PART I
FORWARD-LOOKING STATEMENTS
This report and the
information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties,
as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment
of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results
and outcomes discussed in the forward-looking statements. In addition, statements that “we believe” and similar statements
reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the
date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be
limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or
review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not
to unduly rely upon these statements.
The forward-looking
statements are contained principally in the sections entitled “Business,” “Risk Factors,”
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements,
other than statements of historical facts, contained in this document, including statements regarding our business, operations
and financial performance and conditions, as well as our plans, objectives and expectations for our business operations and financial
performance and condition, are forward-looking statements. These statements relate to future events or to our future financial
performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking
statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “might,” “plan,” “predict,”
“project,” “potential,” “should,” “target,” “will,” “would,”
or the negative of those terms and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain these identifying words.
The forward-looking
statements in this report include, among other things, statements about:
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estimates regarding our financial performance, including future revenue, expenses and capital requirements;
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our expected cash position and ability to obtain financing in the future on satisfactory terms
or at all;
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expectations regarding the our plans to research, develop and commercialize our current and future
product candidates, including TARA-002, and IV Choline Chloride;
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expectations regarding the safety and efficacy of our product candidates;
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expectations regarding the timing, costs and outcomes of our planned clinical trials;
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expectations regarding potential market size;
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expectations regarding the timing of the availability of data from our clinical trials;
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expectations regarding the clinical utility, potential benefits and market acceptance of our product
candidates;
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expectations regarding our commercialization, marketing and manufacturing capabilities and strategy;
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the implementation of our business model, strategic plans for our business, product candidates
and technology;
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expectations regarding our ability to identify additional products or product candidates with significant
commercial potential;
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developments and projections relating to the combined our competitors and industry;
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our ability to remain listed on the Nasdaq Capital Market;
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the impact of government laws and regulations;
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the timing or likelihood of regulatory filings and approvals; and
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our ability to protect our intellectual property position.
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We may not actually
achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance
on our forward-looking statements. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements
we make. We have included important factors in the cautionary statements included in this document, particularly in the “Risk
Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking
statements that we make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time
to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements we may make. Our forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments we may make.
We undertake no obligation
to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given
these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. All forward-looking
statements are qualified in their entirety by this cautionary statement.
Merger of Proteon
Therapeutics, Inc. and ArTara Therapeutics, Inc.
On January 9, 2020,
ArTara Therapeutics, Inc. (formerly Proteon Therapeutics, Inc., the “Company”), and privately-held ArTara Subsidiary,
Inc. (“Private ArTara”), completed the merger and reorganization, or the Merger, in accordance with the terms of the
Agreement and Plan of Merger and Reorganization, dated September 23, 2019, or the Merger Agreement, by and among the Company, Private
ArTara and REM 1 Acquisition, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), whereby Merger Sub merged
with and into Private ArTara, with Private ArTara surviving as a wholly owned subsidiary of the Company. The Merger was structured
as a reverse merger and Private ArTara was determined to be the accounting acquirer based on the terms of the Merger and other
factors.
On January 9, 2020,
in connection with, and prior to the completion of, the Merger, the Company effected a 1-for-40 reverse stock split of its common
stock, or the Reverse Stock Split, Private ArTara changed its name from “ArTara Therapeutics, Inc.” to “ArTara
Subsidiary, Inc.”, and the Company changed its name from “Proteon Therapeutics, Inc.” to “ArTara Therapeutics,
Inc.” All share and per share amounts presented in this annual report on Form 10-K have been adjusted to reflect the Reverse
Stock Split. In addition, immediately following the closing of the Private Placement (defined below), all of the outstanding shares
of the Company’s Series A Preferred Stock were converted into shares of the Company’s common stock. Shares of the Company’s
common stock commenced trading on The Nasdaq Capital Market under the new name and ticker symbol “TARA” as of market
open on January 10, 2020. Unless otherwise noted, all references to share amounts in this Annual Report, including references
to shares or options issued in connection with the Merger and the Financing (as defined below), reflect the Reverse Stock Split.
Under the terms of
the Merger Agreement, the Company issued shares of its common stock (“Common Stock”) to Private ArTara’s stockholders,
at an exchange ratio of 0.190756 shares of Common Stock, after taking into account the Reverse Stock Split, for each share of Private
ArTara common stock outstanding immediately prior to the Merger. ArTara assumed all of the outstanding and unexercised stock options
of Private ArTara, with such stock options now representing the right to purchase a number of shares of Common Stock equal to 0.190756
multiplied by the number of shares of Private ArTara common stock previously represented by such Private ArTara stock options.
The Company also assumed all of the unvested Private ArTara restricted stock awards, which were exchanged for a number of shares
of Common Stock equal to 0.190756 multiplied by the number of shares of Private ArTara common stock previously represented by such
Private ArTara restricted stock awards and unvested to the same extent as such Private ArTara restricted stock awards and subject
to the same restrictions as such Private ArTara restricted stock awards.
The shares of Common
Stock issued to the former stockholders of Private ArTara were registered with the U.S. Securities and Exchange Commission (the
“SEC”) on a Registration Statement on Form S-4 (Reg. No. 333-234549) (the “Registration Statement”).
Prior to the Merger,
we entered into a Subscription Agreement (the “Subscription Agreement”) on September 23, 2019 with certain institutional
investors (the “Purchasers”) which agreement was amended on November 19, 2019. Pursuant to the Subscription Agreement,
as amended, the Company agreed to sell and issue shares of Common Stock and shares of the Company’s newly designated Series
1 Convertible Non-Voting Preferred Stock, par value $0.001 per share (the “Series 1 Preferred Stock”), in a private
placement transaction (the “Private Placement”), as previously disclosed in the Company’s Current Report on Form
8-K filed with the SEC on September 24, 2019. The closing of the Private Placement was completed on January 9, 2020.
At the closing, the
Company sold and issued to the Purchasers 1,896,888 shares of Common Stock at a purchase price of approximately $7.01 per share
(the “Common Stock Purchase Price”), and 3,879.356 shares of Series 1 Preferred Stock at a purchase price of $7,011.47
per share, for an aggregate purchase price of approximately $40.5 million.
At the special meeting
of the Company’s stockholders held on January 9, 2020 (the “Special Meeting”), the Company’s stockholders
approved (1) an amendment to the sixth amended and restated certificate of incorporation of the Company (the “Stock Split
Amendment”) to effect the Reverse Stock Split of the Common Stock and to change the Company’s name from “Proteon
Therapeutics, Inc.” to “ArTara Therapeutics, Inc.” (the “Name Change”); and (2) an amendment to the
sixth amended and restated certificate of incorporation of the Company (together with the Stock Split Amendment, the “Pre-Effective
Time Charter Amendment”) to effect the conversion of all of the outstanding shares of the Company’s Series A Convertible
Preferred Stock into shares of Common Stock (the “Series A Preferred Automatic Conversion”).
On January 9, 2020,
immediately prior to the closing of the Merger, the Company filed the Pre-Effective Time Charter Amendment with the Secretary of
State of the State of Delaware to effect the Reverse Stock Split and the Name Change. As a result of the Reverse Stock Split, the
number of issued and outstanding shares of Common Stock immediately prior to the Reverse Stock Split was reduced to a smaller number
of shares, such that every 40 shares of Common Stock held by a stockholder immediately prior to the Reverse Stock Split were combined
and reclassified into one share of the Company’s common stock. Immediately following the Reverse Stock Split, there were
approximately 557,631 million shares of Common Stock outstanding.
No fractional shares
were issued in connection with the Reverse Stock Split. Any fractional shares resulting from the Reverse Stock Split were rounded
down to the nearest whole number, and each stockholder who would otherwise be entitled to a fraction of a share of Common Stock
upon the Reverse Stock Split (after aggregating all fractions of a share to which such stockholder would otherwise be entitled)
is, in lieu thereof, entitled to receive a cash payment determined by multiplying the fraction of a share of Common Stock to which
each stockholder would otherwise be entitled by the closing price of the Common Stock on the Nasdaq Capital Market on the date
immediately prior to the date on which the Reverse Stock Split is affected.
On January 9, 2020,
immediately following the closing of the Private Placement, the Series A Preferred Automatic Conversion became effective pursuant
to the Pre-Effective Time Charter Amendment. As a result of the Series A Preferred Automatic Conversion, the 18,954 outstanding
shares of the Company’s Series A Convertible Preferred Stock were converted into 476,276 shares of Common Stock (on a post-Reverse
Stock Split basis).
On January 9, 2020,
the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series 1 Convertible Non-Voting Preferred
Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware. The Certificate of Designation
establishes and designates the Series 1 Preferred Stock, and the rights, preferences and privileges thereof.
Each share of Series
1 Preferred Stock is convertible into 1,000 shares of Common Stock, at a conversion price initially equal to the Common Stock Purchase
Price, subject to adjustment for any stock splits, stock dividends and similar events, at any time at the option of the holder,
provided that any conversion of Series 1 Preferred Stock by a holder into shares of Common Stock would be prohibited if, as a result
of such conversion, the holder, together with its affiliates and any other person or entity whose beneficial ownership of the common
stock would be aggregated with such holder’s for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended,
would beneficially own more than 9.99% of the total number of shares Common Stock issued and outstanding after giving effect to
such conversion. Upon written notice to the Company, the holder may from time to time increase or decrease such limitation to any
other percentage not in excess of 19.99% specified in such notice. Each share of Series 1 Preferred Stock is entitled to a preference
of $10.00 per share upon liquidation of the Company, and thereafter will share ratably in any distributions or payments on an as-converted
basis with the holders of Common Stock. In addition, upon the occurrence of certain transactions that involve the merger or consolidation
of the Company, an exchange or tender offer, a sale of all or substantially all of the assets of the Company or a reclassification
of its common stock, each share of Series 1 Preferred Stock will be convertible into the kind and amount of securities, cash and/or
other property that the holder of a number of shares of Common Stock issuable upon conversion of one share of Series 1 Preferred
Stock would receive in connection with such transaction.
The Company was originally
incorporated in Delaware in March 2006, and at that time, acquired Proteon Therapeutics, LLC, the predecessor of ArTara, which
was formed in June 2001.
Unless the context
requires otherwise, references in this Annual Report to “ArTara”, “TARA”, “we”, “us”,
the “Company” and “our” refer to ArTara Therapeutics, Inc. (formerly Proteon Therapeutics, Inc.).
Our principal executive
offices are located at 1 Little West 12th Street, New York, New York 10014, our telephone number is (646) 844-0337 and our website
address is www.artaratx.com. Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
will be made available free of charge on our website as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission, or SEC. The contents of our website are not incorporated into this
Annual Report and our reference to the URL for our website is intended to be an inactive textual reference only. The information
contained on, or that can be accessed through, our website is not a part of this document.
Company Overview
Prior to the Merger,
we were a late-stage biopharmaceutical company focused on the development of novel, first-in-class pharmaceuticals to address the
needs of patients with renal and vascular disease. After the Merger, we became a company that is committed to identifying and advancing
transformative therapies for people with rare and specialty diseases. The Company prioritizes creativity, diverse perspectives
and tenacity to expedite our goal of bringing life-changing therapies to people with limited treatment options, including our current
development programs focused on the treatment of rare diseases in structural disorders as well as rare hepatology/gastrointestinal
and metabolic disorders.
We are a
development-stage, clinical biopharmaceutical company focused on bringing life-saving therapies to patients who suffer from
rare and specialty diseases. The company’s core strategy is to identify and acquire or license overlooked or
undervalued products or product candidates and modernize or optimize development programs for these assets. ArTara’s
current development programs focus on therapeutics for rare structural disorders as well as rare hepatology/gastrointestinal
and metabolic disorders.
TARA-002 / OK-432
TARA-002, ArTara’s lead program, is a follow-on biologic of the
immunotherapy OK-432 (marketed as Picibanil® in Japan and Taiwan by Chugai Pharmaceutical Co., Ltd. (Chugai Pharmaceutical)).
ArTara expects to utilize the same regulatory starting materials as OK-432 and manufacture TARA-002 using an updated version of
the same proprietary processes used to manufacture OK-432. Functionally, ArTara’s lead product is OK-432. ArTara has designated
this product as TARA-002 in order to differentiate the regulatory path in the United States and other geographies from that of
OK-432 in Japan.
TARA-002 is a cell therapy developed from the master cell line of the
same genetically distinct Streptococcus pyogenes (group A, type 3) Su strain as OK-432 and will be manufactured in a similar
manner following Good Manufacturing Practices (GMP). ArTara believes that these two factors will result in a product that is comparable
to OK-432 such that for the development and regulatory applications of TARA-002, it can use the historic data and literature amassed
for OK-432 in the four decades since it was first approved in Japan.
ArTara entered into
an agreement with Chugai Pharmaceutical in June 2019 to support ArTara’s development of TARA-002. The agreement provides
ArTara with exclusive access, for a limited period, to certain materials and documents relating to OK-432 including the master
cell bank of Streptococcus pyogenes used in the manufacture of OK-432. Additionally, the agreement provides technical support
during a certain period. ArTara plans to utilize the materials, proprietary manufacturing process and technical support provided
by Chugai Pharmaceutical to produce TARA-002 at a GMP-compliant facility in the United States. Under the agreement with Chugai
Pharmaceutical, ArTara will have sole responsibility for the development and commercialization of TARA-002 worldwide, excluding Japan and Taiwan.
In Japan, OK-432
is indicated for: the treatment of lymphangiomas (lymphatic malformations); the prolongation of survival time in patients with gastric cancer
(postoperative cases) or primary lung cancer in combination with chemotherapy; and the reduction of cancerous pleural
effusion or ascites in patients with lung cancer or gastrointestinal cancer respectively, head and neck cancer (maxillary
cancer, laryngeal cancer, pharyngeal cancer, and tongue cancer) and thyroid cancer that are resistant to other drugs.
ArTara plans to pursue
development of TARA-002 for the treatment of lymphatic malformations (LMs). ArTara also plans to explore the potential of TARA-002
in other indications where its utility as a sclerosant (an injectable irritant) or as an immunostimulant has been hypothesized
to be of therapeutic benefit.
Lymphatic Malformations
ArTara intends
to initially seek approval of TARA-002 for the treatment of LMs. Lymphatic malformations are rare, non-malignant cysts of the
lymphatic vascular system that primarily form in the head and neck region of children before the age of two. The
International Society for the Study of Vascular Anomalies categorizes LMs as macrocystic, microcystic, or mixed. Macrocystic
LMs are characteristically large, fluid-filled cysts with a thin endothelial lining. Microcystic LMs have very limited
internal space with a thick, irregular endothelial lining. Mixed LMs are comprised of varying degrees of both macrocystic and
microcystic LMs.
In the United States, LMs are present in approximately one in every 4,000 live births. Outside
of Japan and Taiwan, the standard of care for LMs is surgical excision, which is associated with high rates of recurrence and complications.
There are no pharmacotherapies currently approved for LMs except in Japan and Taiwan, where OK-432 is marketed. In these countries,
OK-432 has been the standard of care for LMs for almost 25 years. When OK-432 is administered locally for LMs, it is hypothesized
that innate immune cells within the cyst are activated and produce a strong immune cascade. Neutrophils and monocytes infiltrate
the cyst and various cytokines, including interleukins IL-6, IL-8, IL-12, interferon (IFN)-gamma, tumor necrosis factor (TNF)-alpha,
and vascular endothelial growth factor (VEGF) are secreted by immune cells within the cyst in response to the presence of OK-432.
In concert, these immune activities induce a strong local inflammatory reaction in the cyst wall, resulting in fluid drainage,
shrinkage and fibrotic adhesion of the cyst.
The University of
Iowa led a multi-year study in LMs beginning in the late 1990s that included three separate studies including a randomized, controlled
safety and efficacy study. In this phase 2 clinical trial, 151 patients with LMs (>90% pediatric) were treated with OK-432.
A clinically successful outcome was demonstrated in 94% (74/79) of patients with macrocystic LMs and 63% (25/40) of patients with
mixed LMs who completed treatment per protocol. Following these results, an additional 500 pediatric patients were treated with
OK-432 in the United States at 27 different pediatric referral centers. ArTara has entered into an exclusive license agreement
with the University of Iowa for the data from these clinical trials and is currently analyzing such data.
ArTara plans to request
a meeting with the U.S. Food and Drug Administration (FDA) in 2020 to determine if additional clinical data are needed to support
the submission of a Biologics License Application (BLA) for TARA-002 for the treatment of LMs.
IV Choline Chloride
IV Choline Chloride
is an intravenous (IV) substrate replacement therapy initially in development for patients receiving parenteral (typically intravenous)
nutrition (PN) who have intestinal failure associated liver disease (IFALD).
Choline is a known
important substrate for phospholipids that are critical for healthy liver function. Because PN patients cannot sufficiently absorb
adequate levels of choline and no available PN components contain sufficient amounts of choline to correct this deficit, PN patients
often experience a prolonged progression to hepatic failure and death, with the only known intervention being a dual small bowel
/ liver transplant. If approved, IV Choline Chloride would be the first approved therapy for IFALD. It has been granted Orphan
Drug Designations (ODDs) by the FDA for the treatment of IFALD and the prevention of choline deficiency in PN patients.
ArTara entered into
a license agreement with Dr. Alan Buchman for exclusive rights to the IND, ODDs and other regulatory assets related to IV Choline
Chloride, as well as exclusive rights to the data from previously conducted phase 1 and phase 2 clinical trials led by Dr. Buchman.
Intestinal Failure
Associated Liver Disease
IFALD is associated
with significant morbidity in patients who rely on PN for long-term survival. It is believed that there are multiple contributing
factors to the development of IFALD with a substantial body of literature pointing to choline deficiency as a key cause.
IFALD is uniquely
characterized by the presence of both steatosis (toxic fat accumulation in liver cells) and cholestasis (damage to the biliary
system in the liver) in patients who are chronic (greater than six months) PN users.
The results of a randomized,
controlled, phase 2 clinical trial demonstrated that treatment with IV Choline Chloride resulted in normalization of plasma-free
choline concentrations, improvement of hepatic steatosis, and a clinically meaningful and statistically significant improvement
in cholestasis in patients dependent on PN. ArTara had an end of phase 2 meeting with the FDA in November 2018 and received the
FDA’s support for the design of studies necessary to complete the registration package for IV Choline Chloride for the treatment
of IFALD.
Our Corporate Strategy:
Leveraging the drug
development and commercialization experience of ArTara’s management team, ArTara’s objective is to build a leading
biopharmaceutical company focused on bringing life-saving therapies to patients who suffer from rare and specialty diseases. ArTara’s
core strategy is to identify and acquire or license overlooked or undervalued products or product candidates and modernize or optimize
development programs for these assets. ArTara’s current development programs focus on therapeutics for rare structural disorders,
as well as rare hepatology/gastrointestinal and metabolic disorders.
1. Establish comparability
of OK-432 and TARA-002 and rapidly seek approval for use in Lymphatic Malformations
Utilizing the same genetically distinct Streptococcus-pyogenes strain and proprietary
manufacturing process used by Chugai Pharmaceutical to manufacture OK-432, ArTara plans to produce development batches of TARA-002
and conduct comparability studies using commercial OK-432 (Picibanil®) manufactured in Japan as a reference. ArTara plans to
engage with the FDA in 2020 to seek their agreement on the comparability of the two products. In addition, ArTara plans to discuss
with the FDA whether OK-432’s efficacy and safety database from the clinical trials of more than 600 patients conducted in
the US and led by the University of Iowa, as well as the more than 25 year safety database in LM’s are sufficient for a BLA
submission for TARA-002.
2. Pursue development
and approval of IV Choline Chloride for IFALD
ArTara is in ongoing
discussions with the FDA regarding the development plan for IV Choline Chloride for the treatment of IFALD. ArTara has reached
agreement with FDA on a number of key aspects of the overall clinical program necessary for registration. ArTara plans to start
implementing certain facets of the development plan in 2020.
3. Explore product
expansion opportunities from existing pipeline
The immunological
activity of TARA-002’s reference product, OK-432, has been effectively interrogated in patients in a long list of indications.
We plan to carefully evaluate the case reports and the literature and perform initial in vitro characterization studies
to better understand the mechanism of action of TARA-002 and its potential activity in indications beyond LMs.
4. Continue to leverage
expertise in business development
ArTara’s leadership
team has a strong track record of licensing, acquiring and optimizing product candidates for the treatment of patients with diseases
with limited or no treatment options. ArTara plans on building its therapeutic portfolio by strategically pursuing products and
product candidates that allow it to utilize this expertise to expand the existing pipeline.
Our Pipeline
TARA-002 for the Treatment
of Lymphatic Malformations
Background
ArTara will initially
develop TARA-002 for the treatment of lymphatic malformations. Lymphatic malformations are rare, non-malignant masses that primarily
form in the head and neck region of children before the age of two. While the exact prevalence of LMs is not known, in the United
States, the condition is thought to be present in approximately one in every 4,000 live births. Outside of Japan and Taiwan, the
standard of care is surgical excision, which is associated with high rates of recurrence and complications. There are no approved
pharmacotherapies for LMs, except in Japan and Taiwan where OK-432 is approved. In these countries, OK-432 has been the standard
of care for LMs for over 25 years.
Disease Overview
The exact cause of
LMs is not completely understood; however, there are studies suggesting that somatic genetic mutations may cause the lymphatic
abnormality. One study described the association between observed mutations in the PI3K/AKT1/mTOR pathway and the development of
LMs. This pathway is known to regulate the formation of endothelial cells that line the lymphatic channels. In patients with LMs,
there is a relatively frequent observation of somatic gain of function mutations in the PIK3CA gene. Additionally, five different
point mutations in DNA analyzed from LM tissue have been identified. It remains unclear whether these mutations alone are what
cause LMs.
Lymphatic malformations
are rare, non-malignant cystic masses that primarily form in the head and neck region of children before the age of two. The International
Society for the Study of Vascular Anomalies classifies LMs as either macrocystic, microcystic, or mixed. Macrocystic and microcystic
LMs are differentiated by the size of the fluid-containing portion of the malformation. Macrocystic LMs are characteristically
large, fluid-filled cysts with a thin endothelial lining. Macrocystic LMs are composed of cysts greater than 2 cm3 in size and
present as a soft, fluid-filled swelling beneath normal or slightly discolored skin. Macrocystic LMs are usually located in the
antero-lateral cervical region of the neck; however, it is possible for this type of LM to originate in other areas of the body.
In contrast, microcystic LMs have very limited internal space with a thick irregular endothelial lining. Microcystic LMs are comprised
of cysts less than 2 cm3 in size and are often composed of micro-lymphatic channels that integrate and infiltrate normal soft tissue.
Microcystic LMs can involve both superficial and deep aspects including muscle and bone. Microcystic LMs can thicken or swell causing
enlargement of surrounding soft tissue and bones and can be found on any area of the skin or mucous membrane. Mixed LMs are comprised
of varying degrees of both macrocystic and microcystic LMs.
Treatment
The standard of care
for LMs varies depending on the symptoms and complications that present themselves. One of the most common procedures used to reduce
the size of lymphatic growth is a percutaneous drainage of the lymphatic fluid. This procedure results in significant discomfort
to the pediatric patients and is only a short-term solution that often results in recurrence of the lymphatic fluid. The standard
of care outside Japan and Taiwan for the treatment of LMs is either a partial or complete surgical excision of the cysts. While
surgery is the standard approach to the treatment of LMs in the head and neck, the region is a difficult area to operate in because
of the large number of important anatomical structures in the area. Major venous and arterial trunks travel through the neck, as
do important nerves. Surgery on such malformations frequently results in high rates of recurrence and complications including life-long
chronic conditions, such as damage to nerves and other important structures of the head and neck.
Clinical Development
A randomized, phase
2 clinical trial led by the University of Iowa studied the use of OK-432 in 182 patients with lymphatic malformations (>90%
pediatric) from 1998 to 2004. This trial included patients with macrocystic, microcystic and mixed lymphatic malformations. There
were three treatment groups: immediate treatment, delayed treatment, and open label. The immediate treatment group received treatment
with OK-432 upon diagnosis. The delayed treatment group received OK-432 treatment following a six-month observation period because
at the time of this trial, there was some belief that LMs could spontaneously resolve. The open-label treatment group included infants
younger than six months of age, adults older than 18 years of age, patients with LMs involving sites other than the head and neck
(such as the axilla, thorax, and extremities), and patients treated on an emergent basis. Response to therapy was measured by quantitating
change in lesion size. Clinical success was defined as a complete (90% to 100%) or substantial (60% to 89%) response to treatment
based on radiographically confirmed shrinkage in lesions.
Figure 1: Consort Diagram of Patients included
in the Iowa trial
Figure 2: Intent-to-Treat: Observations
Six Months After Enrollment
Figure 2 demonstrates that the primary
endpoint was met showing that 68% of patients in the immediate treatment group had a complete or substantial response to OK-432
while 0% of patients in the delayed treatment group had a complete or substantial response after six months of observation and
before treatment.
Figure 3: Clinical Success of OK-432
Figure 3 illustrates that a large majority
of patients in all three cohorts of the trial experienced a complete or substantial response once they completed treatment with
OK-432.
Figure 4: Clinical Success of OK-432 Based
on LM Type
Figure 4 illustrates the compelling response
to OK-432 demonstrating the overall clinical success of the treatment by radiographically confirmed lesion type.
The most common after effects with treatment
were local injection site reactions, fever, fatigue, decreased appetite, with resolution within a few days. Serious adverse events
associated with OK-432 treatment included re-hospitalization for injection (n=3), severe edema (n=3), airway obstruction necessitating
tracheostomy tube replace (n=4), and submental intra-cystic hemorrhage necessitating surgical excision.
Following the results
with OK-432 treatment in this trial, an additional 500 patients were enrolled in an open-label study of OK-432 in the United States
from 2005 to 2017. ArTara has entered into an exclusive license agreement with the University of Iowa for the data from these trials
and is currently analyzing such data.
Once ArTara can demonstrate
that it is manufacturing a drug product that is comparable to OK-432, it plans to meet with the FDA to determine if additional
clinical data are needed to support the submission of a BLA for TARA-002 for the treatment of lymphatic malformations.
Preclinical Development:
A comprehensive preclinical
development program for OK-432, including in vitro and in vivo pharmacology and toxicology studies, was conducted
by Chugai Pharmaceutical to support the filing of a new drug application with the Japan Pharmaceuticals and Medical Devices Agency.
ArTara plans to discuss with the FDA the ability to rely on these studies for the submission of a BLA for TARA-002.
Clinical Development
Plan:
ArTara plans to engage
the FDA in 2020 to determine the requirements for a BLA submission, including agreement on requirements to demonstrate the comparability
of the two products. ArTara plans to discuss with the FDA whether OK-432’s more than 25-year safety database in LMs, as well
as the efficacy and safety database from the clinical trials of more than 600 patients conducted in the US and led by the University
of Iowa are sufficient for a BLA submission for TARA-002. Based on the guidance from the FDA, ArTara plans to conduct additional
clinical trials as required.
Manufacturing Plans:
TARA-002 will be
manufactured using an equivalent, but modernized, proprietary manufacturing process as is used to produce OK-432 by Chugai
Pharmaceutical. Starting with a master cell line propagated by ArTara but utilizing the same genetically distinct strain of Streptococcus
pyogenes (A group, type 3) Su strain as OK-432, TARA-002 will be manufactured by a CMO in a facility located in the
United States. TARA-002 will be compared against OK-432 in formal comparability studies to establish the potency of
OK-432. ArTara plans to discuss the planned manufacturing program with the FDA as soon as it has demonstrated comparability
in the planned research-scale manufacturing batches which is expected to occur in 2020.
IV Choline Chloride
for the treatment of Intestinal Failure Associated Liver Disease
Background:
IFALD is a rare hepatic/metabolic
disease. IFALD, which occurs in patients dependent upon PN, is characterized by choline deficiency, hepatic steatosis, cholestasis,
and rapid progression of liver disease through to hepatic failure and death, in the absence of intestine-liver transplant. IFALD
carries a relatively poor prognosis, with a 15-34% death rate within one to four years. When IFALD presents in children, mortality
is even higher, with studies reporting death rates of 23-40% within 18 months. A patient is considered to have IFALD if she/he:
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•
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is dependent on PN for more than six months (e.g., has chronic intestinal failure);
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•
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has evidence of steatosis, determined by imaging techniques or histologic assessments;
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•
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has evidence of cholestasis (e.g., elevated alkaline phosphatase (ALP), elevated bilirubin and/or
histology); and
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•
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may have evidence of ongoing, progressive liver injury on the basis of multiple abnormal liver
function tests, in conjunction with findings of fibrosis, cirrhosis, and/or end-stage liver disease (ESLD).
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It is well established
that IFALD prevalence increases with duration of PN use; however, the duration that PN is used varies. Based on Medicare data,
there are approximately 220,000 PN patients per year (>12 years old) in the United States, the majority of whom tend to be short-term.
However, approximately 7% of all patients are on PN for longer than three months and therefore at high risk for developing IFALD.
When taking into consideration IFALD available prevalence data and known distribution of PN duration, it is estimated that there
are several thousand patients aged 12 and older with IFALD in the United States.
Many patients receiving
PN are entirely dependent on PN for their nutritional needs. PN delivers nearly all the macro and micro-nutrients necessary for
survival in their patients, with the notable exception of choline. Consequently, patients dependent on PN support have been shown
to be choline deficient. Patients dependent upon PN are unable to synthesize sufficient levels of choline and malabsorption limits
the bioavailability of choline chloride from the PN diet. The American Society for Parenteral and Enteral Nutrition and the Academy
of Nutrition and Dietetics’ Dietitians in Nutrition Support both recommend that choline be required in PN products; however,
there are currently no FDA-approved choline chloride PN products.
Choline is an essential
dietary nutrient in humans. It is a component of the predominant phospholipids in cell membranes (phosphatidylcholine and sphingomyelin)
and a precursor for the neurotransmitter acetylcholine and phospholipid biosynthesis. Choline also plays an important role in the
synthesis of methyl groups needed to make the primary methyl donor, S-adenosylmethionine. The normal range of physiologic concentrations
of free choline is broad, ranging from 6.7 to 26.9 nmol/mL, due in part to effects of variations in diet, differences in absorption,
and genetic polymorphisms related to choline metabolism. Patients are considered to be choline deficient if concentrations of plasma
free choline are less than 7 nmol/mL.
PN-dependent patients
develop choline deficiency, with 80-85% of long-term PN patients exhibiting decreased concentrations of plasma free choline below
7 nmol/mL. Choline deficiency causes impaired triglyceride export from the liver due to reduced very low-density lipoprotein (VLDL)
synthesis, leading to fatty accumulation, abnormal bile composition, and progressive hepatocellular injury. Choline deficient patients
dependent on PN present with signs of hepatic injury, neuropsychological impairment (including memory abnormalities), and muscle
damage, as well as thrombotic abnormalities. Cholestasis (when bile from the liver stops or slows) in IFALD may be mediated by
altered and potentially toxic bile salt composition due to deficient phosphatidylcholine, a major component of normal bile.
Dependence on PN and
resulting choline deficiency often leads to IFALD, which is the most common adverse outcome in chronic PN adult patients that is
associated with death. Low free choline plasma concentrations are associated with alanine aminotransferase (“ALT”),
aspartate aminotransferase (“AST”), and alkaline phosphatase (“ALP”) elevations as well as steatosis (fatty
liver), all indicators of ongoing liver damage. As plasma free choline concentrations decline in PN patients, serum concentrations
of liver enzymes, ALT and AST, ALP, and/or bilirubin become abnormally high, which is associated with hepatic steatosis, cholestasis,
and liver damage.
Figure 6. Choline Synthesis Pathway
Figure 6 depicts the
metabolic pathway in which choline is normally synthesized.
1. Throughout the
body, phosphatidylcholine (PC) is synthesized almost exclusively through external choline consumption.
2. Intra-hepatically,
the phosphatidylethanolamine N-methyltransferase (“PEMT”) pathway can provide 30% of the liver’s needs.
Clinical History:
In a Phase 2 randomized,
double-blind, controlled 24-week clinical trial, patients (n=15) receiving nightly PN for > 85% of their nutritional needs (for
at least 12 weeks prior to entry) were randomized to receive via IV infusion (10-12 hours) their usual PN with placebo (n = 8),
or PN to which 2g IV Choline Chloride was added (n = 7).
In the IV Choline
Chloride group, mean choline levels were within or greater than the estimated normal range (i.e., 6.7 to 26.9 nmol/mL) throughout
the 24-week trial and quickly returned to baseline levels when treatment was discontinued.
Steatosis:
Upon conversion of the quantification of computed tomography (CT)
values to magnetic resonance imaging proton density fat fraction (MRI-PDFF), significant differences in the least square (LS) mean
change from baseline in estimated MRI-PDFF were observed in the IV Choline Chloride group in comparison to placebo group at Week
4 through Week 24, demonstrating a clinically meaningful and statistically significant reduction in steatosis. When LS mean percent
changes from baseline in MRI-PDFF were compared between treatment groups, significant differences in LS mean changes (range, 31.7%
to 53.6%) were observed from Weeks 4 to 24 with p-values of 0.0009 to 0.0297 favoring the IV Choline Chloride group.
Figure 7. Steatosis: ConversionI
of CT to MRI-PDFFI
Note: CT to MRI-PDFF Conversion Equation:
MRI-PDFF (%) = –0.572*Liver CT(HU) + 37.264
Imixed
model for repeated measurement (“MMRM”) method used for imputation
IA
placebo subject was excluded from all analyses due to likely IV contrast-induced imaging abnormalities, confirmed by independent
radiologist in subsequent re-analysis.
Figure 8. Liver CT Images: Before and After
Treatment with IV Choline Chloride
Alkaline Phosphatase:
At baseline, LS mean
ALP concentration was 239.3 ± 118.93 in the IV Choline Chloride group and 148.1 ± 100.2 in the placebo group. The
MMRM analyses demonstrated statistically significant decreases in ALP concentrations at Week 12 (p = 0.008), Week 16 (p = 0.005),
Week 20 (p = 0.007), and Week 24 (p = 0.005) for the IV Choline Chloride group, demonstrating a reduction in cholestasis. A trend
towards significance was observed at Week 4 (p = 0.076) and Week 6 (p = 0.056). At Week 34, 10 weeks after discontinuation of IV
Choline Chloride treatment, LS mean change from baseline in ALP concentrations still demonstrated statistically significant decreases
(p = 0.002), demonstrating a significant improvement in cholestasis with treatment with IV Choline Chloride (Figure 9).
In the subgroup of subjects with ALP concentration > 1.5x upper
limit of normal (ULN) at baseline, (n=7), mean values at baseline were comparable between the IV Choline Chloride and placebo groups
(294.20 ± 87.947 versus 277.00 ± 128.693, respectively). In the sub-group analysis, improvement in ALP was consistent
and substantial, with 20-30% improvement over 12-24 weeks of treatment (Figure 10).
Figure 9. Improvement in CholestasisI:
All Patients
Imixed
model for repeated measurement (“MMRM”) method used for imputation
IA
placebo subject was excluded from all analyses due to likely IV contrast-induced imaging abnormalities, confirmed by independent
radiologist in subsequent re-analysis.
Figure 10. Improvement in CholestasisI:
Patients with 1.5x ULN (ITT Population)I
IMMRM
method used for imputation
IA
placebo subject was excluded from all analyses due to likely IV contrast-induced imaging abnormalities, confirmed by independent
radiologist in subsequent re-analysis.
Preclinical Development:
Table 1. Preclinical Studies Conducted
by ArTara for IV Choline Chloride
Study Type
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Brief Description
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In vitro protein binding
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Evaluation of Protein Binding by Choline Chloride in Plasma Using Rapid Equilibrium Dialysis
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In vitro cardiac ion channel study
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In Vitro Assessment of the Effect of Choline on Currents Mediated by hERG, Cav1.2, and Peak and Late Nav1.5 Channels Expressed in Human Embryonic Kidney (HEK) Cells
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In vitro drug-drug interaction
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Evaluation of Transporter Inhibition by Choline Chloride in Transporter-Transfected HEK293 Cells
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Evaluation of OCT2, MATE1 and MATE2-K Inhibition by Choline Chloride in Transporter-Transfected HEK293 Cells
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Evaluation of Transporter Inhibition by Choline Chloride in Caco-2 Cells
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Evaluation of Time Dependent Cytochrome P450 Inhibition (IC50 Shift) by Choline Chloride in Human Liver Microsomes
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Evaluation of Direct Cytochrome P450 Inhibition by Choline Chloride in Human Liver Microsomes
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Evaluation of Cytochrome P450 Induction by Choline Chloride in Human Hepatocytes
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Evaluation of Transporter Inhibition by Choline Chloride in Caco-2 Cells
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Evaluating of Cytochrome P450 2C8, 2C9, and 2C19 mRNA Induction by Choline Chloride in Human Hepatocytes
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In vitro BSEP inhibition
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Assessment of Choline as an Inhibitor of Human BSEP Mediated Transport
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Assessment of Choline as a Substrate of Human BSEP Mediated Transport
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Nonclinical pharmacology studies
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Non-GLP Pilot Single Dose, Escalating Dose Tolerance Study of Choline by Intravenous Infusion in Male Beagle Dogs
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GLP Single-dose IV Cardiovascular Study in Surgically Instrumented Male Dogs Monitored by Telemetry
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GLP Combined Single-dose IV Neurobehavioral and Respiratory Study
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Clinical Development
Plan:
Discussions are ongoing
with the FDA regarding the development plan for IV Choline Chloride for the treatment of IFALD. ArTara has reached agreement with
FDA on a number of key aspects of the overall clinical program necessary for registration. ArTara plans to start implementing certain facets of the development plan in 2020.
Manufacturing Plans:
ArTara has manufactured
sufficient amounts of GMP drug substance and drug product to initiate the planned clinical trials. Scale up for commercial demand
is ready and will commence when appropriate. ArTara’s end-to-end manufacturing of IV Choline Chloride is conducted in the
United States by a GMP-compliant CDMO.
Vonapanitase
As a result of the
Merger, ArTara acquired the product candidate, vonapanitase, a recombinant human elastase that the Company previously pursued development
for the improvement of vascular access outcomes in patients with chronic kidney disease, undergoing or preparing for hemodialysis,
and as a treatment for patients with symptomatic peripheral artery disease. ArTara is reviewing the research, preclinical and clinical
data of vonapanitase and has not yet determined whether to pursue any further development of this product candidate in the future.
Sales and Marketing
ArTara aims to become
a fully integrated biopharmaceutical company pursuing its mission of supporting and improving the lives of patients suffering from
rare diseases.
If approved by the
FDA, ArTara plans to commercialize both of its current product candidates in the United States first and then move to other geographies.
As ArTara advances IV Choline Chloride and TARA-002 through its respective clinical development programs, ArTara plans to grow
its commercial organization in support of anticipated product launches.
Collaborations
and License Agreements
Chugai Agreement
On June 17, 2019,
ArTara entered into an agreement (the “Chugai Agreement”) with Chugai Pharmaceutical, a company organized and existing
under the laws of Japan. Chugai Pharmaceutical has developed and commercialized a therapeutic product, OK-432 (Existing Product),
in Japan and Taiwan (the “Chugai Territory”), and owns and controls certain materials and documents related to the
Existing Product (the “Chugai Materials”). Pursuant to the Chugai Agreement, Chugai Pharmaceutical will provide ArTara
with certain materials and documents relating to the Existing Product and will provide certain technical services to ArTara for
ArTara’s development and commercialization in territories other than the Chugai Territory (the “ArTara Territory”)
of a new therapeutic product (the “New Product” or “TARA-002”) comparable to the Existing Product. Beginning
on the effective date of the Chugai Agreement and ending on June 30, 2020, or any other date to be agreed to by the parties (the
“Chugai Service Period”), Chugai Pharmaceutical will exclusively provide the Existing Product and Chugai Materials
to ArTara and will not provide the Existing Product or Chugai Materials to any third parties during the Chugai Service Period,
other than for medical, compassionate use and/or non-commercial research purposes. Additionally, beginning on the effective date
of the Chugai Agreement and ending on the fifth anniversary of such date or upon the termination of the Chugai Agreement, whichever
comes earlier, Chugai Pharmaceutical shall not provide Chugai Materials or technical support to any third party for the purpose
of development and commercialization in the ArTara Territory of a therapeutic product comparable to the Existing Product. ArTara
is responsible, at its sole cost and expense, for the development and commercialization of the New Product in the ArTara Territory.
As consideration for
Chugai Pharmaceutical’s performance under the Chugai Agreement, ArTara has agreed to pay Chugai Pharmaceutical a payment
in the low, single-digit millions, which payments shall be made in two installments with an initial payment in July 2020, and the
remaining majority of the payment payable upon FDA approval of the New Product.
ArTara granted Chugai
Pharmaceutical a right of first refusal on terms to be negotiated between the parties for a license related to the New Product-relevant
information, data and documentation and inventions to develop and commercialize the New Product in the Chugai Territory. ArTara
will be responsible for manufacturing and supplying or causing its CMO to manufacture and supply the New Product to Chugai Pharmaceutical.
The Chugai Agreement
shall remain in full force and effect until the first anniversary of the date of FDA approval of the New Product, unless terminated
sooner (the “Chugai Term”). Following the Chugai Service Period and during the Chugai Term, Chugai Pharmaceutical may
terminate the Chugai Agreement, in whole or in part, without cause, by providing ArTara 90 days prior written notice. ArTara may
terminate the Chugai Agreement, in whole only, by providing Chugai Pharmaceutical 90 days prior written notice if (i) ArTara decides
to discontinue the New Product development; (ii) ArTara decides that the FDA’s requirements for the New Product are not likely
to be met; or (iii) the FDA identifies a safety issue regarding the New Product.
In addition, either
party may terminate the Chugai Agreement, in whole or in part, in the event that the other party materially breaches the Chugai
Agreement and fails to cure the breach within 30 days of written notice. Either party may terminate the Chugai Agreement in its
entirety immediately upon notice to the other party if such other party: (i) is dissolved or liquidated or takes any corporate
action for such purpose; (ii) becomes insolvent or is generally unable to pay, or fails to pay, its debts as they become due; (iii)
files or has filed against it a petition for voluntary or involuntary bankruptcy or otherwise becomes subject to any proceeding
under any domestic or foreign bankruptcy or insolvency laws; (iv) makes or seeks to make a general assignment for the benefit of
creditors; or (v) applies for or has a receiver, trustee, custodian or similar agent appointed by order of any court to take charge
of or sell any material portion of its property or business.
In the event that
ArTara undergoes a change of control, Chugai Pharmaceutical may terminate the Chugai Agreement upon 90 days written notice to ArTara,
absent a written pledge by the new controlling party of its agreement to fulfill and undertake all obligations of ArTara and to
be bound by the Chugai Agreement.
Sponsored Research
and License Agreement
On November 28, 2018,
ArTara entered into a sponsored research and license agreement (the “Research Agreement”) with The University of Iowa
(the “University”), pursuant to which the University will provide access to certain program data related to Chugai
Pharmaceutical’s OK-432 and will assist ArTara in conducting certain clinical studies. As consideration for the University’s
performance under the Research Agreement, ArTara will pay the University $30,000 per year in funding for the project. The parties
also agree to discuss in good faith potential additional funding required for completion of the project pursuant to the Research
Agreement as applicable and necessary. In addition, within 45 days of approval of the TARA-002 BLA by the FDA, ArTara will pay
a one-time approval milestone to the University, the amount of which depends on the usefulness of the program data in TARA-002’s
BLA filing, and the milestone amount will range from $0 to $1 million. ArTara will also be responsible for certain tiered royalties
on annual net sales of products for the indication, which royalty rates are in the low single digit percentages. These royalty
rates are also subject to a reduction in the event that regulatory authorities determine that the program data is not sufficient
for regulatory approval on its own and additional pediatric efficacy and safety clinical studies are required. In the event that
the annual net sales surpass certain dollar amount thresholds, ArTara will need to make certain additional milestone payments following
the close of the calendar quarter in which each milestone is reached, with the payments ranging from $62,500 to $125,000.
ArTara may terminate
the Research Agreement upon 30 days prior written notice to the University. Either party may terminate the project under the Research
Agreement and all commitments and obligations with respect thereto upon 30 days prior written notice to the other party. In the
event of any termination of the project under the Research Agreement by the University, (a) the University agrees to complete certain
phases of the project and (b) ArTara will continue to provide annual funding until the completion of the second phase of the project.
Upon termination of the project by ArTara, the Agreement will terminate and ArTara will reassign to the University the IND.
Choline License Agreement
On September 27, 2017,
ArTara entered into a choline license agreement (the “Choline Agreement”) with Alan L. Buchman, M.D., pursuant to which
Dr. Buchman granted ArTara an exclusive, worldwide, non-transferable license in and to certain licensed orphan designations, certain
licensed IND, certain existing study data and to certain licensed know-how to develop, make, use, sell, offer for sale and import
the licensed product during the term of the Choline Agreement. ArTara is solely responsible for all fees and expenses related to
the undertaking of the Choline Agreement, including all due diligence obligations, regulatory authority fees, attorney fees and
consulting fees. During the term of the Choline Agreement, Dr. Buchman may not work with any third parties on any product competing
with the licensed product. In consideration for the rights and licenses granted under the Agreement, ArTara made an initial upfront
payment of $50,000 payable to Dr. Buchman.
ArTara will also owe
Dr. Buchman certain milestone and royalty payments. ArTara paid Dr. Buchman $50,000 in October 2019 because ArTara had not received
at least $5 million in working capital from any source or in any manner as of October 15, 2019. ArTara paid Dr. Buchman an additional
$550,000 upon the closing of the Private Placements following the consummation of the Merger because ArTara received at least $5
million in working capital.
Regardless of whether
development or commercialization is undertaken by ArTara under the Choline Agreement, commencing on November 21, 2022 and during
the term of the Choline Agreement, ArTara shall pay Dr. Buchman a minimum annual royalty that ranges between $25,000 and $75,000.
ArTara owes Dr.
Buchman sales royalties based on aggregate net sales of IV Choline Chloride in each calendar quarter, with the royalty rates
ranging from 5.0% to 10.5% based on the amount of net sales. ArTara also agreed to pay Dr. Buchman a royalty in the
mid-single digit percentage of (i) net cash receipts after payment of taxes and (ii) any other consideration received by
ArTara from its sale or transfer of a priority review voucher, including a fair monetary value for any transaction that is
not a bona fide arms-length transaction or that is consideration other than money.
ArTara shall also
pay Dr. Buchman up to an aggregate of up to $775,000 in additional milestone payments upon the achievement of various regulatory
approval milestones. ArTara issued Dr. Buchman 150,000 shares of ArTara’s common stock as of September 27, 2017 and granted
Dr. Buchman an option to purchase 43,038 shares of ArTara’s common stock as of September 13, 2018, both in consideration
for the rights and licenses granted pursuant to the Choline Agreement.
Dr. Buchman also provides
advisory services to ArTara related to regulatory and clinical strategy for IV Choline Chloride. In consideration for such services,
ArTara issued Dr. Buchman 100,000 shares of ArTara’s common stock as of September 27, 2017 and granted Dr. Buchman an option
to purchase 28,692 shares of ArTara’s common stock as of September 13, 2018.
The Choline Agreement
will remain in full force and effect until the last sale of the licensed product under the Choline Agreement. After ArTara received
the FDA’s written minutes regarding its initial FDA meeting concerning the development of the first licensed product for
one or more of the licensed indications, ArTara paid an additional payment of $100,000 to Dr. Buchman and elected not terminate
the Choline Agreement. The Choline Agreement may be terminated by Dr. Buchman if, following regulatory approval of a licensed product,
ArTara has not made its first sale of a licensed product within such country within a specified time period. ArTara may terminate
the Choline Agreement for convenience upon 90 days prior written notice to Dr. Buchman. Dr. Buchman may terminate the Choline Agreement
effective immediately for non-payment of any payment due that has not been cured. Either party may terminate the Choline Agreement
effective immediately if the other party is in material breach and has not cured such breach within 60 days’ notice. In addition,
Dr. Buchman may terminate the Choline Agreement effective immediately upon 60 days prior written notice if (a) ArTara ceases or
threatens to cease to carry on its business; (b) a petition or resolution for the making of an administration order or for the
bankruptcy, winding-up or dissolution of ArTara is presented or passed; (c) ArTara files a voluntary petition in bankruptcy or
insolvency; (d) a receiver or administrator takes possession of ArTara’s assets or (e) any similar procedure is commenced
against ArTara in the United States.
License Agreement
On December 22, 2017,
ArTara entered into a license agreement (the “License Agreement”) with The Feinstein Institute for Medical Research,
a not-for-profit corporation organized and existing under the laws of New York (the “Institute”). The Institute owns,
by assignment, a U.S. patent related to the treatment of fatty liver disease in humans. Pursuant to the License Agreement, the
Institute granted ArTara an exclusive, worldwide license, with the right to grant sublicenses to non-affiliate third parties, to
develop, make, have made, use, sell, offer for sale and import certain products for use in the field of fatty liver disease in
humans receiving total parenteral nutrition, by administering, as monotherapy, a pharmaceutical composition comprising intravenous
choline, wherein the fatty liver disease is selected from IFALD, non-alcoholic fatty liver, non-alcoholic steatohepatitis (“NASH”),
NASH-associated liver fibrosis, or non-alcoholic cirrhosis. Notwithstanding the exclusive rights granted to ArTara, the Institute
shall retain the right to make, use and practice such patents in its own laboratories solely for non-commercial scientific purposes
and for continued non-commercial research.
As consideration for
the license grant, ArTara agreed to pay the Institute tiered royalties of between 1.0% and 1.5% of all net sales. In addition,
ArTara agreed to pay the Institute a low double digit percentage of net proceeds resulting from agreements entered into within
two years from the effective date of the License Agreement and a mid single digit percentage of net proceeds resulting from agreements
entered into thereafter. ArTara also agreed to make certain license maintenance payments of $15,000 beginning on the second anniversary
of the effective date of the License Agreement and continuing upon every anniversary thereafter until the first commercial sale
of a licensed product. Beginning on the first anniversary of the effective date of the License Agreement after the first commercial
sale of a licensed product and every anniversary of the effective date of the License Agreement thereafter, ArTara shall pay the
Institute $30,000 as a license maintenance fee. Such license maintenance fees are non-refundable but are creditable against future
royalty payments due to the Institute during the 12-month period following each such anniversary.
ArTara agreed to make
certain one-time milestone payments in the aggregate amount of $375,000 upon the achievement of certain regulatory approval milestones,
of which $100,000 was paid on January 28, 2020 upon ArTara having consummated the Private Placements.
Unless terminated
earlier, the License Agreement will expire upon the expiration of the last to expire patent under the License Agreement. ArTara
may terminate the License Agreement by giving the Institute 60 days prior notice. Either party may terminate the License Agreement
in the event of a default or breach by the other party that has not been cured within 60 days of such notice. If ArTara (i) makes
an assignment for the benefit of creditors or if proceedings for a voluntary bankruptcy are instituted on behalf of ArTara; (ii)
is declared bankrupt or insolvent or (iii) is convicted of a felony relating to the manufacture, use or sale of the licensed products
or a felony relating to moral turpitude, the Institute may terminate the License Agreement.
Competition
The process for commercialization
of new drugs is very competitive, and ArTara could potentially face worldwide competition from other pharmaceutical companies,
biotechnology companies and ultimately generic products. ArTara’s potential competitors may develop or market therapies that
are more clinically effective, safer or less expensive than any therapeutic products ArTara develops.
With respect to ArTara’s
lead product candidate, TARA-002, for the treatment of Lymphatic Malformations, TARA-002 is a genetically distinct strain of Streptococcus
pyogenes (group A, type 3) Su. TARA-002 is produced through a proprietary manufacturing process. ArTara anticipates that, if
approved by the FDA, TARA-002 will be protected by 12 years of biologic exclusivity. There are no pharmacotherapies currently available
for the treatment of LMs and the current standard of care is a high-risk surgical procedure.
There are a handful
of drug development companies and academic researchers exploring oral formulations of various agents including macrolides, phosphodiesterase
inhibitors, and calcineurin/mTOR inhibitors. These are in early development and earlier experiments in LM’s utilizing other
compounds utilizing these mechanisms have not produced conclusive evidence of efficacy.
There are no treatments
currently available for IFALD. With respect to IV Choline Chloride for the treatment of IFALD, IV Choline Chloride is the only
sterile injectable form of choline chloride that can be combined with parenteral nutrition. Progression of IFALD to liver failure
occurs over time and leads to the need for a dual bowel and liver transplant. If approved, IV Choline Chloride may be protected
by orphan Drug Designation exclusivity for seven years.
Intellectual Property
ArTara’s intellectual
property is critical to its business and ArTara strives to protect it, including by obtaining and maintaining patent protection
in the United States and internationally for its product candidates, novel biological discoveries, epitopes, new therapeutic approaches
and potential indications, and other inventions that are important to our business. Throughout the development of ArTara’s
product candidates, it will seek to identify additional means of obtaining patent protection that would potentially enhance commercial
success.
The patent positions
of biotechnology companies like ArTara’s are generally uncertain and involve complex legal, scientific and factual questions.
ArTara recognizes that the ability to obtain patent protection and the degree of such protection depends on a number of factors,
including the extent of the prior art, the novelty and non-obviousness of the invention, and the ability to satisfy the enablement
requirement of the patent laws. In addition, the coverage claimed in a patent application can be significantly reduced before the
patent is issued, and its scope can be reinterpreted after issuance. Consequently, ArTara may not obtain or maintain adequate patent
protection for any of its product candidates. Any patents that ArTara holds may be challenged, circumvented or invalidated by third
parties.
ArTara’s commercial
success will also depend in part on not infringing the proprietary rights of third parties. In addition, ArTara has licensed rights
under proprietary technologies of third parties to develop, manufacture and commercialize specific aspects of our products and
services. It is uncertain whether the issuance of any third-party patent would require ArTara to alter its development or commercial
strategies, alter its processes, obtain licenses or cease certain activities. The expiration of patents or patent applications
licensed from third parties or ArTara’s breach of any license agreements or failure to obtain a license to proprietary rights
that it may require to develop or commercialize its future technology may have a material adverse impact on it. If third parties
prepare and file patent applications in the United States that also claim technology to which ArTara has rights, ArTara may have
to participate in interference proceedings in the United States Patent and Trademark Office (the “USPTO”) to determine
priority of invention. For a more comprehensive discussion of the risks related to ArTara’s intellectual property, please
see “Risk Factors—Risks Related to ArTara’s Intellectual Property.”
TARA-002:
TARA-002 is a genetically
distinct Su strain of Streptococcus pyogenes (group A, type 3). TARA-002 is produced through a proprietary manufacturing
process. ArTara believes a significant barrier to entry exists, as it believes only Chugai Pharmaceutical and ArTara have the specific
strain and possess the know-how to manufacture the product. ArTara anticipates that, if approved by the FDA, TARA-002 will be protected
by 12 years of biologic exclusivity.
IV Choline Chloride:
With respect to IV
Choline Chloride, ArTara has acquired an exclusive, worldwide license to U.S. Patent 8,865,641 B2 from the Feinstein Institute
for Medical Research providing protection in the United States until 2035. The patent applies to a method of treating a fatty liver
disease in a subject. In particular, the method comprises administering to the subject an effective amount of a cholinergic pathway
stimulating agent, wherein the fatty liver disease is selected from non-alcoholic fatty liver (NAFL), alcoholic fatty liver (AFL),
non-alcoholic steatohepatitis (NASH), alcoholic steatohepatitis (ASH), NASH-associated liver fibrosis, ASH-associated liver fibrosis,
non-alcoholic cirrhosis and alcoholic cirrhosis.
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 ArTara
may file, the patent term is 20 years from the earliest date of filing a non- provisional patent application related to the patent.
A U.S. patent also may be accorded a patent term adjustment under certain circumstances to compensate for delays in obtaining the
patent from the USPTO. In some instances, such a patent term adjustment may result in a U.S. patent term extending beyond 20 years
from the earliest date of filing a non-provisional patent application related to the U.S. patent. In addition, in the United States,
the term of a U.S. patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent
term restoration as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits
a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related
to the length of time the drug is under regulatory review. Patent term 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 other foreign jurisdictions to extend the term of a patent that covers an approved drug.
In the future, if and when ArTara’s products receive FDA approval, ArTara expect to apply for patent term extensions on patents
covering certain of those products, when applicable.
ArTara also relies
on trade secrets relating to product candidates and seeks to protect and maintain the confidentiality of proprietary information
to protect aspects of its business that are not amenable to, or that it does not consider appropriate for, patent protection. Although
ArTara takes steps to protect its proprietary information and trade secrets, including through contractual means with its employees
and consultants, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise
gain access to ArTara’s trade secrets, including through breaches of such agreements with its employees and consultants.
Thus, ArTara may not be able to meaningfully protect its trade secrets. It is ArTara’s policy to require its employees, consultants,
outside scientific partners, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement
of employment or consulting relationships with ArTara. These agreements provide that all confidential information concerning ArTara’s
business or financial affairs developed or made known to the individual during the course of the individual’s relationship
with ArTara is to be kept confidential and not disclosed to third parties except in specific circumstances. ArTara’s agreements
with employees also provide that all inventions conceived by the employee in the course of employment with ArTara or from the employee’s
use of ArTara’s confidential information are ArTara’s exclusive property.
Manufacturing
ArTara relies on contract
manufacturing organizations (“CMOs”) to produce its drug candidates in accordance with current Good Manufacturing Practices
(“cGMP”), regulations for use in clinical trials and commercial product. The manufacture of pharmaceuticals is subject
to extensive cGMP regulations, which impose various procedural and documentation requirements and govern all areas of record keeping,
production processes and controls, personnel and quality control.
The CMOs that ArTara partners with have the capability to produce
clinical supply required for clinical trials, as well as support commercial scale up activities for both products.
Both TARA-002 and
Choline Chloride will be produced in the United States. The starting materials for TARA-002 were provided to ArTara pursuant to
an agreement with Chugai Pharmaceutical. The regulatory starting materials for Choline Chloride are available commercially.
Government Regulation
and Product Approval
The FDA and other
regulatory authorities at federal, state, and local levels, as well as in foreign countries, extensively regulate, among other
things, the research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging,
storage, distribution, record keeping, approval, advertising, promotion, marketing, post-approval monitoring, and post-approval
reporting of drugs and biologics such as those we are developing. ArTara, along with third-party contractors, will be required
to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies of the
countries in which ArTara wishes to conduct studies or seek approval or licensure of its product candidates.
In the United States,
the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (“FDCA”) and biologics additionally under the
Public Health Services Act (“PHSA”) as well as their respective implementing regulations. The process required by the
FDA before biopharmaceutical product candidates may be marketed in the United States generally involves the following:
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completion of preclinical laboratory tests and animal studies performed in accordance with the
FDA’s current Good Laboratory Practices (“GLP”) regulations;
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submission to the FDA of an IND, which must become effective before clinical trials may begin and
must be updated annually or when significant changes are made;
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approval by an independent Institutional Review Board (“IRB”) or ethics committee at
each clinical site before the trial is commenced;
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performance of adequate and well-controlled human clinical trials to establish the safety and efficacy
of a drug product candidate and the safety, purity and potency of the proposed biologic product candidate for its intended purpose;
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preparation of and submission to the FDA of an NDA or BLA after completion of all pivotal clinical
trials that includes substantial evidence of safety, purity and potency or efficacy from results of nonclinical testing and clinical
trials;
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satisfactory completion of an FDA Advisory Committee review, if applicable;
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a determination by the FDA within 60 days of its receipt of an NDA or BLA to file the application
for review;
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satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities
at which the proposed product is produced to assess compliance with cGMP, and of selected clinical investigation sites to assess
compliance with Good Clinical Practices (“GCP”); and
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FDA review and approval, or licensure, of the NDA or BLA to permit commercial marketing of the
product for particular indications for use in the United States.
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Preclinical and
Clinical Development
Prior to beginning
the first clinical trial with a product candidate, ArTara must submit an IND to the FDA. An IND is a request for authorization
from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission is on the general
investigational plan and the protocol(s) for clinical trials. The IND also includes results of animal and in vitro studies
assessing the toxicology, pharmacokinetics, pharmacology, and pharmacodynamic characteristics of the product candidate; chemistry,
manufacturing, and controls information; and any available human data or literature to support the use of the investigational product.
An IND must become effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt
by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or questions about the proposed clinical trial.
In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or
questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin
a clinical trial.
Clinical trials involve
the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance
with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any
clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters
to be used in monitoring safety and the effectiveness criteria to be evaluated. A separate submission to the existing IND must
be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments. Furthermore,
an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial
and its informed consent form before the clinical trial begins at that site, and must monitor the trial until completed. Regulatory
authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects
are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also
include oversight by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety
monitoring board, which provides authorization for whether or not a trial may move forward at designated check points based on
access to certain data from the trial and may halt the clinical trial if it determines that there is an unacceptable safety risk
for subjects or other grounds, such as no demonstration of efficacy. There are also requirements governing the reporting of ongoing
clinical trials and clinical trial results to public registries.
Human clinical trials
are typically conducted in three sequential phases that may overlap.
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Phase 1—The investigational product is initially introduced into healthy human subjects or
patients with the target disease or condition. These trials are designed to test the safety, dosage tolerance, absorption, metabolism,
distribution and elimination of the investigational product in humans, the side effects associated with increasing doses, and,
if possible, to gain early evidence on effectiveness.
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Phase 2—The investigational product is administered to a limited patient population with
a specified disease or condition to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to identify possible
adverse side effects and safety risks. Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning
larger and more expensive Phase 3 clinical trials.
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Phase 3—The investigational product is administered to an expanded patient population to
further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally
at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit
ratio of the investigational product and to provide an adequate basis for product approval.
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In some cases, the
FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information
about the product. These so- called Phase 4 trials may be made a condition to approval of the NDA or BLA. Concurrent with clinical
trials, companies may complete additional animal studies and develop additional information about the biological characteristics
of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with
cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate
and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product, or for
biologics, the safety, purity and potency. Additionally, appropriate packaging must be selected and tested and stability studies
must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
Application Submission,
Review and Approval
Assuming successful
completion of all required testing in accordance with all applicable regulatory requirements, the results of product development,
nonclinical studies and clinical trials are submitted to the FDA as part of an NDA or BLA requesting approval to market the product
for one or more indications. The NDA or BLA must include all relevant data available from pertinent preclinical and clinical trials,
including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s
chemistry, manufacturing, controls, and proposed labeling, among other things. The submission of an NDA or BLA requires payment
of a substantial application user fee to FDA, unless a waiver or exemption applies.
Once an NDA or BLA
has been submitted, the FDA’s goal is to review standard applications within ten months after it accepts the application
for filing, or, if the application qualifies for priority review, six months after the FDA accepts the application for filing.
In both standard and priority reviews, the review process is often significantly extended by FDA requests for additional information
or clarification. The FDA reviews the application to determine, among other things, whether a product is safe, pure and potent
and the facility in which it is manufactured, processed, packed, or held meets standards designed to assure the product’s
continued safety, purity and potency. The FDA may convene an advisory committee to provide clinical insight on application review
questions. Before approving an NDA or BLA, the FDA will typically inspect the facility or facilities where the product is manufactured.
The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance
with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally,
before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. If the
FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the
deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any
requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for
approval.
The FDA may issue
an approval letter or a Complete Response letter. An approval letter authorizes commercial marketing of the product with specific
prescribing information for specific indications. A Complete Response letter will describe all of the deficiencies that the FDA
has identified in the NDA or BLA. In issuing the Complete Response letter, the FDA may recommend actions that the applicant might
take to place the application in condition for approval, including requests for additional information or clarification. The FDA
may delay or refuse approval of an application if applicable regulatory criteria are not satisfied, require additional testing
or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.
If regulatory approval
of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses
for which such product may be marketed. For example, the FDA may impose a Risk Evaluation and Mitigation Strategy (REMS), to ensure
the benefits of the product outweigh its risks. A REMS is a safety strategy to manage a known or potential serious risk associated
with a product and to enable patients to have continued access to such medicines by managing their safe use, and could include
medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient
registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling
or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance
with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The
FDA may require one or more Phase 4 post-market trials and surveillance to further assess and monitor the product’s safety
and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing
trials.
Orphan Drug Designation
Under the Orphan Drug
Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease
or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States
for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic
for this type of disease or condition will be recovered from sales in the United States for that drug or biologic. Orphan designation
must be requested before submitting an NDA or BLA. After the FDA grants orphan designation, the generic identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage
in, or shorten the duration of, the regulatory review or approval process.
If a product that
has orphan designation subsequently receives the first FDA approval for the disease for which it has such designation, the product
is entitled to orphan exclusivity, which means that the FDA may not approve any other applications, including a full NDA or BLA,
to market the same product for the same indication for seven years, except in limited circumstances, such as a showing of clinical
superiority to the product with orphan drug exclusivity. Orphan exclusivity does not prevent FDA from approving a different drug
or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other
benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA application fee.
A designated orphan
product may not receive orphan exclusivity if it is approved for a use that is broader than the indication for which it received
orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the
request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product
to meet the needs of patients with the rare disease or condition.
Post-Approval Requirements
Any products manufactured
or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other
things, requirements relating to quality control and quality assurance, record-keeping, reporting of adverse experiences, periodic
reporting, product sampling and distribution, and advertising and promotion of the product. After approval, most changes to the
approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There
also are continuing user fee requirements, under which FDA assesses an annual program fee for each product identified in an approved
NDA or BLA. Biopharmaceutical manufacturers and their subcontractors are required to register their establishments with the FDA
and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance
with cGMP, which impose certain procedural and documentation requirements upon sponsors and their third-party manufacturers. Changes
to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval
before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting
requirements upon sponsor and third-party manufacturers. Accordingly, manufacturers must continue to expend time, money and effort
in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
The FDA may withdraw
approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches
the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or
frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved
labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition
of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of a product, mandated modification of promotional
materials or issuance of corrective information, issuance by FDA or other regulatory authorities of safety alerts, Dear Healthcare
Provider letters, press releases or other communications containing warnings or other safety information about the product, or
complete withdrawal of the product from the market or product recalls;
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fines, warning or untitled letters or holds on post-approval clinical trials;
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refusal of the FDA to approve pending applications or supplements to approved applications, or
suspension or revocation of existing product approvals;
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product seizure or detention, or refusal of the FDA to permit the import or export of products;
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injunctions, consent decrees or the imposition of civil or criminal penalties.
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The FDA closely regulates
the marketing, labeling, advertising and promotion of biopharmaceuticals. A company can make only those claims relating to safety
and efficacy, purity and potency of a biopharmaceutical that are approved by the FDA and in accordance with the provisions of the
approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.
Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising
and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described
in the product’s labeling and that differ from those approved by the FDA. Such off-label uses are common across medical specialties.
Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does
not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications
on the subject of off-label use of their products.
Biosimilars and
Reference Product Exclusivity
The Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA), signed into law in 2010, includes
a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA), which created an abbreviated approval pathway
for biological products that are biosimilar to or interchangeable with an FDA-approved reference biological product. To date, a
number of biosimilars have been licensed under the BPCIA, and numerous biosimilars have been approved in Europe. The FDA has issued
several guidance documents outlining its approach to the review and approval of biosimilars.
Biosimilarity, which
requires that there be no clinically meaningful differences between the biological product and the reference product in terms of
safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability
requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce
the same clinical results as the reference product in any given patient and, for products that are administered multiple times
to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered
without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. Complexities
associated with the larger, and often more complex, structures of biological products, as well as the processes by which such products
are manufactured, pose significant hurdles to implementation of the abbreviated approval pathway that are still being worked out
by the FDA.
Under the BPCIA, an
application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product
was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12
years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company
may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing
that applicant’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety,
purity and potency of its product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable
products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily
substituted by pharmacies, which are governed by state pharmacy law.
The BPCIA is complex
and continues to be interpreted and implemented by the FDA. In addition, recent government proposals have sought to reduce the
12-year reference product exclusivity period. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions,
have also been the subject of recent litigation. As a result, the ultimate impact, implementation, and impact of the BPCIA is subject
to significant uncertainty.
Other U.S. Healthcare
Laws and Compliance Requirements
In the United States,
ArTara’s current and future operations are subject to regulation by various federal, state and local authorities in addition
to the FDA, including but not limited to, the Centers for Medicare and Medicaid Services (“CMS”), other divisions of
the U.S. Department of Health and Human Services (“HHS”) (such as the Office of Inspector General, Office for Civil
Rights and the Health Resources and Service Administration), the U.S. Department of Justice (“DOJ”) and individual
U.S. Attorney offices within the DOJ, and state and local governments. For example, ArTara’s clinical research, sales, marketing
and scientific/educational grant programs will need to comply with the anti-fraud and abuse provisions of the Social Security Act,
the false claims laws, the privacy and security provisions of the Health Insurance Portability and Accountability Act (“HIPAA”),
and similar state laws, each as amended, as applicable.
The federal Anti-Kickback
Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving
any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any item or service reimbursable, in whole or in part, under Medicare,
Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value.
The Anti-Kickback Statute has been interpreted to apply to arrangements between therapeutic product manufacturers on one hand and
prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve
remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if
they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory
exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality
of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances.
ArTara’s practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory
safe harbor.
Additionally, the
intent standard under the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”) to a stricter standard such that a
person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed
a violation. In addition, the Affordable Care Act codified case law that a claim including items or services resulting from a violation
of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (the
“FCA”) (discussed below).
The federal false
claims, including the FCA, and civil monetary penalty laws, which imposes significant penalties and can be enforced by private
citizens through civil qui tam actions, prohibit any person or entity from, among other things, knowingly presenting, or causing
to be presented, a false or fraudulent claim for payment to, or approval by, the federal government, including federal healthcare
programs, such as Medicare and Medicaid, knowingly making, using, or causing to be made or used a false record or statement material
to a false or fraudulent claim to the federal government, or knowingly making a false statement to improperly avoid, decrease or
conceal an obligation to pay money to the federal government. A claim includes “any request or demand” for money or
property presented to the U.S. government. For instance, historically, pharmaceutical and other healthcare companies have been
prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill
federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the
companies’ marketing of the product for unapproved, off-label, and thus generally non-reimbursable, uses.
HIPAA created additional
federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme
to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by,
or under the control or custody of, any healthcare benefit program, including private third-party payors, willfully obstructing
a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up by trick, scheme
or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of
or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, the Affordable Care Act amended the intent
standard for certain healthcare fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge
of the statute or specific intent to violate it in order to have committed a violation.
Also, many states
have similar, and typically more prohibitive, fraud and abuse statutes or regulations that apply to items and services reimbursed
under Medicaid and other state programs, or, in several states, apply regardless of the payor.
ArTara may be subject
to data privacy and security regulations by both the federal government and the states in which it conducts business. HIPAA, as
amended by the Health Information Technology for Economic and Clinical Health Act (HITECH) and its implementing regulations, imposes
requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things,
HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, independent contractors,
or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf
of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties
directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or
injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil
actions. In addition, many state laws govern the privacy and security of health information in specified circumstances, many of
which differ from each other in significant ways, are often not pre-empted by HIPAA, and may have a more prohibitive effect than
HIPAA, thus complicating compliance efforts.
ArTara may develop
products that, once approved, may be administered by a physician. Under currently applicable U.S. law, certain products not usually
self-administered (including injectable drugs) may be eligible for coverage under Medicare through Medicare Part B. Medicare Part
B is part of original Medicare, the federal health care program that provides health care benefits to the aged and disabled, and
covers outpatient services and supplies, including certain biopharmaceutical products, that are medically necessary to treat a
beneficiary’s health condition. As a condition of receiving Medicare Part B reimbursement for a manufacturer’s eligible
drugs, the manufacturer is required to participate in other government healthcare programs, including the Medicaid Drug Rebate
Program and the 340B Drug Pricing Program. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into
and have in effect a national rebate agreement with the Secretary of HHS as a condition for states to receive federal matching
funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Under the 340B Drug Pricing Program, the manufacturer
must extend discounts to entities that participate in the program.
In addition, many
pharmaceutical manufacturers must calculate and report certain price reporting metrics to the government, such as average sales
price (“ASP”) and best price. Penalties may apply in some cases when such metrics are not submitted accurately and
timely. Further, these prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs
or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be
sold at lower prices than in the United States. It is difficult to predict how Medicare coverage and reimbursement policies will
be applied to ArTara’s products in the future and coverage and reimbursement under different federal healthcare programs
are not always consistent. Medicare reimbursement rates may also reflect budgetary constraints placed on the Medicare program.
Additionally, the
federal Physician Payments Sunshine Act (the “Sunshine Act”), within the Affordable Care Act, and its implementing
regulations, require that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available
under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) report annually to CMS information
related to certain payments or other transfers of value made or distributed to physicians, as defined by such law, and teaching
hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and
to report annually certain ownership and investment interests held by physicians and their immediate family members. Failure to
report accurately could result in penalties. In addition, many states also govern the reporting of payments or other transfers
of value, many of which differ from each other in significant ways, are often not pre-empted, and may have a more prohibitive effect
than the Sunshine Act, thus further complicating compliance efforts.
In order to distribute
products commercially, ArTara must comply with state laws that require the registration of manufacturers and wholesale distributors
of drug and biological products in a state, including, in certain states, manufacturers and distributors who ship products into
the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements
on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that
require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution
chain. Several states and/or localities have enacted legislation requiring pharmaceutical and biotechnology companies to establish
marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing,
clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other
healthcare entities from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in
sales and marketing, and to prohibit certain other sales and marketing practices. All of ArTara’s activities are potentially
subject to federal and state consumer protection and unfair competition laws.
Ensuring business
arrangements with third parties comply with applicable healthcare laws and regulations is a costly endeavor. If ArTara’s
operations are found to be in violation of any of the federal and state healthcare laws described above or any other current or
future governmental regulations that apply to it, it may be subject to penalties, including without limitation, significant civil,
criminal and/or administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government
programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual whistleblowers
in the name of the government, or refusal to allow it to enter into government contracts, contractual damages, reputational harm,
administrative burdens, diminished profits and future earnings, additional reporting obligations and oversight if ArTara becomes
subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the
curtailment or restructuring of its operations, any of which could adversely affect ArTara’s ability to operate its business
and its results of operations.
Coverage, Pricing
and Reimbursement
Significant uncertainty
exists as to the coverage and reimbursement status of any product candidates for which ArTara may obtain regulatory approval. In
the United States and in foreign markets, sales of any products for which ArTara receives regulatory approval for commercial sale
will depend, in part, on the extent to which third-party payors provide coverage and establish adequate reimbursement levels for
such products. In the United States, third-party payors include federal and state healthcare programs, private managed care providers,
health insurers and other organizations. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare
and Medicaid in the United States, and commercial payors are critical to new product acceptance.
ArTara’s ability
to commercialize any products successfully also will depend in part on the extent to which coverage and reimbursement for these
products and related treatments will be available from government health administration authorities, private health insurers and
other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance
organizations, decide which therapeutics they will pay for and establish reimbursement levels. Coverage and reimbursement by a
third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a therapeutic
is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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appropriate for the specific patient;
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neither experimental nor investigational.
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ArTara cannot be sure
that reimbursement will be available for any product that it commercializes and, if coverage and reimbursement are available, what
the level of reimbursement will be. Coverage may also be more limited than the purposes for which the product is approved by the
FDA or comparable foreign regulatory authorities. Reimbursement may impact the demand for, or the price of, any product for which
ArTara obtains regulatory approval.
Third-party payors
are increasingly challenging the price, examining the medical necessity, and reviewing the cost-effectiveness of medical products,
therapies and services, in addition to questioning their safety and efficacy. Obtaining reimbursement for ArTara’s products
may be particularly difficult because of the higher prices often associated with branded drugs and drugs administered under the
supervision of a physician. ArTara may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity
and cost-effectiveness of its products, in addition to the costs required to obtain FDA approvals. ArTara’s product candidates
may not be considered medically necessary or cost-effective. Obtaining coverage and reimbursement approval of a product from a
government or other third-party payor is a time-consuming and costly process that could require ArTara to provide to each payor
supporting scientific, clinical and cost-effectiveness data for the use of its product on a payor-by-payor basis, with no assurance
that coverage and adequate reimbursement will be obtained. A payor’s decision to provide coverage for a product does not
imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a
product does not assure that other payors will also provide coverage for the product. Adequate third-party reimbursement may not
be available to enable ArTara to maintain price levels sufficient to realize an appropriate return on ArTara’s investment
in product development. If reimbursement is not available or is available only at limited levels, ArTara may not be able to successfully
commercialize any product candidate that it successfully develops.
Different pricing
and reimbursement schemes exist in other countries. In the European Union, governments influence the price of biopharmaceutical
products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the
cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only
be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may
require the completion of clinical trials that compare the cost effectiveness of a particular product candidate to currently available
therapies. Other member states allow companies to fix their own prices for medicines but monitor and control company profits. The
downward pressure on health care costs has become intense. As a result, increasingly high barriers are being erected to the entry
of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing
within a country.
The marketability
of any product candidates for which ArTara receives regulatory approval for commercial sale may suffer if the government and third-party
payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care, the increasing influence of
health maintenance organizations, and additional legislative changes in the United States has increased, and ArTara expects will
continue to increase, the pressure on healthcare pricing. The downward pressure on the rise in healthcare costs in general, particularly
prescription medicines, medical devices and surgical procedures and other treatments, has become very intense. Coverage policies
and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for
one or more products for which ArTara receives regulatory approval, less favorable coverage policies and reimbursement rates may
be implemented in the future.
Healthcare Reform
In the United States
and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes
regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval
activities, and affect the ability to profitably sell product candidates for which marketing approval is obtained. Among policy
makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems
with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical
industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.
For example, the Affordable
Care Act has substantially changed healthcare financing and delivery by both governmental and private insurers. Among the Affordable
Care Act provisions of importance to the pharmaceutical and biotechnology industries, in addition to those otherwise described
above, are the following:
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an annual, nondeductible fee on any entity that manufactures or imports certain specified branded
prescription drugs and biologic agents apportioned among these entities according to their market share in some government healthcare
programs;
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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate
Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively, and capped the total
rebate amount for innovator drugs at 100% of the Average Manufacturer Price (the “AMP”);
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a new Medicare Part D coverage gap discount program, in which manufacturers must now agree to offer
70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap
period, as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D;
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extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals
who are enrolled in Medicaid managed care organizations;
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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states
to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income
at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability;
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expansion of the entities eligible for discounts under the 340B Drug Discount Program;
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research;
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expansion of healthcare fraud and abuse laws, including the FCA and the Anti-Kickback Statute,
new government investigative powers, and enhanced penalties for noncompliance;
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a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program
are calculated for drugs that are inhaled, infused, instilled, implanted, or injected;
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requirements to report certain financial arrangements with physicians and teaching hospitals;
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a requirement to annually report certain information regarding drug samples that manufacturers
and distributors provide to physicians;
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establishment of a Center for Medicare and Medicaid Innovation at CMS to test innovative payment
and service delivery models to lower Medicare and Medicaid spending; and
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a licensure framework for follow on biologic products.
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There remain legal
and political challenges to certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two executive
orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the Affordable Care Act.
In December 2017, Congress repealed the tax penalty for an individual’s failure to maintain Affordable Care Act-mandated
health insurance as part of a tax reform bill. Further, the 2020 federal spending package permanently eliminated, effective January
1, 2020, the Affordable Care Act-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical
device tax and, effective January 1, 2021, also eliminates the health insurer tax. Moreover, the Bipartisan Budget Act of 2018
(BBA), among other things, amends the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare
drug plans, commonly referred to as the “donut hole.” In December 2018, CMS published a new final rule permitting further
collections and payments to and from certain qualified health plans and health insurance issuers under the Affordable Care Act
risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine
this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual
mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the
tax reform bill, the remaining provisions of the Affordable Care Act are invalid as well. Additionally, on December 18, 2019, the
U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and
remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid
as well. It is unclear how this decision, future decisions, subsequent appeals, if any, and other efforts to repeal and replace
the Affordable Care Act will impact the Affordable Care Act. Congress is continuing to consider legislation that would alter other
aspects of the Affordable Care Act. The ultimate content, timing or effect of any healthcare reform legislation on the U.S. healthcare
industry is unclear.
ArTara anticipates
that the Affordable Care Act, if substantially maintained in its current form, will continue to result in additional downward pressure
on coverage and the price that ArTara receives for any approved product, and could seriously harm its business. Any reduction in
reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The
implementation of cost containment measures or other healthcare reforms may prevent ArTara from being able to generate revenue,
attain profitability, or commercialize ArTara’s products. Such reforms could have an adverse effect on anticipated revenue
from product candidates that ArTara may successfully develop and for which ArTara may obtain regulatory approval and may affect
its overall financial condition and ability to develop product candidates.
Further legislation
or regulation could be passed that could harm ArTara’s business, financial condition and results of operations. Other legislative
changes have been proposed and adopted since the Affordable Care Act was enacted. For example, in August 2011, President Obama
signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction
to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted
deficit reduction of at least $1.2 trillion for fiscal years 2012 through 2021, triggering the legislation’s automatic reduction
to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year,
which went into effect beginning on April 1, 2013 and will stay in effect through 2029 unless additional Congressional action is
taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced
Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years.
Additionally, there
has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices.
Specifically, there have been several recent U.S. Congressional inquiries and proposed federal legislation designed to, among other
things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship
between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the
federal level, the Trump administration’s budget proposal for fiscal year 2021 includes
a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket
drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. Further, the Trump administration
previously released a “Blueprint,” or plan, to lower drug prices and reduce out of pocket costs of drugs
that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal
healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of
drug products paid by consumers. HHS has solicited feedback on some of these measures and has implemented others under its existing
authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step therapy
for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January 1, 2019.
While some proposed measures will require additional authorization to become effective, Congress and the Trump administration have
each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. Individual states
in the United States have also become increasingly active in passing legislation and implementing regulations designed to control
biopharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other
countries and bulk purchasing.
The Foreign Corrupt
Practices Act
The Foreign Corrupt
Practices Act (the “FCPA”), prohibits any U.S. individual or business from paying, offering, or authorizing payment
or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose
of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining
business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions
requiring ArTara to maintain books and records that accurately and fairly reflect all transactions of the corporation, including
international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Additional Regulation
In addition to the
foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety
and Health Act, the Resource Conservancy and Recovery Act and the Toxic Substances Control Act, affect ArTara’s business.
These and other laws govern ArTara’s use, handling and disposal of various biological, chemical and radioactive substances
used in, and wastes generated by, ArTara’s operations. If ArTara’s operations result in contamination of the environment
or expose individuals to hazardous substances, ArTara could be liable for damages and governmental fines. ArTara believes that
it is in material compliance with applicable environmental laws and that continued compliance therewith will not have a material
adverse effect on its business. ArTara cannot predict, however, how changes in these laws may affect its future operations.
Other Regulations
ArTara is also subject
to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. ArTara may incur significant costs
to comply with such laws and regulations now or in the future.
Employees
As of March 10, 2020,
we had twelve employees, eight of whom were full-time employees, one of whom was a part-time employee, and three of whom were contract
employees. As of March 10, 2020, four of ArTara’s employees were engaged in research and development activities and eight
of its employees were engaged in business development, finance, information systems, facilities, human resources or administrative
support. As of March 10, 2020, all of ArTara’s employees were located in the U.S. None of ArTara’s U.S. employees are
represented by any collective bargaining agreements. ArTara believes that it maintains good relations with its employees.
You should consider
carefully the following information about the risks described below, together with the other information contained in this Annual
Report and in our other public filings, in evaluating our business. If any of the following risks actually occurs, our business,
financial condition, results of operations, and future growth prospects would likely be materially and adversely affected. In these
circumstances, the market price of our common stock would likely decline.
Risks Related to ArTara’s
Financial Condition
ArTara has a very
limited operating history and has never generated any revenues.
ArTara is an early-stage
biopharmaceutical company with a very limited operating history that may make it difficult to evaluate the success of its business
to date and to assess its future viability. ArTara’s operations with respect to the entity that operationally survived the
Merger, have been limited to organizing and staffing the company, business planning, raising capital and in-licensing rights to
TARA-002 and IV Choline Chloride, have been limited to business planning, raising capital, developing ArTara’s pipeline assets
(TARA-002 and IV Choline Chloride), identifying product candidates, and other research and development. ArTara has not yet demonstrated
an ability to successfully complete any clinical trials and has never completed the development of any product candidate, nor has
it ever generated any revenue from product sales or otherwise. Consequently, ArTara has no meaningful operations upon which to
evaluate its business, and predictions about its future success or viability may not be as accurate as they could be if it had
a longer operating history or a history of successfully developing and commercializing biopharmaceutical products.
ArTara expects to
incur significant losses for the foreseeable future and may never achieve or maintain profitability.
Investment in biopharmaceutical
product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that
a product candidate will fail to gain regulatory approval or become commercially viable. ArTara has never generated any revenues,
and cannot estimate with precision the extent of our future losses. ArTara expects to incur increasing levels of operating losses
for the foreseeable future as it executes on the plan to continue research and development activities, including the ongoing and
planned clinical development of its product candidates, potentially acquire new products and/or product candidates, seek regulatory
approvals of and potentially commercialize any approved product candidates, hire additional personnel, protect its intellectual
property, and incur the additional costs of operating as a public company. ArTara expects to continue to incur significant and
increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have
an adverse effect on ArTara’s financial position and working capital.
To become and remain
profitable, ArTara must develop or acquire and eventually commercialize a product with significant market potential. This will
require the Company to be successful in a range of challenging activities, including completing preclinical studies and clinical
trials, obtaining marketing approval, manufacturing, marketing and selling any product candidate for which ArTara obtains marketing
approval, and satisfying post-marketing requirements, if any. ArTara may never succeed in these activities and, even if ArTara
succeeds in obtaining approval for and commercializing one or more products, ArTara may never generate revenues that are significant
enough to achieve profitability. In addition, as a young business, ArTara may encounter unforeseen expenses, difficulties, complications,
delays and other known and unknown challenges. Furthermore, because of the numerous risks and uncertainties associated with biopharmaceutical
product development, ArTara is unable to accurately predict the timing or amount of increased expenses or when, or if, ArTara will
be able to achieve profitability. If ArTara achieves profitability, it may not be able to sustain or increase profitability on
a quarterly or annual basis and may continue to incur substantial research and development and other expenditures to develop and
market additional product candidates. ArTara’s failure to become and remain profitable would decrease the value of the company
and could impair its ability to raise capital, maintain its research and development efforts, expand the business or continue operations.
A decline in the value of the Company could also cause you to lose all or part of your investment.
ArTara will need
to raise additional financing in the future to fund ArTara’s operations, which may not be available to it on favorable terms
or at all.
ArTara will require
substantial additional funds to conduct the costly and time-consuming clinical efficacy trials necessary to pursue regulatory approval
of each potential product candidate and to continue the development of TARA-002 and IV Choline Chloride in new indications or uses.
ArTara’s future capital requirements will depend upon a number of factors, including: the number and timing of future product
candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture
sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting,
maintaining and enforcing patent and other intellectual property claims; and the time and costs involved in obtaining regulatory
approvals and favorable reimbursement or formulary acceptance. Raising additional capital may be costly or difficult to obtain
and could significantly dilute stockholders’ ownership interests or inhibit ArTara’s ability to achieve its business
objectives. If ArTara raises additional funds through public or private equity offerings, the terms of these securities may include
liquidation or other preferences that adversely the rights of its common stockholders. Further, to the extent that ArTara raises
additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership
interest in ArTara will be diluted. In addition, any debt financing may subject ArTara to fixed payment obligations and covenants
limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or
declaring dividends. If ArTara raises additional capital through marketing and distribution arrangements or other collaborations,
strategic alliances or licensing arrangements with third parties, ArTara may have to relinquish certain valuable intellectual property
or other rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms
that may not be favorable to it. Even if ArTara were to obtain sufficient funding, there can be no assurance that it will be available
on terms acceptable to ArTara or its stockholders.
Clinical drug development
is very expensive, time-consuming and uncertain.
Clinical development
for ArTara’s product candidates is very expensive, time-consuming, difficult to design and implement, and the outcomes are
inherently uncertain. Most product candidates that commence clinical trials are never approved by regulatory authorities for commercialization
and of those that are approved many do not cover their costs of development. In addition, ArTara, any partner with which it may
in the future collaborate, the FDA, an institutional review board (IRB), or other regulatory authorities, including state and local
agencies and counterpart agencies in foreign countries, may suspend, delay, require modifications to or terminate ArTara’s
clinical trials at any time.
Risks Related to Drug/Biologics
Development
ArTara’s
business depends on the successful clinical development, regulatory approval and commercialization of TARA-002 and IV Choline Chloride.
The success of ArTara’s
business, including its ability to finance itself and generate revenue in the future, primarily depends on the successful development,
regulatory approval and commercialization of TARA-002 and IV Choline Chloride. The clinical and commercial success of TARA-002
and IV Choline Chloride depends on a number of factors, including the following:
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timely and successful completion of required clinical trials not yet initiated, which may be significantly
slower or costlier than ArTara currently anticipates and/or produce results that do not achieve the endpoints of the trials;
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whether ArTara is required by the FDA or similar foreign regulatory agencies to conduct additional
studies beyond those planned to support the approval and commercialization of TARA-002 and IV Choline Chloride;
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achieving and maintaining, and, where applicable, ensuring that ArTara’s third-party contractors
achieve and maintain compliance with their contractual obligations and with all regulatory requirements applicable to TARA-002
and IV Choline Chloride;
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ability of third parties with whom ArTara contracts to manufacture adequate clinical trial and
commercial supplies of TARA-002 and IV Choline Chloride, to remain in good standing with regulatory agencies and to develop, validate
and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices (“cGMP”);
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a continued acceptable safety profile during clinical development and following approval of TARA-002
and IV Choline Chloride;
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ability to obtain favorable labeling for TARA-002 and IV Choline Chloride through regulators that
allows for successful commercialization, given the drugs may be marketed only to the extent approved by these regulatory authorities
(unlike with most other industries);
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ability to successfully commercialize TARA-002 and IV Choline Chloride in the United States and
internationally, if approved for marketing, sale and distribution in such countries and territories, whether alone or in collaboration
others;
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acceptance by physicians, insurers and payors, and patients of the quality, benefits, safety and
efficacy of TARA-002 and IV Choline Chloride, if either is approved, including relative to alternative and competing treatments;
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existence of a regulatory environment conducive to the success of TARA-002 and IV Choline Chloride;
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ability to price TARA-002 and IV Choline Chloride to recover ArTara’s development costs and
generate a satisfactory profit margin; and
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ArTara’s ability and its partners’ ability to establish and enforce intellectual property
rights in and to TARA-002 and IV Choline Chloride.
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If ArTara does not
achieve one or more of these factors, many of which are beyond its control, in a timely manner or at all, ArTara could experience
significant delays or an inability to obtain regulatory approvals or commercialize TARA-002 and IV Choline Chloride. Even if regulatory
approvals are obtained, ArTara may never be able to successfully commercialize TARA-002 and IV Choline Chloride. Accordingly, ArTara
cannot assure you that it will be able to generate sufficient revenue through the sale of TARA-002 and IV Choline Chloride to continue
its business.
ArTara has never
conducted a clinical trial itself and may be unable to successfully do so for TARA-002 or IV Choline Chloride.
The conduct of a clinical
trials is a long, expensive, complicated and highly regulated process. Although ArTara’s employees have conducted successful
clinical trials in the past across many therapeutic areas while employed at other companies, ArTara as a company has not conducted
any clinical trials, and as a result may require more time and incur greater costs than it anticipates. Failure to commence or
complete, or delays in, ArTara’s planned clinical trials would prevent it from or delay ArTara in obtaining regulatory approval
of and commercializing TARA-002 and IV Choline Chloride, which would adversely impact its financial performance, as well as subjecting
it to significant contract liabilities.
TARA-002 is an
immunotherapy, the first indication for which ArTara plans to pursue is the treatment of lymphatic malformations, an indication
for which there are no FDA-approved therapies. This makes it difficult to predict the timing and costs of clinical development
for TARA-002, as well as the regulatory approval path.
To date, there are
no FDA-approved therapies for the treatment of lymphatic malformations and the standard of care is surgery. The regulatory approval
process for novel product candidates such as TARA-002 can be more expensive and take longer than for other, better known or extensively
studied therapeutic approaches. In addition, the clinical trials conducted on TARA-002 in the United States to date, included a
control arm in which treatment was initially delayed. It is unclear whether this trial design could support FDA approval or whether
a placebo-control or other randomization will be required by the FDA. Delay or failure to obtain, or unexpected costs in obtaining,
the regulatory approval necessary to bring TARA-002 to market could decrease ArTara’s ability to generate sufficient revenue
to maintain its business.
The regulatory path to approval of TARA-002 is dependent on FDA
acceptance on prior clinical data from OK-432.
The proposed regulatory strategy for the TARA-002 program is combination
of demonstrating comparability to a product that is not FDA approved. By demonstrating that TARA-002 is, in fact, OK-432, ArTara
believes that the large volume of data published on OK-432 including the data generated by the University of Iowa led study will
then apply to TARA-002. This strategy will rely on some components of a biosimilar pathway, with a significant difference being
that the same genetically distinct strain and proprietary manufacturing processes will be used to produce TARA-002 as OK-432. If
comparability is demonstrated and accepted by regulatory authorities, ArTara will attempt to rely on existing OK-432 safety and
efficacy data to file the Biologics Licensing Application (BLA). There is no example to date of a biologic product that was approved
utilizing this regulatory approach that we are aware of.
ArTara’s
product candidates may cause undesirable side effects or have other unexpected properties that could delay or prevent their regulatory
approval, limit the commercial profile of an approved label, or result in post-approval regulatory action.
Unforeseen side effects
from TARA-002 or IV Choline Chloride could arise either during clinical development or, if approved, after it has been marketed.
Undesirable side effects could cause ArTara, any partners with which ArTara may collaborate, or regulatory authorities to interrupt,
extend, modify, delay or halt clinical trials and could result in a more restrictive or narrower label or the delay or denial of
regulatory approval by the FDA or comparable foreign authorities.
Results of clinical
trials could reveal a high and unacceptable severity and prevalence of side effects. In such an event, trials could be suspended
or terminated, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny
approval of a product candidate for any or all targeted indications. The drug-related side effects could affect patient recruitment
or the ability of enrolled patients to complete the trial or result in product liability claims. Any of these occurrences may harm
ArTara’s business, financial condition, operating results and prospects.
Additionally, if ArTara
or others identify undesirable side effects, or other previously unknown problems, caused by a product after obtaining U.S. or
foreign regulatory approval, a number of potentially negative consequences could result, which could prevent ArTara or its potential
partners from achieving or maintaining market acceptance of the product and could substantially increase the costs of commercializing
such product.
Even if a product
candidate obtains regulatory approval, it may fail to achieve the broad degree of physician and patient adoption and use necessary
for commercial success.
The commercial success
of both TARA-002 and IV Choline Chloride, if approved, will depend significantly on the broad adoption and use of them by physicians
and patients for approved indications, and neither may be commercially successful even though the product is shown to be safe and
effective. The degree and rate of physician and patient adoption of a product, if approved, will depend on a number of factors,
including but not limited to:
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patient demand for approved products that treat the indication for which a product is approved;
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the effectiveness of the product compared to other available therapies;
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the availability of coverage and adequate reimbursement from managed care plans and other healthcare
payors;
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the cost of treatment in relation to alternative treatments and willingness to pay on the part
of patients;
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in the case of TARA-002, overcoming physician or patient biases toward surgery for the treatment
of lymphatic malformations;
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insurers’ willingness to see the applicable indication as a disease worth treating;
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patient satisfaction with the results, administration and overall treatment experience;
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limitations or contraindications, warnings, precautions or approved indications for use different
than those sought by ArTara that are contained in the final FDA-approved labeling for the applicable product;
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any FDA requirement to undertake a risk evaluation and mitigation strategy;
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the effectiveness of ArTara’s sales, marketing, pricing, reimbursement and access, government
affairs, and distribution efforts;
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adverse publicity about a product or favorable publicity about competitive products;
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new government regulations and programs, including price controls and/or limits or prohibitions
on ways to commercialize drugs, such as increased scrutiny on direct-to-consumer advertising of pharmaceuticals; and
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potential product liability claims or other product-related litigation.
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If either of TARA-002
or IV Choline Chloride is approved for use but fails to achieve the broad degree of physician and patient adoption necessary for
commercial success, ArTara’s operating results and financial condition will be adversely affected, which may delay, prevent
or limit its ability to generate revenue and continue its business.
Any adverse developments
that occur in patients undergoing treatment with OK-432 / Picibanil or in patients participating in clinical trials conducted by
third parties may affect ArTara’s ability to obtain regulatory approval or commercialize TARA-002.
Chugai Pharmaceutical
Co., Ltd., over which ArTara has no control, has the rights to commercialize TARA-002 and it is currently marketed in Japan and
Taiwan, under the name Picibanil for various indications. In addition, clinical trials using Picibanil are currently ongoing in
various countries around the world. If serious adverse events occur with patients using Picibanil or during any clinical trials
of Picibanil conducted by third parties, the FDA may delay, limit or deny approval of TARA-002 or require ArTara to conduct additional
clinical trials as a condition to marketing approval, which would increase its costs. If ArTara receives FDA approval for TARA-002
and a new and serious safety issue is identified in connection with use of Picibanil or in clinical trials of Picibanil conducted
by third parties, the FDA may withdraw their approval of the product or otherwise restrict ArTara’s ability to market and
sell TARA-002. In addition, treating physicians may be less willing to administer TARA-002 due to concerns over such adverse events,
which would limit ArTara’s ability to commercialize TARA-002.
ArTara may in the
future conduct clinical trials for its product candidates outside the United States, and the FDA and applicable foreign regulatory
authorities may not accept data from such trials.
ArTara may in the
future choose to conduct one or more of its clinical trials outside of the United States. Although the FDA or applicable foreign
regulatory authority may accept data from clinical trials conducted outside the United States or the applicable jurisdiction, acceptance
of such study data by the FDA or applicable foreign regulatory authority may be subject to certain conditions or exclusion. Where
data from foreign clinical trials are intended to serve as the basis for marketing approval in the United States, the FDA will
not approve the application on the basis of foreign data alone unless such data are applicable to the U.S. population and U.S.
medical practice; the studies were performed by clinical investigators of recognized competence; and the data are considered valid
without the need for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able
to validate the data through an on-site inspection or other appropriate means. Many foreign regulatory bodies have similar requirements.
In addition, such foreign studies would be subject to the applicable local laws of the foreign jurisdictions where the studies
are conducted. There can be no assurance the FDA or applicable foreign regulatory authority will accept data from trials conducted
outside of the United States or the applicable home country. If the FDA or applicable foreign regulatory authority does not accept
such data, it would likely result in the need for additional trials, which would be costly and time-consuming and delay aspects
of ArTara’s business plan.
ArTara may choose
not to continue developing or commercializing any of its product candidates at any time during development or after approval, which
would reduce or eliminate its potential return on investment for those product candidates.
At any time, ArTara
may decide to discontinue the development of any of its product candidates for a variety of reasons, including the appearance of
new technologies that make its product obsolete, competition from a competing product or changes in or failure to comply with applicable
regulatory requirements. If ArTara terminates a program in which it has invested significant resources, ArTara will not receive
any return on its investment and it will have missed the opportunity to have allocated those resources to potentially more productive
uses.
ArTara’s
or third party’s clinical trials may fail to demonstrate the safety and efficacy of its product candidates, or serious adverse
or unacceptable side effects may be identified during their development, which could prevent or delay marketing approval and commercialization,
increase ArTara’s costs or necessitate the abandonment or limitation of the development of the product candidate.
Before obtaining marketing
approvals for the commercial sale of any product candidate, ArTara must demonstrate through lengthy, complex and expensive preclinical
testing and clinical trials that such product candidate is both safe and effective for use in the applicable indication, and failures
can occur at any stage of testing. Clinical trials often fail to demonstrate safety and are associated with side effects or have
characteristics that are unexpected. Based on the safety profile seen in clinical testing, ArTara may need to abandon development
or limit development to more narrow uses in which the side effects or other characteristics are less prevalent, less severe or
more tolerable from a risk-benefit perspective. The FDA or an IRB may also require that ArTara suspend, discontinue, or limit clinical
trials based on safety information. Such findings could further result in regulatory authorities failing to provide marketing authorization
for the product candidate. Many pharmaceutical candidates that initially showed promise in early stage testing and which were efficacious
have later been found to cause side effects that prevented further development of the drug candidate and, in extreme cases, the
side effects were not seen until after the drug was marketed, causing regulators to remove the drug from the market post-approval.
ArTara’s regulatory
strategy for TARA-002 requires first that it can demonstrate that TARA-002 is the same biologic substance as OK-432, which is currently
manufactured in Japan and marketed in Japan and Taiwan by Chugai. In order to demonstrate comparability, ArTara plans to conduct
studies using batches of OK-432 from Japan and batches of TARA-002 manufactured in the United States by its CMO. If ArTara can
demonstrate comparability, it plans to engage with the FDA to seek its agreement to use OK-432’s safety and efficacy data
from clinical trials previously conducted by third parties for its BLA filing. There can be no assurances that ArTara’s CMO
will be able to produce a sufficiently comparable product or that the FDA will find such substances comparable or permit ArTara
to use any of the data from prior clinical trials as part of the BLA filing for TARA-002.
Other Risks Related
to ArTara’s Business
ArTara’s
product candidates, if approved, will face significant competition and their failure to compete effectively may prevent them from
achieving significant market penetration.
The pharmaceutical
industry is characterized by rapidly advancing technologies, intense competition, less effective patent terms, and a strong emphasis
on developing newer, fast-to-market proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing
and marketing of healthcare products competitive with those that ArTara is developing, including TARA-002 and IV Choline Chloride.
ArTara will face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology
companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales
forces, manufacturing capabilities, research and development capabilities, regulatory expertise, clinical trial expertise, intellectual
property portfolios, more international reach, experience in obtaining patents and regulatory approvals for product candidates
and other resources than ArTara. Some of the companies that offer competing products also have a broad range of other product offerings,
large direct sales forces and long-term customer relationships with ArTara’s target physicians, which could inhibit ArTara’s
market penetration efforts.
With respect to ArTara’s
lead product candidate, TARA-002, for the treatment of LMs, the active ingredient in TARA-002 is a genetically distinct strain
of Streptococcus pyogenes (group A, type 3) Su strain. TARA-002 is produced through a proprietary manufacturing process.
ArTara anticipates that, if approved by the FDA, TARA-002 will be protected by 12 years of biologic exclusivity. In addition, TARA-002
is likely to have seven years of Orphan Drug Designation exclusivity if deemed comparable to OK-432 by the FDA or based on the
prevalence of the disease. There are no pharmacotherapies currently available for the treatment of LMs and the current standard
of care is a high-risk surgical procedure. There are a handful of drug development companies and academic researchers exploring
oral formulations of various agents including macrolides, phosphodiesterase inhibitors, and calcineurin/ mTOR inhibitors. These
are in early development and earlier experiments in LMs utilizing other compounds utilizing these mechanisms have not produced
conclusive evidence of safety or efficacy.
There are no treatments
currently available for IFALD. With respect to IV Choline Chloride for the treatment of IFALD, IV Choline Chloride is the only
sterile injectable form of choline chloride that can be combined with parenteral nutrition. Further, if approved, IV Choline Chloride
will be protected by Orphan Drug Designation exclusivity for seven years.
TARA-002 and any
future product candidates for which ArTara intends to seek approval as biologic products may face competition sooner than anticipated.
The Patient Protection
and Affordable Care Act, or Affordable Care Act, signed into law on March 23, 2010, includes a subtitle called the Biologics Price
Competition and Innovation Act of 2009, or BPCIA, which created an abbreviated approval pathway for biological products that are
biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a biosimilar
product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the
FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which
the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing
version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical
data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product.
The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation
and meaning are subject to uncertainty. While it is uncertain when such processes are intended to implement BPCIA may be fully
adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for ArTara’s
biological products.
ArTara believes that
any of its product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity.
However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will
not consider ArTara’s product candidates to be reference products for competing products, potentially creating the opportunity
for biosimilar competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity
provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be
substituted for any one of ArTara’s reference products in a way that is similar to traditional generic substitution for non-biological
products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
ArTara expects
to rely on third-party CROs and other third parties to conduct and oversee its clinical trials. If these third parties do not meet
ArTara’s requirements or otherwise conduct the trials as required, ArTara may not be able to satisfy its contractual obligations
or obtain regulatory approval for, or commercialize, its product candidates.
ArTara expects to
rely on third-party contract research organizations (CROs) to conduct and oversee its TARA-002 and IV Choline Chloride clinical
trials and other aspects of product development. ArTara also expects to rely on various medical institutions, clinical investigators
and contract laboratories to conduct its trials in accordance with ArTara’s clinical protocols and all applicable regulatory
requirements, including the FDA’s regulations and good clinical practice (GCP) requirements, which are an international standard
meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors,
and state regulations governing the handling, storage, security and recordkeeping for drug and biologic products. These CROs and
other third parties will play a significant role in the conduct of these trials and the subsequent collection and analysis of data
from the clinical trials. ArTara will rely heavily on these parties for the execution of its clinical trials and preclinical studies
and will control only certain aspects of their activities. ArTara and its CROs and other third-party contractors will be required
to comply with GCP and good laboratory practice (GLP) requirements, which are regulations and guidelines enforced by the FDA and
comparable foreign regulatory authorities. Regulatory authorities enforce these GCP and GLP requirements through periodic inspections
of trial sponsors, principal investigators and trial sites. If ArTara or any of these third parties fail to comply with applicable
GCP and GLP requirements, or reveal noncompliance from an audit or inspection, the clinical data generated in ArTara’s clinical
trials may be deemed unreliable and the FDA or other regulatory authorities may require ArTara to perform additional clinical trials
before approving ArTara’s or ArTara’s partners’ marketing applications. ArTara cannot assure that upon inspection
by a given regulatory authority, such regulatory authority will determine that any of ArTara’s clinical or preclinical trials
comply with applicable GCP and GLP requirements. In addition, ArTara’s clinical trials generally must be conducted with product
produced under cGMP regulations. ArTara’s failure to comply with these regulations and policies may require it to repeat
clinical trials, which would delay the regulatory approval process.
If any of ArTara’s
CROs or clinical trial sites terminate their involvement in one of its clinical trials for any reason, it may not be able to enter
into arrangements with alternative CROs or clinical trial sites or do so on commercially reasonable terms. In addition, if ArTara’s
relationship with clinical trial sites is terminated, it may experience the loss of follow-up information on patients enrolled
in its ongoing clinical trials unless ArTara is able to transfer the care of those patients to another qualified clinical trial
site. In addition, principal investigators for ArTara’s clinical trials may serve as scientific advisors or consultants to
it from time to time and could receive cash or equity compensation in connection with such services. If these relationships and
any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable
clinical trial site may be questioned by the FDA.
ArTara currently
has no marketing capabilities and no sales organization. If ArTara is unable to establish sales and marketing capabilities on its
own or through third parties, ArTara will be unable to successfully commercialize its product candidates, if approved, or generate
product revenue.
ArTara currently has
no marketing capabilities and no sales organization. To commercialize ArTara’s product candidates, if approved, in the United
States, Canada, the European Union, Latin America and other jurisdictions it seeks to enter, ArTara must build its marketing, sales,
distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services,
and ArTara may not be successful in doing so. Although ArTara’s employees have experience in the marketing, sale and distribution
of pharmaceutical products, and business development activities involving external alliances, from prior employment at other companies,
ArTara as a company has no prior experience in the marketing, sale and distribution of pharmaceutical products, and there are significant
risks involved in building and managing a sales organization, including its ability to hire, retain and incentivize qualified individuals,
generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically
dispersed sales and marketing team. Any failure or delay in the development of ArTara’s internal sales, marketing, distribution
and pricing/reimbursement/access capabilities would impact adversely the commercialization of these products.
ArTara has only
received the exclusive rights to the materials required to commercialize TARA-002 in territories other than Japan and Taiwan until
June 17, 2024, or an earlier date if Chugai terminates the agreement with ArTara for any number of reasons, including for convenience
after June 2020, following which such rights become nonexclusive.
Pursuant to an agreement
with Chugai Pharmaceutical Co., Ltd. dated June 17, 2019, Chugai agreed to provide ArTara with exclusive access to the starting
material necessary to manufacture TARA-002 as well as technical support necessary for ArTara to develop and commercialize TARA-002
anywhere in the world other than Japan and Taiwan. However, this agreement does not prevent Chugai from providing such materials
and support to any third party for medical, compassionate use and/or non-commercial research purposes and this agreement is not
exclusive following June 17, 2024 or following any termination of the agreement by either party, which includes a termination by
Chugai for convenience, which it has the right to do upon 90 days’ notice after June 2020. Once ArTara’s rights to
the materials and technology necessary to manufacture, develop and commercialize TARA-002 are not exclusive, third parties, including
those with greater expertise and greater resources, could obtain such materials and technology and develop a competing therapy,
which would adversely affect ArTara’s ability to generate revenue and achieve or maintain profitability.
ArTara currently
has no products approved for sale, and it may never obtain regulatory approval to commercialize any of its product candidates.
The research, testing,
manufacturing, safety surveillance, efficacy, quality control, recordkeeping, labeling, packaging, storage, approval, sale, marketing,
distribution, import, export and reporting of safety and other post-market information related to its biopharmaceutical products
are subject to extensive regulation by the FDA and other regulatory authorities in the United States and in foreign countries,
and such regulations differ from country to country and frequently are revised.
Even after ArTara
achieves U.S. regulatory approval for a product candidate, if any, ArTara will be subject to continued regulatory review and compliance
obligations. For example, with respect to ArTara’s product candidates, the FDA may impose significant restrictions on the
approved indicated uses for which the product may be marketed or on the conditions of approval. A product candidate’s approval
may contain requirements for potentially costly post-approval studies and surveillance, including Phase 4 clinical trials, to monitor
the safety and efficacy of the product. ArTara also will be subject to ongoing FDA obligations and continued regulatory review
with respect to, among other things, the manufacturing, processing, labeling, packaging, distribution, pharmacovigilance and adverse
event reporting, storage, advertising, promotion and recordkeeping for ArTara’s product candidates.
These requirements
include submissions of safety and other post-marketing information and reports, registration, continued compliance with cGMP requirements
and with the FDA’s GCP requirements and GLP requirements, which are regulations and guidelines enforced by the FDA for all
of ArTara’s product candidates in clinical and preclinical development, and for any clinical trials that it conducts post-approval,
as well as continued compliance with the FDA’s laws governing commercialization of the approved product, including but not
limited to the FDA’s Office of Prescription Drug Promotion (OPDP) regulation of promotional activities, fraud and abuse,
product sampling, scientific speaker engagements and activities, formulary interactions as well as interactions with healthcare
practitioners. To the extent that a product candidate is approved for sale in other countries, ArTara may be subject to similar
or more onerous (i.e., prohibition on direct-to-consumer advertising that does not exist in the United States.) restrictions and
requirements imposed by laws and government regulators in those countries.
In addition, manufacturers
of drug and biologic products and their facilities are subject to continual review and periodic inspections by the FDA and other
regulatory authorities for compliance with cGMP regulations. If ArTara or a regulatory agency discovers previously unknown problems
with a product, such as adverse events of unanticipated severity or frequency, or problems with the manufacturing, processing,
distribution or storage facility where, or processes by which, the product is made, a regulatory agency may impose restrictions
on that product or ArTara, including requesting that ArTara initiate a product recall, or requiring notice to physicians or the
public, withdrawal of the product from the market, or suspension of manufacturing.
If ArTara, its product
candidates or the manufacturing facilities for its product candidates fail to comply with applicable regulatory requirements, a
regulatory agency may:
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impose restrictions on the sale, marketing or manufacturing of the product, amend, suspend or withdraw
product approvals or revoke necessary licenses;
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mandate modifications to promotional and other product-specific materials or require ArTara to
provide corrective information to healthcare practitioners or in its advertising;
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require ArTara or its partners to enter into a consent decree, which can include imposition of
various fines, reimbursements for inspection costs, required due dates for specific actions, penalties for noncompliance and, in
extreme cases, require an independent compliance monitor to oversee ArTara’s activities;
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issue warning letters, bring enforcement actions, initiate surprise inspections, issue show cause
notices or untitled letters describing alleged violations, which may be publicly available;
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commence criminal investigations and prosecutions;
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impose injunctions, suspensions or revocations of necessary approvals or other licenses;
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impose other civil or criminal penalties;
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suspend any ongoing clinical trials;
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place restrictions on the kind of promotional activities that can be done;
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delay or refuse to approve pending applications or supplements to approved applications filed by
ArTara or its potential partners;
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refuse to permit drugs or precursor chemicals to be imported or exported to or from the United
States;
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suspend or impose restrictions on operations, including costly new manufacturing requirements;
or
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seize or detain products or require ArTara or its partners to initiate a product recall.
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The regulations, policies
or guidance of the FDA and other applicable government agencies may change, and new or additional statutes or government regulations
may be enacted, including at the state and local levels, which can differ by geography and could prevent or delay regulatory approval
of ArTara’s product candidates or further restrict or regulate post-approval activities. ArTara cannot predict the likelihood,
nature or extent of adverse government regulations that may arise from future legislation or administrative action, either in the
United States or abroad. If ArTara is not able to achieve and maintain regulatory compliance, it may not be permitted to commercialize
its product candidates, which would adversely affect its ability to generate revenue and achieve or maintain profitability.
ArTara may face
product liability exposure, and if successful claims are brought against it, ArTara may incur substantial liability if its insurance
coverage for those claims is inadequate.
ArTara faces an inherent
risk of product liability or similar causes of action as a result of the clinical testing of its product candidates and will face
an even greater risk if ArTara commercializes any products. This risk exists even if a product is approved for commercial sale
by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority and notwithstanding
ArTara complying with applicable laws on promotional activity. ArTara’s products and product candidates are designed to affect
important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with ArTara’s
product candidates could result in injury to a patient or potentially even death. ArTara cannot offer any assurance that it will
not face product liability suits in the future, nor can it assure that its insurance coverage will be sufficient to cover its liability
under any such cases.
In addition, a liability
claim may be brought against ArTara even if its product candidates merely appear to have caused an injury. Product liability claims
may be brought against ArTara by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming
into contact with its product candidates, among others, and under some circumstances even government agencies. If ArTara cannot
successfully defend itself against product liability or similar claims, it will incur substantial liabilities, reputational harm
and possibly injunctions and punitive actions. In addition, regardless of merit or eventual outcome, product liability claims may
result in:
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withdrawal or delay of recruitment or decreased enrollment rates of clinical trial participants;
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termination or increased government regulation of clinical trial sites or entire trial programs;
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the inability to commercialize ArTara’s product candidates;
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decreased demand for ArTara’s product candidates;
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impairment of ArTara’s business reputation;
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product recall or withdrawal from the market or labeling, marketing or promotional restrictions;
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substantial costs of any related litigation or similar disputes;
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distraction of management’s attention and other resources from ArTara’s primary business;
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significant delay in product launch;
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substantial monetary awards to patients or other claimants against ArTara that may not be covered
by insurance;
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withdrawal of reimbursement or formulary inclusion; or
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ArTara intends to
obtain product liability insurance coverage for its clinical trials. Large judgments have been awarded in class action or individual
lawsuits based on drugs that had unanticipated side effects. ArTara’s insurance coverage may not be sufficient to cover all
of its product liability-related expenses or losses and may not cover it for any expenses or losses it may suffer. Moreover, insurance
coverage is becoming increasingly expensive, restrictive and narrow, and, in the future, ArTara may not be able to maintain adequate
insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect it against losses due to product
liability or other similar legal actions. ArTara will need to increase its product liability coverage if any of its product candidates
receive regulatory approval, which will be costly, and it may be unable to obtain this increased product liability insurance on
commercially reasonable terms or at all and for all geographies in which ArTara wishes to launch. A successful product liability
claim or series of claims brought against ArTara, if judgments exceed its insurance coverage, could decrease its cash and harm
its business, financial condition, operating results and future prospects.
ArTara’s
employees, independent contractors, principal investigators, other clinical trial staff, consultants, vendors, CROs and any partners
with whom ArTara may collaborate may engage in misconduct or other improper activities, including noncompliance with regulatory
standards and requirements.
ArTara is exposed
to the risk that its employees, independent contractors, principal investigators, other clinical trial staff, consultants, vendors,
CROs and any partners with which ArTara may collaborate may engage in fraudulent or other illegal activity. Misconduct by these
persons could include intentional, reckless, gross or negligent misconduct or unauthorized activity that violates: laws or regulations,
including those laws requiring the reporting of true, complete and accurate information to the FDA or foreign regulatory authorities;
manufacturing standards; federal, state and foreign healthcare fraud and abuse laws and data privacy; anticorruption laws, antikickback
and Medicare/Medicaid rules, or laws that require the true, complete and accurate reporting of financial information or data, books
and records. If any such or similar actions are instituted against ArTara and ArTara is not successful in defending itself or asserting
ArTara’s rights, those actions could have a significant impact on ArTara’s business, including the imposition of civil,
criminal and administrative and punitive penalties, damages, monetary fines, possible exclusion from participation in Medicare,
Medicaid and other federal healthcare programs, debarments, contractual damages, imprisonment, reputational harm, diminished profits
and future earnings, injunctions, and curtailment or cessation of ArTara’s operations, any of which could adversely affect
ArTara’s ability to operate ArTara’s business and ArTara’s operating results.
ArTara may be subject
to risks related to off-label use of its product candidates.
The FDA strictly regulates
the advertising and promotion of drug products, and drug products may only be marketed or promoted for their FDA approved uses,
consistent with the product’s approved labeling. Advertising and promotion of any product candidate that obtains approval
in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Office of Inspector General of the
Department of Health and Human Services, state attorneys general, members of Congress and the public. Violations, including promotion
of ArTara’s products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations,
and civil, criminal and/or administrative sanctions by the FDA. Additionally, advertising and promotion of any product candidate
that obtains approval outside of the United States will be heavily scrutinized by relevant foreign regulatory authorities.
Even if ArTara obtains
regulatory approval for its product candidates, the FDA or comparable foreign regulatory authorities may require labeling changes
or impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially
costly post-approval studies or post-market surveillance.
In the United States,
engaging in impermissible promotion of ArTara’s product candidates for off-label uses can also subject it to false claims
litigation under federal and state statutes, which can lead to civil, criminal and/or administrative penalties and fines and agreements,
such as a corporate integrity agreement, that materially restrict the manner in which ArTara promotes or distributes its product
candidates. If ArTara does not lawfully promote its products once they have received regulatory approval, ArTara may become subject
to such litigation and, if it is not successful in defending against such actions, those actions could have a material adverse
effect on its business, financial condition and operating results and even result in having an independent compliance monitor assigned
to audit ArTara’s ongoing operations for a lengthy period of time.
If ArTara or any
partners with which ArTara may collaborate are unable to achieve and maintain coverage and adequate levels of reimbursement for
TARA-002 or IV Choline Chloride following regulatory approval, their commercial success may be hindered severely.
If TARA-002 and IV
Choline Chloride only becomes available by prescription, successful sales by ArTara or by any partners with which ArTara may collaborate
depend on the availability of coverage and adequate reimbursement from third-party payors. Patients who are prescribed medicine
for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with
their prescription drugs. The availability of coverage and adequate reimbursement from governmental healthcare programs, such as
Medicare and Medicaid in the United States, and private third-party payors is often critical to new product acceptance. Coverage
decisions may depend on clinical and economic standards that disfavor new drug products when more established or lower-cost therapeutic
alternatives are already available or subsequently become available, or may be affected by the budgets and demands on the various
entities responsible for providing health insurance to patients who will use TARA-002 and IV Choline Chloride. Even if ArTara obtains
coverage for its products, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients
find unacceptably high. Patients are unlikely to use a product unless coverage is provided, and reimbursement is adequate to cover
a significant portion of the cost.
In addition, the market
for ArTara’s products will depend significantly on access to third-party payors’ drug formularies or lists of medications
for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often
leads to downward pricing pressures on pharmaceutical companies and there may be time limitations on when a new drug may even apply
for formulary inclusion. Also, third-party payors may refuse to include products in their formularies or otherwise restrict patient
access to such products when a less costly generic equivalent or other treatment alternative is available in the discretion of
the formulary.
Third-party payors,
whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare
costs. In addition, in the United States, although private third-party payors tend to follow Medicare practices, no uniform or
consistent policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement
for drug products can differ significantly from payor to payor as well as state to state. Consequently, the coverage determination
process is often a time-consuming and costly process that must be played out across many jurisdictions and different entities and
which will require ArTara to provide scientific, clinical and health economics support for the use of its products compared to
current alternatives and do so to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained
and in what time frame.
Further, ArTara believes
that future coverage and reimbursement likely will be subject to increased restrictions both in the United States and in international
markets. Third-party coverage and reimbursement for ArTara’s products may not be available or adequate in either the United
States or international markets, which could harm ArTara’s business, financial condition, operating results and prospects.
Healthcare reform
measures could hinder or prevent the commercial success of ArTara’s product candidates.
The current presidential
administration and certain members of the majority of the U.S. Congress have sought to repeal all or part of the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “Affordable Care Act”),
and implement a replacement program. For example, the so-called “individual mandate” was repealed as part of tax reform
legislation adopted in December 2017, such that the shared responsibility payment for individuals who fail to maintain minimum
essential coverage under section 5000A of the Code was eliminated beginning in 2019. In addition, litigation may result in the
repeal or replacement of prevent some or all of the Affordable Care Act legislation from taking effect. For example, on December
14, 2018, the U.S. District Court for the Northern District of Texas held that the individual mandate is a critical and inseverable
feature of the Affordable Care Act, and therefore, because it was repealed as part of the tax reform legislation, the remaining
provisions of the Affordable Care Act are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit
upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court
to determine whether the remaining provisions of the ACA are invalid as well. The impact of this ruling is stayed as it is appealed
to the Fifth Circuit Court of Appeals. While the ruling will have no immediate effect, it is unclear how this decision, future
decisions, and subsequent appeals, if any, will impact the law. In 2019 and beyond, ArTara may face additional uncertainties as
a result of likely federal and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions
of the Affordable Care Act. There is no assurance that the Affordable Care Act, as amended in the future, will not adversely affect
ArTara’s business and financial results.
Additionally, there has been increasing legislative and enforcement interest in the United
States with respect to drug pricing practices. For example, the Trump administration previously released a “Blueprint,”
or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer
competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list
price of their products, and reduce the out of pocket costs of drug products paid by consumers, and the Trump administration’s
budget proposal for fiscal year 2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug
prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and
biosimilar drugs in October 2018, the U.S. President proposed to lower Medicare Part B drug prices, in addition to contemplating
other measures to lower prescription drug prices. While these and other measures in the proposal may require additional authorization
to become effective, ArTara expects that additional state and federal healthcare reform measures will be adopted in the future,
any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could
result in reduced demand for its product candidates if approved or additional pricing pressures.
There are also calls
to place additional restrictions on or to ban all direct-to-consumer advertising of pharmaceuticals, which would limit ArTara’s
ability to market its product candidates. The United States is in a minority of jurisdictions that allow this kind of advertising
and its removal could limit the potential reach of a marketing campaign.
ArTara may also
be subject to stricter healthcare laws, regulation and enforcement, and its failure to comply with those laws could adversely affect
its business, operations and financial condition.
Certain federal and
state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to ArTara’s
business. ArTara is subject to regulation by both the federal government and the states in which it or its partners conduct business.
The healthcare laws and regulations that may affect ArTara’s ability to operate include: the federal Anti-Kickback Statute;
federal civil and criminal false claims laws and civil monetary penalty laws; the federal Health Insurance Portability and Accountability
Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act; the Prescription Drug Marketing
Act (for sampling of drug product among other things); the federal physician sunshine requirements under the Affordable Care Act;
the Foreign Corrupt Practices Act as it applies to activities outside of the United States; the new federal Right-to-Try legislation;
and state law equivalents of many of the above federal laws.
Because of the breadth
of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of ArTara’s
business activities could be subject to challenge under one or more of such laws. In addition, recent healthcare reform legislation
has strengthened these laws. For example, the recently enacted Affordable Care Act, among other things, amended the intent requirement
of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes. A person or entity no longer needs to have
actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided that the government
may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the federal civil False Claims Act.
Achieving and sustaining
compliance with these laws may prove costly. In addition, any action against ArTara for violation of these laws, even if ArTara
successfully defends against it, could cause ArTara to incur significant legal expenses and divert its management’s attention
from the operation of its business and result in reputational damage. If ArTara’s operations are found to be in violation
of any of the laws described above or any other governmental laws or regulations that apply to ArTara, it may be subject to penalties,
including administrative, civil and criminal penalties, damages, including punitive damages, fines, disgorgement, the exclusion
from participation in federal and state healthcare programs, imprisonment or the curtailment or restructuring of its operations,
and injunctions, any of which could adversely affect ArTara’s ability to operate its business and its financial results.
ArTara intends
to in-license and acquire product candidates and may engage in other strategic transactions, which could impact its liquidity,
increase its expenses and present significant distractions to its management.
ArTara’s strategy
is to in-license and acquire product candidates and it may engage in other strategic transactions. Additional potential transactions
that ArTara may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint
ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require ArTara to incur
non-recurring or other charges, may increase its near- and long-term expenditures and may pose significant integration challenges
or disrupt its management or business, which could adversely affect its operations and financial results. Accordingly, there can
be no assurance that ArTara will undertake or successfully complete any transactions of the nature described above, and any transaction
that it does complete could harm its business, financial condition, operating results and prospects. ArTara has no current plan,
commitment or obligation to enter into any transaction described above, and ArTara is not engaged in discussions related to additional
partnerships.
ArTara’s
failure successfully to in-license, acquire, develop and market additional product candidates or approved products would impair
its ability to grow its business.
ArTara intends to
in-license, acquire, develop and market additional products and product candidates. Because ArTara’s internal research and
development capabilities are limited, it may be dependent on pharmaceutical companies, academic or government scientists and other
researchers to sell or license products or technology to it. The success of this strategy depends partly on ArTara’s ability
to identify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements
with their current owners, and finance these arrangements.
The process of proposing,
negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other
companies, including some with substantially greater financial, marketing, sales and other resources, may compete with ArTara for
the license or acquisition of product candidates and approved products. ArTara has limited resources to identify and execute the
acquisition or in-licensing of third-party products, businesses and technologies and integrate them into its current infrastructure.
Moreover, ArTara may devote resources to potential acquisitions or licensing opportunities that are never completed, or ArTara
may fail to realize the anticipated benefits of such efforts. ArTara may not be able to acquire the rights to additional product
candidates on terms that it finds acceptable or at all.
Further, any product
candidate that ArTara acquires may require additional development efforts prior to commercial sale, including preclinical or clinical
testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure
typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently
safe and effective for approval by regulatory authorities. In addition, ArTara cannot provide assurance that any approved products
that it acquires will be manufactured or sold profitably or achieve market acceptance.
ArTara expects
to rely on collaborations with third parties for the successful development and commercialization of its product candidates.
ArTara expects to
rely upon the efforts of third parties for the successful development and commercialization of ArTara’s current and future
product candidates. The clinical and commercial success of ArTara’s product candidates may depend upon maintaining successful
relationships with third-party partners which are subject to a number of significant risks, including the following:
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ArTara’s partners’ ability to execute their responsibilities in a timely, cost-efficient
and compliant manner;
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reduced control over delivery and manufacturing schedules;
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price increases and product reliability;
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manufacturing deviations from internal or regulatory specifications;
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the failure of partners to perform their obligations for technical, market or other reasons;
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misappropriation of ArTara’s current or future product candidates; and
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other risks in potentially meeting ArTara’s current and future product commercialization
schedule or satisfying the requirements of its end-users.
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ArTara cannot assure
you that it will be able to establish or maintain third-party relationships in order to successfully develop and commercialize
its product candidates.
ArTara relies completely
on third-party contractors to supply, manufacture and distribute clinical drug supplies for its product candidates, which may include
sole-source suppliers and manufacturers; ArTara intends to rely on third parties for commercial supply, manufacturing and distribution
if any of its product candidates receive regulatory approval; and ArTara expects to rely on third parties for supply, manufacturing
and distribution of preclinical, clinical and commercial supplies of any future product candidates.
ArTara does not currently
have, nor does it plan to acquire, the infrastructure or capability to supply, store, manufacture or distribute preclinical, clinical
or commercial quantities of drug substances or products. Additionally, ArTara has not entered into a long-term commercial supply
agreement to provide it with such drug substances or products. As a result, ArTara’s ability to develop its product candidates
is dependent, and ArTara’s ability to supply its products commercially will depend, in part, on ArTara’s ability to
obtain the APIs and other substances and materials used in its product candidates successfully from third parties and to have finished
products manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for preclinical
and clinical testing and commercialization. If ArTara fails to develop and maintain supply and other technical relationships with
these third parties, it may be unable to continue to develop or commercialize its products and product candidates.
ArTara does not have
direct control over whether its contract suppliers and manufacturers will maintain current pricing terms, be willing to continue
supplying ArTara with APIs and finished products or maintain adequate capacity and capabilities to serve its needs, including quality
control, quality assurance and qualified personnel. ArTara is dependent on its contract suppliers and manufacturers for day-to-day
compliance with applicable laws and cGMPs for production of both APIs and finished products. If the safety or quality of any product
or product candidate or component is compromised due to a failure to adhere to applicable laws or for other reasons, ArTara may
not be able to commercialize or obtain regulatory approval for the affected product or product candidate successfully, and ArTara
may be held liable for injuries sustained as a result.
In order to conduct
larger or late-stage clinical trials for its product candidates and supply sufficient commercial quantities of the resulting drug
product and its components, if that product candidate is approved for sale, ArTara’s contract manufacturers and suppliers
will need to produce its drug substances and product candidates in larger quantities, more cost-effectively and, in certain cases,
at higher yields than they currently achieve. If ArTara’s third-party contractors are unable to scale up the manufacture
of any of its product candidates successfully in sufficient quality and quantity and at commercially reasonable prices, or are
shut down or put on clinical hold by government regulators, and ArTara is unable to find one or more replacement suppliers or manufacturers
capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and ArTara is unable
to transfer the processes successfully on a timely basis, the development of that product candidate and regulatory approval or
commercial launch for any resulting products may be delayed, or there may be a shortage in supply, either of which could significantly
harm its business, financial condition, operating results and prospects.
ArTara expects to
continue to depend on third-party contract suppliers and manufacturers for the foreseeable future. ArTara’s supply and manufacturing
agreements, if any, do not guarantee that a contract supplier or manufacturer will provide services adequate for its needs. Additionally,
any damage to or destruction of ArTara’s third-party manufacturer’s or suppliers’ facilities or equipment, even
by force majeure, may significantly impair its ability to have its products and product candidates manufactured on a timely basis.
ArTara’s reliance on contract manufacturers and suppliers further exposes it to the possibility that they, or third parties
with access to their facilities, will have access to and may misappropriate ArTara’s trade secrets or other proprietary information.
In addition, the manufacturing facilities of certain of ArTara’s suppliers may be located outside of the United States. This
may give rise to difficulties in importing ArTara’s products or product candidates or their components into the United States
or other countries.
The manufacture
of biologics is complex and ArTara’s third-party manufacturers may encounter difficulties in production. If ArTara’s
CMO encounter such difficulties, the ability to provide supply of TARA-002 for clinical trials, ArTara’s ability to obtain
marketing approval, or its ability to obtain commercial supply of TARA-002, if approved, could be delayed or stopped.
ArTara’s has
no experience in biologic manufacturing and does not own or operate, and it does not expect to own or operate, facilities for product
manufacturing, storage and distribution, or testing. ArTara is completely dependent on CMOs to fulfill its clinical and commercial
supply of TARA-002. The process of manufacturing biologics is complex, highly regulated and subject to multiple risks. Manufacturing
biologics is highly susceptible to product loss due to contamination, equipment failure, improper installation or operation of
equipment, vendor or operator error, inconsistency in yields, variability in product characteristics and difficulties in scaling
the production process. Even minor deviations from normal manufacturing processes could result in reduced production yields, product
defects and other supply disruptions and higher costs. If microbial, viral or other contaminations are discovered at the facilities
of ArTara’s manufacturer, such facilities may need to be closed for an extended period of time to investigate and remedy
the contamination, which could delay clinical trials, result in higher costs of drug product and adversely harm its business. Moreover,
if the FDA determines that ArTara’s manufacturer is not in compliance with FDA laws and regulations, including those governing
cGMPs, the FDA may deny BLA approval until the deficiencies are corrected or it replaces the manufacturer in its BLA with a manufacturer
that is in compliance.
In addition, there
are risks associated with large scale manufacturing for clinical trials or commercial scale including, among others, cost overruns,
potential problems with process scale-up, process reproducibility, stability issues, compliance with cGMPs, lot consistency and
timely availability of raw materials. Even if ArTara obtains regulatory approval for TARA-002 or any future product candidates,
there is no assurance that its manufacturers will be able to manufacture the approved product to specifications acceptable to the
FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of
the product or to meet potential future demand. If ArTara’s manufacturers are unable to produce sufficient quantities for
clinical trials or for commercialization, commercialization efforts would be impaired, which would have an adverse effect on ArTara’s
business, financial condition, results of operations and growth prospects. Scaling up a biologic manufacturing process is a difficult
and uncertain task, and any CMO ArTara contracts may not have the necessary capabilities to complete the implementation and development
process of further scaling up production, transferring production to other sites, or managing its production capacity to timely
meet product demand.
ArTara expects
its stock price to be highly volatile.
The market price of
ArTara’s shares could be subject to significant fluctuations. Market prices for securities of biotechnology and other life
sciences companies historically have been particularly volatile subject even to large daily price swings. Some of the factors that
may cause the market price of ArTara’s shares to fluctuate include, but are not limited to:
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the ability of ArTara to obtain timely regulatory approvals for TARA-002, IV Choline Chloride or
future product candidates, and delays or failures to obtain such approvals;
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failure of TARA-002 or IV Choline Chloride, if approved, to achieve commercial success;
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issues in manufacturing TARA-002, IV Choline Chloride or future product candidates;
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the results of current and any future clinical trials of TARA-002 or IV Choline Chloride;
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failure of other ArTara product candidates, if approved, to achieve commercial success;
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the entry into, or termination of, or breach by partners of key agreements, including key commercial
partner agreements;
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the initiation of, material developments in, or conclusion of any litigation to enforce or defend
any intellectual property rights or defend against the intellectual property rights of others;
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announcements of any dilutive equity financings;
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announcements by commercial partners or competitors of new commercial products, clinical progress
or the lack thereof, significant contracts, commercial relationships or capital commitments;
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failure to elicit meaningful stock analyst coverage and downgrades of the company’s stock
by analysts; and
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the loss of key employees.
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Moreover, the stock
markets in general have experienced substantial volatility in our industry that has often been unrelated to the operating performance
of individual companies or a certain industry segment. These broad market fluctuations may also adversely affect the trading price
of ArTara’s shares.
In the past, following
periods of volatility in the market price of a company’s securities, shareholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management
attention and resources, which could significantly harm ArTara’s profitability and reputation. In addition, such securities
litigation often has ensued after a reverse merger or other merger and acquisition activity. Such litigation if brought could impact
negatively ArTara’s business.
ArTara incurs
costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
ArTara incurs significant
legal, accounting and other expenses that ArTara Subsidiary Inc. did not incur as a private company, including costs associated
with public company reporting and other SEC requirements. ArTara also will incur costs associated with corporate governance requirements,
including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the SEC and Nasdaq.
These rules and regulations
are expected to increase ArTara’s legal and financial compliance costs and to make some activities more time-consuming and
costly. ArTara’s executive officers and other personnel will need to devote substantial time to gaining expertise regarding
operations as a public company and compliance with applicable laws and regulations. These rules and regulations may also make it
expensive for ArTara to operate its business.
ArTara is expected
to take advantage of reduced disclosure and governance requirements applicable to smaller reporting companies, which could result
in its common stock being less attractive to investors.
ArTara expects to
have a public float of less than $250 million and therefore will qualify as a smaller reporting company under the rules of the
SEC. As a smaller reporting company, ArTara will be able to take advantage of reduced disclosure requirements, such as simplified
executive compensation disclosures and reduced financial statement disclosure requirements in its SEC filings. Decreased disclosures
in ArTara’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its
results of operations and financial prospects. We cannot predict if investors will find ArTara’s common stock less attractive
if it relies on these exemptions. If some investors find its common stock less attractive as a result, there may be a less active
trading market for its common stock and its stock price may be more volatile. ArTara may take advantage of the reporting exemptions
applicable to a smaller reporting company until it is no longer a smaller reporting company, which status would end once it has
a public float greater than $250 million. In that event, ArTara could still be a smaller reporting company if its annual revenues
were below $100 million and it has a public float of less than $700 million.
ArTara does not
anticipate paying any dividends in the foreseeable future.
The current expectation
is that ArTara will retain its future earnings to fund the development and growth of the Company’s business. As a result,
capital appreciation, if any, of the shares of ArTara will be your sole source of gain, if any, for the foreseeable future.
If ArTara fails
to attract and retain management and other key personnel, it may be unable to continue to successfully develop or commercialize
its product candidates or otherwise implement its business plan.
ArTara’s ability
to compete in the highly competitive pharmaceuticals industry depends on its ability to attract and retain highly qualified managerial,
scientific, medical, legal, sales and marketing and other personnel. ArTara is highly dependent on its management and scientific
personnel. The loss of the services of any of these individuals could impede, delay or prevent the successful development of ArTara’s
product pipeline, completion of its planned clinical trials, commercialization of its product candidates or in-licensing or acquisition
of new assets and could impact negatively its ability to implement successfully its business plan. If ArTara loses the services
of any of these individuals, it might not be able to find suitable replacements on a timely basis or at all, and its business could
be harmed as a result. ArTara might not be able to attract or retain qualified management and other key personnel in the future
due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses.
ArTara’s
ability to use its net operating loss carry-forwards to offset future taxable income may be subject to certain limitations.
As of December 31,
2019, for U.S. federal and state income tax reporting purposes, ArTara has approximately $11.4 million of unused net operating
losses (“NOLs”) available for carry forward to future years. The 2019 and 2018 federal and New York City NOLs may
be carried forward indefinitely, but utilization will be subject to an annual deduction limitation of 80% of taxable income. These
2019 and 2018 losses will not be allowed to be carried back. The 2019 state NOLs may be carried forward through the year 2039
and may be applied against future taxable income. The 2017 federal and New York City NOLs will begin to expire during the
year ended December 31, 2037. Because United States tax laws limit the time during which NOL carry forwards may be applied
against future taxable income, ArTara may be unable to take full advantage of its NOLs for federal income tax purposes when ArTara
does generate taxable income. Further, net operating loss carryforwards of both ArTara and Private ArTara will be limited since
there was a more than 50% ownership change for each entity.
ArTara may be adversely
affected by natural disasters, pandemics and other catastrophic events and by man-made problems such as terrorism that could disrupt
its business operations, and its business continuity and disaster recovery plans may not adequately protect it from a serious disaster.
ArTara’s corporate
office is located in New York, New York. If a disaster, power outage, computer hacking, or other event occurred that prevented
ArTara from using all or a significant portion of an office, that damaged critical infrastructure, such as enterprise financial
systems, IT systems, manufacturing resource planning or enterprise quality systems, or that otherwise disrupted operations, it
may be difficult or, in certain cases, impossible for it to continue its business for a substantial period of time. ArTara’s
contract manufacturer’s and suppliers’ facilities are located in multiple locations where other natural disasters or
similar events, such as tornadoes, fires, explosions or large-scale accidents or power outages, or IT threats, could severely disrupt
ArTara’s operations and have a material adverse effect on its business, financial condition, operating results and prospects.
In addition, pandemic, acts of terrorism and other geo-political unrest could cause disruptions in ArTara’s business or the
businesses of its partners, manufacturers or the economy as a whole. All of the aforementioned risks may be further increased if
ArTara does not implement a disaster recovery plan or its partners’ or manufacturers’ disaster recovery plans prove
to be inadequate. To the extent that any of the above should result in delays in the regulatory approval, manufacture, distribution
or commercialization of TARA-002 or IV Choline Chloride, its business, financial condition, operating results and prospects would
suffer.
ArTara’s
business and operations would suffer in the event of system failures, cyber-attacks or a deficiency in its cyber-security.
Despite the implementation of security measures, ArTara’s internal computer systems
and those of its current and future CROs and other contractors and consultants are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. The risk of a security breach
or disruption, particularly through cyber-attacks or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists,
has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have
increased. If such an event were to occur and cause interruptions in ArTara’s operations, it could result in a material disruption
of its development programs and its business operations. In the first quarter of 2020, our email server was compromised in a cyber-attack.
We quickly isolated the incident and have, since, implemented additional risk prevention measures. In addition, since ArTara sponsors
clinical trials, any breach that compromises patient data and identities causing a breach of privacy could generate significant
reputational damage and legal liabilities and costs to recover and repair, including affecting trust in the company to recruit
for future clinical trials. For example, the loss of clinical trial data from completed or future clinical trials could result
in delays in ArTara’s regulatory approval efforts and significantly increase its costs to recover or reproduce the data.
To the extent that any disruption or security breach were to result in a loss of, or damage to, ArTara’s data or applications
or inappropriate disclosure of confidential or proprietary information, ArTara could incur liability and the further development
and commercialization of its products and product candidates could be delayed.
The COVID-19 coronavirus
could adversely impact our business, including our clinical development plans.
In December 2019,
a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, the COVID-19 coronavirus has
spread to multiple countries, including the United States. As the COVID-19 coronavirus continues to spread in the United States
and around the world, we may experience disruptions that could severely impact our business, including:
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interruption of key manufacturing, research and clinical development activities, due to limitations
on work and travel imposed or recommended by federal or state governments, employers and others;
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delays or difficulties in clinical trial site operations, including difficulties in recruiting
clinical site investigators and clinical site staff and difficulties in enrolling patients;
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interruption of key business activities, due to illness and/or quarantine of key individuals and
delays associated with recruiting, hiring and training new temporary or permanent replacements for such key individuals, both internally
and at our third party service providers; and
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delays in research and clinical trial sites receiving the supplies and materials needed to conduct
preclinical studies and clinical trials, due to work stoppages, travel and shipping interruptions or restrictions or other reasons;
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difficulties in raising additional capital needed to pursue the development of our programs due
to the slowing of our economy and near term and/or long term negative effects of the pandemic on the financial, banking and capital
markets;
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changes in local regulations as part of a response to the COVID-19 coronavirus outbreak which may
require us to change the ways in which research, including clinical development, is conducted, which may result in unexpected costs;
and
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delays in necessary interactions with regulators, ethics committees and other important agencies
and contractors due to limitations in employee resources, travel restrictions or forced furlough of government employees.
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The global outbreak of the COVID-19 coronavirus continues to
rapidly evolve. The extent to which the COVID-19 coronavirus may impact our business will depend on future developments, which
are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration
of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business
disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.
Anti-takeover provisions
in ArTara’s charter documents and under Delaware law could make an acquisition of ArTara more difficult and may prevent attempts
by ArTara stockholders to replace or remove ArTara’s management.
Provisions in ArTara’s
certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. In addition, because ArTara’s
is incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in
excess of 15% of the outstanding ArTara voting stock from merging or combining with ArTara. These provisions may frustrate or prevent
any attempts by ArTara’s stockholders to replace or remove then current management by making it more difficult for stockholders
to replace members of the board of directors, which is responsible for appointing the members of management.
The certificate
of incorporation of ArTara provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially
all disputes between ArTara and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial
forum for disputes with ArTara or its directors, officers or other employees.
The certificate of
incorporation of ArTara provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative
action or proceeding brought on ArTara’s behalf, any action asserting a breach of fiduciary duty owed by any of its directors,
officers or other employees to the ArTara or its stockholders, any action asserting a claim against it arising pursuant to any
provisions of the DGCL, its certificate of incorporation or its bylaws, or any action asserting a claim against it that is governed
by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial
forum that it finds favorable for disputes with ArTara or its directors, officers or other employees, which may discourage such
lawsuits against ArTara and its directors, officers and other employees. If a court were to find the choice of forum provision
contained in the certificate of incorporation to be inapplicable or unenforceable in an action, ArTara may incur additional costs
associated with resolving such action in other jurisdictions.
Certain stockholders
have the ability to control or significantly influence certain matters submitted to ArTara’s stockholders for approval.
Certain stockholders
have consent rights over certain significant matters of ArTara’s business. These include decisions to effect a merger or
other similar transaction, changes to the principal business of ArTara, and the sale or other transfer of TARA-002 or other assets
with an aggregate value of more than $2,500,000. As a result, these stockholders, have significant influence over certain matters
that require approval by ArTara’s stockholders.
If equity research
analysts do not publish research or reports, or publish unfavorable research or reports, about ArTara, its business or its market,
its stock price and trading volume could decline.
The trading market
for ArTara’s common stock is influenced by the research and reports that equity research analysts publish about it and its
business. Equity research analysts may elect not to provide research coverage of ArTara’s common stock after the completion
of the Merger, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does
have equity research analyst coverage, ArTara will not have any control over the analysts or the content and opinions included
in their reports. The price of ArTara’s common stock could decline if one or more equity research analysts downgrade its
stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of ArTara or fails
to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading
volume to decline.
If ArTara fails
to maintain proper and effective internal controls, its ability to produce accurate financial statements on a timely basis could
be impaired.
ArTara is subject
to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. The Sarbanes-Oxley
Act requires, among other things, that ArTara maintain effective disclosure controls and procedures and internal control over financial
reporting. ArTara must perform system and process evaluation and testing of its internal control over financial reporting to allow
management to report on the effectiveness of its internal controls over financial reporting in its Annual Report on Form 10-K filing
for that year, as required by Section 404 of the Sarbanes-Oxley Act. As a private company, ArTara was not required to test its
internal controls within a specified period. This will require that it incur substantial professional fees and internal costs to
expand its accounting and finance functions and that it expend significant management efforts. ArTara may experience difficulty
in meeting these reporting requirements in a timely manner.
ArTara may discover
weaknesses in its system of internal financial and accounting controls and procedures that could result in a material misstatement
of its financial statements. ArTara’s internal control over financial reporting will not prevent or detect all errors and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and
instances of fraud will be detected.
If ArTara is not able
to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if it is unable to maintain proper and effective internal
controls, ArTara may not be able to produce timely and accurate financial statements. If that were to happen, the market price
of its common stock could decline and it could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory
authorities.
Risks Related to Intellectual
Property Rights
ArTara may not
be able to obtain, maintain or enforce global patent rights or other intellectual property rights that cover its product candidates
and technologies that are of sufficient breadth to prevent third parties from competing against ArTara.
ArTara’s success
with respect to its product candidates will depend, in part, on its ability to obtain and maintain patent protection in both the
United States and other countries, to preserve its trade secrets and to prevent third parties from infringing on its proprietary
rights. ArTara’s ability to protect its product candidates from unauthorized or infringing use by third parties depends in
substantial part on its ability to obtain and maintain valid and enforceable patents around the world.
The patent application
process, also known as patent prosecution, is expensive and time-consuming, and ArTara and its current or future licensors and
licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or
in a timely manner in all the countries that are desirable. It is also possible that ArTara or its current licensors, or any future
licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization
activities before it is too late to obtain patent protection on them. Therefore, these and any of ArTara’s patents and applications
may not be prosecuted and enforced in a manner consistent with the best interests of its business. Moreover, ArTara’s competitors
independently may develop equivalent knowledge, methods and know-how or discover workarounds to ArTara patents that would not constitute
infringement. Any of these outcomes could impair ArTara’s ability to enforce the exclusivity of its patents effectively,
which may have an adverse impact on its business, financial condition and operating results.
Due to legal standards
relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, ArTara’s
ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions especially across
countries. Accordingly, rights under any existing patents or any patents ArTara might obtain or license may not cover its product
candidates or may not provide ArTara with sufficient protection for its product candidates to afford a sustainable commercial advantage
against competitive products or processes, including those from branded, generic and over-the-counter pharmaceutical companies.
In addition, ArTara cannot guarantee that any patents or other intellectual property rights will issue from any pending or future
patent or other similar applications owned by or licensed to ArTara. Even if patents or other intellectual property rights have
issued or will issue, ArTara cannot guarantee that the claims of these patents and other rights are or will be held valid or enforceable
by the courts, through injunction or otherwise, or will provide ArTara with any significant protection against competitive products
or otherwise be commercially valuable to ArTara in every country of commercial significance that ArTara may target.
Competitors in the
field of immunology and oncology therapeutics have created a substantial amount of prior art, including scientific publications,
posters, presentations, patents and patent applications and other public disclosures including on the Internet. ArTara’s
ability to obtain and maintain valid and enforceable patents depends on whether the differences between its technology and the
prior art allow its technology to be patentable over the prior art. ArTara does not have outstanding issued patents covering all
of the recent developments in its technology and is unsure of the patent protection that it will be successful in obtaining, if
any. Even if the patents do successfully issue, third parties may design around or challenge the validity, enforceability or scope
of such issued patents or any other issued patents ArTara owns or licenses, which may result in such patents being narrowed, invalidated
or held unenforceable. If the breadth or strength of protection provided by the patents ArTara holds or pursues with respect to
its product candidates is challenged, it could dissuade companies from collaborating with ArTara to develop or threaten its ability
to commercialize or finance its product candidates.
The laws of some foreign
jurisdictions do not provide intellectual property rights to the same extent or duration as in the United States, and many companies
have encountered significant difficulties in acquiring, maintaining, protecting, defending and especially enforcing such rights
in foreign jurisdictions. If ArTara encounters such difficulties in protecting or are otherwise precluded from effectively protecting
its intellectual property in foreign jurisdictions, its business prospects could be substantially harmed, especially internationally.
Proprietary trade
secrets and unpatented know-how are also very important to ArTara’s business. Although ArTara has taken steps to protect
its trade secrets and unpatented know-how by entering into confidentiality agreements with third parties, and intellectual property
protection agreements with officers, directors, employees, and certain consultants and advisors, there can be no assurance that
binding agreements will not be breached or enforced by courts, that ArTara would have adequate remedies for any breach, including
injunctive and other equitable relief, or that its trade secrets and unpatented know-how will not otherwise become known, inadvertently
disclosed by ArTara or its agents and representatives, or be independently discovered by its competitors. If trade secrets are
independently discovered, ArTara would not be able to prevent their use and if ArTara and its agents or representatives inadvertently
disclose trade secrets and/or unpatented know-how, ArTara may not be allowed to retrieve this and maintain the exclusivity it previously
enjoyed.
ArTara may not
be able to protect its intellectual property rights throughout the world.
Filing, prosecuting
and defending patents on ArTara’s product candidates does not guarantee exclusivity. The requirements for patentability differ
in certain countries, particularly developing countries. In addition, the laws of some foreign countries do not protect intellectual
property rights to the same extent as laws in the United States, especially when it comes to granting use and other kinds of patents
and what kind of enforcement rights will be allowed, especially injunctive relief in a civil infringement proceeding. Consequently,
ArTara may not be able to prevent third parties from practicing its inventions in all countries outside the United States and even
in launching an identical version of ArTara’s product notwithstanding ArTara has a valid patent in that country. Competitors
may use ArTara’s technologies in jurisdictions where it has not obtained patent protection to develop their own products,
or produce copy products, and, further, may export otherwise infringing products to territories where ArTara has patent protection
but enforcement on infringing activities is inadequate or where ArTara has no patents. These products may compete with ArTara’s
products, and ArTara’s patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing.
Many companies have
encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems
of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual
property protection, particularly those relating to pharmaceuticals, and the judicial and government systems are often corrupt,
which could make it difficult for ArTara to stop the infringement of its patents or marketing of competing products in violation
of its proprietary rights generally. Proceedings to enforce its patent rights in foreign jurisdictions could result in substantial
costs and divert its efforts and attention from other aspects of its business, could put its global patents at risk of being invalidated
or interpreted narrowly and its global patent applications at risk of not issuing, and could provoke third parties to assert claims
against it. ArTara may not prevail in any lawsuits that ArTara initiates or infringement actions brought against ArTara, and the
damages or other remedies awarded, if any, may not be commercially meaningful when ArTara is the plaintiff. When ArTara is the
defendant it may be required to post large bonds to stay in the market while it defends itself from an infringement action.
In addition, certain
countries in Europe and certain developing countries have compulsory licensing laws under which a patent owner may be compelled
to grant licenses to third parties, especially if the patent owner does not enforce or use its patents over a protracted period
of time. In some cases, the courts will force compulsory licenses on the patent holder even when finding the patent holder’s
patents are valid if the court believes it is in the best interests of the country to have widespread access to an essential product
covered by the patent. In these situations, the royalty the court requires to be paid by the license holder receiving the compulsory
license is not calculated at fair market value and can be inconsequential, thereby disaffecting the patentholder’s business.
In these countries, ArTara may have limited remedies if its patents are infringed or if ArTara is compelled to grant a license
to its patents to a third party, which could also materially diminish the value of those patents. This would limit its potential
revenue opportunities. Accordingly, ArTara’s efforts to enforce its intellectual property rights around the world may be
inadequate to obtain a significant commercial advantage from the intellectual property that ArTara owns or licenses, especially
in comparison to what it enjoys from enforcing its intellectual property rights in the Unites States. Finally, the company’s
ability to protect and enforce its intellectual property rights may be adversely affected by unforeseen changes in both U.S. and
foreign intellectual property laws, or changes to the policies in various government agencies in these countries, including but
not limited to the patent office issuing patents and the health agency issuing pharmaceutical product approvals For example, in
Brazil, pharmaceutical patents require initial approval of the Brazilian health agency (ANVISA). Finally, many countries have large
backlogs in patent prosecution, and in some countries in Latin America it can take years, even decades, just to get a pharmaceutical
patent application reviewed notwithstanding the merits of the application.
Obtaining and maintaining
ArTara’s patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements
imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these
requirements.
Periodic maintenance
and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime
of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. While an inadvertent lapse can, in many cases,
be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance
can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction just for failure to know about and/or timely pay a prosecution fee. Non-compliance events that could
result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed
time limits, non-payment of fees in prescribed time periods, and failure to properly legalize and submit formal documents in the
format and style the country requires. If ArTara or its licensors fail to maintain the patents and patent applications covering
its product candidates for any reason, the Company’s competitors might be able to enter the market, which would have an adverse
effect on ArTara’s business.
If ArTara fails
to comply with its obligations under its intellectual property license agreements, it could lose license rights that are important
to its business. Additionally, these agreements may be subject to disagreement over contract interpretation, which could narrow
the scope of its rights to the relevant intellectual property or technology or increase its financial or other obligations to its
licensors.
ArTara has entered
into in-license arrangements with respect to certain of its product candidates. These license agreements impose various diligence,
milestone, royalty, insurance and other obligations on ArTara. If ArTara fails to comply with these obligations, the respective
licensors may have the right to terminate the license, in which event ArTara may not be able to develop or market the affected
product candidate. The loss of such rights could materially adversely affect its business, financial condition, operating results
and prospects. For more information about these license arrangements, see “Description of ArTara’s Business—Collaborations
and License Agreements.”
If ArTara is sued
for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent
or delay it from developing or commercializing its product candidates.
ArTara’s commercial
success depends on its ability to develop, manufacture, market and sell its product candidates and use its proprietary technologies
without infringing the proprietary rights of third parties. ArTara cannot assure that marketing and selling such candidates and
using such technologies will not infringe existing or future patents. Numerous U.S.- and foreign-issued patents and pending patent
applications owned by third parties exist in the fields relating to its product candidates. As the biotechnology and pharmaceutical
industries expand and more patents are issued, the risk increases that others may assert that its product candidates, technologies
or methods of delivery or use infringe their patent rights. Moreover, it is not always clear to industry participants, including
us, which patents and other intellectual property rights cover various drugs, biologics, drug delivery systems or their methods
of use, and which of these patents may be valid and enforceable. Thus, because of the large number of patents issued and patent
applications filed in ArTara’s fields across many countries, there may be a risk that third parties may allege they have
patent rights encompassing ArTara’s product candidates, technologies or methods.
In addition, there
may be issued patents of third parties that are infringed or are alleged to be infringed by ArTara’s product candidates or
proprietary technologies notwithstanding patents ArTara may possess. Because some patent applications in the United States may
be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions
are typically not published until 18 months after filing and because publications in the scientific literature often lag behind
actual discoveries, ArTara cannot be certain that others have not filed patent applications for technology covered by its own and
in-licensed issued patents or its pending applications. ArTara’s competitors may have filed, and may in the future file,
patent applications covering ArTara’s own product candidates or technology similar to ArTara’s technology. Any such
patent application may have priority over ArTara’s own and in-licensed patent applications or patents, which could further
require ArTara to obtain rights to issued patents covering such technologies, which may mean paying significant licensing fees
or the like. If another party has filed a U.S. patent application on inventions similar to those owned or in-licensed to us, ArTara
or, in the case of in-licensed technology, the licensor may have to participate, in the United States, in an interference proceeding
to determine priority of invention.
ArTara may be exposed
to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that its
product candidates or proprietary technologies infringe such third parties’ intellectual property rights, including litigation
resulting from filing under Paragraph IV of the Hatch-Waxman Act or other countries’ laws similar to the Hatch-Waxman Act.
These lawsuits could claim that there are existing patent rights for such drug, and this type of litigation can be costly and could
adversely affect its operating results and divert the attention of managerial and technical personnel, even if ArTara does not
infringe such patents or the patents asserted against ArTara is ultimately established as invalid. There is a risk that a court
would decide that ArTara is infringing the third party’s patents and would order ArTara to stop the activities covered by
the patents. In addition, there is a risk that a court will order ArTara to pay the other party significant damages for having
violated the other party’s patents.
Because ArTara relies
on certain third-party licensors and partners and will continue to do so in the future, if one of its licensors or partners is
sued for infringing a third party’s intellectual property rights, ArTara’s business, financial condition, operating
results and prospects could suffer in the same manner as if ArTara were sued directly. In addition to facing litigation risks,
ArTara has agreed to indemnify certain third-party licensors and partners against claims of infringement caused by ArTara’s
proprietary technologies, and ArTara has entered or may enter into cost-sharing agreements with some its licensors and partners
that could require ArTara to pay some of the costs of patent litigation brought against those third parties whether or not the
alleged infringement is caused by its proprietary technologies. In certain instances, these cost-sharing agreements could also
require ArTara to assume greater responsibility for infringement damages than would be assumed just on the basis of its technology.
The occurrence of
any of the foregoing could adversely affect ArTara’s business, financial condition or operating results.
ArTara may be subject
to claims that its officers, directors, employees, consultants or independent contractors have wrongfully used or disclosed to
ArTara alleged trade secrets of their former employers or their former or current customers.
As is common in the
biotechnology and pharmaceutical industries, certain of ArTara’s employees were formerly employed by other biotechnology
or pharmaceutical companies, including its competitors or potential competitors. Moreover, ArTara engages the services of consultants
to assist ArTara in the development of ArTara’s products and product candidates, many of whom were previously employed at,
or may have previously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies,
including its competitors or potential competitors. ArTara may be subject to claims that these employees and consultants or ArTara
has inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their
former or current customers. Although ArTara has no knowledge of any such claims being alleged to date, if such claims were to
arise, litigation may be necessary to defend against any such claims. Even if ArTara is successful in defending against any such
claims, any such litigation could be protracted, expensive, a distraction to its management team, not viewed favorably by investors
and other third parties, and may potentially result in an unfavorable outcome.
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Item 1B.
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Unresolved Staff
Comments.
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This item is not applicable.
As of December 31,
2019, we lease approximately 700 square feet of space for our headquarters in New York, New York under an agreement that expires
in March 2020, with monthly rent of $15,300. We intend to and are able to lease additional space on a month to month basis from
our existing landlord to fill our near term business requirements. In addition, the Company
entered into a quarter-to-quarter lease agreement for a development lab and a manufacturing space, both in North Carolina for quarterly
rent of $1,309 and $19,173, respectively. The development lab space has been occupied as of May 2019 and the manufacturing space
will be occupied as of March 2020. We believe that our existing facilities are adequate to meet our current needs,
and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.
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Item 3.
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Legal Proceedings.
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From time to time,
ArTara may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Between
November 15 and December 23, 2019, four lawsuits were filed in federal court against Proteon, ArTara, Merger Sub and the individual
members of the Proteon Board (captioned Patrick Plumley v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-02143-UNA
(D. Del. filed 11/15/19)); Jeffrey Teow v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-06745 (E.D.N.Y., filed 11/30/19);
Neil Lanteigne v. Proteon Therapeutics, et al., Case No. 1:19-cv-12436 (D. Mass., filed 12/03/19); Stephen Wagner v.
Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-02343 (D. Del., filed 12/23/19). The Plumley complaint is brought
as a purported class action lawsuit. All four lawsuits alleged that the definitive proxy statement in the preliminary registration
statement on Form S-4 filed by Proteon on November 7, 2019 with the SEC in connection with the proposed Merger (the “Proxy
Statement”) omitted material information with respect to the transactions contemplated by the Merger Agreement, rendering
it false and misleading in violation of Sections 14(a) (and Rule 14a-9 promulgated thereunder) and 20(a) of the Exchange Act. The
plaintiffs in each of the four lawsuits sought, among other things, injunctive relief, rescission, declaratory relief and unspecified
monetary damages. On December 31, 2019, Proteon filed an amendment to the Proxy Statement on Form 8-K, which contained certain
supplemental disclosures intended to moot the plaintiffs’ disclosure claims. On January 9, 2019, Proteon held a special meeting
of its stockholders, at which the Company’s stockholders approved the Merger. On January 27, 2020, plaintiff in the Lanteigne
action voluntarily dismissed his case. On February 3, 2020, plaintiff in the Plumley action voluntarily dismissed his case.
On February 7, 2020, plaintiff in the Teow action voluntarily dismissed his case. On February 10, 2020, plaintiff in the
Wagner action dismissed his case.
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Item 4.
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Mine Safety Disclosures.
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This item is not applicable.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and
per share data)
1.
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Organization and Operations
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The Company
ArTara Therapeutics,
Inc (formerly Proteon Therapeutics, Inc., the “Company”) is a biopharmaceutical company that has historically focused
on the development of novel, first-in-class pharmaceuticals to address the medical needs of patients with kidney and vascular disease.
The Company was formed in June 2001 and incorporated on March 24, 2006.
On March 28,
2019, the Company announced that its second Phase 3 trial, PATENCY-2, for vonapanitase did not meet its co-primary endpoints
of fistula use for hemodialysis (p=0.328) and secondary patency (p=0.932). The PATENCY-2 clinical trial was the second of two
randomized, double-blind Phase 3 trials, comparing a 30 microgram dose of investigational vonapanitase to placebo in patients
with chronic kidney disease, or CKD, undergoing creation of a radiocephalic fistula for hemodialysis. Following the release
of top-line data from the PATENCY-2 clinical trial of vonapanitase on March 28, 2019, the Company began to evaluate its
strategic alternatives focusing on enhancing stockholder value. On September 23, 2019, the Company entered into a merger
agreement with ArTara Subsidiary, Inc. (formerly ArTara Therapeutics, Inc. “Private ArTara”). As of December 31,
2019, the Company had discontinued substantially all its research and development activities, including a reduction in
workforce. As of December 31, 2019, the Company had terminated all of its legacy Proteon Therapeutics, Inc. employees. The
Company has recorded severance costs of $2.9 million for the year ended December 31, 2019. The Company remains subject to a number of risks similar to other
companies in the biotechnology industry, including compliance with government regulations, protection of proprietary
technology, dependence on third parties and product liability.
Reverse Merger with Private ArTara
On January 9,
2020, the Company and Private ArTara completed the merger and reorganization (the “Merger”) in accordance with
the terms of the Agreement and Plan of Merger and Reorganization, dated September 23, 2019 (the “Merger
Agreement”), by and among the Company, Private ArTara and REM 1 Acquisition, Inc., a wholly owned subsidiary of the
Company (the “Merger Sub”), whereby Merger Sub merged with and into Private ArTara, with Private ArTara surviving
as a wholly owned subsidiary of the Company.
On January 9, 2020, in connection with, and prior to the completion
of, the Merger, the Company effected a 1-for-40 reverse stock split of its common stock, (the “Reverse Stock Split”),
Private ArTara changed its name from “ArTara Therapeutics, Inc.” to “ArTara Subsidiary, Inc.”, and the
Company changed its name from “Proteon Therapeutics, Inc.” to “ArTara Therapeutics, Inc.” All share and
per share amounts presented in these financial statements have been adjusted to reflect the Reverse Stock Split. In addition,
immediately following the closing of the Private Placements (defined below), all of the outstanding shares of the Company’s
Series A Preferred Stock were converted into shares of the Company’s common stock. Shares of the Company’s common stock
commenced trading on The Nasdaq Capital Market under the new name and ticker symbol “TARA” as of market open on January
10, 2020.
Under the terms of
the Merger Agreement, the Company issued shares of its common stock (“Common Stock”) to Private ArTara’s stockholders,
at an exchange ratio of 0.190756 shares of Common Stock, after taking into account the Reverse Stock Split, for each share of Private
ArTara common stock outstanding immediately prior to the Merger. Proteon assumed all of the outstanding and unexercised stock options
of Private ArTara, with such stock options now representing the right to purchase a number of shares of Common Stock equal to 0.190756
multiplied by the number of shares of Private ArTara common stock previously represented by such Private ArTara stock options.
The Company also assumed all of the unvested Private ArTara restricted stock awards, which were exchanged for a number of shares
of Common Stock equal to 0.190756 multiplied by the number of shares of Private ArTara common stock previously represented by such
Private ArTara restricted stock awards and unvested to the same extent as such Private ArTara restricted stock awards and subject
to the same restrictions as such Private ArTara restricted stock awards.
On January 9, 2020, the Company completed certain private placements
pursuant to a subscription agreement entered into on September 23, 2019. On September 23, 2019, the Company and Private ArTara
entered into a subscription agreement (as amended on November 19, 2019, the "Subscription Agreement") with certain institutional
investors (the "Investors") pursuant to which, among other things, (i) the Company agreed to issue to certain Investors
shares of Proteon Series 1 Convertible Non-Voting Preferred Stock and/or Proteon common stock immediately following the Merger
in a private placement transaction for an aggregate purchase price of approximately $40.5 million (the "Proteon Private Placement")
and (ii) Private ArTara agreed to issue to an Investor (that is an existing investor in ArTara) shares of ArTara common stock (the
"ArTara Private Placement Shares") immediately prior to the Merger in a private placement transaction for an aggregate
purchase price of approximately $2.0 million (together with the Proteon Private Placement, the "Private Placements").
Immediately after the Proteon Private Placement, the Company converted all outstanding shares of Proteon's Series A Convertible
Preferred Stock into shares of Proteon common stock (the "Series A Preferred Automatic Conversion"). On January 9, 2020,
the Company received approximately $39.6 million, net of offering costs related to the Private Placements.
The Merger was structured as a reverse merger and Private ArTara was determined to be the accounting
acquirer based on the terms of the Merger Agreement. The Merger will be accounted for as a business combination
as of the effective date of the Merger.
The financial information
included in the financial statements is that of the Company prior to the Merger because the Merger was consummated after the period
covered by these financial statements.
Liquidity
As of December 31,
2019, the Company had cash and cash equivalents of $6.2 million. The Company had an accumulated deficit of $225.5 million as of
December 31, 2019.
In connection with the Merger, the Company consummated the Private Placements, raising gross
proceeds of $42.5 million. The Company expects there will be no further material near term cash expenditures to fund the Company’s
vonapanitase clinical trials. From the date of the Merger, the activities of the Company will become those of Private ArTara.
The Company is in
the business of developing biopharmaceuticals, has no current or near term revenues. The Company is incurring substantial clinical
and other costs in its drug development efforts. The Company expects it will need to raise additional capital in order to fully
realize management’s plans.
The Company believes
that its current financial resources, as of the date of the issuance of these consolidated financial statements, are sufficient
to fund its current twelve month operating budget, alleviating any substantial doubt raised by our historical operating results
and satisfying our estimated liquidity needs for at least twelve months from the issuance of these consolidated financial statements.
The accompanying
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome
of the uncertainties described above.
At-The-Market Equity Offering Program
On November 12, 2015, the Company filed a shelf registration
statement on Form S-3 (the “Registration Statement”), and entered into a Sales Agreement with Cowen and Company, LLC
(the “Sales Agreement”) to establish an at-the-market (“ATM”) equity offering program pursuant to which
they are able, with the Company’s authorization, to offer and sell up to $40 million of the Company’s Common Stock
at prevailing market prices from time to time. The Registration Statement became effective on January 12, 2016. The Company paid
Cowen a commission equal to 3% of the gross proceeds of the sales price of all shares sold through it as sales agent under the
Sales Agreement. The offering costs were offset against proceeds from the sale of common stock under this agreement. The Company
filed a prospectus supplement on March 16, 2017 because the Company is currently subject to General Instruction I.B.6 of Form S-3,
which limits the amounts that the Company may sell under the Registration Statement. The Company’s ATM program was terminated
effective as of February 7, 2019, when its new shelf registration statement on Form S-3, File No. 333-228865, was declared effective
by the SEC. For the year ended December 31, 2018, the Company sold 1,494,579 shares of Common Stock under the Sales Agreement for
aggregate gross proceeds of $3.0 million. For the year ended December 31, 2018, total offering costs of $46,000, were offset against
the proceeds from the sale of common stock. The 1,494,579 shares of Common Stock sold under the ATM program during the year ended
December 31, 2018 were all sold on September 25, 2018 to New Leaf Venture Partners LLC.
2.
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Summary of Significant Accounting Policies
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Basis of Presentation, Principles
of Consolidation and Use of Estimates
The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable
guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting
Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards
Board (“FASB”).
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates,
which include, but are not limited to, estimates related to stock-based compensation expense, clinical trial accruals and reported
amounts of expenses during the reported period. The Company bases its estimates on historical experience and other market-specific
or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates
or assumptions.
Segment Information
Operating segments
are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the
Company's chief operating decision maker view the Company's operations and manage its business in one operating segment, which
is the business of developing and commercializing vonapanitase for the treatment of renal and vascular disease. Currently, the
Company operates in only one geographic segment.
Fair Value of Financial Instruments
The Company’s
financial instruments consist of cash and cash equivalents, available-for-sale investments, forward foreign currency contracts
(see Note 3), accounts payable, and accrued liabilities. The Company is required to disclose information on all assets and liabilities
reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB ASC Topic 820,
Fair Value Measurement and Disclosures, established a hierarchy of inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the financial instrument based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
inputs that market participants would use in pricing the financial instrument and are developed based on the best information available
under the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported or disclosed
fair value of the financial instruments and is not a measure of the investment credit quality. Fair value measurements are classified
and disclosed in one of the following three categories:
|
|
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
|
Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.
|
To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for
instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest
level of any input that is significant to the fair value measurement.
Financial instruments measured at fair value on a recurring basis include
cash equivalents and available-for-sale investments (see Note 3). There have been no changes to the valuation methods utilized
by the Company during the years ended December 31, 2019 and 2018. The Company evaluates transfers between levels at the end of
each reporting period. There were no transfers of financial instruments between levels during the years ended December 31, 2019
and 2018.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU
2014-09”), a new standard on revenue recognition providing a single, comprehensive revenue recognition model for all contracts
with customers. The new revenue standard is based on the principle that revenue should be recognized to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The new standard was effective beginning January 1, 2018, with early adoption permitted.
The Company adopted ASU 2014-09 during the quarter ended March 31, 2018. The adoption did not have a material impact on the consolidated
financial statements.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842): Amendments to FASB Codification (“ASU 2016-02”), which increases transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. At the lease commencement date, the lessee must recognize a lease liability and right-of-use asset, which
is initially measured at the present value of future lease payments. The Company adopted ASU 2016-01 at January 1, 2019 using the
optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior
periods. It has have also elected to adopt the package of practical expedients permitted in Accounting Standards Codification Topic
842, or ASC 842. Accordingly, it is continuing to account for its existing operating lease as an operating lease under the new
guidance, without reassessing whether the contract contains a lease under ASC 842 or whether classification of the operating leases
would be different under ASC Topic 842, and to treat lease and non-lease components as a single lease component. The Company has
also elected the short-term lease accounting policy under which the Company would not recognize a lease liability or ROU asset
for any lease that at the commencement date has a lease term of twelve months or less and does not include a purchase option that
the Company is more than reasonably certain to exercise. Also, the Company elected the expedient allowing an entity to use hindsight
to determine the lease term and impairment of ROU assets and the expedient to allow the Company to not have to separate lease and
non-lease components. The Company’s sole lease at the adoption date was an operating lease for facilities and did not include
any non-lease components.
As a result of
the adoption of ASU 2016-02, on January 1, 2019, the Company recognized (a) a lease liability of approximately $0.2 million,
which represents the present value of its remaining lease payments using an estimated incremental borrowing rate of 8%, (b) a
right-of-use asset of approximately $0.2 million that was expensed as operating lease expense over the term of the lease
which ended on September 30, 2019. Due to the adoption of the standard using the modified retrospective cumulative-effect
adjustment method, there are no changes to previously reported results prior to January 1, 2019. Lease expense did not change
materially as a result of the adoption of ASU 2016-02.
In June 2018, the FASB
issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”). ASU 2018- 07 aims to simplify the accounting for share-based payments to nonemployees by aligning
it to the accounting for share based payments to employees including determining the fair value of the award on the date of grant
and recognizing the stock-based compensation expense as of the respective vesting date. The new standard also requires companies
to elect to either measure the awards to nonemployees over an estimated expected term or contractual term as well as elect to estimate
forfeitures or account for forfeitures as incurred. ASU 2018-07 is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2018. The guidance was effective for the Company on January 1, 2019. The Company
adopted ASU 2018-07 during the quarter ended March 31, 2019. The adoption did not have an impact on the consolidated financial
statements as all outstanding non-employee share-based awards had vested prior to March 31, 2018.
Cash and Cash Equivalents
The Company considers
all highly liquid investments with maturities of 90 days or less from the purchase date to be cash equivalents. Cash and cash equivalents
are held in depository and money market accounts and are reported at fair value.
Short-Term Investments
The Company classifies
its investments as available-for-sale and records such assets at estimated fair value in the consolidated balance sheets, with
unrealized gains and losses, if any, reported as a component of other comprehensive income (loss) within the consolidated statements
of operations and comprehensive loss and as a separate component of stockholders' equity (deficit). The Company invests its excess
cash balances primarily in government debt securities and money market funds with strong credit ratings and maturities of less
than one year. There have been no realized gains and losses for the years ended December 31, 2019 and 2018.
At each balance sheet
date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss
is other-than-temporary. The Company considers factors including: the significance of the decline in value compared to the cost
basis, underlying factors contributing to a decline in the prices of securities in a single asset class, the length of time the
market value of the security has been less than its cost basis, the security's relative performance versus its peers, sector or
asset class, expected market volatility and the market and economy in general. When the Company determines that a decline in the
fair value below its cost basis is other-than-temporary, the Company recognizes an impairment loss in the year in which the other-than-temporary
decline occurred. There have been no other-than-temporary declines in value of short-term investments for the years ended December
31, 2019 and 2018, as it is more likely than not the Company will hold the securities until maturity or a recovery of the cost
basis.
Concentrations of Credit Risk and
Off-Balance Sheet Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents and short-term investments.
The Company's cash and cash equivalents are held in accounts with financial institutions that management believes are creditworthy.
The Company's investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable
investments that the Company believes minimizes the exposure to concentration of credit risk. These amounts at times may exceed
federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed
to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss.
Property and Equipment
Property and equipment
is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective
assets are expensed to operations as incurred. When capitalizing assets for research and development purposes the Company evaluates
whether an alternative future use of the asset exists; if not, such assets are expensed as research and development. Upon disposal,
the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results
of operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets,
which are as follows:
Asset
|
|
Estimated Useful Life (in years)
|
Computer equipment and software
|
|
|
3
|
|
Furniture, fixtures and other
|
|
|
5
|
|
Laboratory equipment
|
|
|
7
|
|
Research and Development Costs
Research and development
costs are charged to expense as incurred in performing research and development activities. The costs include employee compensation
costs, facilities and overhead, clinical study and related clinical manufacturing costs, regulatory and other related costs. Nonrefundable
advanced payments for goods or services to be received in the future for use in research and development activities are deferred
and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Stock-Based Compensation Expense
The Company accounts
for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic 718, Compensation-Stock
Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees, including grants of employee
stock options and restricted stock, to be recognized in the consolidated statements of operations and comprehensive loss based
on their grant date fair values. Compensation expense related to awards to employees is recognized on a straight-line basis based
on the grant date fair value over the associated service period of the award, which is generally the vesting term. Share-based
payments issued to non-employees are recorded at their fair values and are periodically revalued as the equity instruments vest
and are recognized as expense over the related service period in accordance with the provisions of ASC 718 and are expensed using
an accelerated attribution model.
The Company estimates
the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions,
including (a) the expected stock price volatility, (b) the expected term of the award, (c) the risk-free interest
rate, (d) expected dividends and (e) the estimated fair value of its Common Stock on the measurement date. Due to the
lack of company specific historical and implied volatility data of its Common Stock, the Company has based its estimate of expected
volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies
on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it,
including enterprise value, risk profiles, position within the industry and with historical share price information sufficient
to meet the expected term of the stock based awards. The Company computes historical volatility data using the daily closing prices
for the selected companies' shares during the equivalent period of the calculated expected term of the stock-based awards. During
2018 the Company began to estimate volatility by using a blend of our stock price history, for the length of time we have market
data for our stock and the historical volatility of similar public companies for the expected term of each grant. The Company accounts
for forfeitures as they occur. Due to the lack of Company specific historical option activity, the Company has estimated the expected
term of its employee stock options using the “simplified” method, whereby, the expected term equals the arithmetic
average of the vesting term and the original contractual term of the option. The expected term for non-employee awards is the remaining
contractual term of the option. The risk-free interest rates are based on the U.S. Treasury securities with a maturity date commensurate
with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable
future. Refer to Note 2, “Use of Estimates,” for a discussion of the Company's estimated fair value of
its Common Stock.
Income Taxes
Income taxes are
recorded in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”), which provides for deferred
taxes using an asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax reporting basis of assets and liabilities and are measured using enacted tax
rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are provided
if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized. The Company has evaluated all available evidence and concluded that it is not more likely than not that the Company
will realize the benefit of its deferred tax assets, therefore, a valuation allowance has been established for the full amount
of the deferred tax assets.
The Company accounts
for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes
the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to
whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as
consideration of the available facts and circumstances. As of December 31, 2019 and 2018, the Company did not have any significant
uncertain tax positions. The Company's practice is to recognize interest and/or penalties related to income tax matters in income
tax expense. See Note 10 for further details.
Net Income (Loss) per Share Attributable
to Common Stockholders
Basic net income (loss)
per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted net income per share is calculated by dividing the net income attributable to common
stockholders by the weighted-average number of common equivalent shares outstanding for the period, including any dilutive effect
from outstanding stock options and warrants using the treasury stock method.
The Company follows
the two-class method when computing net income (loss) per share in periods when issued shares that meet the definition of participating
securities are outstanding. The two-class method determines net income (loss) per share for each class of common and participating
securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method
requires income available to common stockholders for the period to be allocated between common and participating securities based
upon their respective rights to receive dividends as if all income for the period had been distributed. Accordingly, in periods
in which the Company reports a net loss attributable to common stockholders when participating securities are outstanding, losses
are not allocated to the participating securities. For purposes of calculating diluted net income per share attributable to
common shareholders, preferred stock, stock options, warrants and convertible debt are considered common stock equivalents.
Comprehensive Loss
Comprehensive loss
consists of net income or loss and changes in equity during a period from transactions and other events and circumstances generated
from non-owner sources. The Company's net loss equals comprehensive loss, net of any changes in the unrealized gains and losses
of the Company's short-term investments, held as available-for-sale, and foreign currency translation for all periods presented.
Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance
sheet date up to March 19, 2020, the date that the financial statements were available to be issued. Other than as described
in Notes 1, 9 and 13, the Company did not identify any subsequent events that would have required adjustment or disclosure in the
financial statements.
3.
|
|
Fair Value Measurements
|
Below is a summary
of assets and liabilities measured at fair value (in thousands):
|
|
As of December 31, 2019
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
5,841
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,841
|
|
Total
|
|
$
|
5,841
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,841
|
|
|
|
As of December 31, 2018
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
18,353
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,353
|
|
Government securities
|
|
|
2,496
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,496
|
|
Total
|
|
$
|
20,849
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,849
|
|
As of December 31, 2019, and 2018, the
Company’s cash equivalents consist principally of money market funds and government debt securities with original maturities
of 90 days or less. Government securities consist principally of government debt securities and money market funds which are classified
as available-for-sale.
Available-for-sale
securities at December 31, 2019 and 2018 consist of the following (in thousands):
|
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Due within 1 year)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Due within 1 year)
|
|
$
|
2,496
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,496
|
|
|
|
$
|
2,496
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,496
|
|
4.
|
|
Property and Equipment, net
|
Property and equipment,
net consists of the following (in thousands):
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
-
|
|
|
$
|
211
|
|
Furniture, fixtures, and other
|
|
|
-
|
|
|
|
365
|
|
Laboratory equipment
|
|
|
-
|
|
|
|
514
|
|
|
|
|
-
|
|
|
|
1,090
|
|
Accumulated depreciation
|
|
|
-
|
|
|
|
(827
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
263
|
|
Depreciation expense
for the years ended December 31, 2019 and 2018 was $0.3 million and $0.1 million, respectively.
During the three months ended March
31, 2019, the Company voluntarily discontinued substantially all research and development activities. As a result, as of March
31, 2019 the Company performed an impairment assessment of the laboratory equipment used in development of vonapanitase by comparing
the equipment’s carrying value to its estimated fair value, which was determined based on the recoverability of the assets
remaining value as of March 31, 2019. As of September 30, 2019, the Company performed an additional impairment assessment due to
the expiration of its lease agreement. The fair value of the remaining assets including office furniture, computer hardware and
software licenses were determined be impaired as the Company determined there to be no future use for the assets. The Company recorded
impairment charges of $0.2 million and fully wrote off all property and equipment during the year ended December 31, 2019.
Accrued expenses consist of the following
(in thousands):
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Payroll and employee-related costs
|
|
$
|
4
|
|
|
$
|
1,390
|
|
Contracted service costs
|
|
|
9
|
|
|
|
968
|
|
Professional fees and other
|
|
|
307
|
|
|
|
279
|
|
Total
|
|
$
|
320
|
|
|
$
|
2,637
|
|
6.
|
|
Commitments and Contingencies
|
Significant Contracts and Agreements
In February 2002,
the Company entered into an agreement to license certain intellectual property with Johns Hopkins University. The agreement calls
for payments to be made by the Company upon the commencement of product sales, in the form of a royalty of 2.5% on net sales of
the product. As of December 31, 2019 the Company has not commenced product sales and therefore has recognized no royalties on product
sales.
Operating Leases
The Company’s operating leases for
facilities and office equipment all expired or were terminated during the year ended December 31, 2019. During the years ended
December 31, 2019 and 2018 the company recognized operating lease expense of $0.2 million and $0.3 million, respectively including
property taxes and routine maintenance expense, which approximated its cash payments for the period.
Restricted cash related to certificate
of deposit
In November 2019 the Company took out a
certificate of deposit in the amount of $50,000 related to a letter of credit that the Company posted with World Customs Brokers
so that they could import materials from Lonza an international vendor into the US and cover future import fees that might be due.
At December 31, 2019 and 2018 the Company had $50,000 and zero which is included in current assets.
Restricted cash related to facilities
leases
At December 31, 2019 and 2018, the Company had zero and $22,000,
respectively, in an outstanding letter of credit to be used as collateral for leased premises which is in non-current assets. At
December 31, 2018 and 2017, the Company pledged an aggregate of $22,000, to the bank as collateral for the letter of credit, which
is included in other non-current assets.
Litigation
From time to time, ArTara may be subject
to various legal proceedings and claims that arise in the ordinary course of its business activities.
Between November 15 and December 23, 2019,
four lawsuits were filed in federal court against Proteon, ArTara, Merger Sub and the individual members of the Proteon Board (captioned
Patrick Plumley v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-02143-UNA (D. Del. filed 11/15/19)); Jeffrey
Teow v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-06745 (E.D.N.Y., filed 11/30/19); Neil Lanteigne v. Proteon
Therapeutics, et al., Case No. 1:19-cv-12436 (D. Mass., filed 12/03/19); Stephen Wagner v. Proteon Therapeutics, Inc., et
al., Case No. 1:19-cv-02343 (D. Del., filed 12/23/19). The Plumley complaint is brought as a purported class action
lawsuit. All four lawsuits alleged that the definitive proxy statement in the preliminary registration statement on Form S-4 filed
by Proteon on November 7, 2019 with the SEC in connection with the proposed Merger (the “Proxy Statement”) omitted
material information with respect to the transactions contemplated by the Merger Agreement, rendering it false and misleading in
violation of Sections 14(a) (and Rule 14a-9 promulgated thereunder) and 20(a) of the Exchange Act. The plaintiffs in each of the
four lawsuits sought, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. On
December 31, 2019, Proteon filed an amendment to the Proxy Statement on Form 8-K, which contained certain supplemental disclosures
intended to moot the plaintiffs’ disclosure claims. On January 9, 2019, Proteon held a special meeting of its stockholders,
at which the Company’s stockholders approved the Merger. On January 27, 2020, plaintiff in the Lanteigne action voluntarily
dismissed his case. On February 3, 2020, plaintiff in the Plumley action voluntarily dismissed his case. On February 7,
2020, plaintiff in the Teow action voluntarily dismissed his case. On February 10, 2020, plaintiff in the Wagner
action dismissed his case.
The Company believes that it is probable
that it will incur a loss related to these matters. However, the Company is unable to reasonably estimate the loss,
and as such the Company has not recorded a loss contingency.
7.
|
|
Series A Preferred Financing
|
On August 2, 2017, the Company issued and sold 22,000 shares of
the Company’s Series A Convertible Preferred Stock, par value of $0.001 per share (the “Series A Preferred”),
for a purchase price of $1,000 per share, or aggregate purchase price and gross proceeds of $22.0 million, all upon the terms and
conditions set forth in the Securities Purchase Agreement dated as of June 22, 2017. The Company incurred $0.5 million of issuance
costs in connection with the transaction. Each share of Series A Preferred is convertible into approximately 25 shares of the Company’s
Common Stock at a conversion price of $39.80 per share, in each case subject to adjustment for any stock splits, stock dividends
and similar events, provided that any conversion of Series A Preferred by a holder into shares of Common Stock is prohibited if,
as a result of such conversion, the holder, together with its affiliates and any other person or entity whose beneficial ownership
of the Company’s Common Stock would be aggregated with such holder’s for purposes of Section 13(d) of the Exchange
Act would beneficially own more than 9.985% of the total number of shares of Common Stock issued and outstanding after giving effect
to such conversion. At December 31, 2019 and 2018, the Company had 22,000 shares of Series A Convertible Preferred Stock authorized.
The Company evaluated the Series A Preferred for liability or equity
classification in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, and determined that equity
treatment was appropriate because the Series A Preferred did not meet the definition of the liability instruments defined thereunder
for convertible instruments. Specifically, the Series A Preferred are not mandatorily redeemable and do not embody an obligation
to buy back the shares outside of the Company’s control in a manner that could require the transfer of assets. Additionally,
the Company determined that the Series A Preferred would be recorded as permanent equity, not temporary equity, based on the guidance
of ASC 480 given that there is no scenario where the holders of equally and more subordinated equity of the entity would not be
entitled to also receive the same form of consideration upon the occurrence of the event that gives rise to the redemption. During
the year ended December 31, 2019, 3,046 shares of the Series A convertible preferred stock were converted into 76,540 shares of
Common Stock. The Company had issued and outstanding 18,954 and 22,000 share of Series A Convertible Preferred Stock with a par
value of $0.001 at December 31, 2019 and 2018, respectively. On January 9, 2020, 18,954 shares of Series A Convertible Preferred
Stock were converted into 476,276 shares of Common Stock.
Dividends
Holders of the Series
A Preferred Stock are entitled to receive dividends, if and when declared by the Board of Directors.
Liquidation Preference
Holders of the Series A
Preferred Stock have preference in the event of a liquidation or dissolution of the Company equal to $0.001 per share, plus any
declared dividends.
Thereafter, the Holders
of the shares of Series A Preferred Stock shall share ratably in any distributions and payments of any remaining assets of the
Company, on an as converted basis, with the holders of Common Stock.
Voting Rights
Except for matters
with specific voting rights as provided in the Series A Preferred Stock Purchase Agreement, the Holders of shares of Series A Preferred
Stock have no voting rights.
General
At December 31, 2019, the Company has 100,000,000 shares of Common
Stock authorized for issuance, $0.001 par value per share, of which 557,631 shares were issued and outstanding.
Reserved
for Future Issuance
The
Company has the following shares of Common Stock reserved for future issuance:
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Conversion of Series A Preferred Stock
|
|
|
476,279
|
|
|
|
552,819
|
|
Stock-based compensation awards
|
|
|
185,729
|
|
|
|
129,099
|
|
Employee Stock Purchase Plan
|
|
|
2,953
|
|
|
|
2,953
|
|
Total
|
|
|
664,961
|
|
|
|
684,871
|
|
9.
|
|
Stock-based Compensation
|
On
August 21, 2014, the Company’s Board of Directors superseded the 2006 Equity Incentive Plan (the “2006 Plan”)
with the 2014 Equity Incentive Plan (the “2014 Plan”), and the 2014 Employee Stock Purchase Plan (the “2014 ESPP”).
On October 3, 2014, the stockholders approved these plans.
On
June 20, 2017, the Company’s Board of Directors amended the 2014 Plan (the “Amended 2014 Plan”). On July 31,
2017, the stockholders approved this amendment.
The
Plans provide for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock and stock
unit awards, performance units, stock grants and qualified performance-based awards. Under the 2006 Plan, no new stock compensation
awards will be granted subsequent to the completion of the Company’s IPO. The Company initially reserved 17,600 shares of
Common Stock for issuance under the 2014 Plan. The 2014 Plan provides that the number of shares reserved and available for issuance
under the 2014 Plan will automatically increase each January 1, beginning January 1, 2015 by four percent of the outstanding shares
of Common Stock on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s Board
of Directors prior to each such January 1st. The Amended 2014 Plan clarifies that the number of shares for purposes of calculating
the evergreen feature includes the number of shares of Common Stock issuable upon conversion of any security that the Company may
issue that is convertible into or exchangeable for Common Stock, including, but not limited to, preferred stock or warrants. Pursuant
to the evergreen provision, the number of shares available for issuance under the Amended 2014 Plan will increase by 900,003 shares
from 129,088 shares to 1,074,384 shares on January 1, 2020.
Terms
of the stock awards, including vesting requirements, are determined by the Board of Directors, subject to the provisions of the
Plans. Options granted by the Company typically vest over three to four years. Certain awards provide for accelerated vesting if
there is a change in control as defined in the Plans. Stock options outstanding under the 2006 Plan are exercisable from the date
of grant for a period of ten years. Stock options granted under the Amended 2014 Plan are exercisable only upon vesting. For options
granted to date, the exercise price equaled the fair value of the Common Stock as determined by the Board of Directors on the date
of grant.
Stock-based
compensation expense
Total
stock-based compensation expense is recognized for stock options granted to employees and non-employees and has been reported in
the Company’s consolidated statements of operations as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Research and development
|
|
$
|
233
|
|
|
$
|
1,142
|
|
General and administrative
|
|
|
710
|
|
|
|
2,287
|
|
Total
|
|
$
|
943
|
|
|
$
|
3,429
|
|
The Company estimates the fair value of
each employee stock award on the grant date using the Black-Scholes option-pricing model based on the following assumptions regarding
the fair value of the underlying Common Stock on each measurement date:
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Weighted average expected volatility
|
|
|
89.6
|
%
|
|
|
93.5
|
%
|
Expected term (in years)
|
|
|
6.10
|
|
|
|
6.07
|
|
Risk free interest rate
|
|
|
2.60
|
%
|
|
|
2.55
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock Options
The following table summarizes
stock option activity for employees and non-employees:
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
114,931
|
|
|
$
|
204.76
|
|
|
|
7.4
|
|
|
$
|
404
|
|
Granted
|
|
|
29,562
|
|
|
$
|
106.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(80,431
|
)
|
|
$
|
124.40
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(63,951
|
)
|
|
$
|
260.40
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
111
|
|
|
$
|
218.40
|
|
|
|
0.1
|
|
|
$
|
-
|
|
Exercisable at December 31, 2019
|
|
|
111
|
|
|
$
|
218.40
|
|
|
|
0.1
|
|
|
$
|
-
|
|
Vested or expected to vest at December 31, 2019 (1)
|
|
|
111
|
|
|
$
|
218.40
|
|
|
|
0.1
|
|
|
$
|
-
|
|
_____________
(1) Represents the number of vested options at December 31,
2019 plus the number of unvested options expected to vest based on the unvested options outstanding at December 31, 2019.
During the year ended December 31, 2019, the Company granted stock options to purchase
an aggregate of 29,563 shares of its Common Stock with a weighted-average grant date fair value of $80.00. During the year ended
December 31, 2018, the Company granted stock options to purchase an aggregate of 51,040 shares of its Common Stock with a weighted-average
grant date fair value of $104.32.
The total intrinsic
value of options exercised in the years ended December 31, 2019 and 2018 was $0 and $0 and respectively. As of December 31, 2019,
and 2018 there was $0.0 million and $4.6 million, respectively of total unrecognized compensation cost related to employee non-vested
stock options.
Employee Stock Purchase Plan
The 2014 Employee
Stock Purchase Plan (“ESPP”) initially authorized the issuance of up to 3,513 shares of Common Stock. The number of
shares increases each January 1, commencing on January 1, 2015 and ending on (and including) January 1, 2024, by an amount equal
to the lesser of one percent of the outstanding shares as of the end of the immediately preceding fiscal year, 281,000 shares or
any lower amount determined by the Company’s Board of Directors prior to each such January 1st. As of December 31, 2019,
as a result of an increase on January 1, 2019 of one percent of the outstanding shares as of the end of the fiscal year ending
December 31, 2018, the 2014 ESPP authorized the issuance of up to 4,811 shares of Common Stock. The tenth offering under the 2014
ESPP began on July 1, 2019 and ended on September 30, 2019. During the years ended December 31, 2019 and 2018, no shares and 1,859
shares, respectively, were issued under the 2014 ESPP. The Company incurred $0.1 million in stock-based compensation expense related
to the 2014 ESPP for the years ended December 31, 2019, 2018, and 2017. On January 1, 2020, as a result of the increase of one
percent of the outstanding shares as of the end of the fiscal year ending December 31, 2019, the 2014 ESPP increased the authorized
shares available for issuance by 5,576 shares.
The components of
loss from operations before income taxes are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Domestic
|
|
$
|
(14,965
|
)
|
|
$
|
(17,855
|
)
|
Foreign
|
|
|
(27
|
)
|
|
|
(2,874
|
)
|
Total
|
|
$
|
(14,992
|
)
|
|
$
|
(20,729
|
)
|
For the years ended
December 31, 2019 and 2018, the Company has not recorded a provision for federal or state income taxes as it has had net operating
losses since inception.
A reconciliation of
income taxes computed using the U.S. federal statutory rate to that reflected in operations is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Income tax benefit computed at federal statutory tax rate
|
|
$
|
(3,148
|
)
|
|
$
|
(4,348
|
)
|
Permanent differences
|
|
|
1
|
|
|
|
6
|
|
Write-off of deferred tax asset
|
|
|
2,048
|
|
|
|
-
|
|
Stock compensation - permanent items
|
|
|
-
|
|
|
|
325
|
|
State income taxes, net of federal benefit
|
|
|
(930
|
)
|
|
|
(958
|
)
|
Tax credits
|
|
|
(465
|
)
|
|
|
(1,466
|
)
|
Change in valuation allowance
|
|
|
2,449
|
|
|
|
5,409
|
|
Foreign rate differential
|
|
|
5
|
|
|
|
602
|
|
Other
|
|
|
40
|
|
|
|
430
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The significant components
of the Company's deferred tax assets are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
11,090
|
|
|
$
|
6,742
|
|
Federal and state tax credits
|
|
|
3,587
|
|
|
|
3,122
|
|
Accrued expenses
|
|
|
-
|
|
|
|
411
|
|
Patents
|
|
|
74
|
|
|
|
132
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
1,782
|
|
Other
|
|
|
59
|
|
|
|
169
|
|
Total deferred tax assets
|
|
|
14,810
|
|
|
|
12,358
|
|
Valuation allowance
|
|
|
(14,810
|
)
|
|
|
(12,358
|
)
|
Net deferred assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Management of the
Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the
Company's history of operating losses, management of the Company has concluded that it is more likely than not that the benefit
of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred
tax assets as of December 31, 2019 and 2018.
Net operating loss
and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (the "IRS")
and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant
shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code. This
could substantially limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.
The amount of the annual limitation is determined based on the Company's value immediately prior to the ownership change. Subsequent
ownership changes may further affect the limitation in future years. The Company expects that there will be an ownership change
in excess of 50% in connection with the consummation of the Merger on January 9, 2020. This will substantially limit the amount
of tax attributes that can be utilized annually to offset future taxable income or tax liabilities, the amount of which has not
yet been determined.
As a result of current
year activity, the valuation allowance increased by approximately $2.4 million during the year ended December 31, 2019. This was
due primarily to the generation of net operating losses. In the year ended December 31, 2018, the valuation allowance increased
by approximately $5.4 million. This was due primarily to the addition of Orphan Drug Tax credits and the generation of net operating
losses.
Subject to the limitations
described below, as of December 31, 2019 and 2018 the Company has net operating loss carryforwards of approximately $41.7 million
and $25.7 million, respectively, to offset future federal taxable income. The pre-2018 federal net operating loss carryforwards
expire at various dates through 2037. Federal net operating loss carryforwards generated in 2018 and forward will have an unlimited
carryforward period as part of the Tax Cuts and Jobs Act. The indefinite lived net operating loss carryforwards as of December
31, 2019 are approximately $30.6 million. As of December 31, 2019 and 2018, the Company has state net operating loss carryforwards
of approximately $37.2 million and $21.5 million, respectively, to offset future state taxable income, which will expire at various
dates through 2039. As of December 31, 2019 and 2018, the Company has tax credit carryforwards of approximately $3.6 million and
$3.1 million, respectively, to offset future federal and state income taxes, which will expire at various dates through 2039.
The Company had no
unrecognized tax benefits or related interest and penalties accrued during the years ended December 31, 2019 and 2018. The Company
will recognize interest and penalties related to uncertain tax positions in income tax expense.
The Company is subject
to U.S. federal income tax and primarily Massachusetts state income tax. The statute of limitations for assessment by the IRS and
state tax authorities is open for tax years ending December 31, 2016 through 2019, although carryforward attributes that were generated
prior to tax year 2016 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will
be used in a future period. Currently, no federal or state income tax returns are under examination by the respective taxing authorities.
11.
|
|
Net Loss per Share Attributable to Common Stockholders
|
As described in Note
2, Summary of Significant Accounting Policies, the Company computes basic and diluted loss per share using a methodology that
gives effect to the impact of outstanding participating securities (the “two-class method”). As the years ended December
31, 2019 and 2018 resulted in net losses, there is no income allocation required under the two-class method or dilution attributed
to weighted-average shares outstanding in the calculation of diluted loss per share.
The following Common
Stock equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods
presented, due to their anti-dilutive effect:
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Outstanding stock options
|
|
|
111
|
|
|
|
114,931
|
|
Convertible preferred stock
|
|
|
476,279
|
|
|
|
552,819
|
|
|
|
|
476,390
|
|
|
|
667,750
|
|
12.
|
|
Restructuring Charges
|
In April 2019, the Board of Directors approved a plan (“2019
Restructuring Program”) to reduce operating expenses as the Company evaluates its strategic alternatives following the release
of top-line data from the PATENCY-2 clinical trial of vonapanitase on March 28, 2019. The restructuring initiatives are company-wide.
The remainder of the charges were incurred by the end of the fiscal year ended December 31, 2019 (“Fiscal Year 2019”)
and were paid during the year ended December 31, 2019.
Changes in the restructuring accrual during
the year ended December 31, 2019 are summarized below (in thousands):
|
|
As of
December 31, 2018
|
|
Charges/
(Benefits)
|
|
Payment/Other
|
|
As of
December 31, 2019
|
2019 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance
|
|
$
|
-
|
|
|
$
|
2,854
|
|
|
$
|
(2,854
|
)
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
2,854
|
|
|
$
|
(2,854
|
)
|
|
$
|
-
|
|
Per the discussion
in Note 1 “Organization and Basis of Presentation”, the Company and Private ArTara completed the Merger in accordance
with the terms of the Merger Agreement whereby Merger Sub merged with and into Private ArTara, with Private ArTara surviving as
a wholly owned subsidiary of the Company.
F-18