection with the issuance of the Convertible Notes due 2015.
Funding Requirements
All of our product candidates are still in pre-clinical development. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:
continue the ongoing pre-clinical studies, and initiate the planned clinical trials, of our product candidates;
continue the research and development of our other product candidates and our platform technology;
seek to identify additional product candidates;
acquire or in-license other products and technologies;
seek marketing approvals for our product candidates that successfully complete clinical trials;
establish, either on our own or with strategic partners, a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
maintain, leverage and expand our intellectual property portfolio; and
add operational, financial and management information systems and personnel, including personnel to support our product development and future commercialization efforts.
We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. Our future capital requirements will depend on many factors, including:
the progress and results of the clinical trials of our lead product candidates;
the scope, progress, results and costs of compound discovery, pre-clinical development, laboratory testing and clinical trials for our other product candidates;
the extent to which we acquire or in-license other products and technologies;
the costs, timing and outcome of regulatory review of our product candidates;
the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and
our ability to establish any future collaboration arrangements on favorable terms, if at all.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
We will also incur costs as a public company that we have not previously incurred, including, but not limited to, costs and expenses for increased personnel costs, increased directors fees, increased directors and officers insurance premiums, audit and legal fees, investor relations and external communications fees, expenses for compliance with the Sarbanes-Oxley Act and rules implemented by the SEC and NASDAQ and various other costs.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2013:
| | | | | | | | | | | | | | | | | | | | |
| | | Payments by period | |
| | Total | | | Less than
1 year | | | 1-3 years | | | 3-5 years | | | More than
5 years | |
Long-term debt obligations (1) | | $ | 11,963,650 | | | $ | — | | | $ | 11,963,650 | | | $ | — | | | $ | — | |
License agreements (2) | | | 2,929,194 | | | | 908,200 | | | | 1,510,994 | | | | 310,000 | | | | 200,000 | |
Operating lease obligations (3) | | | 13,079,697 | | | | 818,815 | | | | 1,687,086 | | | | 1,755,244 | | | | 8,818,552 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 27,972,541 | | | $ | 1,727,015 | | | $ | 15,161,730 | | | $ | 2,065,244 | | | $ | 9,018,552 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Includes approximately $12.0 million aggregate principal amount of our Convertible Notes due 2015, which are payable on May 31, 2015. All of such notes will convert into shares of our common stock upon the closing of this offering. |
(2) | Includes certain amounts payable under our licenses and sponsored research agreements with The Rockefeller University, MorphoSys AG and Trellis Bioscience LLC. The payments do not include $0.5 million payable in Series C-1 Preferred Stock to Trellis Bioscience LLC on or before July 29, 2014. |
(3) | We lease office and laboratory space under non-cancelable operating lease agreements expiring on December 31, 2027. |
In addition to the commitments discussed above, we have commitments to make potential future milestone payments to third parties under our licenses and sponsored research agreements totaling approximately $10.1 million, which assumes one product achieving all applicable development and regulatory milestones under each agreement, excluding the MorphoSys license agreement, which terminates on August 15, 2014. These milestones primarily include the commencement and results of clinical trials and obtaining regulatory approval in various jurisdictions, the outcome and timing of which are difficult to predict and subject to significant uncertainty. In addition to the milestones discussed above, we are obligated to make additional payments upon the achievement of future sales milestones and to pay royalties on future sales, both of which are contingent on generating levels of sales of future products that have not been achieved and may never be achieved. Since we are unable to reliably estimate the timing and amounts of such milestone and royalty payments, or whether they will occur at all, these contingent payments have been excluded from the table above.
In the course of normal business operations, we also have agreements with contract service providers to assist in the performance of our research and development and manufacturing activities. We can elect to discontinue the work under these agreements at any time. We could also enter into additional sponsored research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and even long-term commitments of cash.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we are currently not party to, any off-balance sheet arrangements.
Multiemployer Plans
We did not have during the periods presented, and we are currently not party to, any multiemployer plans.
JOBS Act
The JOBS Act provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.
Additionally, as an “emerging growth company,” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 or (ii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).
Change in Accountants
In preparation for this offering, we released EisnerAmper LLP and engaged Ernst & Young LLP as our independent registered public accounting firm effective as of April 16, 2013. The decision to appoint Ernst & Young LLP and release EisnerAmper LLP was recommended by our audit committee and subsequently approved by our board of directors.
The report of EisnerAmper LLP on our financial statements for the year ended December 31, 2011 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of our financial statements for the year ended December 31, 2011 and through our change of auditors, there were no disagreements with EisnerAmper LLP on any matters of accounting principles or practices, financial statement disclosures or auditing scope or procedures, which if not resolved to EisnerAmper LLP’s satisfaction would have caused EisnerAmper LLP to make reference to the matter in their report.
In connection with our audited financial statements for the year ended December 31, 2011 through our change of auditors, there have been no reportable events with us as set forth in Item 304(a)(1)(v) ofRegulation S-K.
We requested that EisnerAmper LLP furnish us with a letter addressed to the SEC stating whether it agrees with the above statements. A copy of the letter, dated April 17, 2014, is filed as an exhibit to the registration statement of which this prospectus forms a part.
Prospective investors should carefully review the terms and provisions of the form of applicable Public Warrants for a complete description of the terms and conditions of such Public Warrants.BUSINESSExercise Price, Exercisability and Duration
Our Company
We are a biotechnology company focused on discovering and developing therapeutic protein and antibody productsEach Class E warrant will have an exercise price of $ for life-threatening, drug-resistant infectious diseases, particularly those treated in hospital settings. Due to drug-resistant and newly emerging pathogens, hospital acquired infections are currentlyeach whole share, will be exercisable upon the fourth leading causedate of death in the United States, following heart disease, cancer and stroke. We intend to address drug- resistant infections using our therapeutic product candidates from our lysin and monoclonal antibody platforms to target conserved regions of either bacteria or viruses. Lysins are enzymes that are produced in the life cycle stagepublication by us of a bacteriophage, a virus that infects and kills bacteria. Lysins can digest bacterial cell walls and are fundamentally different than antibiotics because they kill bacteria immediately upon contact. We believepress release containing the propertiesresults of our lysins make them suitablePhase 1b/2 clinical trial on the use of intra-articular exebacase for the treatment of antibiotic-resistant organisms that can cause seriouschronic Staphylococcal prosthetic joint infections such as Staph aureus bacteremia, pneumonia and osteomyelitis, andof the treatment of biofilm-related indications for infected prosthetic joints, indwelling devices and catheters. In addition to our lysins, we are exploring therapies using mAbs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerableknee with respect to the body’s natural immune response. Our product candidates have not yet entered42-day clinical trials. Our most advanced product candidates are CF-301, a lysinresponse to the trial drug for cohort 1 of such trial (referred to herein as the treatment of Staph aureus bacteremia,PJI Data Release Date) and CF-404, a combination of mAbs forwill expire on the treatment of life-threatening seasonal and pandemic varieties of influenza.date that is 60 days after the PJI Data Release Date.
Our Focus—Therapeutic Approach
Our lysin and antibody drug development approach involves creating drugs that target the conserved regions of bacteria and viruses to mitigate evolutionary escape mechanisms, preventing resistance to our drugs. In addition, we have sought to further reinforce our drugs’ chances against resistance by employing a combination strategy. Current therapeutic industry practice focuses on monotherapy—the use of one drug at a time. Should the drug not be effective, then a second drug is used. We believe that monotherapy with antibiotics exerts an evolutionary pressure on mutant strains promoting the formation of drug-resistant pathogens. To bypass this, we believe that treatment of drug-resistant pathogens requires a new approach—one focusing on combination therapy. By simultaneously attacking multiple targets on pathogens, we believe that no single mutation or genetic reassortment can result in complete escape from therapy.
Our Competitive Strengths
We believe the following strengthsEach Class F warrant will enable us to progress our product candidates through pre-clinical and clinical development:
| • | | Our lysins possess rapid bactericidal activity. Lysins have the ability to kill bacteria immediately upon contact. Traditional antibiotics, and most cytotoxic agents, require bacterial cell division and metabolism to exert their effect, which can take hours or days to be effective. CF-301 has demonstrated in vitro the ability to kill Staph aureus bacteria seconds after contact. Based upon these data, we believe our lysins, combined with standard-of-care antibiotics, have the potential to reduce treatment times and therefore improve patient outcomes and shorten hospital stays. |
| • | | Our mAb platform includes fully human mAbs. We have access to technology that isolates antibodies directly from human blood samples, enabling the screening of billions of human mAbs with different binding sites. |
| • | | Minimal resistance to date in pre-clinical in vitro study. Our lysins target the conserved regions of bacteria and our mAbs target the conserved regions of viruses. Based on our research and experimentation in pre-clinical in vitro studies to date, bacteria have shown minimal resistance to our lysins. It is our intention to maintain this attribute for all of our product candidates. |
| • | | Our product candidates are highly specific. A key feature of our lysins that distinguishes them from many standard-of-care antibiotics is their ability to target pathogenic antibiotic-resistant bacteria, as
|
| well as those that are antibiotic-sensitive, while sparing healthy bacteria. Our mAbs specifically target conserved regions of principal influenza strains, which in turn allows the mAb to be effective against many different variations of the principal strain.
|
| • | | Minimal competition. There are limited treatment options for life-threatening infectious diseases, such as bacteremia, pneumonia, osteomyelitis, influenza, meningitis and endocarditis. For example, there are only two FDA approved drugs for the treatment of MRSA bacteremia, vancomycin and daptomycin, and there are only four approved drugs for the treatment of influenza—Tamiflu, Relenza, Symmetrel and Flumadine—although only Tamiflu is widely used in practice. MRSA have shown resistance to both MRSA bacteremia drugs. Influenza has demonstrated a strong propensity for developing resistance to Tamiflu, and the clinical benefit of Tamiflu is greatest when antiviral treatment is administered early, especially within 48 hours of influenza illness onset. |
| • | | Diverse research pipeline behind our lead products. Our lysin discovery platform provides a steady pipeline of novel lysins for research consideration and has recently generated lysins with activity against gram-negative bacteria of interest. Our mAb platform and strategy have yielded an innovative program for the treatment of influenza. |
| • | | Deep patent portfolio.We have a deep patent portfolio consisting of 16 families of patents and patent applications in the United States and certain foreign jurisdictions, which include seven issued U.S. patents. This portfolio includes patent applications filed by us and patents and patent applications licensed from Rockefeller and Trellis. |
| • | | Substantial market opportunity. Our market opportunity has accelerated and expanded as antibiotic resistance has become a major threat to global public health. Hospital-based infections are currently the fourth leading cause of death in the United States, following heart disease, cancer and stroke. Recently, these pathogens have become a significant threat outside the hospital, moving rapidly into the community at large. |
| • | | Experienced leadership team. Our management team and board of directors, together with our founders, have formed nine companies that have gone on to produce multibillion dollar drugs such as Revlimid, Thalomid, Cialis, Tobi, Abraxane, Levovir, Racivir and Sovaldi. |
Our Strategy
Our strategy is to use our therapeutic products to achieve a leading market position in the treatment of life-threatening infectious diseases, including drug-resistant pathogens. We plan to pursue commercialization of therapeutic products through discovery, acquisition and development of protein and antibody products as follows:
Advance our lead product candidates, CF-301 and CF-404, into clinical trials and demonstrate superiority over standard-of-care drugs;
Advance additional product candidates from our lysin portfolio;
Acquire additional foundation technologies that enable the efficient discovery of mAbs; and
Acquire or discover mAbs that treat infectious diseases by blocking and disarming the virulence factors of bacteria and viruses
Our Pipeline
Our product candidates are intended to treat these antibiotic-resistant infections and viruses through novel methods and our current pipeline of product candidates and advanced research programs is reflected in Figure 1:
Figure 1: Product Pipeline
Lysins
Background
Bacteria can be divided into two groups based on structural differences of the bacteria’s outermost walls: (a) “gram-positive” and (b) “gram-negative”. Gram-positive bacteria have an outermost cell wallexercise price of peptidoglycan (a structure consisting of sugars and amino acids), which, when exposed to a dye known as the “Gram-stain,” absorb the dye and appear dark blue or violet when viewed under a microscope. Gram-negative bacteria have an additional outer membrane that prevents the Gram-stain from penetrating the peptidoglycan and, therefore, do not appear dark blue or violet when viewed microscopically. The additional outer membrane has also made gram-negative bacteria harder$ for lysins to penetrate. However, we have discovered and have multiple research programs on lysins that kill gram-positive and gram-negative bacteria.
Lysins are bacteriophage enzymes that have been shown to digest the peptidoglycan of the bacteria cell wall in in vitro experiments. Once the cell wall is breached, the bacteria lyses in a virtually explosive manner due to the high internal osmotic pressure of its cytoplasm. We believe lysins are unlike standard-of-care antibiotics, especially regarding their mechanism and speed of action. Traditional antibiotics, and most cytotoxic agents, require bacterial cell division and metabolism to occur in order to exert their effect (i.e., cell death or cessation of growth). Based on in vitro tests, lysins, however, are fundamentally different in that they kill bacteria immediately upon contact.
In cooperation with Rockefeller, we have built a deep pipeline of recombinant forms of lysins for use as human therapeutics. We acquired worldwide exclusive license rights to patents of nine lysins from Rockefeller. Each lysin targets specific gram-positive bacteria, including drug-sensitive and drug-resistant forms of Staph aureus, pneumococcus, group B streptococcus, enterococcus and anthrax. Significantly, our lysins digest only the specific types of bacteria they target, which we believe will avoid the damaging side effects that often occur when conventional antibiotic treatments kill the body’s healthy, desirable bacteria. Table 1 sets forth the lysins for which we have acquired licenses to patents from Rockefeller, the bacteria that each lysin targets and the diseases associated with such bacteria.
Table 1: Lysins Licensed from The Rockefeller University
| | | | |
Lysin
| | Bacteria
| | Disease
|
CF-301
| | Staphylococcus aureus | | Bacteremia* |
CF-302
| | Staphylococcus aureus | | Abscesses* |
| | | | Pneumonia |
| | | | Endocarditi |
| | | | Meningitis |
| | |
CF-303
| | Pneumococcus | | Pneumonia* |
CF-309
| | Pneumococcus | | Bacteremia* |
| | | | Endocarditis* |
| | | | Meningitis* |
| | | | Otitis Media* |
| | |
CF-304
| | Enterococcus | | Serious Intestinal Infections |
| | |
CF-305
| | Group B Strep | | Neonatal Meningitis* |
| | |
CF-306
| | Anthrax | | Serious Bacteremia* |
CF-307
| | Anthrax | | |
CF-308
| | Anthrax | | |
* | Indicates published data. |
Our Lysin Discovery Platform
We employ bioinformatics and a series of metagenomic-based techniques to clone bacteriophage lysins from bacterial, viral, and environmental sources. The field of metagenomics is based on the bulk extraction of DNA/RNA from environmental samples (e.g., soil, water, etc.) without prior isolation of individual microbial sources. This is useful when one considers that less than 1% of microbes are culturable under standard laboratory conditions. Once extracted, the metagenomic DNA can then be examined using sequence-based methods or by proprietary functional screens. These functional screens for bacteriophage lysin activity form the basis for our lysin discovery work.
For the functional metagenomic work that we perform, environmental genes are expressed in a recombinant format in a standard host organism (i.e.,Escherichia coli) and cells are monitored for the acquisition of a desired phenotype. We can vary both the source of environmental DNA and the way we monitor for desired phenotypes to focus only on environmental populations enriched for bacteriophage lysins that can actively kill a pathogen of interest. We sample various DNA sources including viral, prophage, and pathogen-amplified viral metagenomics. Multiple methods for both DNA library construction and for functional screening are used in parallel in order to maximize lysin identification.
We have also established additional discovery methodologies, including bioinformatics analysis of the rapidly expanding databases of bacterial genomic sequences. The highly conserved modular structure of lysins,
combined with sequence homologies amongst different lysin classes, enable the rapid analysis of putative lysins from DNA databases. Such sequences can be readily synthesized and screened for lytic activity against any pathogen of interest.
The application of these methods enables the large scale identification of lysins, enabling the production of lysin banks specific for any particular pathogen. We believe the ability to rapidly identify lysins specific for any pathogen of interest, either by in vitro or in silico methods, will provide a steady pipeline of novel lysins for consideration as potential antimicrobial therapeutic candidates.
Our most advanced lysin product, CF-301, is providing biologic and pharmacologic insights into our entire portfolio of lysins to optimize these molecules with highly differentiated properties through research and development. The goal of the CF-301 program is to treat Staph aureus bacteremia and then to expand CF-301 treatment to additional indications, including pneumonia, osteomyelitis and biofilm-based infections. Our objective is to gain market leadership in lysin-based drugs for serious life-threatening drug-resistant infections as well as all Staph aureus-related indications.
We intend to pursue pre-clinical and clinical development of additional lysins. In addition to the lysins we have licensed from Rockefeller and our in-house lysin discovery program, we have an active sponsored research agreement for the discovery of new lysins with Dr. Vincent Fischetti’s Laboratory of Bacterial Pathogenesis and Immunology at Rockefeller, where we have the first right to negotiate a license to all discoveries concerning lysins through October 2016. The primary focus of our in-house and sponsored research is the discovery of lysins to target gram-negative bacteria.
Our Lead Lysin Program: CF-301
We intend to pursue the development of CF-301 for the treatment of Staph aureus bacteremia, a blood borne infection, which caused 119,000 hospital admittances in 2011 and causes approximately 30,000 deaths per year in the United States. We filed our IND application with the FDA on March 7, 2013, and this application is currently on clinical hold. See “Risk Factors—Our IND application for CF-301 has been placed on clinical hold by the FDA and there are no assurances that wewhole share, will be permitted to initiate clinical trials on our intended timeline or at all” and “—CF-301: Clinical Status.” Our pre-clinical studies to date have shown that CF-301 has the following attributes:
| • | | Rapid bactericidal activity. CF-301 kills Staph aureus bacteria in vitro seconds after contact. Currently, mortality from Staph bacteremia remains close to 30% with treatment on standard-of-care drugs. The average length of hospitalization due to Staph aureus bacteremia is 21 days and the average total cost of hospitalization is $114,000. We believe our lysins, combined with standard-of-care antibiotics, have the potential to improve patient outcomes, shorten treatment times and reduce the length of hospital stays. |
| • | | Highly specific to all forms of Staph aureus bacteria. CF-301 exhibits activity specific to all forms of Staph aureus, including MRSA and VRSA. Significantly, our lysins digest only the specific type of target bacteria, which we believe will avoid damaging side effects that often occur when conventional antibiotic treatments kill the body’s healthy, desirable bacteria. |
| • | | Minimal resistance. To date, bacteria show minimal resistance to CF-301’s killing activity in vitro. |
| • | | Minimal competition. There are only two FDA approved drugs for the treatment of MRSA bacteremia, vancomycin and daptomycin. MRSA bacteremia has shown resistance to both drugs. |
| • | | Synergy with standard-of-care antibiotics. We have discovered a strong synergistic effect between CF-301 and several standard-of-care antibiotics, including daptomycin, vancomycin and oxacillin. Synergy is defined as the interaction of two or more agents so that their combined effect is greater than the sum of their individual effects. We intend to seek approval for CF-301 in combination with these standard-of-care antibiotics for Staph aureus bacteremia. We believe that the use of CF-301 in combination with, rather than as a replacement for, standard-of-care antibiotics, may help speed adoption of our product by physicians. |
| • | | Eradicates biofilms. CF-301 eradicates biofilms that protect bacterial infections in the body, and on indwelling devices such as prosthetics, from antibiotics. Biofilms render infections up to1,000-fold more resistant to penetration by antibiotics. Infected human tissues, such as a valve in endocarditis or bone in osteomyelitis, or indwelling medical devices, such as central venous catheters, prosthetic joints and pacemakers, are common sites for biofilm formation, providing a hurdle for effective treatment with antibiotics alone. |
| • | | Patent protection.If issued as we expect, our three CF-301 patents would have protection through 2032. |
A key feature of lysins that distinguishes them from standard-of-care antibiotics is their ability to target pathogenic antibiotic-resistant bacteria, as well as those that are antibiotic-sensitive. Antibiotic resistance is a major threat to global public health. Table 2 sets forth the ability of CF-301 to kill all Staph aureus isolates tested, regardless of their antibiotic-resistance profile. In this experiment, we tested 250 different drug sensitive and resistant isolates of Staph aureus. The isolates (which are classified by the particular drugs they are sensitive or resistant too) tested included methicillin-sensitive (“MSSA”), MRSA, VRSA, linezolid-resistant (“LRSA”) and daptomycin-resistant (“DRSA”) Staph aureus. The isolates were all analyzed to determine their sensitivity to CF-301 (and standard-of-care drugs) as measured by the Minimum Inhibitory Concentration (“MIC”) value. The MIC value is the minimum dose of drug that is required to kill a standard amount of bacteria over a 24-hour period. Based on demonstrated MIC values, CF-301 was shown to be active against all the strains tested (‘+’), while subsets of the Staph aureus strains were resistant to daptomycin, vancomycin or linezolid (‘–’).
Table 2: In Vitro Sensitivity of Antibiotic-Sensitive and Antibiotic-Resistant Staph aureus to CF-301
| | | | | | | | |
Strain
(n=250)
| | CF-301 | | Daptomycin | | Vancomycin | | Linezolid |
MSSA (103)
| | + | | + | | + | | + |
MRSA (120)
| | + | | + | | + | | + |
VRSA (14)
| | + | | + | | - | | + |
LRSA (5)
| | + | | + | | + | | - |
DRSA (8)
| | + | | - | | + | | + |
Lysins have been shown to kill bacteriaexercisable upon contact and demonstrate bactericidal activity (a 3-log drop in colony forming units (“CFU”) per mL) in minutes. The figure below compares the rate at which lysins kill bacteria to the rates at which conventional antibiotics kill bacteria. CF-301 reduced the number of Staph aureus bacteria in tests on 62 strains (20 MSSA; 42 MRSA) by 99.9% within 30 minutes. In contrast, daptomycin required six hours to achieve the same level of cell kill, while vancomycin failed to achieve a 99% cell kill during the same six-hour test period. The high speed of killing bacteria is one of the primary reasons we believe lysins could be a highly desirable therapeutic option for the treatment of rapidly advancing bacterial infections.
Figure 2: CF 301’s Rapid Bactericidal Activity In Vitro
* | The star symbols indicate the limit of detection in the plating assay. |
CF-301:Synergy of Lysins with Standard-of-Care Antibiotics
We have discovered a strong synergistic interaction between lysins and several standard-of-care antibiotics, including daptomycin, vancomycin and oxacillin in in vitro tests (data not shown). When used in combination, lysins and antibiotics offer a dual attack on pathogenic bacteria that is far greater than the sum of their individual contributions. The result is significantly improved killing of bacteria.
To demonstrate synergy in vivo, we have developed animal models where CF-301 could be tested as single agent (monotherapy) or in combination with a standard-of-care antibiotic (combination therapy). When used alone, CF-301 has potent anti-Staph activity that demonstrates a dose/response effect. Figure 3 below presents the results of the dose/response of animals infected with 10 million CFU of Staph and treated 3 hours later with various doses of CF-301 (Standard Bacteremia Model). As pictured on the graph below, all mice receiving at least 0.5 mg/kg of CF-301 demonstrated at least 90% survival, whereas doses below 0.5 mg/kg resulted in lesser survival rates.
Figure 3: CF-301 Dose Response in Mice in the Standard Bacteremia Model
The hallmark of our strategy and the development of CF-301 is the synergistic activity of CF-301 with standard-of-care antibiotics daptomycin and vancomycin for MRSA and oxacillin for MSSA (data not shown for oxacillin). For this purpose we developed an animal model where the bacterial infection burden was so high (one billion CFU) that standard-of-care antibiotics used at their humanized doses failed to have significant cure rates (Drug Failure Bacteremia Model). We then titrated the dose of CF-301 down in this model so that CF-301 alone would also fail to have significant cure rates. We treated groups of these animals with the drugs alone and in combinations to determine if there was synergy and an improvement in efficacy.
Figure 4 below presents the results of the combination of CF-301 and daptomycin when applied to the drug failure bacteremia model. Control mice treated with buffer (diamonds) succumbed to bacterial infection within 12 hours. Administration of a clinical dose of daptomycin as a single agent (triangles) resulted in clinical failure, as only 23% of mice survived. When CF-301 (squares) was dosed as a single agent, only 11% of mice survived. In contrast, when mice received the combination of CF-301 and daptomycin (circles), 80% survived the bacterial challenge, demonstrating superiority of the combination therapy over the single-drug regimens.
Figure 4: Combination Therapy of CF-301 with Daptomycin in Drug Failure Bacteremia Model
Figure 5 presents the results of the combination of CF-301 and vancomycin when applied to the drug failure bacteremia model. Control mice treated with buffer (diamonds) succumbed to bacterial infection within 12 hours. Administration of a clinical dose of vancomycin as a single agent (triangles) resulted in clinical failure, as only 3% of mice survived. When CF-301 (squares) was dosed as a single agent, only 3% survived. In contrast, when mice received the combination of CF-301 and vancomycin (circles), 67% survived the bacterial challenge, demonstrating superiority of the combination therapy over the single-drug regimens.
Figure 5: Combination Therapy of CF-301 with Vancomycin in Drug Failure Bacteremia Model
We have tested the combination of CF-301 with daptomycin, vancomycin and oxacillin in 30 different experiments (including the Standard and Drug Failure Bacteremia Models) with over 1,700 mice. In each experiment the combination therapy was proven superior to therapy with single drugs alone. As a result, we decided to pursue clinical development of the combination of CF-301 and standard-of-care antibiotics for the treatment of Staph aureus bacteremia as CF-301’s first indication.
To further explore the activity of CF-301 in combination with standard of care antibiotics for the treatment of life-threatening, drug-resistant infections, we engaged the LA Biomed Research Institute at Harbor-UCLA Medical Center (“UCLA”) to perform a study in their rat infective endocarditis (“IE”) model. The model was developed at UCLA and has become a well-established experimental animal model and has been used for assessing possible efficacy of therapeutic agents in IE. The primary endpoint of this model is a reduction in the amount of bacteria (measured as CFUs) on the heart valve, in the kidney and in the spleen. Survival during the course of the treatment period was considered a secondary endpoint, as the study was not designed to see the long-term effects of the four day treatment on overall survival. Our study examined the activity of CF-301, alone and in combination with vancomycin, in UCLA’s prototypical high-burden biofilm infection rat IE model. Using vancomycin as the comparator, management and the investigator determined that an agent that achieves a 2-log (or 99%) decrease in the CFU in the vegetation on the heart valve, spleen and kidney compared to vancomycin alone would be a very good result, an agent that achieves a 3-log (or 99.9%) reduction would be impressive. We worked directly with UCLA to design the study, and the description of the methods and results follows below.
Figure 6 presents the results of the combination of CF-301 alone and in combination with vancomycin as compared to both buffer and vancomycin alone in the rat IE model. In this study, animals were infected with MRSA and began receiving treatment 24 hours later for four consecutive days. All animals were terminated 18 hours after the final dose and the heart, kidneys and spleen were assessed for the amount of bacteria present. Groups of rats were treated with buffer (black), 1 mg/kg CF-301 IV once per say (data not shown), 10 mg/kg CF-301 IV once per day (dark grey), 120 mg/kg vancomycin SubQ BID (subcutaneous, twice per day) (medium grey), the combination of 1 mg/kg/day and vancomycin (data not shown) and 10/mg/kg/day CF-301 and vancomycin (light grey). In general, across the organs the same activity was seen; both dose levels of CF-301 alone performed nearly identically to the buffer, the vancomycin treated animals had between 0.5 and 1-log reduction in CFUs compared to buffer, and the 10 mg/kg/day CF-301/ vancomycin combination treated animals had 3-log reductions compared to vancomycin treated animals in the heart and kidney, and a 2-log reduction in spleen. As for mortality outcomes, buffer and 1 mg/kg/day CF-301 monotherapy resulted in no survivors, 10 mg/kg/day CF-301 monotherapy resulted in 37.5% survival, and vancomycin monotherapy and both of the CF-301/vancomycin treatment groups exhibited 100% survival.
Figure 6: Combination Therapy of CF-301 with Vancomycin in Rat Infective Endocarditis Model
These data support our belief that CF-301, in combination with standard-of-care antibiotics, should be tested in human clinical studies in patients with invasive Staph infections, such as bacteremia caused by MSSA or MRSA.
CF-301: Impact of Lysin on Antibiotic-Resistant Biofilms
Biofilm formation is a common protective mechanism for bacteria and a key feature associated with bacterial pathogenesis. Biofilms are characterized by densely packed bacterial cells that grow in communities and are enclosed within a complex matrix of dead bacteria and excess cell wall components. This densely packed biofilm matrix renders biofilm-based infections up to 1,000-fold more resistant to penetration by antibiotics. Infected human tissues, such as the heart valve in endocarditis or bone in osteomyelitis, or indwelling medical devices, such as central venous catheters, prosthetic joints and pacemakers, are common sites for biofilm formation, providing a hurdle for effective treatment with antibiotics alone. Biofilm coating of bacterial infections in human medicine is estimated to occur in more than 60% of bacterial infections, costing the healthcare system billions of dollars, yet no product capable of eradicating biofilms is on the market today. For this reason, novel treatment strategies and antimicrobial agents with activity toward biofilms remain a serious unmet medical need.
Since CF-301 disrupts the outer wall of Staph aureus by enzymatic lysis, we performed studies to determine if CF-301 would also disrupt biofilms. For this purpose, we cultured MRSA for 24 hours within wells of polystyrene dishes typically used for the culture of cells, at which point a dense biofilm formed on the dish surface. Dishes were incubated for up to 24 hours with high-dose (1,000x MIC) daptomycin, vancomycin or linezolid, or lower-dose (1xMIC) CF-301. After the four-hour treatment, dishes were washed and stained with a dye that stains the biomass of a biofilm a dark blue color. In dishes treated with CF-301, there was no visual biofilm present after two hours of treatment, whereas in dishes treated with antibiotics for up to 24 hours, the biofilm biomass remained intact (Figure 7). These findings are consistent with the inability of these antibiotics to penetrate and clear biofilm material. This demonstrated that CF-301 was at least 1,000-fold more potent than standard-of-care antibiotics at destroying bacterial biofilms.
Figure 7: Sensitivity of Staph Aureus (MRSA) Biofilms to CF-301 Versus Standard-of-Care Antibiotics.
In order to assess CF-301’s ability to work on the surface of medically relevant devices, we grew Staph aureus biofilms in medical catheters. To experimentally accomplish this, we grew a culture of MRSA in a catheter and incubated it at body temperature. Biofilms growing in the interior of the catheters were treated for
four hours with CF-301 or daptomycin at different concentrations. To determine the effect of the treatments, the catheters were flushed with buffer and then stained with methylene blue dye to visualize residual biofilm.CF-301 was found to lyse and remove the biofilm when diluted to a level of 0.01x MIC, while daptomycin failed to remove the biofilm at 5,000x MIC, demonstrating that CF-301 had a million-fold greater activity against the MRSA biofilm than the antibiotic in this setting (Figure 8).
Figure 8: Sensitivity of Staph Aureus (MRSA) Biofilms of CF-301 Versus Daptomycin
To microscopically visualize CF-301’s disruption of biofilms, we inoculated MRSA into a catheter where it attached to the wall of the plastic and formed a dense 3-dimensional structure. We then treated the interior of the catheter with CF-301 at 1x MIC. At various time intervals after treatment the interior of the catheter was sectioned and examined by scanning electron microscopy (“SEM”), select images shown below in Figure 9. In the untreated catheter (left panel) the majority of MRSA cells (little circles in the pictures below) were found within a biofilm. However, within 30 seconds of exposure to CF-301, the dense biofilm was largely removed and only single cells were observed (middle panel). Fifteen minutes following exposure to CF-301 (right panel), the biofilm was completely stripped and residual MRSA cells which had been beneath the biofilm were killed, in effect, sterilizing the catheter. These images emphasize the rapid and potent activity of CF-301 against bacterial biofilms. Taken together with the lack of efficacy that antibiotics display against biofilms, we believe CF-301 represents a new therapeutic option against what were previously untreatable biofilms.
Figure 9: Sensitivity of Staph Aureus (MRSA) Biofilms Grown on Catheters to CF-301
CF-301: Clinical Status
We are actively pursuing the development of CF-301 for the treatment of Staph aureus bacteremia. We filed our IND for CF-301 in March of 2013 and the FDA placed the IND on clinical hold in April of 2013. The FDA can place a clinical trial on hold for a variety of reasons. The CF-301 IND was placed on clinical hold because the FDA believes that the results of our pre-clinical studies submitted to the FDA do not provide sufficient information to assess potential risks to subjects in our proposed clinical trial; specifically, the FDA requested additional studies to define the safe starting dose for CF-301 in a human Phase 1 clinical trial by identifying a dose that causes no observed adverse effects in a second animal species, characterizing the potential for hypersensitivity after exposure to CF-301, and identifying a predictive biomarker of toxicity that could be used to stop a Phase 1 study, if necessary.
During 2013 and early 2014, we completed additional pre-clinical studies in rodents aimed at addressing the concerns raised by FDA. We believe that these studies determined a dose where there was no observable effect level (NOEL) and a no observable adverse effect level (NOAEL) in rats. The studies also demonstrated that upon first exposure to CF-301 no hypersensitivity reaction occurs, but upon administration of a second course of CF-301, given two weeks after the completion of the first course of therapy, hypersensitivity or hypersensitivity-like reactions occur. Based on these results, we conducted further studies in a mouse model of hypersensitivity in which we co-administered corticosteroids or anti-histamines with CF-301. These studies showed that co-administration of corticosteroids or anti-histamines with CF-301 during a second course of therapy prevented the hypersensitivity from occurring. In addition, while the nature of hypersensitivity reactions in rats may not necessarily be predictive of the nature of any hypersensitivity reactions that may occur in humans, the FDA has not yet reviewed these data to determine how they affect the clinical hold. If the FDA agrees to lift the clinical hold, at this time, we do not plan to administer a second course of therapy.
We have also considered the risk of hypersensitivity occurring upon first administration of CF-301 due to potential prior exposure to the active protein component of CF-301 from the environment, as it is a naturally occurring protein. If an individual had prior exposure to the active protein component of CF-301, he would have detectable anti-CF-301 antibodies in his body. Therefore, to avoid the potential risk of hypersensitivity occurring upon first administration of CF-301, we have developed and validated an assay to test people for antibodies to CF-301 prior to CF-301 administration. If FDA agrees to lift the clinical hold, we plan to exclude any people from receiving CF-301 who test positive in this pre-screen analysis.
Lastly, we considered the possibility of a human subject who is exposed to CF-301 during a clinical trial subsequently encountering the active protein component of CF-301 in the environment, and the risk of hypersensitivity occurring in that situation. To assess this risk, we calculated the probability of encountering the active protein component of CF-301 in the environment. We also calculated the maximum potential exposure to CF-301 if it were encountered in the environment and compared that number to the minimum dose of CF-301, as determined in animal experiments, required to elicit hypersensitivity upon re-challenge. These analyses estimated a probability of an environmental exposure to the active protein component of CF-301 of approximately one in a billion chance, and that the potential maximum environmental exposure of a human to the active protein component of CF-301, should it occur, would be approximately one million fold below the exposure required to induce hypersensitivity in animals. Based on these estimates, we do not believe that any action is necessary to protect patients from later environmental exposure.
Regarding a predictive biomarker of toxicity, we intend to use CF-301 pharmacokinetics rather than a biomarker for potential formation of vascular lesions as a means to monitor the Phase 1 study. Based on discussions with our external safety experts, we believe this may be acceptable.
We plan to meet with the FDA to present the findings from these studies and propose to conduct an initial clinical study in healthy human subjects incorporating the following methodology: (1) prescreen subjects for pre-existing antibodies to CF-301 and exclude any subject with antibodies that react with CF-301 from the trial, (2) limit subjects to a single dose of CF-301 (i.e., a single two-hour intravenous infusion) and (3) monitor
pharmacokinetics as a surrogate for potential lesion formation. We cannot assure you that the FDA will agree that these activities will be sufficient to lift the clinical hold and permit the use of CF-301 in clinical trials.
Contemporaneously with our FDA activities, we plan to meet with international agencies for national scientific advice in advance of deciding to conduct clinical studies outside of the U.S.
CF-301: Product Development
Product development will be accomplished in four steps, which may overlap: (1) pre-clinical activities to demonstrate consistent manufacturing, safety and efficacy in animals; (2) Phase 1 clinical trials, in healthy volunteers, to determine pharmacokinetics, safety, tolerability, immunogenicity, dosing, effects in special populations, and other issues; (3) Phase 2 clinical trials in patients to determine dose, safety, tolerability, pharmacokinetics and immunogenicity; and (4) Phase 3 clinical trials, the pivotal trials in patients to test for efficacy and safety at the proposed clinical dose.
Non-Clinical Activities
Chemistry, Manufacturing and Controls. Manufacturing of CF-301 utilizes a proprietary engineeredE. coli strain that expresses the product in a recombinant manner during the fermentation process. This technology allows production of up to nine grams of CF-301 per liter of fermentation broth. After fermentation, the broth containing CF-301 is separated and purified through a process containing two chromatographic columns. The resulting product has greater than 99% purity. The CF-301 produced by this process has been used in animal studies submitted to the INDissuance and will be used for our planned Phase 1 and Phase 2 clinical trials, provided that we are permitted to initiate clinical studies.
Safety Pharmacology and Toxicology.Initial pre-clinical safety pharmacology and toxicology studies have been completed in connection with our IND application for CF-301. These studies demonstrate that CF-301 was well tolerated in rats for a single two-hour IV administration of doses up to 10 mg/kg, and in dogs for seven consecutive days of once daily two-hour IV infusions of up to 2.5mg/kg. A pilot study has determined that 1.0 mg/kg/day in rats was well tolerated for up to seven consecutive days of once daily two-hour IV infusions or IV boluses. We will need to conduct a definitive dose ranging, repeat dose study in rats prior to initiating any clinical trial if we choose to administer CF-301 over consecutive days.
Dose dependent adverse tissue effects were seen in both species at doses above 10 mg/kg/day for 1 day in the rat and above 2.5 mg/kg/day for seven-consecutive days in the dog. The dose limiting toxicity observed was the development of vascular lesions on the outer wall of the aorta and pulmonary artery. In accordance with industry practice, we intend to study CF-301 in clinical trials at doses much lower than those that caused adverse effects in animals, and we believe these doses to be within the efficacious range of the drug.
Upon first exposure to CF-301, no hypersensitivity reaction was observed in any of our animal studies. Upon administration of a second course of CF-301, given two weeks after completion of the first course, hypersensitivity or hypersensitivity-like findings were observed in mice, rats and dogs. In a dedicated hypersensitivity study in rats, findings of hypersensitivity (Types I and III) were observed after a two week delayed re-challenge with a second course of CF-301 and were not dose dependent. In general, Type I hypersensitivity is an allergic anaphylaxis-like response (e.g., an immediate and potentially life-threatening allergic reaction) and Type III hypersensitivity is a serum sickness-like response (e.g., fever, joint pain, protein in urine, vascular changes). As a risk mitigation strategy in the clinical trials, we intend to screen patients foranti-CF-301 antibody and exclude them if they test positive for the antibody. In addition, while the nature of hypersensitivity reactions in rats may not necessarily be predictive of the nature of any hypersensitivity reactions that may occur in humans, the FDA has not yet reviewed these data to determine how they affect the clinical hold.
Clinical Activities
Phase 1.Assuming our pre-clinical studies meet all regulatory requirements, we intend to initiate a single ascending dose Phase 1 clinical trial in 16 healthy human volunteers. This trial would be a randomized, double-blind, placebo-controlled, dose-ranging trial designed to evaluate the safety, tolerability, immunogenicity and pharmacokinetics of four different intravenous doses ofCF-301 alone. In accordance with industry practice and FDA guidance documents, the safe startingCF-301 clinical dose for this trial will be 10 fold below the dose determined in the animal studies to be the highest exposure without adverse effects, the NOAEL. Patients randomized to receive intravenous doses of CF-301 will receive a single IV dose of CF-301 administered as a two hour infusion or placebo.
Phase 2.If the Phase 1 results are consistent with our expectations of the safety profile of CF-301, we intend to conduct a Phase 2 clinical trial to assess the safety, tolerability, immunogenicity, pharmacokinetics, and efficacy of CF-301 in combination with standard-of-care antibiotics. We intend for the Phase 2 clinical trial to be a global, multicenter, double-blind, randomized study (1:1:1) that evaluates the safety and efficacy of low-dose CF-301 plus standard-of-care antibiotics, high-dose CF-301 plus standard-of-care antibiotics, and standard-of-care antibiotics alone among patients with bacteremia, including endocarditis, caused by MSSA or MRSA.
Patients randomized to receive intravenous doses of CF-301 will receive a single IV dose of CF-301 on the background of standard-of-care antibiotics. All patients with bacteremia will be treated with standard-of-care antibiotics for a minimum of two to four weeks for uncomplicated and four to six weeks for complicated bacteremia caused by MSSA or MRSA. The primary endpoints of this study are intended to be measures of safety, tolerability, immunogenicity, pharmacokinetics, and efficacy of CF-301 in patients. The selected CF-301 doses for this trial will be based on the safety, tolerability and pharmacokinetics of the doses from the Phase 1 multiple ascending dose study.
Phase 3.If the Phase 1 and Phase 2 results are consistent with our expectations regarding the safety and efficacy profile of CF-301, guidance and precedents from the FDA, and competing products, we intend to conduct Phase 3 clinical trial(s) with a superiority study design. We intend for the Phase 3 clinical trial(s) to be a global, multicenter, double-blind, randomized study (1:1) that evaluates the efficacy and safety of CF-301 plus standard-of-care antibiotics compared to standard-of-care antibiotics alone among patients with bacteremia, including endocarditis, caused by MSSA or MRSA. Specific parameters for the Phase 3 trial(s) will be based on the outcomes of the Phase 2 trial.
Patients randomized to receive CF-301 will receive a single IV dose of CF-301 on the background of standard-of-care antibiotics. All patients with bacteremia will be treated with standard-of-care antibiotics for a minimum of two to four weeks for uncomplicated and four to six weeks for complicated bacteremia due to MSSA or MRSA. The primary endpoints of this study will be measures of efficacy and safety of CF-301, including measures such as all cause mortality and complications associated with bacteremia.
We intend to evaluate clinical, microbiologic, and pharmacoeconomic outcomes in the Phase 3 clinical trial(s). The selected CF-301 dose for Phase 3 will be based on the safety, tolerability and pharmacokinetics of the doses from the Phase 2 study.
Commercial Manufacturing
We intend to further optimize the manufacturing process for increased purity and yield. Once completed, we will begin a program to manufacture Phase 3 material. The process will then be scaled 35-fold from the current 100 liter fermentation to 5,000 liters. This process will then be validated in a series of manufacturing batches to demonstrate consistency. In parallel to the validation, we intend to conduct a comparability program that demonstrates comparability between the final product used in Phase 3 and commercial manufacturing. We will include the results in the BLA that will be submitted to the FDA. Following submission, the FDA will conduct pre-approval inspections of all manufacturing facilities and determine whether it agrees that our commercial material is sufficiently comparable to our Phase 3 material.
Market Opportunities
The issue of antibiotic-resistant bacterial infections has been widely recognized as an increasingly urgent public health threat, including by the World Health Organization, the Centers for Disease Control and Prevention and the Infectious Disease Society of America. Antibiotic resistance has limited the effectiveness of many existing drugs, and the discovery of new antibiotics to address resistance has not kept pace with the increasing incidence of difficult-to-treat micro-organisms. According to the Infectious Diseases Society of America, as of 2010 the estimated cost to the U.S. healthcare system of antibiotic-resistant infections was approximately $21 billion to $34 billion annually, a substantial portion of which is due to increased length of hospital stays.
Staph aureus bacteremia is a serious bacterial infection worldwide associated with high morbidity and mortality infections. The incidence of Staph aureus bacteremia in the United States has increased from approximately 112,000 in 2006 to 119,000 in 2011. By 2020, the number of infections is expected to grow to approximately 132,000. Major factors contributing to the growth of Staph aureus bacteremia incidence include increasing numbers of patients with prosthetic devices, especially cardiac devices which contribute substantially to the growing prevalence of Staph aureus bacteremia, and secondary infections such as infective endocarditis.
Staph aureus bacteremia patients are typically treated in the hospital with vancomycin or daptomycin if they have MRSA-based infections, or with a beta-lactam antibiotic such as oxacillin if they have MSSA-based infections. Our approach will be to use CF-301 in combination with vancomycin, daptomycin or oxacillin depending upon the strain of Staph aureus bacteremia.
Monoclonal Antibodies
Background
We are exploring combination therapy with mAbs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. The strategies of our mAb program include: (1) targeting conserved regions of the virus or bacteria which are not prone to mutation and (b) targeting multiple proteins expressed from different genes within a bacteria or virus to prevent therapeutic escape and (c) combining mAbs to cover multiple strains for superior outcomes.
Our antibodies are generated by genetic engineering using phage display libraries, isolated directly from human blood samples or other available technologies, enabling the screening of billions of human mAbs with different binding sites. When these mAbs are generated by genetic engineering, we have the ability to develop antibodies with a common backbone (“isotype”) structure, providing for a similar pharmacokinetic profile (half-life, absorption, distribution, metabolism and excretion); alternatively, we can isolate directly from human blood samples antibodies that naturally possess the same isotype as well. The common properties provide for a unique ability to create a therapeutic combination of mAbs.
Our Lead mAb Program: CF-404
We are developing a combination of three human mAbs against influenza as a treatment for life-threatening seasonal and pandemic influenza infections, another serious disease that kills as many as 49,000 people annually in the U.S. alone. We expect to complete the required manufacturing and pre-clinical studies to file an IND for CF-404 in late 2015 or early 2016 and enter Phase 1 clinical trials in 2016. Our pre-clinical studies to date have shown that CF-404 has the following attributes:
| • | | Highly specific. Through specific targeting of a conserved region on the virus, our mAbs cross-react with all strains of influenza, including the three principal strains (H1, H3 and B). |
| • | | Minimal resistance. Our mAbs react with the principal protein, hemagglutinin, on the surface of influenza at a region referred to as the hemagglutinin stalk, which is genetically stable and does not vary from one season to another. |
| • | | Broad influenza coverage in one combination drug. Targeting the hemagglutinin stalk bypasses the effects of seasonal change, which allows (1) our mAbs to neutralize many different influenza strains; (2) for the production of a single therapeutic combination of only three mAbs covering all influenza, including Types A H1 and H3, and Type B; and (3) for an immediate effect (through injection) that cannot be obtained by vaccination which typically requires weeks. |
| • | | Minimal competition. There are only four approved drugs for the treatment of influenza—Tamiflu, Relenza, Symmetrel and Flumadine—although only Tamiflu is widely used in practice. Influenza has demonstrated a strong propensity for developing resistance to Tamiflu, and the clinical benefit of Tamiflu is greatest when antiviral treatment is administered early, especially within 48 hours of influenza illness onset. Based on pre-clinical data, we believe treatment with our mAbs may be effective even when given 96 hours after infection. Additionally, our mAbs have an immediate treatment effect that cannot be obtained by vaccination, which only acts prophylactically and typically requires weeks to become effective. |
Influenza Research
We currently have lead compounds that cross-react with all strains of influenza, including the three principal strains (H1, H3 and B). These mAbs react with the principal protein (hemagglutinin) on the surface of influenza at a region (referred to as the hemagglutinin stalk) which is genetically stable and does not vary from one season to another. We have produced mAbs that are reactive with the stalk region of hemagglutinin for the entire natural history of the H3 influenza (1968-present), H1 influenza (1918-present; seasonal and swine flu), and are also reactive with all other strains of type A influenza (including H5), and Type B influenza.
We have tested our mAbs in mouse models to demonstrate protection against lethal infection with influenza in “proof-of-concept” experiments. These data demonstrated that our anti-H1 (CF-401), anti-H3 (CF-402) and anti-B mAbs (CF-403) were able to protect animals from lethal challenge. Importantly, our in vivo animal studies show that treatment with our mAbs appears to provide greatly enhanced potency compared to treatment with other mAbs. Figure 10 below shows the results of an experiment using CF-401 in a mouse model of influenza infection, in which body weight loss is used as a proxy of disease progression (and ultimately, death). In this figure, we also demonstrate that at equivalent dosing of 1 mg/kg, CF-401 is far superior to a competitor’s mAb currently in clinical development. Control mice treated with buffer (diamonds) succumbed to viral infection within 9 days. Administration of a single treatment, 24 hours post-infection, of a competitor’s antibody (triangles) resulted in clinical failure at an identical rate as the no treatment group. When CF-401 (circles) is
administered as a single treatment, 24 hours post-infection, the mice appear perfectly healthy, with weight changes identical to animals that do not receive challenge with influenza (squares).
Figure 10: Effectiveness of CF-401 in Mouse Model of Influenza
As the goal of our influenza program is a combination of mAbs with efficacy against all strains of the flu, we have formulated a preliminary combination of three mAbs covering all influenza strains and tested it in animal models of disease. Figure 11 below shows how CF-404 cures mice infected with influenza, regardless of the strain (H1N1, H3N2 or B). Control mice treated with buffer (triangles) all succumbed to viral infection within 7-9 days. By contrast, when we administered a single treatment of our anti-Influenza combination (squares) 24 hours post-infection, the mice appeared perfectly healthy, with weight change compared to healthy mice (not pictured).
Figure 11: Effectiveness of CF-404 in Mouse Model
Currently, the standard-of-care treatment for influenza is Tamiflu®. Tamiflu, however, has several limitations, including emerging resistance. In 2009, just prior to the emergence of the pandemic H1N1 swine flu, the CDC cautioned against the use of Tamiflu for the treatment of H1N1 seasonal influenza due to nearly complete drug-resistance of the virus (in 2006 <1% of H1N1 were resistant, by 2008 that figure jumped to >95%). As previously discussed, due to the targeting of conserved regions on the hemagglutinin, we do not anticipate resistance will occur to our mAbs. The second major limitation of Tamiflu is its narrow therapeutic window to treat a patient and still be efficacious. The clinical benefit of Tamiflu is greatest when admitted early, especially within 48 hours of illness onset. To compare the therapeutic window of our mAbs to Tamiflu, influenza-infected mice were treated with either a single administration of our combination or a 5 day course of Tamiflu beginning 24-96 hours post infection (HPI). Figure 12 below shows that in mouse models of influenza Tamiflu must be given 24 HPI (diamonds) to cure mice, and treatment at 48 HPI (circles) results in 100% death. Treatment with CF-401, on the other hand, results in 100% survival when given 72 HPI (squares). Treatment at 96 HPI with our mAbs results in 80% survival in this model (data not shown).
Figure 12: Our mAbs Provide Greater Therapeutic Window than Tamiflu® in Mouse Model
We believe our combination for the treatment of influenza is a novel approach addressing a high unmet medical need (influenza causes up to 49,000 deaths per year in U.S. alone) and offers competitive advantages to the only product widely used on the market today and those in the pipeline as well.
Competition
The pharmaceutical and biotechnology industries are intensely competitive. We compete directly and indirectly with other pharmaceutical companies, biotechnology companies and academic and research organizations in developing therapies to treat diseases. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. We compete with companies that have products on the market or in development for the same indications as our product candidates. We may also compete with organizations that are developing similar technology platforms.
CF-301 is a first-in-class drug and we believe will be among the first lysins to enter human clinical trials. There is no clinical competitor to CF-301 as it contains at least six attributes that no single antibiotic possesses,
including: (1) a novel mechanism of action, (2) specificity for a target bacteria (only Staph aureus), (3) rapid speed of action, (4) activity across all drug-sensitive and drug-resistant strains of the target bacteria (including MRSA, VRSA and DRSA), (5) the ability to eradicate biofilms, and (6) synergy with antibiotics. The indication for staph bacteremia currently has two approved standard-of-care drugs: daptomycin and vancomycin. Vancomycin is currently a generic drug and we expect daptomycin to reach the end of its patent life by the time we come to market. We do not see market competition with these drugs, as our strategy is to combine CF-301 with these drugs to aim for superiority over any one of those drugs alone. Additionally, we anticipate similar synergy (and combination approach) with identifiable clinical development molecules, such as Teflaro from Cerexa Inc.
Recently, iNtRon Biotechnology Inc., a biotechnology company located in South Korea, initiated the first Phase I human clinical trial for an anti-Staph lysin, SAL-200. While the indication is yet to be disclosed, it has been reported that SAL-200 is to be administered intravenously in a trial that will take place in South Korea. We will continue to monitor the advancements of SAL-200 as data becomes available.
Our lead mAb program, CF-404, for the treatment of life-threatening seasonal and pandemic influenza infections is unique in that it potentially addresses the short-comings of Tamiflu and current products in development for the following reasons: (1) it may not be prone to drug-resistance due to targeting conserved regions of influenza, (2) it may provide for an increased “time-to-treat” window compared to Tamiflu, which is indicated to be used within 48 hours of symptom onset, and (3) it may provide complete coverage against all seasonal and potential pandemic strains of influenza without the need for annual reformulation, including influenza B. CF-404 may directly or indirectly compete with the following products already in development:
| | | | | | |
Company
| | Product Name
| | Indication(s)
| | Product Stage
|
BioCryst Pharmaceuticals, Inc.
| | Peramivir | | Influenza | | Pre-Registration |
Toyama Chemical Co., Ltd.
| | Favipiravir | | Influenza A and B Infections | | Pre-Registration |
Romark Laboratories, L.C.
| | Alinia | | Influenza | | Phase III |
Biota Pharmaceuticals, Inc.
| | Laninamivir | | Influenza A and B Infections | | Phase III |
Adamas Pharmaceuticals, Inc.
| | Oseltamivir | | Influenza | | Phase II |
Activaero GmbH
| | Acti-INSP-001 | | Influenza | | Phase II |
Far East Bio-Tec Co. Ltd
| | Apomivir | | Influenza | | Phase II |
Crucell N.V.
| | Diridavumab* | | Influenza A Infections | | Phase II |
Crucell N.V.
| | CR-8020* | | Influenza A Infections | | Phase II |
Genentech, Inc.
| | MHAA-4549A | | Influenza | | Phase II |
F. Hoffmann-La Roche Ltd.
| | RG-7745* | | Influenza A Infections | | Phase II |
Theraclone Sciences, Inc.
| | TCN-032* | | Influenza A Infections | | Phase II |
Vertex Pharmaceuticals Incorporated
| | VX-787 | | H5N1 Infection (Avian Influenza) | | Phase II |
Ansun Biopharma, Inc
| | Fludase | | Influenza | | Phase I |
Beech Tree Labs, Inc.
| | BTL-TML001 | | Influenza A and B Infections | | Phase I |
Celltrion, Inc.
| | CT-P27 | | Pandemic Influenza; Seasonal Influenza | | Phase I |
Fab’entech
| | Fabenflu | | H5N1 Infection (Avian Influenza) | | Phase I |
Autoimmune Technologies, LLC
| | Flufirvitide-3 | | Influenza | | Phase I |
Sarepta Therapeutics
| | Radavirsen | | Influenza | | Phase I |
Intellectual Property
Our goal is to obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies, preserve our trade secrets, and operate without infringing on the
proprietary rights of other parties, both in the United States and in other countries. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our product candidates, proprietary information and proprietary technology through a combination of contractual arrangements and patents, both in the United States and abroad. However, patent protection may not afford us with complete protection against competitors who seek to circumvent our patents.
We also depend upon the skills, knowledge, experience and know-how of our management and research and development personnel, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how, which is not patentable, and for inventions for which patents may be difficult to enforce, we currently rely and will in the future rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we will require all of our employees, consultants, and other contractors (including any contractors we may retain for purposes of any of our ad hoc Clinical Advisory Boards) to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
Our patent portfolio consists of 16 families of patents and patent applications in the United States and certain foreign jurisdictions. Our lysin patent portfolio consists of seven issued U.S. patents (licensed on an exclusive basis from Rockefeller) and six active patent applications that we have filed. We hold two issued composition of matter and methods of treatment patents relating to streptococcus in the United States, one for lysins targeting group A streptococcus (U.S. 7,569,223) and one for lysins targeting group B streptococcus (U.S. 8,105,585), for which there is also a granted European counterpart (EP 06813511). The first U.S. patent expires in March 2024, while the second U.S. patent and its European counterpart expire in August 2026. We hold four issued composition of matter and methods of treatment patents in the United States (U.S. 7,402,309, U.S. 8,580,553, U.S. 7,638,600 and U.S. 8,389,469) for lysins targeting bacillus anthracis (anthrax) which expire between May 2023 and May 2026. We hold one issued composition of matter and methods of treatment patent in the United States (U.S. 7,582,291) for lysins targeting enterococcus which expires in March 2026. Of the six active patent applications, three support patent coverage of CF-301 for composition of matter and methods of treatment and were filed between April 2012 and May 2013. Upon issuance we expect these patents to expire between April 2032 and May 2033. The additional three active patent applications are for patent coverage of additional alternative lysins and methods.
Our influenza patent portfolio consists of four active patent applications, three of which we have licensed from Trellis. The three active patent applications filed by Trellis cover compositions and methods relating to influenza antibodies and were filed between June 2011 and February 2014. Upon issuance we expect these patents to expire between June 2031 and February 2035. Another patent application for methods and compositions for administration was filed by us in March 2014 and upon issuance we expect a patent to expire in March 2034.
The U.S. patent system permits the filing of provisional and non-provisional patent applications. A non-provisional patent application is examined by the U.S. Patent and Trademark Office, or U.S. PTO, and can mature into a patent once the U.S. PTO determines that the claimed invention meets the various standards for patentability. A provisional patent application is not examined for patentability, and automatically expires 12 months after its filing date if a non-provisional application is not filed based on the provisional application. As a result, a provisional patent application cannot mature into a patent, but only a non-provisional. The requirements for filing a provisional patent application are not as strict as those for filing a non-provisional patent application. Provisional applications are often used, among other things, to establish an early filing date for a subsequent non-provisional patent application. The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. PTO in granting a patent. Alternatively, a patent’s term may be shortened if a patent is terminally disclaimed over another patent.
The filing date of a non-provisional patent application is used by the U.S. PTO to determine what information is prior art when it considers the patentability of a claimed invention. If certain requirements are
satisfied, a non-provisional patent application can claim the benefit of the filing date of an earlier filed provisional patent application. As a result, the filing date accorded by the provisional patent application may supersede information that otherwise could preclude the patentability of an invention.
The term of a patent that covers an FDA-approved drug may also be eligible for patent term extension (“PTE”), which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Amendments, permits a PTE of up to five years beyond the expiration of the patent. The length of the PTE is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our pharmaceutical product candidates receive FDA or other regulatory approval, we may be able to apply for or receive the benefit of PTEs on patents covering those products.issuance.
License Agreement—Mount Sinai School of Medicine
On January 22, 2010, we entered into a license agreement with the Mount Sinai School of Medicine of New York University that gave us exclusive rights to a patent for a method of discovery of certain monoclonal antibodies. The license also included up to four specific influenza antibodies of our choosing. In consideration for the license, we paid Mount Sinai School of Medicine expenses relating to its patent rights of approximately $25,000 and issued 75,000 shares of Series A Preferred Stock and 5,580 shares of common stock. Under the license agreement, we were also required to make certain maintenance, milestone and royalty payments. We initiated the process to terminate this license agreement in March of 2014, and upon termination all rights in andPublic Warrants contain standard adjustments to the patents will revert to Mount Sinai School of Medicine.exercise price including for stock splits, stock dividend, rights offerings and pro rata distributions.
License Agreements—The Rockefeller University
We have entered into the following license agreements with Rockefeller:
On July 12, 2011, we entered into a license agreement for the worldwide, exclusive right to a provisional patent application, upon which a non-provisional patent application has since been filed, covering the composition of matter for the lysin PlySS2 for the treatment and prevention of diseases caused by gram-positive bacteria (the “CF-301 License”). We rebranded PlySS2 as CF-301.
On June 1, 2011, we entered into a license agreement for the exclusive rights to Rockefeller’s interest in a patent application, which is presently pending, covering the method of delivering antibodies through the cell wall of a gram positive bacteria to the periplasmic space. This intellectual property was developed as a result of the sponsored research agreement between us and Rockefeller, and was jointly discovered and filed by the two parties.
On September 23, 2010, we entered into a license agreement for the worldwide, exclusive right to develop, manufacture, use and sell, and offer for sale products covered by a suite of patents and patent applications covering the composition of matter for eight individual lysin molecules for the treatment and prevention of diseases caused by gram-positive bacteria. The lysins in this suite have activity against Staphylococcus, Group A Streptococcus, Group B Streptococcus, Pneumococcus, Enterococcus and Anthrax.
In consideration for each license, we paid Rockefeller a license initiation fee and, in the case of the CF-301 License, we issued Rockefeller 30,303 shares of our Series C Preferred Stock. Under the CF-301 License agreement, we will also be required to pay an annual maintenance fee, milestone payments up to a total of $5.0 million and royalties of 5% of net sales to Rockefeller. Under the June 1, 2011 license agreement, we will also be required to pay royalties up to 2% of net sales to Rockefeller. Under the September 23, 2010 license agreement, we will also be required to pay an annual maintenance fee, and for each product, milestone payments up to a total of $3.8 million and royalties up to 5% of net sales to Rockefeller.
We are allowed to grant sublicenses to third parties without prior approval, subject to certain conditions and the payment of a certain percentage of all payments we receive from sublicensees.
Each license agreement terminates upon the later of (i) the expiration or abandonment of the last licensed patent under the license agreement to expire or become abandoned, or (ii) 10 years after the first commercial sale of the first licensed product. Rockefeller may terminate any license agreement in the event of a breach of such agreement by us or if we challenge the validity or enforceability of the underlying patent rights. We may terminate any license agreement atAt any time on 60 days’ notice.
License Agreement—MorphoSys AG
On April 1, 2011, we entered into a five-year non-exclusive license agreement with MorphoSys AG (“MorphoSys”) pursuant to which we obtained from MorphoSys limited rights to practice under MorphoSys’ patent rights, and licenses for its HuCAL Platinum (45 billion antibody) human phage display library (the “HuCAL Library”) and AutoCAL (automation software and know-how) technology for use onsite at our facility.
We recently agreed to terminate the license agreement with MorphoSys as of August 15, 2014 and resolve all outstanding claims thereunder. See “—Legal Proceedings”.
License Agreement—Trellis Bioscience LLC
On January 29, 2014, we entered into a license agreement with Trellis that gives us exclusive rights to all Trellis mAbs in the field of influenza discovered from their CellSpot platform. Particularly, the license provides us with three fully human mAbs that bind, neutralize and protect animals from all strains of H1, H3 and B influenza, and that will also cross bind, neutralize and protect animals from all other seasonal or pandemic influenza strains that may arise (including H5N1 and H7N9). To date, we have selected our lead mAbs for the H1 and H3 influenzas, and are evaluating multiple lead candidates that have anti-B activity.
In consideration for the license, we paid Trellis $200,000 and issued 151,515 shares of Series C-1 preferred stock, valued at $500,000. On June 15, 2014, we entered intowhen an amendment to the license agreement with Trellis. Under the license agreement, as amended, on the six-month anniversary of the license agreement, we will issue to Trellis an additional $500,000 in shares of Series C-1 preferred stock or, if we consummate an IPO before this six-month anniversary, in shares of our common stock. The number of shares of common stock to be issued to Trellis will be calculated by dividing $500,000 by the average closing price per share of our common stock, quoted by the NASDAQ Capital Market for each of the ten trading days preceding this issuance. We will also be required to pay Trellis up to $1.3 million upon the achievement of specified development and regulatory milestones and make additional payments upon the achievement of future sales and a royalty of 4% of future net sales from products. We are allowed to grant sublicenses to third parties.
The license agreement terminates upon the earlier of (i) our decision to terminate the agreement at will or for safety reasons, (ii) material breach by either party thatapplicable Public Warrant is not cured within ninety (90) days, or (iii) either party’s insolvency.
Sponsored Research Agreements—The Rockefeller University
Effective October 1, 2009, we entered into a sponsored research agreement with Rockefeller to produce and test monoclonal antibodies against proteins of Staph aureus. In accordance with the agreement, Rockefeller and we each provide certain equipment and tools, with funding provided by us of up to approximately $350,000, to maintain a research program used to create joint intellectual property.
The agreement expired on September 30, 2012. Following the expiration of the agreement, each party has a non-exclusive license to use for internal research purposes all research results, including joint intellectual
property. If joint intellectual property develops from these programs, we will have the right to acquire a royalty-bearing license to utilize the intellectual property for commercial purposes.
Effective October 24, 2011, we entered into a second sponsored research agreement with Rockefeller, to identify lysins, enzymes or small molecules that will kill gram-negative bacteria, and identify and characterize lysins from Clostridia difficile to be engineered into gut commensal bacteria. In accordance with the agreement, Rockefeller and we each provide certain equipment and tools, with funding provided by us of up to approximately $300,000 each year for five years.
The initial term of the agreement runs through October 31, 2016. Either party may terminate the agreement upon breach of the agreement, following 30 days written notice and failure to cureexercisable, such breach. Following the expiration or termination of the agreement, each party will have a non-exclusive license to use for internal research purposes all research results, including joint intellectual property. If joint intellectual property develops from these programs, we will have the right to acquire a royalty-bearing license to utilize the intellectual property for commercial purposes.
Government Regulation
The production, distribution, and marketing of products employing our research and intellectual property or that we may license from third parties are subject to extensive governmental regulation in the United States and in other countries. In the United States, our products will be regulated as biologics and subject to the Federal Food, Drug, and Cosmetic Act, as amended (the “FDC Act”), the Public Health Service Act, as amended (the “PHSA”) and the regulations of the FDA, as well as to other federal, state, and local statutes and regulations. These laws, and similar laws outside the United States, govern the research, development, clinical and pre-clinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, sale, import, export, storage, record-keeping, reporting, advertising, and promotion and marketing of our products. Product development and approval within this regulatory framework, if successful, will require the expenditure of substantial resources and take years to achieve. Violations of regulatory requirements at any stage may result in various adverse consequences, including the FDA’s and other health authorities’ delay in approving or refusal to approve a product and may result in enforcement actions and administrative or judicial sanctions.
The following provides further information on certain legal and regulatory requirements that have the potential to affect our operations and the future marketing of our products.
FDA Approval Process
In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDC Act and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Biological products used for the prevention, treatment, or cure of a disease or condition of a human being are subject to regulation under the FDC Act, except the section of the FDC Act which governs the approval of NDAs. Biological products are approved for marketing under provisions of PHSA, via a BLA. However, the application process and requirements for approval of BLAs are very similar to those for NDAs, and biologics are associated with similar approval risks and costs as drugs. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs or BLAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Pharmaceutical product development for a new product or certain changes to an approved product in the United States typically involves pre-clinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical
trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.
Pre-clinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the pre-clinical tests must comply with federal regulations and requirements, including good laboratory practices. The results of pre-clinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term pre-clinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.
Clinical trials involve the administration of the investigational new drug or biologic to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with good clinical practice (“GCP”), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on healthy U.S. volunteers or patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an IRB for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical trials to support NDAs or BLAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug or biologic into healthy human subjects or patients, the product is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses, and, if possible, early evidence of effectiveness. Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the drug or biologic for a particular indication, dosage tolerance, and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug or biologic and to provide adequate information for the labeling of the product. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug or biologic. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the study is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.
After completion of the required clinical testing, an NDA or BLA is prepared and submitted to the FDA. FDA approval of the NDA or BLA is required before marketing of the product may begin in the United States. The NDA or BLA must include the results of all pre-clinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA or BLA is substantial. The submission of most NDAs and BLAs is additionally subject to a
substantial application user fee, currently exceeding $2,169,000, and the manufacturer and/or sponsor under an approved new drug application are also subject to annual product and establishment user fees, currently exceeding $104,000 per product and $554,000 per establishment. These fees are typically increased annually.
The FDA has 60 days from its receipt of an NDA or BLA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs and BLAs. Most such applications for standard review drug or biologic products are reviewed within ten to twelve months; most applications for priority review drugs or biologics are reviewed in six to eight months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited only for products intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.
The FDA may also refer applications for novel drug or biologic products, or drug or biologic products that present difficult questions of safety or efficacy, to an advisory committee—typically a panel that includes clinicians and other experts—for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with cGMPs is satisfactory and the NDA or BLA contains data that provide substantial evidence that the drug or biologic is safe and effective in the indication studied.
After the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.
An approval letter authorizes commercial marketing of the drug or biologic with specific prescribing information for specific indications. As a condition of NDA or BLA approval, the FDA may require a risk evaluation and mitigation strategy (“REMS”), to help ensure that the benefits of the drug or biologic outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use (“ETASU”). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the product. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the product’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or BLA or NDA or BLA supplement before the change can be implemented. An NDA or BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA or BLA supplements as it does in reviewing NDAs or BLAs.
Post-Approval Requirements
Once an NDA or BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates the post-approval marketing and promotion of drugs and biologics, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. Drugs and biologics may be marketed only for the approved indications and in accordance with the provisions of the approved labeling.
Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA or BLA. The FDA also may require post-marketing testing, known as Phase 4 testing, REMS, and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality control, drug manufacture, packaging, and labeling procedures must continue to conform to cGMPs after approval. Drug and biologic manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.
Fast Track Designation and Accelerated Approval
The FDA is required to facilitate the development, and expedite the review, of drugs or biologics that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug or biologic candidate may request that the FDA designate the candidate for a specific indication as a fast track drug or biologic concurrent with, or after, the filing of the IND for the candidate. The FDA must determine if the drug or biologic candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.
Under the fast track program and FDA’s accelerated approval regulations, the FDA may approve a drug or biologic for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments.
In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions, or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A drug or biologic candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, will allow the FDA to withdraw the drug or biologic from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
In addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with the FDA, the FDA may initiate review of sections of a fast track product’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides, and the FDA approves, a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application does not begin until the last section of the NDA or BLA
is submitted. Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
The Breakthrough Therapy Designation
The FDA is required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that the FDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request. We intend to apply for breakthrough therapy designation of CF-301 during Phase 1 clinical trials.
Pediatric Information
Under the Pediatric Research Equity Act (“PREA”), NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.
Additional Controls for Biologics
To help reduce the increased risk of the introduction of adventitious agents, the PHSA emphasizes the importance of manufacturing controls for products whose attributes cannot be precisely defined. The PHSA also provides authority to the FDA to immediately suspend licenses in situations where there exists a danger to public health, to prepare or procure products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of regulations to prevent the introduction or spread of communicable diseases in the United States and between states.
After a BLA is approved, the product may also be subject to official lot release as a condition of approval. As part of the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot. The FDA may also perform certain confirmatory tests on lots of some products, such as viral vaccines, before releasing the lots for distribution by the manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of biological products. As with drugs, after approval of biologics, manufacturers must address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after approval.
Biosmilars
The Biologics Price Competition and Innovation Act of 2009 (“BPCIA”), creates an abbreviated approval pathway for biological products shown to be highly similar to or interchangeable with an FDA-licensed reference biological product. Biosimilarity sufficient to reference a prior FDA-approved product requires that there be no differences in conditions of use, route of administration, dosage form, and strength, and no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency. Biosimilarity must be shown through analytical studies, animal studies, and at least one clinical study, absent a waiver by the Secretary. A biosimilar product may be deemed interchangeable with a prior approved product if it
meets the higher hurdle of demonstrating that it can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. No biosimilar or interchangeable products have been approved under the BPCIA to date. Complexities associated with the larger, and often more complex, structures of biological products, as well as the process by which such products are manufactured, pose significant hurdles to implementation which are still being evaluated by the FDA.
A reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product, and no application for a biosimilar can be submitted for four years from the date of licensure of the reference product. The first biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivity against a finding of interchangeability for other biologics for the same condition of use for the lesser of (i) one year after first commercial marketing of the first interchangeable biosimilar, (ii) eighteen months after the first interchangeable biosimilar is approved if there is no patent challenge, (iii) eighteen months after resolution of a lawsuit over the patents of the reference biologic in favor of the first interchangeable biosimilar applicant, or (iv) 42 months after the first interchangeable biosimilar’s application has been approved if a patent lawsuit is ongoing within the 42-month period.
Disclosure of Clinical Trial Information
Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.
Other Domestic Regulatory Requirements
In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are potentially subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services, other divisions of the United States Department of Health and Human Services (e.g., the Office of the Inspector General), the United States Department of Justice and individual United States Attorneys’ offices within the Department of Justice, and state and local governments. For example, sales, marketing, and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provision of the Health Insurance Portability and Accountability Act, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws, and violations of these laws may result in imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption of safe harbor.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent
years. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
Moreover, ContraFect is now, and in the future may become, subject to additional federal, state, and local laws, regulations, and policies relating to safe working conditions, laboratory practices, the experimental use of animals, and/or the use, storage, handling, transportation, and disposal of human tissue, waste, and hazardous substances, including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.
Foreign Regulation
In addition to regulations in the United States, we may become subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. In addition, under current United States law, there are restrictions on the export of products not approved by the FDA, depending on the country involved and the status of the product in that country.
Pharmaceutical Coverage, Pricing and Reimbursement
Our ability to commercialize our product candidates successfully will depend in part on the extent to which the United States and foreign governmental authorities, private health insurers and other third-party payors establish appropriate coverage and reimbursement levels for our product candidates and related treatments. In many of the markets where we would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms. Public and private health care payors control costs and influence drug pricing through a variety of mechanisms, including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Payors also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. In particular, many public and private
health care payors limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA.
In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenues and profitability and the future revenues and profitability of our potential customers. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”) revised the payment methodologies for many drugs, which resulted in reduced reimbursement to providers. Additionally, the MMA created an outpatient prescription drug benefit which became effective on January 1, 2006. This benefit is administered by private pharmacy benefit managers and other managed care organizations and is putting increased pressure on the pharmaceutical industry to reduce prices.
Manufacturing
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for pre-clinical and clinical testing, as well as for commercial manufacture of any products that we may commercialize. We employ the services of Fujifilm UK to supply the active pharmaceutical ingredient for CF-301. We do not yet have contracts to produce a commercial supply of the active pharmaceutical ingredient for CF-301; however, we intend to pursue agreements with Fujifilm UK to do so. We employ the services of CanGene to produce CF-301 in its final vialed drug product form. We do not have contracts for the commercial supply of CF-301. We intend to pursue agreements with third party manufacturers regarding commercial supply of vialed drug product at an appropriate future time. We intend to locate second fill finish third party manufacturers to supply other world regions such as the European Union or Asia.
We generally expect to rely on third parties for the manufacture of any companion diagnostics we develop.
Research and Development
We have invested $13.2 million, $9.1 million, $2.3 million and $2.7 million in research and development for the years ended December 31, 2012 and 2013 and for the three months ended March 31, 2013 and 2014, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview—Research and Development Expenses”.
Facilities
In the second quarter of 2011, we opened our corporate headquarters and laboratory in Yonkers, New York. This 15,000 sq. ft. laboratory consists of 1,400 sq. ft. of open laboratory and suites for molecular biology, microbiology, tissue culture, microscopy, an animal vivarium, and a robotics suite. This facility is leased through December 31, 2027. We also retain the right to an additional 45,000 sq. ft. of expansion space, which may house up to 200 employees when fully constructed.
Sales, Marketing and Distribution
We do not currently have an organization for the sales, marketing and distribution of pharmaceutical products. We may rely on licensing and co-promotion agreements with strategic partners for the commercialization of our products in the United States and other territories. If we choose to build a commercial infrastructure to support marketing in the United States, such commercial infrastructure could be expected to include a targeted sales force supported by sales management, internal sales support, an internal marketing group
and distribution support. To develop the appropriate commercial infrastructure internally, we would have to invest financial and management resources, some of which would have to be deployed prior to any confirmation that CF-301 or any of our other products will be approved.
Employees
As of June 30, 2014, we had 16 full-time employees, including 8 employees with M.D. or Ph.D. degrees. Of these full-time employees, 8 employees are engaged in research and development activities. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Legal Proceedings
On October 31, 2013, MorphoSys instituted arbitration proceedings against us before the International Chamber of Commerce relating to a subscription and license agreement between MorphoSys and us entered into in April 2011. See “—Intellectual Property—License Agreement—MorphoSys AG”. In June 2014, we and MorphoSys agreed to terminate our license agreement effective as of August 15, 2014 and resolve all outstanding claims thereunder for a payment of one million euros (approximately $1.4 million). We expect to make the required payment under the settlement agreement on or before August 15, 2014.
MANAGEMENT
The following table sets forth the name and position of each of our executive officers, directors and key employees.
| | | | | | |
Name
| | Age | | | Position
|
Executive Officers
| | | | | | |
Julia P. Gregory, M.B.A.
| | | 61 | | | Chief Executive Officer and Director |
David Huang, M.D., Ph.D.
| | | 39 | | | Senior Vice President & Chief Medical Officer |
Michael Wittekind, Ph.D.
| | | 60 | | | Senior Vice President & Chief Scientific Officer |
| | |
Directors
| | | | | | |
Sol Barer, Ph.D.
| | | 67 | | | Chairman of the board of directors |
Isaac Blech
| | | 64 | | | Director |
David N. Low, Jr.
| | | 55 | | | Director |
Michael J. Otto, Ph.D.
| | | 65 | | | Director |
Roger Pomerantz, M.D.
| | | 57 | | | Director, Vice Chairman |
David A. Scheinberg, M.D., Ph.D.
| | | 58 | | | Director |
Cary W. Sucoff
| | | 62 | | | Director |
Shengda Zan
| | | 51 | | | Director |
| | |
Key Employees
| | | | | | |
Daniel Couto
| | | 42 | | | Senior Vice President, Product Development |
Barry Kappel, Ph.D., M.B.A.
| | | 38 | | | Senior Vice President, Business Development |
Michael Messinger
| | | 40 | | | Vice President, Finance |
Nancy Dong
| | | 49 | | | Vice President, Controller |
Julia P. Gregory. Ms. Gregory has been our Chief Executive Officer since November 2013 and a director since April 2014, previously serving as Executive Vice President and Chief Financial Officer since July 2012. Prior to joining ContraFect, Ms. Gregory was President and Chief Executive Officer of Five Prime Therapeutics, Inc. (“Five Prime”), a clinical-stage, biotechnology company discovering and developing innovative protein and antibody therapeutics in the fields of oncology and immunology. Prior to Five Prime, Ms. Gregory was Executive Vice President, Corporate Development and Chief Financial Officer of Lexicon Pharmaceuticals, Inc. (“Lexicon”). While at Five Prime and Lexicon, she led transactions for several strategic partnerships including those with GlaxoSmithKline, Human Genome Sciences, Genentech, Inc., TheBristol-Myers Squibb Company and Takeda Pharmaceutical Company Limited. She conducted Lexicon’s $220 million initial public offering and was involved in the creation of Lexicon’s $500 million private equity investment plan with Invus, LLP. Prior to joining Lexicon, Ms. Gregory served as the head of investment banking for Punk, Ziegel & Company, a specialty technology and healthcare investment banking firm, and was an investment banker with Dillon, Read & Co., Inc. She currently serves as a Director on the board of Clinipace, Inc. on behalf of and as Special Advisor to Morgan Stanley Expansion Capital and on the board of The Global TB Alliance for Drug Development, primarily funded by the Bill & Melinda Gates Foundation. Ms. Gregory received her B.A. from George Washington University’s Elliott School of International Affairs, where she was elected to Phi Beta Kappa, and her M.B.A. from the Wharton School of the University of Pennsylvania.
David Huang, M.D., Ph.D., J.D. Dr. Huang has served as our Senior Vice President and Chief Medical Officer since September 2011. Prior to joining ContraFect, Dr. Huang served as the Global Medical Director of Medical Affairs for Pfizer Inc., where he played a key role in the development efforts for Zyvox for Gram-positive infections. Previously, he was the Associate Director of Clinical Development for Boehringer Ingelheim GmbH, where he played a key role in the development of Aptivus and Viramune XR for HIV infections and other compounds for HCV infections. Dr. Huang previously served as an Assistant Professor at Baylor College of Medicine, and currently serves as an Adjunct Clinical Professor at the Rutgers University New Jersey Medical School, and is an attending physician at the Veterans Affairs Medical Center in Manhattan.
Dr. Huang received his M.D. and Ph.D. from the University of Texas at Houston Medical School. He is board certified in internal medicine and infectious diseases and is a fellow of the American College of Physicians and a fellow of the Infectious Diseases Society of America. He completed his internal medicine residency at the University of Texas at Southwestern and his infectious diseases fellowship at Baylor College of Medicine. Dr. Huang received his J.D. from Pace Law School and is a member of the New York Bar Association. Dr. Huang’s research interest has focused on the epidemiology, pathogenesis and treatment of viruses and bacteria, including multi-drug resistant pathogens, and has resulted in over 100 peer-reviewed publications.
Michael Wittekind, Ph.D. Dr. Wittekind has served as our Senior Vice President and Chief Scientific Officer since August 2012. Prior to joining ContraFect, Dr. Wittekind served as the Executive Director of Research for Amgen Inc. (“Amgen”), where he directed the Protein Science Department at the Amgen-Seattle site. While at Amgen, he was involved in the discovery efforts for multiple protein therapeutics currently undergoing clinical trials, including antibodies, antibody-drug conjugates, and protein fusions. Previously, Dr. Wittekind was the Director of Process Development for Phylos Inc., where he played a key role in the development of alternate scaffold therapeutic discovery, design, and production. Dr. Wittekind has also served as the Associate Director of the Gene Expression and Protein Biochemistry Department of the Bristol-Myers Squibb Pharmaceutical Research Institute, directing groups in both the Lawrenceville and Hopewell, New Jersey sites leading structural biology research as well as protein and small molecule therapeutic efforts.
Dr. Wittekind received his Ph.D. from the University of Wisconsin-Madison in Biochemistry and pursued his postdoctoral studies at the University of Washington. Dr. Wittekind’s research interests have encompassed genetics, molecular biology, structural biology, and engineering of novel antibodies and proteins, resulting in over 40 publications and patents.
Directors
Sol Barer, Ph.D. Dr. Barer has served as a member of our board of directors since April 2011 and Chairman of our board of directors since March 2012. Dr. Barer is the Managing Director of SJ Barer Consulting, LLC. He served as Chairman of Celgene Corporation (“Celgene”) from January 2011 to June 2011 and as Executive Chairman from June 2010 to January 2011. Prior to that time, he served as Chief Executive Officer of Celgene from January 2006 to June 2010, as Chairman from January 2007 to June 2010, as President in 1993 and Chief Operating Officer and director in 1994. He previously served as Senior Vice President, Science and Technology, and Vice President/General Manager, Chiral Products, from 1991 to 1994, and Vice President, Technology, from 1987 to 1991. Dr. Barer serves on the boards of directors of Aegerion Pharmaceuticals, Inc., Amicus Therapeutics, Cerecor Inc. (Chair), InspireMD Inc. (Chair), Centrexion (Chair), Restor Genex (Chair) and Medgenics Inc. (Chair). He has previously served as Commissioner of the New Jersey Commission on Science and Technology and as Chairman of the University of Medicine and Dentistry of New Jersey Governor’s Advisory Committee. Dr. Barer received a Ph.D. in organic chemistry from Rutgers University.
We believe that Dr. Barer’s significant scientific, executive and board leadership experience in the pharmaceutical industry qualifies him to serve as a member of our board of directors.
Isaac Blech. Mr. Blech has served as a member of our board of directors since 2010. Mr. Blech is a renowned biotechnology entrepreneur and investor, who, over the past 32 years, has founded and served on the boards of a number of companies which have produced major advances in a broad array of diseases, including the diagnosis of chlamydia, herpes, syphilis and HIV, and the treatment of cystic fibrosis, sexual dysfunction, multiple myeloma and brain cancer. The companies he founded include Celgene Corporation, ICOS Corporation, Nova Pharmaceutical Corporation, Pathogenesis Corporation and Genetics Systems Corporation. Mr. Blech is a major shareholder and Vice Chairman of Cerecor, Inc., and major shareholder and Vice Chairman of Edge Therapeutics. He is also a major shareholder and Vice Chairman of The SpendSmart Payments Company as well as a major shareholder and Vice Chairman of Premier Alliance Group. Mr. Blech is a director of Medgenics, Inc. Mr. Blech earned a B.A. degree from Baruch College in 1975.
We believe that Mr. Blech’s broad experience as a founder, director and major investor in numerous biotechnology companies qualifies him to serve as a member of our board of directors.
David N. Low, Jr.Mr. Low has served as a member of our board of directors since April 2014. Mr. Lowhas worked as an investment banker since 1987, with broad investment and advisory experience in the life sciences, biotechnology and medical technology sectors. Since 2002, Mr. Low has served as a Senior Advisor at Lazard and as a member of Lazard’s Life Sciences Group as a Managing Director. Mr. Low has advised on major mergers and acquisitions transactions in the life sciences, biotechnology and medical technology sectors, and has worked with private and public companies to raise capital, including emerging growth companies. Prior to joining Lazard, Mr. Low was a Managing Director at JP Morgan and a Senior Vice President at Lehman Brothers. Mr. Low also serves on the Regional Advisory Board of the Institute of International Education West Coast Center, on the Board of Directors for Lets Be Frank Dogs and on the Board of Directors of We Teach Science Foundation.
Mr. Low holds an A.B. from Harvard College, where he graduated cum laude, an M.A. from the Johns Hopkins University School of Advanced International Studies and an M.B.A. from Yale University.
We believe that Mr. Low’s significant investment and financial advisory experience qualifies him to serve as a member of our board of directors.
MichaelJ.Otto, Ph.D. Dr. Otto has served as a member of our board of directors since May 2014. Previously, Dr. Otto served as Chief Scientific Officer of Pharmasset, Inc. from October 1999 until February 2012, when the company was acquired by Gilead Sciences. While at Pharmasset, Dr. Otto led the research team responsible for the discovery of sofosbuvir, a drug used for the treatment of HCV infections. Earlier in his career, Dr. Otto served as Associate Director of Anti-Infectives Clinical Research at Rhône-Poulenc Rorer, Vice President for Research and Development at Avid Therapeutics, Inc., Research Manager at DuPont Pharmaceuticals and Dupont Merck Pharmaceuticals and as Group Leader in the Virology Department at Sterling Drug. Prior to joining Sterling Drug, Dr. Otto was Research Assistant Professor at the Yale University School of Medicine, Department of Pharmacology. Dr. Otto also served as the U.S. editor for Antiviral Chemistry & Chemotherapy, a peer-reviewed academic journal, from 1989 until 2012. Dr. Otto holds a B.S. from Loyola University of Chicago and a Ph.D. in medical microbiology from The Medical College of Wisconsin. He is the author or coauthor of over 100 research papers and book chapters, and named inventor on several patents and patent applications.
We believe that Dr. Otto’s substantial scientific and executive leadership experience in the pharmaceutical industry qualifies him to serve as a member of our board of directors.
Roger J. Pomerantz, M.D., F.A.C.P. Dr. Pomerantz has served as a member of our board of directors since April 2014 and as Vice Chairman of our board of directors since May 2014. Previously, Dr. Pomerantz was Worldwide Head of Licensing & Acquisitions, Senior Vice President at Merck & Co., Inc. where he oversaw all licensing and acquisitions at Merck Research Laboratories. Previously, he served as Senior Vice President and Global Franchise Head of Infectious Diseases at Merck. Prior to joining Merck, Dr. Pomerantz was Global Head of Infectious Diseases for Johnson & Johnson Pharmaceuticals. He joined Johnson & Johnson in 2005 as President of Tibotec Pharmaceuticals, Inc. Dr. Pomerantz currently serves as the Chairman of the Board of Directors for Seres Health Inc.
Dr. Pomerantz received his B.A. in Biochemistry at the Johns Hopkins University and his M.D. at the Johns Hopkins School of Medicine. He received post-graduate training at the Massachusetts General Hospital, Harvard Medical School and M.I.T. Dr. Pomerantz is Board Certified in both Internal Medicine and Infectious Diseases. He was Professor of Medicine, Biochemistry and Molecular Pharmacology, Chief of Infectious Diseases, and the Founding Director and Chair of the Institute for Human Virology and Biodefense at the Thomas Jefferson University and Medical School. He has developed eight drugs approved world-wide in important diseases, including HIV, HCV, and tuberculosis.
We believe that Dr. Pomerantz’s significant scientific, executive and board leadership experience in drug development and in the pharmaceutical industry qualifies him to serve as the Vice Chairman of our board of directors.
David A. Scheinberg, M.D., Ph.D. Dr. Scheinberg has served as a member of our board of directors since 2010. Since 2002, Dr. Scheinberg has served as Vincent Astor Chair and Chairman of the Molecular Pharmacology and Chemistry Program at the Sloan-Kettering Institute. In 2002, he also founded and serves as the Chair of the Experimental Therapeutics Center at the Memorial Sloan-Kettering Cancer Center. Dr. Scheinberg has been a Professor of Medicine (since 2002) and Pharmacology (since 1999) at the Weill-Cornell University Medical College and has served as Co-chair of the Pharmacology graduate program since 2001. He has served as a Professor at the Gerstner-Sloan Kettering Graduate School at the Memorial Sloan-Kettering Cancer Center since 2005. From 1992 until 2003, he was Chief of the Leukemia Service at Memorial Hospital. He founded and is a Director of the Therapeutics Discovery Institute, a non-profit drug development corporation, which is a subsidiary of Rockefeller, Weill Cornell Medical College and Memorial Sloan-Kettering. He has been elected into the American Society of Clinical Investigation, the American Association of Physicians and the Interurban Club. His other awards include the Doris Duke Distinguished Clinical Science Professorship, the Lucille P. Markey Scholarship, Leukemia and Lymphoma Society Translational Investigator Awards, and CapCure Awards. He Co-chairs the Medical Board of the Laurie Strauss Leukemia Foundation.
Dr. Scheinberg has been a Director of Progenics Pharmaceuticals, a public biotechnology company, from 1996 to the present. He was a founder and Chairman of the board of directors of Active Biotherapeutics, Inc., a private company that was acquired by Progenics Pharmaceuticals, and is currently a member of the Scientific Advisory Boards of Pfizer CTI, Oncopep and Encyse Pharma. Dr. Scheinberg received his A.B., cum laude, distinction in all subjects, from the College of Arts & Sciences, Cornell University, in 1977. He earned his M.D. from Johns Hopkins University in 1983, and his Ph.D. from Johns Hopkins University School of Medicine, Department of Pharmacology and Experimental Therapeutics, in 1983.
We believe that Dr. Scheinberg’s significant scientific, executive and board leadership experience in drug and biologic therapy development and in the pharmaceutical industry qualifies him to serve as a member of our board of directors.
Cary W. Sucoff. Mr. Sucoff has served as a member of our board of directors since 2010. Mr. Sucoff has over 30 years of securities industry experience encompassing supervisory, banking and sales responsibilities. Mr. Sucoff currently owns and operates Equity Source Partners, LLC, an advisory and consulting firm. Prior to December 2011, Equity Source Partners, LLC operated as a boutique investment bank. During that time, Mr. Sucoff provided investment banking and consulting services to public and private companies and institutional investors. Mr. Sucoff has played a role in financings for biotechnology companies such as Amgen Inc., Janssen Biotech, Inc. (formerly Centocor Biotech, Inc.), Genzyme Corporation, Genentech, Inc., ICOS Corporation (acquired by Eli Lilly and Company), PathoGenesis Corporation (acquired by Chiron Corp.), Vaxgen Inc. and BioTime, Inc. Mr. Sucoff currently serves on the boards of directors of Cerecor, Inc., Premier Alliance Group, Inc., and The SpendSmart Payments Corp. In addition, Mr. Sucoff serves as a consultant to Medgenics, Inc., and RestorGenex. Mr. Sucoff is the President of New England Law/Boston, has been a member of the Board of Trustees for over 25 years and is the current Chairman of the Endowment Committee. Mr. Sucoff received a B.A. from SUNY Binghamton (1974) and a J.D. from New England School of Law (1977) where he was the Managing Editor of the Law Review and graduated Magna Cum Laude. Mr. Sucoff has been a member of the Bar of the State of New York since 1978.
We believe that Mr. Sucoff’s broad financial and legal experience qualifies him to serve as a member of our board of directors.
Shengda Zan. Mr. Zan has served as a member of our board of directors since January 2013. Mr. Zan founded the Zongyi Group in 1987 and has been the president of the Zongyi Group since that time. The Zongyi
Group is a diversified business group in China focusing on clean energy, information technology, strategic investments and asset management. Mr. Zan currently serves as the sole director of Alpha Spring Limited, a shareholder of ContraFect.
We believe that Mr. Zan’s significant international business experience qualifies him to serve as a member of our board of directors.
Scientific Advisors
We have assembled a world-class scientific advisory board that includes renowned experts in infectious diseases. These advisors work in close collaboration with our scientists to identify new research directions and accelerate our infectious disease programs. Our scientific advisory board is led by Dr. Vincent A. Fischetti, the founder of our lysin technology.
| | |
Name
| | Primary Affiliation
|
Vincent A. Fischetti, Ph.D.
| | The Rockefeller University, Laboratory of Bacterial Pathogenesis and Immunology |
Charles Bailey, Ph.D.
| | George Mason University Biomedical Research Laboratory |
Daniel Capon, Ph.D.
| | Blood Systems Research Institute |
Adolfo Garcia-Sastre, Ph.D.
| | Mount Sinai School of Medicine, Department of Microbiology; Global Health & Emerging Pathogens Institute |
Peter Palese, Ph.D.
| | Mount Sinai School of Medicine, Department of Microbiology |
Christoph Renner, M.D.
| | University Hospital, Zurich, Department of Internal Medicine and Oncology |
Leon G. Smith, M.D., M.A.C.P.
| | Formerly, Saint Michael’s Medical Center, New Jersey |
Key Employees
Daniel Couto. Mr. Couto currently serves as our Senior Vice President, Product Development. He has over 20 years of experience in Operations Management. Prior to joining ContraFect in 2011, he served as Vice President of Commercial Manufacturing Operations for Merck Sharp & Dohme Biologics UK Ltd. for three years. Previously, he was Director of Manufacturing for Nuvelo Inc. for three years, where he was responsible for seven worldwide contract manufacturing sites. Mr. Couto also served in Director positions at Genzyme Transgenics Corp., Advanced Biosystems Corp., ImmuCell Corp. and Sepracor Corp. Mr. Couto holds patents for several novel separation technologies such as Bulk Protein Crystallization, HPTFF, and SMB.
Mr. Couto received his B.S. Degree in Chemical Engineering from Rensselaer Polytechnic Institute.
Barry Kappel, Ph.D. Dr. Kappel joined ContraFect in 2009 as our second employee and the Head of Business Development. He currently serves as our Senior Vice President, Business Development. Since joining ContraFect, Dr. Kappel has been involved in all aspects of the Company, including licensing of the Company’s key technologies, participation in the financings of the Company, and establishing scientific collaborations with academic and corporate partners.
Dr. Kappel previously was a Senior Consultant at Easton Associates, LLC, a life science consulting firm. In this capacity, he performed a wide range of activities, including the assessment of pre-clinical and clinical compounds for pharmaceutical and biotechnology companies. Dr. Kappel received his BA in chemistry from Emory University. He subsequently obtained his Ph.D. in immunology and pharmacology from the Weill Graduate School of Medical Sciences and the Memorial Sloan-Kettering Cancer Center. Dr. Kappel holds an M.B.A. from the S.C. Johnson Graduate School of Management at Cornell University.
Michael Messinger, CPA. Mr. Messinger currently serves as our Vice President, Finance. He has more than 15 years of experience in finance, accounting and forecasting for clinical development. Prior to joining ContraFect, he served as Controller of Coelacanth Corporation and Lexicon Pharmaceuticals, Inc. for five years
after which he served as Director of Finance for Lexicon for eight years. From June 2007 until he joined ContraFect in November 2012, Mr. Messinger was responsible for the financial management of Lexicon’s partnership with Symphony Capital, LLC, in addition to coordinating fiscal and program management concerning Lexicon’s development programs.
Mr. Messinger received his B.B.A degree in accounting from the University of Michigan. He started his career as an auditor at Ernst & Young LLP.
Nancy Dong. Ms. Dong currently serves as Vice President and Controller of the Company. She has more than 20 years of experience in accounting, strategic planning, budgeting and forecasting, organizational development, financial systems and controls. She served as controller at XL Marketing and Alley Corp prior to her role as Vice President of Finance and Administration at DCM, a tele-services firm supporting the performing arts. Ms. Dong also held the positions of COO/CFO at Semaphore, a project management software development firm.
Ms. Dong received her B.A. degree from Yale University and a MPPM degree from The Wharton School at the University of Pennsylvania. She started her career as a management consultant at Ernst & Young LLP.
Board Composition
Our board of directors currently consists of eight directors and is authorized to have up to 11 members.
In accordance with the terms of our certificate of incorporation and bylaws that will become effective upon the closing of this offering, our directors may be removed only for cause by the affirmative vote of the holders of 75% or more of our voting stock.
We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.
Director Independence
Rule 5605 of the NASDAQ Listing Rules requires a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, the NASDAQ Listing Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act.
Under Rule 5605(a)(2) of the NASDAQ Listing Rules, a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.
Our board of directors has reviewed the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of our directors, with the exceptions of Ms. Gregory and Mr. Sucoff, is an “independent director” as defined under Rule 5605(a)(2) of the NASDAQ Listing Rules. Our board of directors also determined that Mr. Low, Dr. Scheinberg and Mr. Blech, who will comprise our audit committee following this offering, Drs. Scheinberg and
Barer and Mr. Blech, who will comprise our compensation committee following this offering, and Dr. Barer and Mr. Blech, who will be members of our nominating and corporate governance committee following this offering, satisfy the independence standards for such committees established by the SEC and the NASDAQ Listing Rules, as applicable. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.
There are no family relationships among any of our directors or executive officers.
Board Committees
Our board has established three standing committees—audit, compensation, and nominating and corporate governance—each of which will, upon the closing of this offering, operate under a charter that has been approved by our board.
Audit Committee
The members of our audit committee are Mr. Low, Dr. Scheinberg and Mr. Blech. Mr. Low is the chair of the audit committee. Our board of directors has determined that Mr. Low qualifies as an audit committee financial expert within the meaning of SEC regulations and the NASDAQ Listing Rules. In making this determination, our board has considered the formal education and nature and scope of his previous experience. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements. Following this offering, our audit committee’s responsibilities will include:
appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;
overseeing the work of our registered public accounting firm, including through the receipt and consideration of reports from such firm;
reviewing and discussing with management and the registered public accounting firm our annual and quarterly financial statements and related disclosures;
monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
overseeing our internal audit function;
discussing our risk management policies;
establishing policies regarding hiring employees from the registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;
meeting independently with our internal auditing staff, registered public accounting firm and management;
reviewing and approving or ratifying any related person transactions; and
preparing the audit committee report required by SEC rules.
Compensation Committee
The members of our compensation committee are Drs. Scheinberg and Barer and Mr. Blech. Dr. Scheinberg is the chair of the compensation committee. Our compensation committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. Following this offering, the compensation committee’s responsibilities will include:
reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation; reviewing and approving, or making recommendations to our board with respect to, the compensation of our Chief Executive Officer and our other executive officers;
overseeing an evaluation of our senior executives;
overseeing and administering our cash and equity incentive plans;
reviewing and making recommendations to our board with respect to director compensation;
reviewing and discussing with management our “Compensation Discussion and Analysis”; and
preparing the compensation committee report required by SEC rules.
Nominating and Corporate Governance Committee
The members of our nominating and corporate governance committee are Dr. Barer and Mr. Blech. Mr. Blech is the chair of the nominating and corporate governance committee. Following this offering, the nominating and corporate governance committee’s responsibilities will include:
identifying individuals qualified to become board members;
recommending to our board the persons to be nominated for election as directors and to each committee of our board of directors;
reviewing and making recommendations to the board with respect to management succession planning;
developing and recommending corporate governance principles to the board; and
overseeing periodic evaluations of the board.
We believe that the composition of our nominating and corporate governance committee will meet the requirements for independence under current NASDAQ and SEC rules and regulations. Our board of directors has determined that Dr. Barer and Mr. Blech are independent as independence is currently defined in applicable NASDAQ listing standards.
Science and Technology Committee
The members of our science and technology committee are Dr. Barer, Dr. Otto, Dr. Scheinberg and Dr. Pomerantz. Dr. Pomerantz is the chair of the science and technology committee. The science and technology committee meets periodically to discuss scientific and technological developments that may affect our business.
Code of Ethics and Code of Conduct
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to post on our website, www.contrafect.com, a current copy of the code and all disclosures that are required by law or NASDAQ stock market listing standards concerning any amendments to, or waivers from, any provision of the code.
EXECUTIVE COMPENSATION
We are providing compensation disclosure that satisfies the requirements applicable to emerging growth companies, as defined in the JOBS Act.
Summary Compensation Table
We are an emerging growth company and have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting companies,” as such term is defined under the Securities Act, which require compensation disclosure for our principal executive officer and the two most highly-compensated executive officers other than our principal executive officer. The table below sets forth the annual compensation earned during fiscal 2013 by our current principal executive officer, our next two most highly-compensated executive officers, and our former Chief Executive Officer (collectively, our “Named Executive Officers”).
| | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Salary ($) | | | Bonus ($) | | | Option
Awards ($)(1) | | | All Other
Compensation ($) | | | Total ($) | |
Julia P. Gregory, M.B.A. | | $ | 424,000 | | | $ | 142,788 | | | $ | 193,992 | (4) | | $ | 33,735 | (2) | | $ | 794,515 | |
Chief Executive Officer | | | | | | | | | | | | | | | | | | | | |
| | | | | |
David Huang, M.D., Ph.D. | | $ | 391,600 | | | $ | 49,588 | | | $ | 141,803 | (5) | | $ | 6,894 | (2) | | $ | 589,885 | |
Chief Medical Officer | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Michael Wittekind, Ph.D. | | $ | 313,000 | | | $ | 61,152 | | | $ | 54,842 | (6) | | $ | 33,735 | (2) | | $ | 462,729 | |
Chief Scientific Officer | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Robert C. Nowinski, Ph.D. | | $ | 462,993 | | | $ | — | | | $ | 877,757 | | | $ | 3,738,168 | (3) | | $ | 5,078,918 | |
Former Chief Executive Officer | | | | | | | | | | | | | | | | | | | | |
(1) | The amounts reported in the “Option Awards” column reflect the aggregate grant date fair value of share-based compensation awarded during the year computed in accordance with the provisions of Financial Accounting Standards Board Accounting Standard Codification, or ASC, Topic 718. See Note 2 to our financial statements included elsewhere in this prospectus regarding assumptions underlying the valuation of equity awards. |
(2) | The amounts reported in the “All Other Compensation” column reflect, for each Named Executive Officer, the sum of the incremental cost to us of all perquisites and other personal benefits and are comprised of the dollar value of medical and life insurance costs paid by us on behalf of each of the Named Executive Officers. |
(3) | The amounts reported in the “All Other Compensation” column reflect, for Dr. Nowinski, the sum of the incremental cost to us of all costs, including $0.9 million of share-based compensation expense representing the estimated fair value calculated with respect to the modification of options to purchase an aggregate of 435,000 shares of our common stock pursuant to the terms of the separation agreement and all perquisites and other personal benefits and are comprised of the dollar value of transportation services and medical and life insurance costs paid by us on his behalf. See “—Separation Agreement with Former CEO.” |
(4) | Includes $57,931 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 67,142 shares of our common stock pursuant to the Exchange Offer. |
(5) | Includes $33,336 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 36,876 shares of our common stock pursuant to the Exchange Offer. |
(6) | Includes $24,975 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 29,142 shares of our common stock pursuant to the Exchange Offer. |
Outstanding Option Awards as of the date of this prospectus
The following table sets forth information regarding outstanding stock options held by our Named Executive Officers:
| | | | | | | | | | | | | | | | |
Name and Principal Position | | Number of securities
underlying unexercised
options exercisable
(#) | | | Number of securities
underlying unexercised
options unexercisable
(#) | | | Option
exercise
price
($/share) | | | Option
expiration date | |
Julia P. Gregory. | | | 44,761 | | | | 22,381 | (1) | | | 3.50 | | | | 8/10/2022 | |
Chief Executive Officer | | | 29,285 | | | | 29,286 | (2) | | | 3.50 | | | | 2/26/2023 | |
| | | 85,714 | | | | 257,143 | (3) | | | 4.27 | | | | 4/28/2024 | |
| | | | |
David Huang, M.D., Ph.D. | | | 8,305 | | | | — | | | | 3.50 | | | | 6/29/2021 | |
Chief Medical Officer | | | 19,047 | | | | 9,524 | (4) | | | 3.50 | | | | 8/31/2021 | |
| | | 23,346 | | | | 23,346 | (2) | | | 3.50 | | | | 2/26/2023 | |
| | | | |
Michael Wittekind Ph.D. | | | 13,714 | | | | 6,857 | (5) | | | 3.50 | | | | 3/31/2022 | |
Chief Scientific Officer | | | 5,714 | | | | 2,857 | (1) | | | 3.50 | | | | 8/10/2022 | |
| | | 6,428 | | | | 6,429 | (2) | | | 3.50 | | | | 2/26/2023 | |
| | | 5,357 | | | | 16,071 | (3) | | | 4.27 | | | | 4/28/2024 | |
| | | | |
Robert C. Nowinski, Ph.D. | | | 14,285 | | | | — | | | | 3.50 | | | | 4/14/2020 | |
Former Chief Executive Officer | | | 242,857 | | | | — | | | | 9.03 | | | | 12/30/2020 | |
| | | 142,857 | | | | — | | | | 9.03 | | | | 2/7/2021 | |
| | | 142,857 | | | | — | | | | 9.03 | | | | 2/7/2021 | |
| | | 377,857 | | | | — | | | | 3.50 | | | | 2/26/2023 | |
| | | 35,714 | | | | — | | | | 6.02 | | | | 12/17/2023 | |
(1) | This option vests over two years, with 34% of the shares underlying the option vested immediately on August 11, 2012 and 33% of the shares underlying the option vesting annually thereafter. |
(2) | This option vests over three years, with 25% of the shares underlying the option vested immediately on January 1, 2013 and 25% of the shares underlying the option vesting annually thereafter. |
(3) | This option vests over three years, with 25% of the shares underlying the option vested immediately on April 1, 2014 and 25% of the shares underlying the option vesting annually thereafter. |
(4) | This option vests over three years, with 34% of the shares underlying the option vested on September 1, 2012 and 33% of the shares underlying the option vesting annually thereafter. |
(5) | This option vests over three years, with 34% of the shares underlying the option vested on April 1, 2013 and 33% of the shares underlying the option vesting annually thereafter. |
Employment Agreements
Julia P. Gregory
On April 29, 2014, we entered into an employment agreement with Julia Gregory, our current Chief Executive Officer, for a period of one year beginning on April 1, 2014 (the “CEO Agreement”). The CEO Agreement will automatically renew for an additional one-year term unless we or Ms. Gregory elect to terminate the CEO Agreement at the expiration of the initial one-year term. During the term of the CEO Agreement, Ms. Gregory will be paid an annual base salary of $475,000, retroactive to January 1, 2014, and will be eligible to earn an annual performance bonus in an amount up to $237,500 for each calendar year. In connection with the execution of the CEO Agreement, Ms. Gregory was granted a stock option covering 342,857 shares, which vest in equal quarterly installments over a period of three years. In the event that Ms. Gregory ceases to serve as Chief Executive Officer but remains employed by us in another capacity, she will forfeit any unvested portion of the options granted to her in connection with the execution of the CEO Agreement. Ms. Gregory is eligible to earn a bonus of $100,000 with which she may purchase fully-vested shares of common stock in the event that we raise $20,000,000 in cash or investments during calendar year 2014. Ms. Gregory was also appointed to the Board of Directors.
In the event that Ms. Gregory is terminated without cause or resigns for good reason, she is eligible to receive severance consisting of: (i) 18 months of base salary continuation and payment of an annual bonus, the amounts of which vary based upon the time and form of termination; (ii) 18 months of deemed vesting acceleration for outstanding options granted to Ms. Gregory during the period she was serving as our Chief Financial Officer; (iii) with respect to the options granted to Ms. Gregory in connection with the execution of the CEO Agreement, accelerated vesting of such portion of the option that would become vested through March 31 of the year following the year in which the termination occurs; and (iv) 12 months of COBRA coverage for Ms. Gregory and her eligible dependents.
For a termination without cause or resignation for good reason that occurs on or following April 1, 2015, Ms. Gregory’s base salary will be continued for 18 months at the rate of $475,000 and she will be eligible to receive an annual bonus in an amount up to $237,500. For a termination without cause or a resignation for good reason that occurs prior to April 1, 2015, Ms. Gregory’s base salary will be continued at the rate of $475,000 from the date of termination through March 31, 2015, and at a rate of $424,000 for the remainder of the 18-month severance period. In addition, Ms. Gregory will be eligible to receive an annual bonus of up to $237,500 or, solely in the event that Ms. Gregory resigns for good reason due to our election not to renew the CEO Agreement at the expiration of the initial one-year term, a bonus of no less than $118,750 and up to $237,500. Any severance payments due to Ms. Gregory are subject to her executing and not revoking a release of claims.
Ms. Gregory is subject to non-competition and non-solicitation provisions during the term and for one year following any termination of employment.
David Huang, M.D., Ph.D.
In June 2011, we entered into a four-year employment agreement with Dr. Huang, to serve, at will, as Chief Medical Officer. Dr. Huang currently receives an annual base salary of $391,600 and is eligible to receive an annual bonus equivalent to 35% of his annual salary payable one half in cash and one half in equity. Dr. Huang currently holds options to purchase an aggregate of 83,568 shares of common stock.
In the event Dr. Huang is terminated without cause, he is eligible for severance payments equal to 12 months of base salary continuation, payable in installments over 12 months. Any severance payment is subject to Dr. Huang’s executing and not revoking a release of claims. Dr. Huang is subject to non-competition and non-solicitation provisions during the term of his agreement and for one year following termination.
Michael Wittekind, Ph.D.
In March 2012, we entered into a three-year employment agreement with Dr. Wittekind, to serve, at will, as Chief Scientific Officer. Dr. Wittekind currently receives an annual base salary of $313,000 and is eligible to receive an annual bonus equivalent to 30% of his annual salary payable one half in cash and one-half in equity. Dr. Wittekind currently holds options to purchase an aggregate of 63,427 shares of common stock.
In the event Dr. Wittekind is terminated without cause or resigns for good reason, he is eligible for severance payments equal to 12 months of base salary continuation, payable in installments over 12 months. Any severance payment is subject to Dr. Wittekind’s executing and not revoking a release of claims. Dr. Wittekind is subject to non-competition and non-solicitation provisions during the term of his agreement and for one year following termination.
Separation Agreement with Former CEO
In June 2010, we entered into an employment agreement with Robert Nowinski, Ph.D., to serve as our Chief Executive Officer and as a member of the board of directors for a period of five years. This agreement was terminated effective December 25, 2013. Consistent with the terms of the June 2010 agreement, we entered into a
separation agreement and release of claims with Dr. Nowinski in December 2013 which provided for severance payments and the maintenance of health benefits for a period of 24 months following the departure date of Dr. Nowinski. The separation agreement also provided for the modification of existing stock option grants such that all unvested portions of existing stock option grants were immediately vested and all existing stock option grants became exercisable for up to ten years from the date of grant. The estimated fair value of these modifications of $0.9 million was recognized as non-cash share-based compensation for the year ended December 31, 2013. Dr. Nowinski received an additional, fully vested stock option to purchase 35,714 shares of common stock at an exercise price of $6.02 per share, resulting in recognition of non-cash share-based compensation expense of $0.1 million for the year ended December 31, 2013. In addition, the outstanding loans to Dr. Nowinski, in the aggregate amount of $600,000, plus accrued interest of $32,650, were forgiven pursuant to the separation agreement. Dr. Nowinski is subject to restrictive covenants, including non-competition and non-solicitation provisions. The total amount of the severance payments of $2.0 million, share-based compensation of $1.0 million and loan forgiveness of $0.6 million was included as part of general and administrative expenses for the year ended December 31, 2013.
Equity and Other Compensation Plans
The three equity incentive plans described in this section are the 2008 Equity Incentive Plan (the “2008 Plan”), the Amended and Restated 2008 Equity Incentive Plan (the “Amended 2008 Plan”), and the 2014 Omnibus Incentive Plan (the “2014 Plan”). Following the closing of this offering, we expect to grant awards to eligible participants under the 2014 Plan, which will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part.
Amended and Restated 2008 Equity Incentive Plan
Our Amended 2008 Plan was adopted by our board of directors in February 2013. The Amended 2008 Plan provides us with the flexibility to use restricted stock, stock options and other awards based on the Company’s common stock as part of an overall compensation package to provide performance-based compensation to attract and retain qualified personnel. We believe that awards under our Amended 2008 Plan may serve to broaden the equity participation of key employees and others and further link the long-term interests of management and stockholders. We expect that no further grants will be made under our Amended 2008 Plan after the closing of this offering, but the Amended 2008 Plan will continue to be administered until all awards thereunder are exercised or expire.
Unless the issuance of awards and underlying securities have been registered under the Securities Act and qualified or registered under applicable state securities laws, we issue the awards pursuant to applicable exemptions from such registration or qualification requirements. In connection with any such exempt issuance, the board of directors may require the recipients to provide a written representation and undertaking to the Company, satisfactory in form and scope to us, that such recipient is acquiring such awards and underlying securities for such recipient’s own account as an investment and not with a view to, or for sale in connection with, the distribution of any securities, and that such person will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act and other applicable law, and that if securities are issued without registration, a legend to this effect may be endorsed upon the securities so issued, and to the effect of any additional representations that are appropriate in light of applicable securities laws and rules. We may also order our transfer agent to stop transfers of such shares. We have agreed that if we file a registration statement under the Securities Act for an offering of our securities, we will register the Amended 2008 Plan and the securities subject thereto.
Available Shares
Subject to adjustment upon certain corporate transactions or events, there are 2,357,143 shares of our common stock reserved for issuance pursuant to awards granted under the Amended 2008 Plan, of which 225,234 are available for issuance as of the date of this prospectus. If an Award granted under the Amended 2008 Plan expires, is cancelled, or terminates, the shares subject to any portion of the award that expires, is cancelled, or terminates without having
been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless previously terminated by our board of directors, no new Award may be granted under the Amended 2008 Plan after May 30, 2018, the tenth anniversary of the effective date of the 2008 Plan (hereinafter described).
Administration
The Amended 2008 Plan is administered by our board of directors, in its sole discretion. The board of directors, may from time to time, appoint a committee to administer the Amended 2008 Plan and exercise all powers, authority and discretion of the board of directors thereunder and make all other determinations that it deems necessary or appropriate in connection with the Amended 2008 Plan or the administration or interpretation thereof. This committee shall consist of not less than two directors.
Eligibility and Types of Awards
Employees, directors and officers of the Company or of any Affiliated Entity (as such term is defined in the Amended 2008 Plan), and consultants and advisors who render bona fide services to the Company or any Affiliated Entity not in connection with capital-raising are eligible to be granted awards under our Amended 2008 Plan. Our Amended 2008 Plan provides for the grant of NSOs, performance awards, restricted stock awards, stock appreciation rights, stock bonuses, phantom stock and other forms of equity compensation to our employees, directors and consultants.
Repurchase Rights
Each recipient agrees as a condition to receipt of an award that, in connection with the termination of service of the recipient, the Company, within 60 days of the later of the date of termination or the date of exercise, will have the right to purchase all of the shares that the recipient acquired or will acquire through the exercise of applicable options. This right will terminate upon the closing of this offering.
Termination of Service
AwardsWarrant will be exercisable, by a recipient (orat the recipient’s successor in interest) following such recipient’s termination of service for any reason other than Cause (as defined in the Amended 2008 Plan) for a period of two years (90 days if the Company’s stock is publicly traded) and only to the extent that installments thereof had become exercisable on or prior to the date of such termination.
Change in Control
Upon a Change in Control (as defined in the Amended 2008 Plan), all outstanding options will vest and become immediately exercisable in full, the restrictions on all shares of restricted stock, phantom stock or other stock-based awards shall lapse immediately and all performance goals or other vesting criteria of performance-based shares shall be deemed to be met and payment made immediately.
Lock-Up Agreements
Each recipient agrees as a condition to receipt of an Award that, in connection with any public offering by us of our equity securities, and upon our request and that of the principal underwriter (if any) in such public offering, any shares of common stock acquired or that may be acquired upon exercise or vesting of an Award may not be sold, offered for sale, encumbered, or otherwise disposed of or subjected to any transaction that will involve any sales of our securities, without our prior written consent or that of such underwriter, as the case may be, for a period of not more than 180 days after the effective date of the registration statement for such public offering. Each recipient will, if requested by us or the principal underwriter, enter into a separate agreement to this effect.
2008 Equity Incentive Plan
There are 111,762 stock options currently outstanding which were granted under our 2008 Plan. The 2008 Plan and the Amended 2008 Plan are substantially similar except as noted below.
Repurchase Rights
The 2008 Plan does not provide the Company any rights of repurchase.
Termination of Service
The 2008 Plan allows for awards that have become exercisable to be exercisable by the recipient for a period lasting until the tenth anniversary of the grant date.
Lock-Up Agreements
The 2008 Plan provides for a lock-up period of not more than 60 days after the effective date of the registration statement for a public offering.
Retention Bonus Plan
We have adopted the ContraFect Corporation Retention Bonus Plan (the “Retention Plan”) in order to reward and retain our key employees, including our Named Executive Officers.
Under the Retention Plan, participants will vest in and become eligible to receive awards equal to a fixed dollar amount (the “Award Amount”), upon the earliest to occur of any of the following events: (i) the IPO; (ii) a Change of Control (as defined in the Retention Plan); (iii) May 31, 2015; and (iv) a participant’s termination of employment due to death or Disability (as defined in the Retention Plan) (each such event, a “Payment Event”).
In the event of an IPO or Change in Control, participants who are then employed by us shall be eligible to receive a payment in an amount equal to 1.82 times each participant’s Award Amount. For an IPO Payment Event, we intend to pay each participant’s Award Amount in shares of our common stock, with a lump sum cash payment in respect of any fractional shares. For a Change of Control Payment Event, we intend to pay each participant’s Award Amount in the same form of consideration that the holders of our common shares receive in the transaction. We intend to pay Award Amounts that vest upon an eligible termination or May 31, 2015 in a lump sum cash payment.
Participants whose employment is terminated for any reason other than death or Disability will immediately forfeit their award under the Retention Plan. Payment of Award Amounts will occur within 60 days following the applicable Payment Event, but in no event will payment occur after March 15 of the year following the year in which the applicable Payment Event occurs. Participants will receive an award agreement setting forth each participant’s Award Amount and additional terms and conditions. The Board, or a committee thereof, will administer the Retention Plan.
On April 1, 2014, we awarded approximately $533,000 in total Award Amounts to participants in the Retention Plan.
2014 Omnibus Incentive Plan
Our board of directors adopted our 2014 Omnibus Incentive Plan, or the 2014 Plan, on April 29, 2014. Our stockholders approved the 2014 Plan in June 2014. The 2014 Plan will become effective immediately upon the signing of the underwriting agreement for this offering. The 2014 Plan will terminate on April 28, 2024, unless sooner terminated by our board of directors. Our 2014 Plan provides for the grant of ISOs to our employees and
for the grant of NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, performance-based cash awards and other forms of equity compensation to our employees, directors and consultants. Additionally, our 2014 Plan provides for the grant of performance cash awards to our employees, directors and consultants.
Authorized shares
The maximum number of shares of our common stock that may be issued under our 2014 Plan will consist of (i) 571,429 shares of common stock; (ii) the shares of our common stock remaining available for issuance under the Amended 2008 Plan on the date of this offering and (iii) the shares of our common stock subject to awards granted under the Amended 2008 Plan that expire or terminate for any reason prior to exercise or settlement, are forfeited because of the failure to vest in those shares, or are otherwise reacquired or withheld to satisfy a tax withholding obligation in connection with such awards if, as, and when such shares are subject to such events, which aggregate number of shares will not exceed 1,214,285 shares, with such shares subject to adjustment to reflect any split of our common stock happening prior to the effectiveness of the registration statement of which this prospectus forms a part. Additionally, the number of shares of our common stock reserved for issuance under our 2014 Plan will automatically increase on January 1option of each year, beginning on January 1, 2015 and ending on and including January 1, 2024, by 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. The maximum number of shares that may be issued upon the exercise of ISOs under our 2014 Plan is 714,285 (subject to adjustment to reflect any split of our common stock).
Shares issued under our 2014 Plan include authorized but unissued or reacquired shares of our common stock. Shares subject to stock awards granted under our 2014 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, do not reduce the number of shares available for issuance under our 2014 Plan. Additionally, shares issued pursuant to stock awards under our 2014 Plan that we repurchase or that are forfeited, as well as shares used to pay the exercise price of a stock award or to satisfy the tax withholding obligations related to a stock award, become available for future grant under our 2014 Plan.
Administration
Our board of directors, or a duly authorized committee of our board of directors, will administer our 2014 Plan. Our board of directors may also delegate to one or more of our officers the authority to (i) designate employees (other than officers) to receive specified stock awards, and (ii) determine the number of shares of our common stock to be subject to such stock awards. Subject to the terms of our 2014 Plan, the board of directors has the authority to determine the terms of awards, including recipients, the exercise, purchase or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share of our common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of consideration, if any, payable upon exercise or settlement of the award and the terms of the award agreements.
The board of directors has the power to modify outstanding awards under our 2014 Plan. The board of directors has the authority to reprice any outstanding option or stock appreciation right, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the consent of any adversely affected participant.
Section 162(m) limits
At such time as is necessary for compliance with Section 162(m) of the Code regarding the tax deductibility of compensation expense, no participant may be granted stock awards covering more than 714,285 shares of our common stock (subject to adjustment to reflect any split of our common stock) under our 2014 Plan during any
calendar year pursuant to stock options, stock appreciation rights and other stock awards whose value is determined by reference to an increase over an exercise price or strike price of at least 100% of the fair market value of our common stock on the date of grant. Additionally, no participant may be granted in a calendar year a performance stock award covering more than 714,285 shares of our common stock (subject to adjustment to reflect any split of our common stock) or a performance cash award having a maximum value in excess of $5,000,000 under our 2014 Plan. These limitations are intended to give us the flexibility to grant compensation that will not be subject to the $1,000,000 annual limitation on the income tax deductibility imposed by Section 162(m) of the Code.
Performance awards
We believe our 2014 Plan permits the grant of performance-based stock and cash awards that may qualify as performance-based compensation that is not subject to the $1,000,000 limitation on the income tax deductibility imposed by Section 162(m) of the Code. Our compensation committee may structure awards so that the stock or cash will be issued or paid only following the achievement of certain pre-established performance goals during a designated performance period. However, we retain the discretion to grant awards under the 2014 Plan that may not qualify for full deductibility.
Our compensation committee may establish performance goals by selecting from one or more performance criteria, including:
initiation of phases of clinical trials and/or studies by specified dates;
patient enrollment rates;
budget management;
regulatory body approval with respect to products, studies and/or trials;
achievement of specified regulatory milestones;
completion of research projects resulting in clinical candidates;
completion of patent applications of patent issuances;
achievement of specified research project or intellectual property milestones;
implementation or completion of corporate projects or processes;
stock price or stock price performance;
earnings or other specified earnings-related measurements;
operating income of other specified profit measurements;
total stockholder return;
return on equity or average stockholders’ equity;
return on assets, investment, or capital employed;
margin (including gross margin);
operating cash flow or cash flow per share;
sales or revenue targets;
expenses and cost reduction goals;
improvement in or attainment of working capital levels;
capital expenditures;
employee retention; and
to the extent that an award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by our board of directors.
Corporate transactions
Our 2014 Plan provides that in the event of certain specified significant corporate transactions, as defined under our 2014 Plan, each outstanding award will be treated as the administrator determines. The administrator may (i) arrange for the assumption, continuation or substitution of a stock award by a successor corporation, (ii) arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation, (iii) accelerate the vesting,holder, in whole or in part, of the stock award and provide for its termination prior to the transaction and arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by us or (iv) cancel the stock award prior to the transaction in exchange for a cash payment, if any, determined by our board of directors. The plan administrator is not obligated to treat all stock awards or portions of stock awards, even those that are of the same type, in the same manner.
Plan amendment or termination
Our board of directors has the authority to amend, suspend, or terminate our 2014 Plan, provided that such action does not materially impair the existing rights of any participant without such participant’s written consent. No ISOs may be granted after the tenth anniversary of the date our board of directors adopted our 2014 Plan.
Pension Benefits
We do not maintain any defined benefit pension plans.
Nonqualified Deferred Compensation
We do not maintain any nonqualified deferred compensation plans.
401(k) Retirement Plan
We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. In general, all of our employees are eligible to participate beginning on the first day of their employment. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal to $17,500 in 2013, and have the amount of the reduction contributed to the 401(k) plan.
Limitation of Liability and Indemnification
Our certificate of incorporation, as amended upon the closing of this offering, limits the personal liability of directors for breach of fiduciary duty to the maximum extent permitted by the Delaware General Corporation Law and provides that no director will have personal liabilitydelivering to us or to our stockholders for monetary damages for breach of fiduciary duty or other duty as a director. However, these provisions do not eliminate or limit the liability of any of our directors:
for any breach of the director’s duty of loyalty to us or our stockholders;
for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law;
for voting or assenting to unlawful payments of dividends, stock repurchases or other distributions; or
for any transaction which the director derived an improper personal benefit.
Any amendment to or repeal of these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to such amendment or repeal. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.
In addition, our certificate of incorporation, which will become effective upon the closing of this offering, provides that we must indemnify our directors and officers and we must advance expenses, including attorneys’ fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions.
We maintain a general liability insurance policy that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers. In addition, we have entered into indemnification agreements with certain of our directors, and we intend to enter into indemnification agreements with all of our directors and executive officers. These indemnification agreements may require us, among other things, to indemnify each such director for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by him in any action or proceeding arising out of his service as one of our directors.
Certain of our non-employee directors may, through their relationships with their employers, be insured and/or indemnified against certain liabilities incurred in their capacity as members of our board of directors.
Rule 10b5-1 Sales Plans
Following the closing of this offering, our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from the director or officer. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.
Director Compensation
Our non-employee directors are compensated on annual basis for their services on the board of directors as follows:
each non-employee director receives an annual cash retainer of $40,000;
each non-employee director receives an annual stock option grant to purchase 14,285 shares of our common stock, generally granted in the first quarter of each calendar year;
the Chairman of the board of directors, each Chairman of a committee of the board of directors or a member of a committee of the board of directors, receives additional cash compensation as follows:
Chairman of the board of directors receives an additional annual retainer of $20,000;
Chairman of the audit committee receives an additional annual retainer of $15,000;
Chairman of the compensation committee receives and additional annual retainer of $10,000;
Chairman of each of the science and technology committee and the nominating and governance committee receives an additional annual retainer of $7,500; and
member of the audit committee, compensation committee, science and technology committee or the nominating and governance committee—with respect to each such membership, an additional annual retainer of $5,000.
each non-employee director receives an initial stock option grant to purchase 28,571 shares of our common stock upon being appointed to the board, granted as soon as reasonably practicable following the director’s appointment.
We generally grant stock options to our non-employee directors in the first quarter of each fiscal year in recognition of their annual service on our board of directors. These stock options have anduly executed exercise price equal to the fair market value of our common stock on the date of grant and have a term of ten years from the date of grant, subject to the director’s continued service on our board of directors. The stock options vest as to 25% of the original number of shares underlying such options at the beginning of each calendar quarter.
The initial stock options granted to non-employee directors have an exercise price equal to fair market value on the date of grant and have a term of ten years from the date of grant, subject to the director’s continued service. The initial option grant vests 25% on the date of grant and 25% on each of the first three anniversaries of the date of grant.
Each member of our board of directors is also entitled to be reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the board of directors and any committee on which he serves.
In April 2014, Dr. Pomerantz, Mr. Low and Dr. Otto were elected to the board of directors. Each has been granted an initial stock option grant to purchase 28,571 of our common stock and will receive a pro-rated portion of the annual cash retainer. In addition, Mr. Low was elected to serve as the chairman of the audit committee, for which he will receive an additional $15,000 cash retainer, pro-rated based upon the date of his appointment. Dr. Pomerantz was elected to serve as the chairman of the science and technology committee, for which he will receive an additional $7,500 cash retainer, pro-rated based on the date of his appointment.
Ms. Gregory was elected to our board of directors in April 2014. She does not receive additional compensation for her services as a board member.
The following table sets forth in summary form information concerning the compensation that we paid or awarded during the year ended December 31, 2013 to each of our non-employee directors:
| | | | | | | | | | | | | | | | |
Name | | Fees Earned
or Paid in
Cash ($) | | | Option Awards ($) | | | Other
Compensation ($) | | | Total ($) | |
Sol Barer, Ph.D. | | $ | 56,500 | | | $ | 132,560 | (1) | | $ | — | | | $ | 189,060 | |
Sir Richard Sykes, FRS. | | $ | 55,000 | | | $ | 77,168 | (2) | | $ | — | | | $ | 132,168 | |
David Scheinberg, M.D., Ph.D. | | $ | 56,500 | | | $ | 73,851 | (3) | | $ | — | | | $ | 130,351 | |
Isaac Blech. | | $ | 58,000 | | | $ | 129,205 | (4) | | $ | — | | | $ | 187,205 | |
Cary Sucoff. | | $ | 55,000 | | | $ | 84,695 | (5) | | $ | 75,000 | (6) | | $ | 214,695 | |
Shengda Zan | | $ | 30,000 | | | $ | 30,882 | | | $ | — | | | $ | 60,882 | |
(1) | Includes $101,678 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 114,284 shares of our common stock pursuant to the Exchange Offer. |
(2) | Includes $46,286 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 57,142 shares of our common stock pursuant to the Exchange Offer. |
(3) | Includes $13,224 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 14,285 shares of our common stock pursuant to the Exchange Offer. |
(4) | Includes $98,323 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 114,283 shares of our common stock pursuant to the Exchange Offer. |
(5) | Includes $24,262 representing the estimated fair value calculated with respect to the repricing of options to purchase an aggregate of 28,570 shares of our common stock pursuant to the Exchange Offer. |
(6) | Represents compensation received under a consulting agreement we entered into with Mr. Sucoff. See “—Certain Relationships and Related Party Transactions—Consulting Agreement.” |
In March and April 2014, our board of directors granted stock options to our directors, pursuant to our Amended 2008 Plan, as follows:
| | | | | | | | | | | | |
Name | | Option Award
(#) | | | Option
Exercise
Price
($/share) | | | Grant Date
Fair Value | |
Sol Barer, Ph.D. | | | 14,285 | | | $ | 4.27 | | | $ | 38,516 | |
David Scheinberg, M.D., Ph.D. | | | 14,285 | | | $ | 4.27 | | | $ | 38,516 | |
Isaac Blech | | | 14,285 | | | $ | 4.27 | | | $ | 38,516 | |
Cary Sucoff | | | 14,285 | | | $ | 4.27 | | | $ | 38,516 | |
Shengda Zan | | | 14,285 | | | $ | 4.27 | | | $ | 38,516 | |
Sir Richard Sykes, FRS | | | 14,285 | | | $ | 4.27 | | | $ | 38,516 | |
David N. Low, Jr. | | | 28,571 | | | $ | 4.27 | | | $ | 85,806 | |
Michael J. Otto, Ph.D. | | | 28,571 | | | $ | 4.27 | | | $ | 85,806 | |
Roger Pomerantz, M.D. | | | 28,571 | | | $ | 4.27 | | | $ | 82,651 | |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2010, we have engaged in the following transactions with our directors, executive officers, beneficial owners of more than 5% of our voting securities, and affiliates of our directors, executive officers and holders of more than 5% of our voting securities, other than equity and other compensation, termination, change in control and other arrangements, which are described under “Executive Compensation.”
Registration Rights
Holders of our preferred stock, as well as the holders of option grants issued pursuant to our Amended 2008 Plan and our 2008 Plan, beginning 180 days after the effective date of this registration statement, have the right to require us to include the shares of our common stock issuable upon conversion of their preferred shares and exercise of their options, respectively, in certain registration statements we may file with the SEC. In addition, holders of our Convertible Notes due 2015, beginning 180 days after the effective date of this registration statement, have the right to require us to include in certain registration statements we may file with the SEC the shares of our common stock underlying the warrants that they received in connection with their purchase of our Convertible Notes due 2015. Further, Maxim Group LLC (“Maxim”), has certain registration rights in connection with the representative’s warrant as described under “Underwriting—Commission and Expenses.”
We are required to pay all expenses, other than underwriting discounts and commissions, relating to all such shares of our common stock that we are required to include in any registration statement we file with the SEC.
The registration rights described above will terminate, as to any given holder of registrable securities, when such holder of registrable securities is able to sell all of such holder’s registrable securities pursuant to Rule 144 under the Securities Act in a single transaction without registration or any other restrictions.
Transactions with Our Directors
Mr. Sucoff, one of our directors, owns and operates Equity Source Partners, LLC (“ESP”), which acted as a placement agent in connection with offerings of our Series A preferred stock in 2009 and 2010, and in connection therewith, Mr. Sucoff and designees of ESP received warrants to purchase an aggregate of 96,425 shares of our common stock. The warrants issued for services as a placement agent had an aggregate estimated fair value at issuance of $55,907 and were recorded as a reduction in the proceeds of the related offering. Mr. Sucoff has received option grants to purchase an aggregate of 71,425 shares of our common stock, with an aggregate estimated fair value at the time of grant of $87,050, for his services as a member of our board of directors, and options and warrants to purchase an aggregate of 42,855 shares of our common stock, with an aggregate estimated fair value at the time of issuance of $49,178, for his services as a consultant.
In 2011, Dr. Scheinberg, one of our directors, purchased 30,000 shares of Series C preferred stock, for a total of $99,000, which are convertible into 10,963 shares of our common stock. Dr. Scheinberg received a warrant to purchase 5,714 shares of our common stock in connection with this investment. Dr. Scheinberg has received option grants to purchase an aggregate of 85,710 shares of our common stock, with an aggregate estimated fair value at the time of grant of $116,795, for his services as a member of our board of directors.
Mr. Blech, one of our directors, through four trusts, purchased an aggregate of 2,392,532 shares of Series B and Series C preferred stock, for a total of $6.5 million, which together, are convertible into 898,263 shares of our common stock. Such trusts also own an aggregate of 171,427 shares of our common stock, which were purchased for a total of $120,000, pursuant to the exercise of warrants issued to them in connection with the purchase of Series B preferred stock. Mr. Blech has also been issued options to purchase an aggregate of 71,425 shares of our common stock, with an aggregate estimated fair value at the time of grant of $91,324, for his services as a member of our board of directors. Mr. Blech has also been granted options to purchase 71,428 shares of our common stock, with an aggregate estimated fair value at the time of grant of $45,660, for his previous services to the Company.
In June 2013, Dr. Barer, one of our directors, purchased $1.0 million principal amount of our Convertible Notes due 2015, at face value, and received related warrants.
In March 2014, Dr. Barer and Ms. Gregory, our Chief Executive Officer, purchased $1.0 million and $25,000 principal amount, respectively, of our Convertible Notes due 2015, at face value, and received related warrants.
In June 2014, Mr. Low, one of our directors, purchased $90,000 principal amount of our Convertible Notes due 2015, at face value, and received related warrants. Additionally, Alpha Spring Limited, for which Mr. Zan, one of our directors, is the sole director, purchased $831,350 principal amount of our Convertible Notes due 2015, at face value, and received related warrants.
Consulting Agreement
In January of 2012, we entered into a consulting agreement with Mr. Sucoff providing for total consideration of $250,000 and warrants to purchase 42,855 shares of our common stock. Mr. Sucoff agreed to provide professional consultation services regarding matters relating to financing. The first payment of $100,000 and warrants to purchase 14,285 shares of our common stock was made at the closing of our Series C Convertible Preferred Stock financing. In May 2013, our board of directors approved the second payment of $75,000 as well as the issuance of a stock option grant, instead of warrants, to purchase 14,285 shares of our common stock. The final payment was approved by our board of directors at $50,000. The agreement can be terminated by Mr. Sucoff or us upon 30 days’ prior written notice.
Indemnification Agreements
Our certificate of incorporation in effect upon the closing of this offering provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we intend to enter into indemnification agreements with our directors. See “Executive Compensation—Limitation of Liability and Indemnification” for additional information regarding these agreements. We maintain insurance policies for director and officer liability providing for maximum coverage in the amount of $10 million.
Policies and Procedures for Related Person Transactions
Our board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship in which we are a participant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or 5% stockholders, or their immediate family members, each of whom we refer to as a “related person,” has a direct or indirect material interest.
If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our Chief Operating Officer or principal financial officer. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our audit committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the committee will review, and, in its discretion, may ratify the related person transaction. The policy also permits the chairman of the committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by the committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually.
A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the committee will review and consider:
the related person’s interest in the related person transaction;
the approximate dollar value of the amount involved in the related person transaction;
the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss;
whether the transaction was undertaken in the ordinary course of our business;
whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party;
the purpose of, and the potential benefits to us of, the transaction; and
any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.
The committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the transaction is in our best interests. The committee may impose any conditions on the related person transaction that it deems appropriate.
Any member of the audit committee who is a related person with respect to a transaction under review will not be able to participate in the deliberations or vote on the approval or ratification of the transaction. However, such a director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.
In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, our board of directors has determined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions for purposes of this policy:
interests arising solely from the related person’s position as an executive officer of another entity (whether or not the person is also a director of such entity), that is a participant in the transaction, where (a) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (b) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction and (c) the amount involved in the transaction is less than the greater of $200,000 or 5% of the annual gross revenues of the company receiving payment under the transaction; and
a transaction that is specifically contemplated by provisions of our charter or by-laws.
The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in the manner specified in its charter.
We did not have a written policy regarding the review and approval of related person transactions prior to this offering. Nevertheless, with respect to such transactions, it was our policy for our board of directors to consider the nature of and business reason for such transactions, how the terms of such transactions compared to those which might be obtained from unaffiliated third parties and whether such transactions were otherwise fair to and in the best interests of, or not contrary to, our best interests. In addition, all related person transactions required prior approval, or later ratification, by our board of directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of our common stock as of the date of this prospectus, and the anticipated beneficial ownership percentages immediately following this offering, of:
each of our directors;
each of our Named Executive Officers;
all of our directors and executive officers as a group; and
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our outstanding shares of common stock.
Each stockholder’s percentage ownership before the offering is based on 13,834,646 shares of our common stock outstanding as of the date of this prospectus (after giving effect to the issuance of 81,947 shares of common stock as consideration for the interest due on our outstanding Convertible Notes due 2015 on May 31, 2014, the automatic conversion of all outstanding shares of our preferred stock and the automatic conversion of all outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of 12,486,845 shares of our common stock, and the issuance of 253,858 shares of our common stock pursuant to grants made under our retention bonus plan), as adjusted to give effect to this offering. Each stockholder’s percentage ownership after the offering is based on 19,289,191 shares of our common stock outstanding immediately after the completion of this offering. We have granted the underwriters an option to purchase up to an aggregate of 818,181 additional units from us to cover over-allotments, if any, and the table below assumes no exercise of that option.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our common stock. Shares of our common stock subject to options or warrants that are currently exercisable or exercisable with 60 days of the date of this prospectus are considered outstanding and beneficially owned by the person holding the options or warrants for the purposes of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Except as otherwise set forth below, the address of the beneficial owner is c/o ContraFect Corporation, 28 Wells Avenue, 3rd Floor, Yonkers, New York 10701.
| | | | | | | | | | | | |
| | | Number of
Shares of
Common
Stock
Beneficially
Owned | | | Percentage of
Shares Beneficially
Owned | |
| | | | Before
Offering
(%) | | | After
Offering
(%) | |
5% Stockholders: | | | | | | | | | | | | |
Alpha Spring Limited (1) | | | 1,559,011 | | | | 11.3 | | | | 8.0 | |
Liberty Charitable Remainder Trust (2) | | | 780,698 | | | | 5.6 | | | | 4.0 | |
Robert C. Nowinski, Ph.D. (3) | | | 1,146,640 | | | | 7.8 | | | | 5.7 | |
Sol Barer, Ph.D. (4) | | | 1,452,861 | | | | 10.1 | | | | 7.3 | |
| | | |
Directors and Named Executive Officers: | | | | | | | | | | | | |
Sol Barer, Ph.D. (4) | | | 1,452,861 | | | | 10.1 | | | | 7.3 | |
Isaac Blech (5) | | | 1,445,877 | | | | 10.3 | | | | 7.4 | |
David N. Low, Jr. (6) | | | 61,786 | | | | * | | | | * | |
Michael J. Otto, Ph.D (7) | | | 7,143 | | | | * | | | | * | |
Roger J. Pomerantz, M.D. F.A.C.P. (8) | | | 7,143 | | | | * | | | | * | |
David Scheinberg, M.D., Ph.D. (9) | | | 100,770 | | | | * | | | | * | |
Cary Sucoff (10) | | | 166,429 | | | | 1.2 | | | | * | |
Sir Richard Sykes, FRS (11) | | | 44,283 | | | | * | | | | * | |
Shengda Zan (12) | | | 1,594,686 | | | | 11.4 | | | | 8.2 | |
Julia P. Gregory (13) | | | 260,060 | | | | 1.9 | | | | 1.3 | |
David Huang, M.D., Ph.D. (14) | | | 81,526 | | | | * | | | | * | |
Michael Wittekind, Ph.D. (15) | | | 72,665 | | | | * | | | | * | |
Robert C. Nowinski, Ph.D. (3) | | | 1,146,640 | | | | 7.8 | | | | 5.7 | |
All current directors and executive officers as a group (15 persons) (16) | | | 5,505,253 | | | | 35.4 | | | | 28.5 | |
* | Represents beneficial ownership of less than one percent of our outstanding common stock. |
(1) | The address for Alpha Spring Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. Consists of (a) 1,055,562 shares of common stock issuable upon conversion of preferred stock, (b) 305,121 shares of common stock issuable upon conversion of Convertible Notes due 2015 and (c) 198,328 shares of common stock underlying warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. Mr. Zan, a member of our board of directors, is the sole director of Alpha Spring Limited. |
(2) | The address for Liberty Charitable Remainder Trust is 75 Rockefeller Plaza, 29th Floor, New York, New York 10019. Consists of (a) 100,000 shares of common stock and (b) 680,698 shares of common stock issuable upon conversion of preferred stock. Mr. Blech, a member of our board of directors, is a trustee and one of the beneficiaries of Liberty Charitable Remainder Trust. |
(3) | Consists of (a) 170,557 shares of common stock, (b) 19,654 shares of common stock issuable upon conversion of preferred stock, and (c) 956,429 shares of common stock underlying options that are exercisable as of the date of this prospectus. All of the shares of common stock owned by Dr. Nowinski have been pledged as security. Pursuant to the pledge agreement, Dr. Nowinski has the power to vote or direct the voting of the shares. |
(4) | Consists of (a) 94,179 shares of common stock, (b) 739,028 shares of common stock issuable upon conversion of Convertible Notes due 2015 and (c) 619,654 shares of common stock underlying options and warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(5) | Consists of (a) (i) 100,000 shares of common stock and (ii) 680,698 shares of common stock issuable upon conversion of preferred stock held by Liberty Charitable Remainder Trust, (b) (i) 71,429 shares of common stock and (ii) 367,633 shares of common stock issuable upon conversion of preferred stock held by River Charitable Remainder Unitrust, (c) 32,654 shares of common stock issuable upon conversion of preferred stock held by Harbor Charitable River Trust, (d) 32,654 shares of common stock issuable upon conversion
|
| of preferred stock held by Summit Charitable Remainder Trust, (e) 21,523 shares of common stock issuable upon conversion of preferred stock held by Miriam Blech and (f) 139,286 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(6) | Consists of (a) 33,117 shares of common stock issuable upon conversion of Convertible Notes due 2015 and (b) 28,669 shares of common stock underlying options and warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(7) | Consists of 7,143 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(8) | Consists of 7,143 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(9) | Consists of (a) 2,857 shares of common stock, (b) 12,913 shares of common stock issuable upon conversion of preferred stock, and (c) 85,000 shares of common stock underlying options and warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(10) | Consists of 166,429 shares of common stock underlying options and warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(11) | Consists of 44,283 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(12) | Consists of (a) 1,055,562 shares of common stock issuable upon conversion of preferred stock held by Alpha Spring Limited (b) 305,121 shares of common stock issuable upon conversion of Convertible Notes due 2015 and (c) 237,614 shares of common stock underlying options and warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(13) | Consists of (a) 62,775 shares of common stock, (b) 9,238 shares of common stock issuable upon conversion of Convertible Notes due 2015, and (c) 188,147 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(14) | Consists of (a) 30,826 shares of common stock, and (b) 50,700 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(15) | Consists of (a) 38,594 shares of common stock, and (b) 34,071 shares of common stock underlying options that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
(16) | Consists of (a) 496,023 shares of common stock, (b) 2,212,767 shares of common stock issuable upon conversion of preferred stock, (c) 1,086,504 shares of common stock issuable upon conversion of Convertible Notes due 2015 and (d) 1,709,959 shares of common stock underlying options and warrants that are exercisable as of the date of this prospectus or will become exercisable within 60 days after such date. |
DESCRIPTION OF SECURITIES
The following description of our securities and provisions of our amended and restated certificate of incorporation and amended and restated by-laws are summaries and are qualified by reference to the certificate of incorporation and the by-laws that will be in effect upon the closing of this offering. We have filed copies of these documents with the SEC as exhibits to our registration statement of which this prospectus forms a part. The description of the securities reflects changes to our capital structure that will occur upon the closing of this offering.
Upon the closing of this offering, our authorized capital stock will consist of 125,000,000 shares of our common stock, par value $0.0001 per share, and 25,000,000 shares of our preferred stock, par value $0.0001 per share, all of which preferred stock will be undesignated.
As of the date of this prospectus, we had issued and outstanding:
1,093,944 shares of our common stock held by 187 stockholders of record;
2,200,000 shares of our Series A preferred stock;
4,651,163 shares of our Series B preferred stock;
9,090,909 shares of our Series C preferred stock;
151,515 shares of our Series C-1 preferred stock; and
an aggregate $15.0 million principal amount of our Convertible Notes due 2015.
On May 28, 2014, our Board of Directors declared the Dividend pursuant to which we will issue 605,645 of Series A preferred stock, 1,172,645 shares of Series B preferred stock, 1,379,388 shares of Series C preferred stock and 2,395 shares of SeriesC-1 preferred stock in payment of the Dividend.
Upon the closing of this offering, all of the outstanding shares of our preferred stock, including the Dividend described above will automatically convert into an aggregate of 6,947,562 shares of our common stock.
Common Stock
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Any matter other than the election of directors shall be determined by a majority of the votes cast. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.
In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
Under the terms of our amended and restated certificate of incorporation that will become effective upon the closing of this offering, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Upon the closing of this offering, there will be no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.
Class A and Class B Warrants
In connection with this offering, we are issuing two types of Warrants: Class A Warrants and Class B Warrants.
The Class A Warrants issued in this offering entitle the registered holder to purchase one share of our common stock at a price equal to $4.80, subject to adjustment as discussed below, immediately following the issuance of such Class A Warrant and terminating at 5:00 p.m., New York City time, 30 months after the closing of this offering. We expect to list each Class A Warrant on the NASDAQ Capital Market, in the form of a unit that also includes one Class B Warrant and one share of our common stock, under the symbol “CFRXU”, and after separation as a standalone security under the symbol “CFRXW.”
We may redeem the outstanding Class A Warrants without the consent of any third party or the representative of the underwriters:
in whole and not in part;
at a price of $0.01 per Class A Warrants, so long as a registration statement relating to the common stock issuable upon exercise of the Class A Warrants is effective and current;
upon not less than 30 days’ prior written notice of redemption; and
if, and only if, the last reported sale price of a share of our common stock equals or exceeds 200% of the Class A Warrant exercise price (subject to adjustment for splits, dividends, recapitalization and other similar events) for any 20 trading days within a 30 consecutive trading day period ending three business days before we send the notice of redemption to the holders of Class A Warrants.
If the foregoing conditions are satisfied and we call the Warrants for redemption, each holder of Class A Warrants will then be entitled to exercise his, her or its Class A Warrants prior to the date scheduled for redemption. However, there can be no assurance that the price of the common stock will exceed the Class A Warrants exercise price after the redemption call is made.
The Class B Warrants issued in this offering entitle the registered holder to purchase one-half share of our common stock at a price equal to $4.00 per full share, subject to adjustment as discussed below, immediately following the issuance of such Class B Warrant and terminating at 5:00 p.m., New York City time, 15 months after the closing of this offering. We expect to list each Class B Warrant on the NASDAQ Capital Market, in the form of a unit that also includes one Class A Warrant and one share of our common stock, under the symbol “CFRXU”, and after separation as a standalone security under the symbol “CFRXZ”.
We may not call the Class B Warrants for redemption.
The Warrants will be issued pursuant to a Class A Warrant Agreement and a Class B Warrant Agreement between us and the Warrant Agent. Certain provisions of the Warrants are set forth herein but are only a summary and are qualified in their entirety by the relevant provisions of such Warrant Agreements, the form of which will be filed as exhibits to the registration statement of which this prospectus forms a part.
The exercise price and number of shares of common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend or recapitalization, reorganization, merger or consolidation. However, the Warrants will not be adjusted for issuances of common stock at prices below their respective exercise prices.
The Warrants may be exercised upon surrender of the applicable Warrant Certificate on or prior to the applicable expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the Warrant Certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us,in full for the number of Warrants being exercised. Underpurchased shares upon such exercise (except in the termscase of the Warrant Agreement, we have agreed to use our reasonable best efforts to maintain the effectiveness of the registration statement and current prospectus relating to common stock issuable upona cashless exercise of the Warrants until the expiration of the Warrants. The Warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their Warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.as discussed below).
Exercise Limitation
A holder (together with its affiliates) may not exercise any portion of a Warrantthe Public Warrants to the extent that the holder together with its affiliates and any other person or entity acting as a group, would beneficially own more than 4.99% of the outstanding common stock immediately after exercise as such percentage ownership is determined in accordance with the terms of the Warrant,(the “Beneficial Ownership Limitation”), except that upon at least 61 days’ prior notice from the holder to us, the holder may waive such limitation.
increase the Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation in no event exceeds 9.99%. No fractional shares of common stock will be issued uponin connection with the exercise of a Public Warrant. In lieu of fractional shares, we will pay the Warrants. If,holder an amount in cash equal to the fractional amount multiplied by the exercise price or round such fractional share to a whole share.
Cashless Exercise
In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may, in the event the shares underlying the Public Warrants, or the
17
