KUBOTA PHARMACEUTICAL HOLDINGS CO LTD - FORM 10-Q

KUBOTA PHARMACEUTICAL HOLDINGS CO LTD - FORM 10-Q - November 12, 2015

Attached files

Attached files

KUBOTA PHARMACEUTICAL HOLDINGS CO LTD Reports

file	filename
EX-31.2 - EXHIBIT 31.2 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	acucela-20150930xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	acucela-20150930xexhibit311.htm
EX-32.1 - EXHIBIT 32.1 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	acucela-20150930xexhibit321.htm
EX-32.2 - EXHIBIT 32.2 - KUBOTA PHARMACEUTICAL HOLDINGS CO LTD	acucela-20150930xexhibit322.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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

For the transition period from to

Commission File Number 000-55133

ACUCELA INC.

(Exact name of registrant as specified in its charter)



Washington		02-0592619
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1301 SECOND AVENUE, SUITE 4200 SEATTLE, WASHINGTON		98101
(Address of principal executive offices)		(Zip Code)

(206) 805-8300

(Registrant's telephone number, including area code)

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

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

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

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

As of October 30, 2015, the registrant had outstanding 36,503,120 shares of common stock.

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ACUCELA INC.

FORM 10-Q

For the quarterly period ended September 30, 2015

INDEX



PART I. FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements	3
	Condensed Balance Sheets as of September 30, 2015 and December 31, 2014 (unaudited)	3
	Condensed Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)	4
	Condensed Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2015 and 2014 (unaudited)	5
	Condensed Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	6
	Notes to Condensed Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

Signatures

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACUCELA INC.

CONDENSED BALANCE SHEETS

(in thousands)



	September 30,			December 31,
	2015			2014
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,167		$	18,778
Investments	100,175			85,008
Accounts receivable from collaborations	11,266			5,285
Deferred tax asset	—			61
Prepaid expenses and other current assets	2,771			2,582
Total current assets	122,379			111,714
Property and equipment, net	938			742
Long-term investments	57,203			84,033
Long-term deferred tax asset	—			42
Other assets	314			435
Total assets	$	180,834		$	196,966
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	473		$	441
Accrued liabilities	4,390			4,176
Accrued compensation	2,157			1,683
Deferred revenue from collaborations	—			6,231
Deferred rent and lease incentives	130			25
Total current liabilities	7,150			12,556
Commitments and contingencies (Note 4)
Long-term deferred rent, lease incentives, and others	1,140			47
Total long-term liabilities	1,140			47
Shareholders’ equity:
Common stock, no par value, 100,000 shares authorized as of September 30, 2015 and December 31, 2014; 36,496 and 35,809 shares issued and outstanding as of September 30, 2015 and December 31, 2014	189,611			186,589
Additional paid-in capital	5,977			3,601
Accumulated other comprehensive loss	(350		)	(361		)
Accumulated deficit	(22,694		)	(5,466		)
Total shareholders’ equity	172,544			184,363
Total liabilities and shareholders’ equity	$	180,834		$	196,966

See accompanying notes to condensed financial statements.

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ACUCELA INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Revenue from collaborations	$	7,128		$	8,119		$	21,524		$	27,751
Expenses:
Research and development	6,255			5,503			17,764			19,974
General and administrative	4,722			2,430			21,772			7,272
Total expenses	10,977			7,933			39,536			27,246
Income (loss) from operations	(3,849		)	186			(18,012		)	505
Other income (expense), net:
Interest income	300			152			802			316
Interest expense	—			(1		)	—			(15		)
Other income (expense), net	(2		)	(5		)	(21		)	30
Total other income, net	298			146			781			331
Income (loss) before income tax	(3,551		)	332			(17,231		)	836
Income tax benefit (expense)	1			(1,868		)	3			(2,247		)
Net loss	$	(3,550	)	$	(1,536	)	$	(17,228	)	$	(1,411	)
Net loss per share
Basic	$	(0.10	)	$	(0.04	)	$	(0.48	)	$	(0.04	)
Diluted	$	(0.10	)	$	(0.04	)	$	(0.48	)	$	(0.04	)
Weighted average shares
Basic	36,491			35,707			36,183			31,876
Diluted	36,491			35,707			36,183			31,876

See accompanying notes to condensed financial statements.

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ACUCELA INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Net loss	$	(3,550	)	$	(1,536	)	$	(17,228	)	$	(1,411	)
Other comprehensive income (loss):
Net unrealized gain (loss) on securities	(127		)	11			11			(87		)
Comprehensive loss	$	(3,677	)	$	(1,525	)	$	(17,217	)	$	(1,498	)

See accompanying notes to condensed financial statements.

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ACUCELA INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)



	Nine months ended September 30,
	2015			2014
	(unaudited)
Cash flows from operating activities
Net loss	$	(17,228	)	$	(1,411	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	299			379
Stock-based compensation	6,538			445
Amortization net of premium/discount on marketable securities	1,743			723
Deferred taxes	103			2,248
Loss on disposal of fixed assets	30			—
Changes in operating assets and liabilities:
Accounts receivable from collaborations	(5,981		)	4,670
Prepaid expenses and other current assets	79			246
Accounts payable	32			(472		)
Accrued liabilities	214			(3,219		)
Accrued compensation	474			(2,254		)
Deferred rent and lease incentives	1,198			(199		)
Deferred revenue from collaborations	(6,231		)	9,928
Other assets	121			(68		)
Net cash provided by (used in) operating activities	(18,609		)	11,016
Cash flows from investing activities
Purchases of marketable securities available for sale	(62,322		)	(152,524		)
Maturities of marketable securities available for sale	71,985			28,462
Net additions to property and equipment	(525		)	(4		)
Net cash provided by (used in) investing activities	9,138			(124,066		)
Cash flows from financing activities
Repurchase of restricted stock units for tax withholdings	(1,142		)	—
Proceeds from issuance of common stock	2			149,783
Payments for deferred offering costs	—			(1,545		)
Excess tax benefit from stock-based compensation	—			79
Net cash provided by (used in) financing activities	(1,140		)	148,317
Increase (decrease) in cash and cash equivalents	(10,611		)	35,267
Cash and cash equivalents—beginning of period	18,778			13,994
Cash and cash equivalents—end of period	$	8,167		$	49,261
Supplemental disclosure
Unpaid deferred offering costs	$	—		$	5,548
Conversion of convertible preferred stock upon IPO	—			28,209
Conversion of contingently convertible debt, related party, upon IPO	—			12,000

See accompanying notes to condensed financial statements.

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ACUCELA INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Business

Acucela Inc. ("the Company",“we,” “our” and “us”) is a clinical-stage biotechnology company that specializes in discovering and developing novel drug candidates to potentially treat and slow the progression of sight-threatening ophthalmic diseases affecting millions of individuals worldwide. In 2008, we and Otsuka Pharmaceutical Co., Ltd. (“Otsuka”) entered into a definitive agreement to co-develop Emixustat hydrochloride ("Emixustat"), our lead investigational compound which is currently being evaluated in a Phase 2b/3 clinical trial in patients with geographic atrophy associated with dry age-related macular degeneration ("AMD").

Unaudited Interim Financial Information

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for full 2015 fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2014 Annual Report on Form 10-K.

Prior year presentation of cash flows includes a re-classification to conform with the current year presentation of purchased interest on marketable securities.

Use of Estimates

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. Actual results could differ from these estimates.

Segments

We operate in one segment, pharmaceutical product development. All of our significant assets are located in the United States. During the three and nine months ended September 30, 2015 and 2014, all revenue was generated in the United States.

2. Significant Accounting Policies

Cash and Cash Equivalents and Investments

We consider investments in highly liquid instruments purchased with an original maturity at purchase of three months or less to be cash equivalents. The amounts are recorded at cost, which approximates fair value. Our cash equivalents consist of money market funds at September 30, 2015 and money market funds and certificates of deposit at December 31, 2014.

We have classified our entire investment portfolio, which consists of corporate debt securities, commercial paper and certificates of deposit, as available-for-sale. Available-for-sale securities are stated at fair value as of each balance sheet date based on market quotes, and unrealized gains and losses are reflected as a net amount under the caption of accumulated other comprehensive loss. Premiums or discounts arising at acquisition are amortized into earnings.

We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as whether it is more likely than not that we will hold the investment until recovery of its amortized

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cost basis. Realized gains and losses are calculated using the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are recorded within the statements of income under the caption other income (expense).

We consider an investment with a maturity greater than twelve months from the balance sheet date as long-term and a maturity less than twelve months as short-term at the balance sheet date.

Concentration of Credit Risk

Our accounts receivable, as of September 30, 2015 and December 31, 2014, consist of amounts due from our collaborations with Otsuka. There was no allowance for doubtful accounts for the periods presented, as we believe all outstanding amounts will be paid based on our contractual arrangements with Otsuka and history of successful collections thereunder and collateral is not required. Revenue recognized for the three and nine month periods ended September 30, 2015 and 2014 consist of amounts derived from our collaboration agreements with Otsuka.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have already been recognized in the financial statements or tax returns. Excess tax benefits associated with stock option exercises and other equity awards are credited to stockholders' equity. Deferred tax liabilities and assets are based on the difference between financial statement carrying amounts and the tax basis of assets and liabilities, operating loss, and tax credit carryforwards and are measured using enacted tax rates expected to be in effect in the years the differences or carryforwards are anticipated to be recovered or settled. A valuation allowance is established when we believe that it is more likely than not that benefits of the deferred tax assets will not be realized.

3. Cash and Cash Equivalents and Investments

Cash, cash equivalents and investments at September 30, 2015 and December 31, 2014 include all cash, money market funds, corporate debt securities, commercial paper and certificates of deposit. We consider our investments as available-for-sale. Available-for-sale securities are stated at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices in active markets for identical assets and liabilities,

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities, and

Level 3—Unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.

We measure the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold any financial instruments categorized as Level 3 as of September 30, 2015 or December 31, 2014.

Cash and cash equivalents and investments as of September 30, 2015 and December 31, 2014 consisted of the following (in thousands):

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	September 30, 2015
	Amortized Cost		Gross Unrealized								Fair Value
	Amortized Cost		Holding Gains		Holding Losses < 12 mos			Holding Losses > 12 mos			Fair Value
Cash	$	547	$	—	$	—		$	—		$	547
Level 1 Securities:
Money market funds	7,620		—		—			—			7,620
Level 2 Securities:
U.S. government agencies	240		1		—			—			241
Corporate debt securities	151,096		4		(325		)	(85		)	150,690
Certificates of deposit	6,440		8		—			(1		)	6,447
	$	165,943	$	13	$	(325	)	$	(86	)	$	165,545



	December 31, 2014
	Amortized Cost		Gross Unrealized							Fair Value
	Amortized Cost		Holding Gains		Holding Losses < 12 mos			Holding Losses > 12 mos		Fair Value
Cash	$	767	$	—	$	—		$	—	$	767
Level 1 Securities:
Money market funds	17,771		—		—			—		17,771
Level 2 Securities:
Commercial paper	15,992		2		(1		)	—		15,993
Corporate debt securities	131,586		—		(398		)	—		131,188
Certificates of deposit	22,115		4		(19		)	—		22,100
	$	188,231	$	6	$	(418	)	$	—	$	187,819

As of September 30, 2015, $1.0 million of certificates of deposit, $56.0 million of corporate debt securities and $0.2 million of U.S. government agencies mature in greater than one year, but less than two years. All other investment securities held at September 30, 2015 mature within 12 months. We do not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of our amortized cost basis, which may be maturity.

Market values were determined for each individual security in the investment portfolio. The declines in value of certain of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. We evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost, the financial condition of the issuer, and our intent to sell, or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of September 30, 2015.

4. Commitments and Contingencies

Commitments

In addition to the contractual commitments, which consist of operating leases for corporate office and laboratory space, disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we have not incurred any additional contractual obligations or commitments outside of the normal course of business other than the following:

Severance and Change in Effective Control Agreements

termination occurs within the six month period following a Qualifying Change in Effective Control (as defined in the Change in Control Agreements), the employee will be entitled to an amount equal to the sum of six months of his or her monthly base salary, plus 50% of the employee’s annual target bonus for 2015, plus the premiums required to continue the employee’s group health care coverage for a period of six months following termination, which will be “grossed up” to cover taxes. The Change in Control Agreements terminate upon the earlier of November 1, 2015 or the employee’s termination date (unless the termination is within six months following a Qualifying Change in Effective Control). On May 1, 2015, as a result of the actions taken by our shareholders at a special meeting of shareholders, a Qualifying Change in Effective Control was deemed to have taken place under the terms of the Change in Control Agreements. As of September 30, 2015, payments totaling $1.6 million have been made under this plan and payments totaling an additional $0.2 million were accrued.

Retention Pool

On February 24, 2015, the compensation committee of the Board of Directors approved the creation of a pool of $0.6 million of which we accrued approximately $0.4 million through September 30, 2015 to be distributed at the discretion of the compensation committee to employees who remain employed with us on December 31, 2015. Allocations of the pool will not be determined until the fourth quarter of 2015.

Special Shareholders' Meeting Expenses

Dr. Ryo Kubota and SBI Holdings, Inc., our two largest shareholders, incurred certain fees and expenses totaling approximately $0.8 million in preparation for the May 1, 2015 special shareholders’ meeting. Our Board of Directors appointed a special committee (the "Special Committee") consisting entirely of independent directors to evaluate these expenses to determine if the expenses, or a portion thereof, should be reimbursed by the Company. The Special Committee met on June 8, 2015 and concluded that the reimbursement of these expenses was appropriate. Accordingly, the income statement for the nine months ended September 30, 2015 reflects these expenses.

Litigation

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material legal proceedings, and to our knowledge none is threatened. There can be no assurance that future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.

5. Net Income (Loss) Per Share

Immediately prior to the closing of our IPO, all outstanding shares of preferred stock were converted to common stock. We issued 9,200,000 shares of common stock in the IPO. In addition, 3,636,365 shares of common stock were issued upon the conversion of the contingently convertible debt held by a related party. As a result, as of September 30, 2015, common stock is our only outstanding class of capital stock.

Basic net income (loss) per share is calculated by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of the common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock include the exercise of outstanding stock options that are dilutive and restricted stock units.

The following tables reconcile the numerator and denominator used to calculate diluted net income per share for the periods presented (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Numerator:
Net income (loss)	$	(3,550	)	$	(1,536	)	$	(17,228	)	$	(1,411	)
Denominator:
Weighted-average shares outstanding—basic (shares)	36,491			35,707			36,183			31,876
Dilutive effect of stock options and RSUs (shares)	—			—			—			—
Weighted average shares outstanding—diluted (shares)	36,491			35,707			36,183			31,876

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For the three and nine months ended September 30, 2015, 108,285 and 71,051 stock options and RSUs were excluded from the calculation of diluted net income (loss) per share because the impact was anti-dilutive.

6. Collaboration and License Agreements

During the three and nine months ended September 30, 2015 and 2014, we recognized $7.1 million and $8.1 million, respectively, and $21.5 million and $27.7 million, respectively, of revenues in performance of our collaborative co-development agreement with Otsuka.

Continued Involvement of the CEO

The Company’s collaboration arrangements with Otsuka require the continuing involvement of our President and Chief Executive Officer, Dr. Ryo Kubota. In the event of the departure of Dr. Kubota from the Company or a change in his role or responsibilities with the Company, the arrangements are subject to termination, at the option of Otsuka. For each agreement, this provision expires upon the approval of the New Drug Application, or "NDA", for the first indication in the United States.

7. Shareholders’ Equity and Share-Based Compensation

Changes in Accumulated Other Comprehensive Loss (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Beginning balance	$	(223	)	$	(105	)	$	(361	)	$	(7	)
Current period other comprehensive gain (loss), net of tax	(127		)	11			11			(87		)
Ending balance	$	(350	)	$	(94	)	$	(350	)	$	(94	)

The changes in accumulated other comprehensive loss relate to unrealized holding gains and losses in available-for-sale securities.

Equity Awards

On April 23, 2015, we granted 9,500 restricted stock units to employees. On May 1, 2015, we granted 358,692 restricted stock units to our Chief Financial Officer; 358,692 shares of restricted stock to our Chief Operating Officer; and, 118,369 shares of restricted stock and 240,323 options to our Chief Business Officer, respectively. Incentive equity grants are subject to a four year vesting, with 25% vesting on the first employment anniversary and the remaining 75% on a monthly pro rata basis over the ensuing three years, with the options and restricted stock units fully vesting four years from the grant date. The options, restricted stock awards and the restricted stock units are subject to accelerated vesting in the event of a change of control and termination of employment under certain circumstances.

On July 2, 2015, at a special meeting of our Board of Directors, the Board approved grants of 64,650 restricted stock units to current employees and 4,200 restricted stock units to newly hired employees with grant dates ranging from May 31, 2015 through to December 31, 2015 to vest annually over four years based on their respective anniversary hire dates.

In addition, our Board of Directors appointed a Chief Strategy Officer and approved a grant to such officer, effective September 1, 2015 of 365,276 restricted stock units, which was equal to 1% of the Company's outstanding common stock on July 2, 2015 on a fully diluted basis.

On August 4, 2015, our Board of Directors appointed a new Executive Vice President of Translational Medicine and a new Executive Vice President of Legal Affairs and approved grants of 127,847 restricted stock units (equal to 0.35% of the outstanding common stock on July 2, 2015 on a fully diluted basis) to each officer effective August 17, 2015 and August 24, 2015, respectively.

The restricted stock units granted to our Chief Strategy Officer, our Executive Vice President of Legal Affairs and our Executive Vice President of Translational Medicine are subject to a four year vesting, with 25% vesting on the first employment anniversary and the remaining 75% on a monthly pro rata basis over the ensuing three years, with the restricted stock units fully vesting four years from the employment anniversary date.

Amendments to Equity Incentive Plans and Share-based Awards

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On March 24, 2015, our Board of Directors approved amendments to outstanding equity awards granted under our 2002 Stock Option and Restricted Stock Plan, our 2012 Equity Incentive Plan, and our 2014 Equity Incentive Plan (collectively, the "Plans") to our employees, executive officers and non-employee members of our Board of Directors. The amendments provided that for employees and executive officers, if their employment is terminated without Cause or for Good Reason (as such terms are defined in the Change in Control Agreements) following qualifying change in control of the Company, then any unvested portion of the awards held by such terminated employees and executives will become immediately vested. In addition, our employees, executive officers and non-employee members of our Board of Directors will be permitted to exercise their awards up to twelve months after their termination. The modifications required acceptance by the option holders, and those acceptances were obtained in April 2015. It was determined that the events of the May 1, 2015 Special Shareholders Meeting constituted a Qualifying Change in Control as defined in the Plans.

Accordingly, the vesting of options previously granted to our former non-employee directors was accelerated such that these equity awards were fully vested as of May 1, 2015. General and administrative expense related to the modification of these options and related to the acceleration of vesting in the second quarter of 2015 was not material.

Vesting of Restricted Stock Units

During the three months ended September 30, 2015, employees subject to the Change in Control Agreements became vested in 20,350 shares of restricted stock units.

8. Income Taxes

Due to our continuing losses, we had an effective tax rate of zero for the three and nine months ended September 30, 2015, which differed from the statutory tax rate due to a full valuation allowance against our deferred tax assets. In the three and nine months ended September 30, 2014, effective tax rates were 563% and 269%, respectively. The difference between the U.S. federal statutory rate of 34% and our effective tax rate in 2014 was due primarily to the provision of a partial valuation allowance related to deferred tax assets for which we do not anticipate future realization and permanent differences in book and tax earnings for stock options, meals and entertainment, and other miscellaneous items.

9. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. This ASU amends the existing accounting standards for revenue recognition. Under the new revenue recognition model, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU was delayed to permit adoption one year later and is effective in the first quarter of 2017. Early adoption is not permitted. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently evaluating the transition alternatives and impact on our financial statements.

10. Former CEO Severance

Former CEO Severance

Under Mr. O'Callaghan's employment agreement, dated October 14, 2014, the termination of Mr. O’Callaghan’s employment without Cause or for Good Reason (as such terms were defined in his employment agreement), entitled him to receive 18 months of salary, up to 18 months of the premiums for health benefit coverage provided under our COBRA program, and a pro-rated portion of his annual bonus (“the CEO severance amounts”). Mr. O'Callaghan resigned his position as our President and Chief Executive Officer, effective on May 3, 2015. The CEO severance amounts, totaling approximately $0.9 million in cash, were paid on May 11, 2015. In addition, pursuant to the terms of the 2014 Equity Incentive Plan, as amended, the vesting of his 712,480 options and 356,410 restricted stock units was accelerated such that all of his equity awards were fully vested as of May 3, 2015.

In connection with the option modifications discussed in Note 7, Shareholders' Equity and Share-based Compensation, in April 2015, Mr. O'Callaghan's 712,480 options were modified to extend the post-termination exercise period from three months to twelve months. The Company recognized stock compensation expense of $2.6 million related to the accelerated vesting of his options in connection with his termination. In addition, pursuant to the terms of the 2014 Equity Incentive Plan, as amended, the vesting of his 356,410 RSUs was accelerated such that these equity awards were fully vested as of May 3, 2015. We recognized general and administrative expense of approximately $2.0 million related to these RSUs in the nine months ended September 30, 2015.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

In this document, unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Acucela” mean Acucela Inc., a Washington corporation. All information is provided as of September 30, 2015, unless otherwise stated.

This Quarterly Report, including the “Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, regarding future events and our future results that are based on our current expectations, estimates, forecasts, and projections about our business, our results of operations, the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “would,” “could,” “intends,” “plans,” “believes,” "may," “seeks” and “estimates,” variations of these words, and similar expressions are intended to identify those forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report under the section entitled “Risk Factors” in Item 1A and elsewhere herein, and in other reports we file with the Securities and Exchange Commission, or "SEC". While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as may be required by law.

Overview

We are a clinical-stage biotechnology company that specializes in discovering and developing novel drug candidates to potentially treat and slow the progression of sight-threatening ophthalmic diseases impacting millions of individuals worldwide. Emixustat hydrochloride ("Emixustat"), our lead investigational visual cycle modulation ("VCM") compound, is designed to potentially reduce retinal toxins and preserve the integrity of retinal tissue in patients suffering from geographic atrophy ("GA") associated with dry age-related macular degeneration ("AMD"). We intend to expand our ophthalmology pipeline by focusing on various degenerative retinal diseases, glaucoma, and dry eye.

Emixustat is currently being evaluated in a Phase 2b/3 study in patients with GA associated with dry AMD. Currently, there are no U.S. Food and Drug Administration (FDA) approved therapies to treat any form of dry AMD, including GA associated with dry AMD. We are co-developing Emixustat under our co-development and commercialization agreement, or the "Emixustat Agreement", with Otsuka Pharmaceutical Co., Ltd., or "Otsuka". Pursuant to the Emixustat Agreement, we and Otsuka have agreed to develop and commercialize Emixustat and/or other back-up compounds for the treatment of dry AMD and other potential ophthalmic indications that the parties agree to pursue under the terms of the agreement.

We completed our initial public offering ("IPO") in February 2014. We manage our operations and allocate resources as a single reporting segment. All our significant assets are located in the United States and all of our revenue during 2015 and 2014 was generated in the United States.

In addition to our continued development of Emixustat for the potential treatment of GA associated with dry AMD, in late 2014, we launched a new strategic plan, referred to as our "Strategic Plan," focused on leveraging our internal research and development efforts and our expertise in VCM to try to expand our ophthalmic product pipeline. As part of our Strategic Plan, we intend to pursue external partnerships and in-licensing and M&A opportunities to develop certain of our proprietary preclinical compounds and compounds we in-license to develop drug candidates for glaucoma, dry eye and various other retinal diseases.

We anticipate that any potential drug candidates developed under our Strategic Plan will be developed independently, and our development expenditures on these programs will not be funded by collaborative partners. As a consequence, we expect that our total research and development expenses will increase and that we will incur net losses from our operating activities in the near term.

Our Strategic Plan also includes: (i) continued collaboration with Otsuka with the goal of successfully developing Emixustat; (ii) initiating out-licensing efforts under the Emixustat Agreement, primarily for the European market; and (iii) leveraging our expertise in VCM by evaluating the potential to develop Emixustat for additional indications such as diabetic retinopathy (DR) or diabetic macular edema (DME).

Description of Operating Accounts

Revenue from collaborations to date has been generated primarily by our research and development activities based on the collaboration and license agreements with Otsuka. Our revenue primarily consists of reimbursement from Otsuka for our fees paid to external service providers in connection with our collaboration agreements with Otsuka, Otsuka’s funding of our portion of development costs under the Emixustat Agreement, payment from Otsuka for the development services provided by our personnel, for services rendered as part of our collaborative research program, an initial license fee as part of the Emixustat Agreement, and milestone payments. We expect any revenue we generate will fluctuate from quarter to quarter as a result of the nature and timing of the compounds under development.

Research and development expenses incurred to date have substantially focused on developing potential therapies for sight-threatening diseases. Since entering into our collaboration agreements with Otsuka, our efforts have been principally directed towards fulfilling our commitments thereunder. We recognize research and development expenses as they are incurred and these costs primarily consist of fees paid to consultants, contract research organizations, independent monitors of our clinical trials, and parties acquiring and evaluating data in conjunction with our clinical trials, including all related fees such as investigator fees, patient screening, lab work and data compilation and statistical analysis; costs related to production of clinical materials, including fees paid to contract manufacturers; costs related to compliance with the U.S. Food and Drug Administration and European Medicine Agency regulatory requirements; consulting fees paid to third parties involved in research and development activities; compensation and related expenses for personnel in research and development functions; and an allocated portion of certain general and administrative costs. We expect our research and development expenses to increase in absolute dollars as we continue to develop drug candidates and as we continue with our discovery research activities.

General and administrative expenses consist primarily of compensation for employees in executive and administrative functions, including finance, accounting, and human resources. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We expect other general and administrative expenses to increase in absolute dollars as we incur additional costs related to the growth of our business, including our intellectual property portfolio.

Interest income consists primarily of interest earned on our cash, cash equivalents and short-term and long-term investments.

Interest expense consisted primarily of interest expense incurred on our contingently convertible debt.

Other income (expense) consists primarily of foreign exchange gains/losses incurred on transactions occurring in Japan, gain or losses from the disposal of fixed assets or other miscellaneous items.

Income tax benefit (expense) consists primarily of the provision of a valuation allowance related to deferred tax assets for which we do not anticipate future realization, and taxes incurred on income, partially offset by the utilization of our carryforwards including our net operating loss carryforward or R&D tax credit, less taxes incurred on income.

RESULTS OF OPERATIONS

Comparison of three and nine month periods ended September 30, 2015 and September 30, 2014

REVENUE FROM COLLABORATIONS

The following table presents revenues for clinical programs (in thousands, except percentages):



	Three Months Ended September 30,				2014 to 2015 $ Change			2014 to 2015 % Change
	2015		2014		2014 to 2015 $ Change			2014 to 2015 % Change
Emixustat	$	7,127	$	8,097	$	(970	)	(12.0	)%
Rebamipide	—		19		(19		)	(100.0	)%
OPA-6566	1		3		(2		)	(66.7	)%
Total	$	7,128	$	8,119	$	(991	)	(12.2	)%



	Nine Months Ended September 30,				2014 to 2015 $ Change			2014 to 2015 % Change
	2015		2014		2014 to 2015 $ Change			2014 to 2015 % Change
Emixustat	$	21,521	$	27,719	$	(6,198	)	(22.4	)%
Rebamipide	—		24		(24		)	(100.0	)%
OPA-6566	3		7		(4		)	(57.1	)%
Total	$	21,524	$	27,750	$	(6,226	)	(22.4	)%

The decrease in revenue from collaborations for the three and nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to fewer billable activities related to Emixustat in 2015.

Our clinical program related to Otsuka's proprietary compound for potential treatment of dry eye, which was the subject of a now-terminated agreement between us and Otsuka referred to as the "Rebamipide Agreement" was terminated in 2013. We do not expect to generate significant revenue from the collaboration related to OPA-6566, Otsuka's proprietary compound for the potential treatment of glaucoma, which was the subject of a development and collaboration agreement with Otsuka, referred to as the "Glaucoma Agreement", for the foreseeable future. A Phase 1/2 study evaluating OPA-6566 was completed in 2012.

OPERATING EXPENSES

Research and development

By program, our research and development expenses were as follows (in thousands, except percentages):



	Three Months Ended September 30,				2014 to 2015 $ Change			2014 to 2015 % Change
	2015		2014		2014 to 2015 $ Change			2014 to 2015 % Change
Emixustat	$	5,815	$	5,249	$	566		10.8	%
Rebamipide	—		1		(1		)	(100.0	)%
OPA-6566	3		1		2			200.0	%
Internal Research	437		252		185			73.4	%
Total	$	6,255	$	5,503	$	752		13.7	%



	Nine Months Ended September 30,				2014 to 2015 $ Change			2014 to 2015 % Change
	2015		2014		2014 to 2015 $ Change			2014 to 2015 % Change
Emixustat	$	16,569	$	19,191	$	(2,622	)	(13.7	)%
Rebamipide	—		15		(15		)	(100.0	)%
OPA-6566	4		8		(4		)	(50.0	)%
Internal Research	1,191		760		431			56.7	%
Total	$	17,764	$	19,974	$	(2,210	)	(11.1	)%

Research and development expense of $6.3 million increased $0.8 million or 13.7% in the three months ended September 30, 2015 primarily due to expenses incurred related to severance payments and retention bonuses paid to employees directly involved in clinical operations and research.

Research and development expense of $17.8 million decreased $2.2 million or 11.1% for the nine months ended September 30, 2015, as compared to the same period in the prior year primarily due to fewer clinical activities related to our Emixustat clinical trials.

We do not expect to incur significant research and development expenses related to the Glaucoma Agreement with Otsuka for the foreseeable future.

As a consequence of our Strategic Plan, we expect that total research and development expenses will increase and that we will incur net losses from our operating activities in the near term.

General and administrative

General and administrative expenses increased $2.3 million in the three months ended September 30, 2015 compared to the same period in the prior year primarily due to the following:


•	approximately $0.7 million related to increased stock compensation expense of which $0.3 million related to accelerated equity vesting in connection with departure of our former Vice President of Finance;


•	approximately $0.6 million in increased consulting charges related to outsourcing of the internal audit function and implementing a new accounting platform;


•	approximately $0.5 million related to the payment of bonuses during the quarter of which $0.4 million related to employee retention and equity equalization programs and $0.1 million to signing bonuses for new executives;


•	approximately $0.2 million in additional office rent in connection with our move to new corporate headquarters; and


•	approximately $0.1 million related to recruiting expenses with remaining increases related to accrued salaries and wages and outside accounting services in connection with audit related services.

General and administrative expenses increased $14.5 million in the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to the following additional expenses:


•	approximately $6.1 million of stock compensation expense of which $5.1 million related to the accelerated vesting of awards, principally to Brian O'Callaghan, and $0.3 million to our former Vice President of Finance;


•	approximately $1.6 million related to severance payments and accruals to other former officers and employees of the Company;


•	approximately $1.5 million of legal and consulting expenses related to our May 1, 2015 special shareholders meeting;


•	approximately $0.8 million of transaction costs reimbursable to Dr. Kubota related to our May 1, 2015 special meeting of shareholders;


•	approximately $1.5 million in bonus payments made during the year of which $1.2 million related to employee retention and equity equalization programs and $0.3 million to signing bonuses for new executives;


•	approximately $1.0 million attributable to accounting and compliance services related to implementing a new general ledger system, audit and equity compliance;


•	approximately $0.9 million related to our internal audit function and implementation of our new enterprise risk management "ERP" system and;


•	approximately $0.6 million in additional office rent in connection with our move to new corporate headquarters plus an overlap of lease payments for both our new and old corporate headquarters during the first quarter of 2015 and remaining expenses related to increased accrued payroll and recruiting.

Interest income, interest expense and other income (expense)

Interest income for the three and nine months ended September 30, 2015 increased $0.1 million and $0.5 million, mainly due to interest earned on proceeds from our February 2014 IPO. Interest expense and other income (expense) were not significant.

Income tax

Liquidity and Capital Resources

Prior to our IPO, we funded our operations primarily from the issuance of convertible preferred stock and contingently convertible debt and, since 2009, from cash generated from operations. Historically, our need for cash has been limited due to Otsuka’s funding of development activities and our receipt of milestone payments from Otsuka. On February 13, 2014, upon the closing of our initial public offering, we issued and sold 9,200,000 shares of common stock at approximately $17.72 per share and received net proceeds of $142.0 million (after underwriting discounts and commissions and offering costs). As a result of the IPO, all preferred stock and contingently convertible debt converted to common stock.

As of September 30, 2015 and December 31, 2014, we had cash, cash equivalents and investments of $165.5 million and $187.8 million, respectively. Cash and cash equivalents include all short-term, highly liquid investments with an original maturity of three months or less at the date of purchase. As of September 30, 2015, cash equivalents consist of money market funds. Short-term investments as of September 30, 2015 and December 31, 2014 were comprised of corporate debt securities and certificates of deposit. As of December 31, 2014, we also held commercial paper. Investments with maturities between three months and one year at the date of purchase are classified as short-term investments. Amounts on deposit with third-party financial institutions may exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable.

The following table shows a summary of our cash flows for the nine months ended September 30, 2015 and 2014 (in thousands):



	Nine Months Ended September 30,
	2015			2014
Cash flows (used in) provided by operating activities	$	(18,609	)	$	11,016
Cash flows provided by (used in) investing activities	9,138			(124,066		)
Cash flows (used in) provided by financing activities	(1,140		)	148,317

Cash Flows from Operating Activities

Net cash used in operating activities was $18.6 million and provided by operating activities was $11.0 million for the nine months ended September 30, 2015 and 2014, respectively. In 2015, cash outflows were primarily the result of a net loss of $17.2 million, a decrease in deferred revenue from collaborations of $6.2 million and an increase in accounts receivables from collaborations of $6.0 million, partially offset by a $6.5 million increase in non-cash employee stock compensation primarily related to accelerated vesting equity incentives held by Brian O'Callaghan and several former Vice Presidents of the Company, a $1.2 million increase in deferred rent and lease incentives related to the lease on our new corporate headquarters and $1.7 million of amortization on marketable securities. In 2014, cash provided by operating activities was primarily the result of an increase in deferred revenue from collaborations of $9.9 million, decreases in accounts receivable of $4.7 million, and a $2.2 million decrease in deferred tax assets due primarily to the provision of a partial valuation allowance for deferred tax assets for which we did not anticipate future realization, partially offset by a $2.3 million decrease in accrued compensation primarily related to payments of accrued bonuses, and decreases in accrued liabilities of $3.2 million.

Cash Flows from Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2015 was $9.1 million which was primarily the result of net maturities of marketable securities held as available for sale being partially offset by purchase of marketable securities available for sale. Net cash used in investing activities for the nine months ended September 30, 2014 was $124.1 million primarily as a result of purchases of marketable securities from the proceeds off our IPO in February 2014.

Cash Flows from Financing Activities

Net cash used in financing activities of $1.1 million for the nine months ended September 30, 2015 primarily due to the repurchase of restricted stock units for employee tax withholdings. Net cash provided by financing activities in the nine months ended September 30, 2014 related to net proceeds from our IPO in February 2014.

Contractual Obligations and Commitments

In addition to the contractual commitments, which consist of operating leases for corporate office and laboratory space, disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we have not incurred any additional material contractual obligations or commitments outside of the normal course of business other than the following:

Severance and Change in Effective Control Agreements

On March 24, 2015, our Board of Directors approved the terms of the Severance and Change in Effective Control Agreements entered into with each member of our then current management team and certain other employees (the "Change in Control Agreements"). The Change in Control Agreements provide that if the employee terminates for any reason or for no reason (including disability), voluntarily resigns for good reason (as defined in the agreement), or the employee dies, and the termination occurs within the six month period following a Qualifying Change in Effective Control (as defined in the Change in Control Agreements), the employee will be entitled to an amount equal to the sum of six months of his or her monthly base salary, plus 50% of the employee’s annual target bonus for 2015, plus the premiums required to continue the employee’s group health care coverage for a period of six months following termination, which will be “grossed up” to cover taxes. The Change in Control Agreements terminate upon the earlier of November 1, 2015 or the employee’s termination date (unless the termination is within six months following a Qualifying Change in Effective Control). On May 1, 2015, as a result of the actions taken by our shareholders at a special meeting of shareholders, a Qualifying Change in Effective Control was deemed to have taken place under the terms of the Change in Control Agreements. As of September 30, 2015, payments totaling $1.6 million have been made under the terms of the Severance and Change in Effective Control Agreements and payments totaling an additional $0.2 million were accrued.

Retention Pool

On February 24, 2015, the compensation committee of our Board of Directors (the "Compensation Committee") approved the creation of a pool of $0.6 million of which we accrued approximately $0.4 million through September 30, 2015 to be distributed at the discretion of the Compensation Committee to employees who remain employed with us on December 31, 2015. Allocations of the pool will not be determined until the fourth quarter of 2015.

Special Shareholders' Meeting Expenses

Dr. Ryo Kubota and SBI Holdings, Inc., our two largest shareholders, incurred certain fees and expenses totaling approximately $0.8 million in preparation for the May 1, 2015 Special Shareholders’ meeting. Our Board of Directors appointed a special committee (the "Special Committee") consisting entirely of independent directors to evaluate these expenses to determine

if the expenses, or a portion thereof, should be reimbursed by the Company. The Special Committee met on June 8, 2015 and concluded that the reimbursement of these expenses was appropriate. Accordingly, the income statement for the three and nine months ended September 30, 2015 reflects these expenses.

Co-Development and Co-Promotion Options

The Emixustat Agreement provides us the right to co-promote with Otsuka in countries within our shared territory of North America. If we elect to co-promote, we will be responsible for a specified portion, ranging from 35% to 50%, of certain obligations in accordance with the agreement. The Glaucoma Agreement provides us the right to co-develop and co-promote OPA-6566. If we elect to co-develop and co-promote OPA-6566, we are obligated to pay an opt-in fee ranging from $10 million to $55 million depending on the timing and participation level of co-development and co-promotion.

We currently intend to exercise our co-promotion rights with respect to Emixustat. We are unable to estimate with certainty the timing or future costs we will incur if we exercise our co-promotion option. The Glaucoma Agreement also provides for potential milestone payments to Otsuka of up to $75 million, based upon various clinical and sales objectives for the treatment of glaucoma.

Contingently Repayable Advances

Under the Emixustat Agreement, Otsuka has agreed to advance funds to us, which are secured by an interest in our net profits and royalty payments and in our entire interests in ownership of the related Emixustat compound and its backup compounds, certain pharmaceutical formulations developed under the Emixustat Agreement that contain one of those compounds, and the underlying intellectual property rights. Amounts may be advanced under this arrangement only to fund our share of development costs under the Emixustat Agreement. Any advances bear interest at the three month LIBOR rate plus three percent. These advances are exclusively payable out of:


•	50% of either our share of net profits, as described in the Emixustat Agreement, generated from collaboration product sales in North America or, if applicable, 50% of the royalty payable to us for those sales;


•	50% of the net profits, as described in the Emixustat Agreement, we generate from collaboration product sales outside North America and Otsuka’s sole territory; and


•	50% of the consideration, as described in the Emixustat Agreement, we receive from the sale or license of collaboration compounds and collaboration products developed under the agreement outside North America and Otsuka’s sole territory.

The percentages above will increase to 75% if we have not repaid the advances within five years of the first commercial sale of a product based on Emixustat in North America. There are no financial covenant requirements under our arrangement with Otsuka. There were outstanding advances, including accrued interest, of $62.7 million and $58.5 million under this arrangement as of September 30, 2015 and December 31, 2014, respectively.

Off-Balance Sheet Transactions

To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Beginning in 2011, we have been sharing the development costs under the Emixustat Agreement, with Otsuka funding our share of these development costs, subject to our agreement to repay them from our share of the profits, if any, or sale or licensing proceeds, if any, from the commercialization of Emixustat. Through September 30, 2015 and 2014, we recognized cumulative revenue of approximately $60.3 million and $46.0 million, respectively, under the agreement as described above. As of September 30, 2015 and December 31, 2014, the contingently repayable borrowing has accrued $4.0 million and $2.5 million, respectively, of interest, which is also contingently repayable under the same terms as the borrowing.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in the market values of our debt investments and interest rates.

Our exposure to market risk results primarily from interest rate changes on our debt securities. We do not invest in financial instruments or their derivatives for trading or speculative purposes. The three primary goals that guide our investment decisions, with the first being the most important, are: preservation of principal, fulfillment of liquidity needs, and balancing pre-tax return and portfolio risk. These objectives are achieved through specific guidelines around maturity parameters, credit quality and allowable investments. Our investment portfolio at September 30, 2015 was well-diversified and included corporate debt securities, certificates of deposits and money market funds. We consider the market value, default, and liquidity risks of our investments to be low at September 30, 2015.

We continually review our debt securities in order to ensure our portfolio is appropriately balanced as part of our overall interest rate risk management strategy, and through this process we consider both short-term and long-term factors in the U.S. and global financial markets in making adjustments to our tolerable exposure to interest rate risk. At September 30, 2015, all of the debt securities that we held were fixed-rate earning instruments that carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. At September 30, 2015, our cash and cash equivalents of $8.2 million were primarily held in money market funds, and our short-term investment balances of $100.2 million were held in corporate debt securities and certificates of deposit. At September 30, 2015, our long-term investment balances of $57.2 million were held in certificates of deposit, corporate debt securities and US. government agencies. We consider the interest rate risk for our cash equivalents and marketable fixed-income securities held at September 30, 2015 and December 31, 2014 to be low. A hypothetical increase in interest rates of 1% as of September 30, 2015 and December 31, 2014 would result in an adverse change in the fair value of our investment portfolio of approximately $1.3 million and $1.6 million, respectively. For further detail on our cash, cash equivalent and investment holdings, please see “Note 3: Cash and Cash Equivalents and Investments” of the Notes to Financial Statements in this quarterly report.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on management’s evaluation, our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2015, our new ERP system replaced our legacy system in which a significant portion of our business transactions originate, are processed and recorded. Our new ERP system is intended to provide us with enhanced transactional processing and management tools compared to our legacy system and is intended to enhance internal controls over financial reporting. We believe our new ERP system will facilitate better transactional reporting and oversight, enhance our internal control over financial reporting, and function as an important component of our disclosure controls and procedures.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

ITEM 1A. Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors including the risks faced by us described below and elsewhere in this report.

Risks Related to Our Business and Industry

We do not have any products that are approved for commercial sale.

To date, we have not generated any product revenue and have funded our operations through proceeds from our February 2014 IPO, private sales of our equity and debt securities and from our collaboration agreements with Otsuka, primarily the Emixustat Agreement. We will not receive revenues from sales of Emixustat or any other drug candidates unless we succeed, either independently or with third parties, in developing and obtaining regulatory approval and marketing drugs with commercial potential. We may never succeed in these activities, and may not generate sufficient revenues to continue our business operations.

Revenues from research and development activities in collaboration with Otsuka and Otsuka’s funding of our portion of development costs under the Emixustat Agreement represented all of our revenues during the nine months ended September 30, 2015, and the loss of these revenues would adversely affect our business.

Revenues from research and development activities under our collaboration agreements with Otsuka have been our only source of revenues to-date in 2015, and we expect they will continue to have a significant impact on our results of operations in future years. As explained further below, in 2013, Otsuka terminated a co-development agreement with us under which we derived significant revenues from development activities. It would be difficult to replace Otsuka as a collaboration partner, and the revenues derived from research and development activities on behalf of Otsuka and Otsuka’s funding of our portion of development costs under the Emixustat Agreement. Accordingly, the loss of Otsuka as a collaboration partner would have a material adverse effect on our business. In addition, any publicity associated with the loss of Otsuka as a collaboration partner could harm our reputation. Otsuka can terminate its collaboration agreements with us on relatively short notice in various circumstances, such as our material breach or insolvency, changes in control of us or, in the case of the Emixustat Agreement, a decision by Otsuka to discontinue funding development costs after considering the results of a Phase 2 or Phase 3 clinical trial, and also for any reason upon six months’ prior notice.

In addition, Otsuka’s interests may differ from ours in relation to development of the drug candidates under our collaboration agreements with them due to changes in management, priorities or its strategic focus. For example, in September 2013, Otsuka terminated its agreement with us to co-develop its compound Rebamipide for the potential treatment of dry eye syndrome in the United States due to the fact that the primary endpoints were not met in the Phase 3 clinical trial in the United States. As a result, planned associated clinical trials and our development activities were halted. Losing the support and focus of Otsuka would adversely affect the development and commercialization of the drug candidates under our collaboration agreements. Our revenues and operating results would suffer and we may need to curtail or cease operations if, among other things, Otsuka terminates the Emixustat Agreement or otherwise fails to fund development costs for any reason.

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We incurred losses in both the last fiscal year and the nine months ended September 30, 2015, and will continue to incur losses in the future.

We incurred a net loss of $17.2 million during the nine months ended September 30, 2015, and as of September 30, 2015, we had an accumulated deficit of $22.7 million, which includes a net loss of approximately $2.0 million for the fiscal year ended December 31, 2014. We expect to incur net losses for the next several years as we continue to develop Emixustat and any other drug candidates, and over the long-term if we expand our research and development programs and acquire or in-license products, technologies or businesses that are complementary to our own. As a result of these losses, we may exhaust our financial resources and be unable to complete the development of our drug candidates. Since 2008, revenues from research and development activities under our collaboration agreements with Otsuka have been our only source of revenues. In the second half of 2011, Otsuka began funding our portion of the development costs under the Emixustat Agreement and we record these advances as revenues in our financial statements. We are contingently obligated to repay these advances, plus interest, with a portion of any revenues we generate, if any, from the potential commercialization of products under the Emixustat Agreement in future periods. For a detailed discussion of our financial condition and results of operations, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this quarterly report. If revenue does not increase, our operating results will be negatively affected. If we fail to raise capital as needed, we may need to curtail operations or cease operations in the future. There can be no assurances that there will be adequate financing available to us in the future on acceptable terms, or at all.

Our long-term prospects are dependent on Emixustat and we cannot be certain that it will achieve success in clinical trials, regulatory approval or be successfully commercialized.

We have invested a significant portion of our time and financial resources in the development of Emixustat, the lead investigational drug candidate emerging from our internally-developed VCM compounds. VCM is an emerging technology and its long-term safety and efficacy is unknown, and thus, there can be no assurance that our drug candidate will achieve regulatory approval. Clinical development is a long, expensive and uncertain process and subject to delays or additional requirements. For instance, based on guidance from the FDA in April 2014, we now expect to conduct at least one additional confirmatory Phase 3 clinical trial in patients with GA associated with dry AMD after we complete our current 24-month Emixustat study. We may also encounter delays or rejections based on our inability to enroll enough patients to complete our clinical trials in a timely manner. It may take several years and require the expenditure of substantial resources to complete the testing of a drug candidate, and failure can occur at any stage of testing. For example:

•

interim results of clinical or non-clinical studies may not necessarily predict their final results, and acceptable results in early studies might not be seen in later studies, in large part because earlier phases of studies are often conducted in smaller groups of patients than later studies, and without the same trial design features, such as randomized controls and long-term patient follow-up and analysis;


•	drug candidates that appear promising at early stages of development may ultimately fail for a number of reasons, including the possibility that the drug candidates may be ineffective, less effective than approved products or investigational drug candidates of our competitors or cause harmful side effects;


•	any clinical or non-clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;


•	clinical and non-clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;


•	negative or inconclusive results from a non-clinical study or clinical trial or adverse events during a clinical trial could cause a non-clinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;


•	the FDA or a foreign regulatory agency can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury;


•	we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a drug or the period required for review of any application for regulatory agency approval; and


•	clinical trials may not demonstrate the safety and efficacy of any drug candidate or result in an approved and marketable product.

Even if clinical trials and testing are successful in the future, we believe the process of completing clinical trials and submitting a marketing application to regulatory agencies for approval will take several years and require the expenditure of

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substantial resources. If we are required to conduct additional clinical trials or other studies of Emixustat beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other studies or if the results of these trials or studies are not positive or are only modestly positive, we may be delayed or unsuccessful in obtaining marketing approval for Emixustat. Additionally, we may not be able to obtain marketing approval or we may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize products.

Even if clinical trials are successful in the future, our growth prospects could be adversely affected and we may need to curtail or cease operations if we do not pursue the optimal commercialization strategy for us under our collaboration agreement.

As a part of our collaboration strategy, we seek to retain an option to choose either to obtain commercialization rights once Emixustat or any other product candidates reach a later stage of development or to receive royalties from future product sales. Under our collaboration agreements with Otsuka, we have exclusive co-promotion rights in certain regions of the world. If we choose to not exercise these rights, we would be entitled to receive royalties on net sales of Emixustat; however, we would not be entitled to any royalties or other payments based on the commercialization of OPA-6566. In general, we must make the decision to exercise these rights before the completion of clinical trials, based on our prediction of future sales and costs and other information. It is possible that the commercialization strategy we choose to pursue will ultimately be less beneficial to us than the other commercialization strategies available to us, which could harm our prospects for growth and could cause us to curtail or cease operations. We may choose a commercialization strategy that results in a less optimal outcome for a variety of reasons, including our failure to accurately predict future sales and costs or our inability to pay the exercise fees and milestone payments.

Our decision to license Emixustat to Otsuka means that we no longer have complete control over how Emixustat is developed and potentially commercialized and how it may be perceived in the marketplace, and we may lose an even greater degree of control over how it is commercialized if we fail to make our co-promotion election under the terms of the Emixustat Agreement. In addition, unless and until we exercise co-promotion rights with respect to OPA-6566, we will have limited or no control over how the drug candidate is developed and commercialized. Even if we exercise commercialization rights for these drug candidates, we will depend, in part, on the efforts of Otsuka to commercialize any successfully-developed drug candidates and will not have control over a number of key elements relating to the commercialization of those drug candidates. Otsuka may fail to effectively commercialize Emixustat or any other drug candidates under our collaboration agreements with them for a variety of reasons, including because it may not regard our programs as significant for its own businesses, because it does have sufficient resources or decides not to devote necessary resources.

The pharmaceutical market is intensely competitive. Even if we are successful in obtaining approval of Emixustat or any other drug candidates, we may be unable to compete effectively with existing drugs, new treatment methods and new technologies.

The pharmaceutical market is intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel therapies for the same indications that we are targeting or expect to target.

If Emixustat is approved for the treatment of GA associated with dry AMD, we anticipate that it would potentially compete with lampalizumab (Roche), which is presently being evaluated in two global Phase 3 studies. We are also aware of a number of investigational drugs and other therapeutic candidates under development for the treatment of AMD (including dry AMD), glaucoma, and dry eye, including several for each of these disease categories by some of the larger pharmaceutical companies. For a listing of potentially competing therapies or products and therapies under development, see "Business—Competition" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Many of our competitors have:


•	much greater financial, technical and human resources than we have at every stage of discovery, development, manufacture and commercialization of products;


•	more extensive experience in non-clinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing and marketing pharmaceutical products;


•	drug candidates that are based on previously tested or accepted technologies;


•	products that have been approved or investigational drug candidates that are in late stages of development; and


•	collaboration arrangements in our target markets with leading companies and research institutions.

Our competitors may succeed in obtaining patent protection, receiving regulatory approval for commercializing drugs for the same indications before we do. Any competing drugs may be more effective or marketed and sold more effectively than

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any products we develop. Moreover, physicians frequently prescribe therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These unapproved, or “off-label,” uses are common across medical specialties and may represent a potential source of competition to Emixustat or any other drug candidates. Competitive therapies, including surgical procedures and medical devices, may make any drug candidates we develop obsolete or noncompetitive before we can recover the expenses of developing and commercializing them.

Market acceptance of Emixustat and other potential products we develop in the future may be limited.

The commercial success of the products for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and third-party payors as clinically useful, cost-effective and safe. Even if a potential product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is commercially launched. We expect that many of the potential products we develop will be based upon mechanisms new to the market. For example, Emixustat is a small-molecule compound within the phenylalkylamine chemical family. To date, no such small-molecule compound has been approved as a pharmaceutical by the FDA. As a result, it may be more difficult for us to achieve market acceptance of our potential products, particularly the first products that we may introduce to the market. Our efforts to educate the medical community about these potentially novel approaches may require greater resources than would be typically required for products based on previously tested or accepted technologies.

Our operating results may fluctuate in the future, which could cause our stock price to decline.

Our quarterly and annual results of operations may fluctuate in the future due to a variety of factors, many of which are outside of our control. The revenues we generate, if any, and our operating results will be affected by numerous factors, including, but not limited to:


•	the development status of Emixustat and, particularly, the timing of any milestone payments to be paid or received by us under our collaboration agreements;


•	the incurrence of clinical expenses that could fluctuate significantly from period to period;


•	the unpredictable effects of collaborations during these periods;


•	the timing of our satisfaction of applicable regulatory requirements;


•	the rate of expansion of our clinical development and other internal development efforts;


•	the effect of competing technologies and products and market developments; and


•	general and industry-specific economic conditions.

If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results and cash flows may, in turn, cause the price of our stock to fluctuate substantially. We believe that comparisons of our historical financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We have limited in-house sales and marketing capabilities and will need to invest significantly to develop these capabilities if our product candidates are successfully developed.

In order to exploit any commercialization opportunities under our agreements with Otsuka, we believe we will need to develop our own sales and marketing infrastructure to facilitate sales of our drug candidates. We cannot assure you that we will be able to do this on a timely basis or at all. The failure to do so would harm our ability to generate drug revenues. To the extent we cannot or choose not to use internal resources for the marketing, sales or distribution of any product candidates in the United States, or elsewhere, we intend to rely on collaboration partners, such as Otsuka, or licensees. We may be unable to establish or maintain such relationships. To the extent that we depend on collaboration partners or other third parties for marketing, sales and distribution, any revenues we receive will depend upon their efforts. Such efforts may not be successful, and we will not be able to control the amount and timing of resources that our licensees or collaborators or other third parties devote to our products.

In addition, to the extent we utilize such relationships for marketing, sales or distribution of any approved products outside of the United States, we will be subject to additional risks related to entering into international business relationships, such as reduced protection for intellectual property rights; unexpected changes in tariffs, trade barriers and regulatory requirements; economic weakness, including inflation, or political instability in particular foreign economies and markets; foreign taxes, including withholding of payroll taxes; and foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country.

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We may not be successful in our efforts to expand our portfolio of drug candidates.

We are seeking to expand our portfolio of drug candidates beyond Emixustat through internal development and by partnering with other pharmaceutical or biotechnology companies.

A significant portion of our internal research program involves unproven technologies. Research programs to identify new disease targets and drug candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential compounds, yet fail to yield drug candidates for clinical development for a number of reasons, including without limitation:


•	the research methodology used may not be successful in identifying potential drug candidates;


•	potential drug candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate they are unlikely to be safe and effective drugs; or


•	we may fail to obtain intellectual property protection for our drug candidates and technologies.

We may attempt to license or acquire drug candidates and be unable to do so for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. A number of more established companies are also pursuing strategies to license or acquire products in the ophthalmic field. These established companies may have a competitive advantage over us due to their size, financial resources and greater clinical development and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable drug candidates include the following:


•	we may be unable to license or acquire the relevant intellectual property rights on terms that would allow us to make an appropriate return from the product;


•	companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or


•	we may be unable to identify suitable products or investigational drug candidates within our areas of expertise.

Relying on third-party manufacturers may result in delays in our clinical trials and product introductions.

We have limited experience in, and we do not own facilities for, manufacturing any product candidates, and we do not intend to develop facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future. While there are likely competitive sources available to manufacture our product candidates, entering into new arrangements may cause delays and additional expenditures, which we cannot estimate with certainty.

There are risks inherent in pharmaceutical manufacturing that could affect the ability of our third-party manufacturers to meet our requirements, which could result in unusable products and cause delays in our development process and our clinical trials. We need to contract with manufacturers who can comply with FDA-mandated current good manufacturing practices, or "cGMPs", and comparable requirements of foreign regulatory bodies on an on-going basis. If we receive necessary regulatory approval for any product candidate, we also expect to rely on third parties, including our collaboration partners, to produce materials required for commercial production. Should we experience difficulties in obtaining and maintaining adequate manufacturing capacity, our ability to successfully develop and commercialize our products could be adversely impacted.

A failure of any of our third-party manufacturers to perform their obligations in a timely manner or establish and follow cGMPs with proper documentation may result in significant delays in clinical trials or in obtaining regulatory approval of product candidates or the ultimate launch of our products into the market. These failures could cause delays and other problems resulting in a material adverse effect on our business, financial condition and results of operations. If we are required to change manufacturers for any reason, we may incur significant costs and be required to devote significant time to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines.

We are dependent on our management team, particularly Ryo Kubota, our President and Chief Executive Officer, and if we are unable to retain and motivate our key management and scientific staff, our drug development programs may be delayed and we may be unable to successfully develop or commercialize our drug candidates.

We are dependent on our management team, particularly Ryo Kubota, our President and Chief Executive Officer. The relationships that our collaboration team members have cultivated with Otsuka make us particularly dependent upon certain employees, including Dr. Kubota and many of our collaboration team leaders, remaining employed by us. In addition, Otsuka has the right to terminate our collaboration agreements if Dr. Kubota is no longer serving as our Chief Executive Officer.

As we acquire or obtain rights to develop and commercialize new drug candidates, our success will depend on our ability to attract, retain and motivate highly qualified management and scientific personnel to manage the development of these

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new drug candidates. We face competition for experienced scientists and other technical and professional personnel from numerous companies and academic and other research institutions. Competition for qualified personnel is particularly intense in the Seattle, Washington area, where very few people possess the skills and expertise we need to develop and commercialize our drug candidates. Our operating history and the uncertainties attendant to being a clinical-stage biotechnology company with limited capital resources could limit our ability to attract and retain personnel.

Dr. Kubota and each of our key management and scientific personnel may terminate his or her employment at any time. If we lose any of our key management personnel, we may be unable to find replacements suitable to us or Otsuka, and our business would be harmed as a result. In addition, if we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may be unable to sustain our operations or grow.

Recent changes to the composition of our board of directors and our management team may be disruptive to our business.

On May 1, 2015, at a special shareholders meeting, our shareholders approved the two shareholder proposals that removed all of the members of our Board of Directors (other than Dr. Kubota) and elected the following new members to our Board of Directors: Yoshitaka Kitao, Dr. Shiro Mita, Eisaku Nakamura and Robert Takeuchi. In addition, on May 1, 2015, at the initial meeting of the new Board of Directors, our founder and former Chief Executive Officer, Dr. Kubota, was appointed as our President and Chief Executive Officer, replacing Brian O'Callaghan, who resigned effective on May 3, 2015. Steve Tarr, John Gebhart and Edward Danse were appointed as the Company’s Chief Operating Officer, Chief Financial Officer and Chief Business Officer, respectively. At the annual shareholders meeting held on June 25, 2015, Dr. Ryo Kubota, Dr. Shiro Mita, Eisaku Nakamura and Robert Takeuchi were re-elected, and Shintaro Asako was elected to the Board of Directors. Effective June 25, 2015, Yoshitaka Kitao resigned from the Board of Directors. Additionally, the Company recently hired Roger Girard, Lukas Scheibler and George Lasezkay as the Company's new Chief Strategy Officer, Executive Vice President of Translational Medicine and Executive Vice President of Legal Affairs.

It is possible that these changes to the composition of our board of directors and our senior management team may be disruptive to our business and may create uncertainty among investors, employees and our collaboration partner concerning our future direction and performance. Any such disruption or uncertainty could have a material adverse impact on our results of operations and financial condition and the market price of our common stock.

If any products we develop become subject to third-party reimbursement practices, unfavorable pricing regulations or healthcare reform initiatives, our business could be harmed.

The availability and levels of reimbursement by governmental and other third-party payors of healthcare services affect the market for our potential products. These payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. In the United States, we will need to obtain approvals for payment for our potential products from private insurers, including managed care organizations, and from the U.S. government's Medicare program. We cannot be sure that reimbursement will be available for any future product candidates and reimbursement amounts, if any, may reduce the demand for, or the price of, our future products.

Obtaining approvals from governmental and other third-party payors of healthcare services can be a time-consuming and expensive process. Because our product candidates are under development, we are unable at this time to determine the level or method of reimbursement. Our business would be materially adversely affected if we do not receive approval for reimbursement of our product candidates from Medicare or private insurers on a timely or satisfactory basis. The Medicare program can deny coverage of a particular drug on the basis of the drug not being “reasonable and necessary” for Medicare beneficiaries. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be materially adversely affected if the Medicare program, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement of our potential products, including the procedures under which they are administered, if any. Our business could also be adversely affected if private insurers, including managed care organizations, the Medicare program or other reimbursing bodies or payors limit the indications for which our potential products will be reimbursed.

There have been, and likely will continue to be, legislative and regulatory proposals in the United States and in some foreign jurisdictions directed at broadening the availability of health care and containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future. These legislative and/or regulatory changes may negatively impact the reimbursement for drug products, following approval, and thus affect our ability to sell our products profitably. The continuing efforts of government and other third-party payors of healthcare services to contain or reduce costs of health care may adversely affect:


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

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•	our ability to set a price or achieve a rate of reimbursement that we believe is fair for our product candidates;


•	our ability to generate revenue and achieve or maintain profitability;


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


•	our access to capital.

We need to grow the size of our organization, and we may experience difficulties in managing this growth.

As our commercialization plans and strategies develop, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial, human resources and other functional areas. Competition for these employees is intense and we may be unable to hire additional qualified personnel in a timely manner and on reasonable terms. While we attempt to provide competitive compensation packages to attract and retain key personnel, many of our competitors are likely to have greater resources and more experience than we have, and we have had difficulty competing successfully for key personnel. Any future growth would impose significant added responsibilities on members of management, including the need to recruit, hire, retain, motivate and integrate additional employees. Also, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to commercialize our drug candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

We face the risk of product liability claims and may not be able to obtain insurance, and we may have exposure to significant contingent liabilities.

Our business exposes us to the risk of product liability claims that are inherent in the development, manufacturing, testing and marketing of drugs and related products. If the use of one or more of our products harms people, we may be subject to costly and damaging product liability claims. We have product liability insurance that covers our clinical trials up to a $10 million annual aggregate limit. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of the products that we may develop. Insurance coverage is increasingly expensive and may not be available on reasonable terms, if at all. We may be unable to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position.

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our development programs and other operations.

As of September 30, 2015, we had cash, cash equivalents and investments of $165.5 million and working capital of $115.2 million. We believe that our cash, cash equivalents and investments, together with Otsuka’s funding of our share of development costs under the Emixustat Agreement and interest income, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. However, our future working capital and capital expenditure requirements will depend on many factors, including:


•	the success of our collaborations with Otsuka to develop and commercialize product candidates;


•	the scope and results of our clinical trials;


•	advancement of other product candidates into development;


•	potential acquisition or licensing of other products or technologies;


•	the timing of, and the costs involved in, obtaining regulatory approvals;


•	the cost of manufacturing activities;


•	the cost of commercialization activities, including product marketing, sales and distribution;


•	the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation; and


•	our ability to establish and maintain additional collaborative arrangements.

Additional financing may not be available to us when we need it or it may not be available on favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail one or more of our development, licensing or acquisition programs. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products which we would otherwise pursue on our own. If we raise additional funds by issuing equity securities or securities convertible into equity, our then-existing shareholders

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will experience dilution and the terms of any new equity securities or securities convertible into equity may have preferences over our common stock.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before the end of that five-year period, we would cease to be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Regulatory Risks

We may not be able to obtain regulatory approval for any of the products resulting from our development efforts. Failure to obtain these approvals could materially harm our business.

All of the drug candidates we are developing or may develop in the future will require additional research or development. None of our drug candidates have received regulatory approval for marketing in the United States or abroad and failure to receive such approvals on one or more of our product candidates could materially harm our business. We will be required to obtain an effective Investigational New Drug Application, or "IND", prior to initiating new human clinical trials in the United States, and must submit a New Drug Application, or "NDA", to obtain marketing approval prior to commercializing any product in the United States. This process is expensive, highly uncertain and lengthy, often taking a number of years until a product is approved for marketing in the United States, if at all. Approval policies or regulations may change and the FDA and other comparable foreign regulatory authorities have substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of a drug candidate for many reasons, such as:


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


•	we, Otsuka, or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a drug candidate is safe and effective for any indication or its clinical and other benefits outweigh any safety risk;


•	such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;


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


•	such authorities may disagree with our interpretation of data from preclinical studies or clinical trials or the use of results from antibody studies that served as precursors to our current drug candidates;


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


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

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

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We may need to successfully address a number of technological challenges in order to complete the development of our drug candidates. Success in early clinical trials does not mean that later clinical trials will be successful because drug candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, our drug candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use, which could have a material adverse effect on our business. Accordingly, there can be no assurance that the FDA and other regulatory authorities will approve any product that we develop.

The “fast track” designation may not actually lead to a faster regulatory review or approval process.

If an investigational drug is intended for the treatment of a serious or life-threatening condition and the investigational drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA “fast track” designation. The fast track classification does not apply to the investigational drug alone, but applies to the combination of the investigational drug and the specific indication or indications for which it is being studied. The FDA’s fast track program is designed to facilitate the clinical development and evaluation of the investigational drug’s safety and efficacy for the fast track indication or indications. NDAs or marketing applications filed by sponsors of investigational drugs with fast track designation may qualify for expedited review under policies or procedures offered by the FDA, but the fast track designation alone does not assure such qualification. Although we have obtained a fast track designation from the FDA for Emixustat for the treatment of dry macular degeneration (geographic atrophy), we may not experience a faster review or approval compared to conventional FDA processes and we do not expect FDA approval to be granted for at least several years, if at all. Our fast track designation may be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Our fast track designation does not guarantee that we will qualify for or be able to take advantage of the expedited review procedures.

Our products could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience problems with our products, when and if any of them are approved.

Any product for which we obtain marketing approval will be subject to continual requirements, review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed. The approval may contain conditions or requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in:


•	voluntary or mandatory recall;


•	withdrawal of the products from the market;


•	restrictions on such products or manufacturing processes;


•	fines;


•	suspension of regulatory approvals;


•	product seizure; and


•	injunctions or the imposition of civil or criminal penalties.

We may be slow to adapt, or we may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements or policies.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products outside of the United States.

We and Otsuka may market Emixustat in our respective exclusive territories. To market Emixustat in foreign jurisdictions, we or Otsuka must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies from country to country and can involve additional testing and documentation. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We and Otsuka may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

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Risks Relating to Intellectual Property and Other Legal Matters

If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may be unable to compete effectively in our markets.

The strength of our patents in the biotechnology and pharmaceutical fields involves complex legal and scientific questions and can be uncertain. In addition to the rights we have obtained from Otsuka relating to some of our product candidates, we rely upon intellectual property we own relating to our product candidates, including patents, patent applications and trade secrets. For a detailed discussion of our patent rights, see "Item 1.Business—Intellectual Property” in our Annual Report on Form 10-K for the fiscal year ended 2014. Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to prevent third parties from developing or designing around these patents. Further, there is no uniform, global policy regarding the subject matter and scope of claims allowable in pharmaceutical patents and the criteria applied by patent offices throughout the world to grant patents are not always predictable or uniform.

In general, there is no guarantee that the patents we file or in-license will be granted or that the patents we hold would be found valid and enforceable if challenged. Third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Additionally, we may lose our rights to the patents and patent applications we license in the event of a breach or termination of any of our collaboration agreements. Manufacturers may also seek to obtain approval to sell generic versions of our product candidates prior to the expiration of the relevant licensed patents. If the sufficiency of the breadth or strength of protection provided by the patents we license with respect to our product candidates is threatened, it could dissuade others from collaborating with us to develop, and threaten our ability to commercialize, our other product candidates. Further, if we encounter delays in our clinical trials or our development activities are otherwise impeded, the period of time during which we could market our product candidates under patent protection would be reduced. Once the patent life has expired for a product, we may be subject to competition from generic pharmaceutical companies.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

We rely on trade secret protection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our development processes with respect to Emixustat and our other product candidates that involve proprietary know-how, information and technology that is not covered by patent applications. While we maintain physical security of our premises and physical and electronic security of our information technology systems, security measures may be breached and we may not have adequate remedies to protect the confidentiality of our proprietary information and know-how. Our systems and external backup measures may also be vulnerable to damage or breach due to natural disasters or other unexpected events.

While we require all of our employees, consultants, advisors and any third-parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. These agreements may be terminated or breached, and we may not have adequate remedies for any such termination or breach. Furthermore, to the extent we develop our operations outside the United States, these agreements may not provide meaningful protection for our trade secrets and know-how in the event of unauthorized use or disclosure as the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. Additionally, to the extent we license certain proprietary know-how, information or technologies from third-parties, including our collaboration partners, we also rely on such third-parties to adopt and enforce policies to protect such proprietary know-how, information and technology.

Third-party claims of intellectual property infringement may prevent or delay our discovery, development and commercialization efforts with respect to Emixustat and our other product candidates.

Our commercial success depends, in part, on avoiding infringement of the patents and proprietary rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to Emixustat, the biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our activities infringe their patents or that we are employing their proprietary technology without authorization. We may not have identified all the patents, patent applications or published literature that affect our business either by blocking our ability to commercialize our product, by preventing the patentability of one or more aspects of our products or those of our licensors or by covering the same or similar technologies that may affect our ability to market our product. In addition, third parties may obtain patents in the future and claim that use of our product candidates or technologies infringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these

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claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties, or we may be enjoined from further developing or commercializing our product candidates and technologies.

We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To the extent we rely on third parties for our proprietary rights, we will have limited control over the protection and defense of such rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

If we use hazardous or biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations in the United States govern the use, manufacture, storage, handling and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, operating results and financial condition.

Risks Related to Ownership of Our Common Stock

The price of our common stock may be volatile, and you could lose all or part of your investment.

The market prices for securities of biotechnology and pharmaceutical companies in general, and clinical-stage companies in particular, have been highly volatile and may continue to be highly volatile in the future. Volatility in the market price for a particular company’s stock has often been unrelated or disproportionate to the operating performance of that company. Market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. The following factors, in addition to the other factors described in this “Risk Factors” section, may have a significant impact on the market price of our common stock:


•	the development status of our product candidates, including results of our clinical trials;


•	market conditions or trends related to the biotechnology and pharmaceutical industries, or the market in general;


•	announcements of technological innovations, new commercial products or other material events by our competitors or us;


•	disputes or other developments concerning our proprietary rights;


•	changes in, or failure to meet, securities analysts’ or investors’ expectations of our financial

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performance;


•	additions or departures of key personnel, particularly Dr. Ryo Kubota;


•	discussions of our business, products, financial performance, prospects or stock price by the financial and scientific press or securities analysts or lack of analyst coverage;


•	public concern as to the safety of drugs and drug delivery techniques;


•	regulatory developments in the United States, Japan and other foreign countries;


•	changes in health care payment systems, including developments in price control legislation; or


•	general economic and political factors, including wars, terrorism, natural disasters and political unrest.

In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often resulted. We may become subject to this type of litigation, which is often extremely expensive and diverts management’s attention, even if such litigation is ultimately concluded in a manner favorable to us.

As a United States public company with shares listed on the Tokyo Stock Exchange, we are subject to a variety of financial and other reporting and corporate governance requirements that may be difficult for us to satisfy, will raise our costs and may divert resources and management attention from operating our business.

As a public company whose shares of common stock are both registered under the Exchange Act in the United States and listed for trading on the Mothers market of the Tokyo Stock Exchange ("TSE") in Japan, we have incurred and will continue to incur significant legal, accounting and other expenses related to various financial reporting and corporate governance requirements in both the United States and Japan. Specifically, we are subject to the continued listing standards of the TSE in Japan as well as the disclosure requirements of the Exchange Act in the United States, which together impose significant compliance obligations upon us. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

In order to continue to meet the listing standard of the Mothers market of the TSE, the adequacy of our internal control over financial reporting must be assessed by management each year. We are required to test operating effectiveness of our internal control over financial reporting on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we are unable to comply with Section 404, management might be unable to certify, and our independent registered public accounting firm might not be able to report on, the adequacy of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our financial information on a timely basis and might suffer adverse regulatory consequences or violate TSE listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal control from our independent registered public accounting firm.

Any future issuance of equity or debt securities by us may adversely affect the rights or value of our previously issued common stock.

If we raise additional capital through the issuance of equity or securities convertible into equity, further dilution to our then existing shareholders will result and new investors could have rights superior to the rights of our existing shareholders. If we raise additional funds through the issuance of debt securities, these securities could have rights that are senior to holders of our common stock and could contain covenants that restrict our operations. In addition, the terms of future financings may restrict our ability to raise additional capital, which could delay or prevent the further development or commercialization of our product candidates.

Because the principal trading market for our shares is the Mothers market of the TSE, the corporate governance rules of the major U.S. stock exchanges will not apply to us. As a result, our governance practices may differ from those of a company listed on such U.S. exchanges.

Our governance practices need not comply with certain New York Stock Exchange and NASDAQ corporate

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governance standards, including:


•	the requirement that a majority of our board of directors consists of independent directors;


•	the requirement that we have an audit committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and


•	the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Although the composition of our Board of Directors and its committees currently complies with the foregoing governance standards, there can be no assurance that we will continue to voluntarily comply with such requirements. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

A limited number of shareholders will have the ability to influence the outcome of director elections and other matters requiring shareholder approval.

As of May 10, 2015, Dr. Ryo Kubota, our largest shareholder, as an individual, and our directors and executive officers and their affiliates, as a group, beneficially owned approximately 28.6% and 28.8% of our outstanding common stock, respectively. Additionally, in January 2015, SBI Holdings, Inc. ("SBI"), who has disclosed in its filings with the SEC beneficial ownership of 7,752,425 shares of our common stock representing approximately 21.2% of our outstanding common stock, sent a letter to the Company (the "Demand Letter") demanding a special meeting of shareholders be held for the purpose of removing four of the five then-current members of our board of directors and to replace them with new director nominees proposed by SBI. A special shareholder meeting was held on May 1, 2015, where both proposals in the Demand Letter were approved by the Company's shareholders.

As a result of their significant holdings in our common stock, Dr. Ryo Kubota and SBI, or other large shareholders, either individually or acting together, have the ability to exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers, acquisitions or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change of control of our company, which could deprive our shareholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other shareholders.

Anti-takeover provisions under Washington law could make an acquisition of us more difficult and affect the market price of our common stock.

Because we are incorporated in the state of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met. These provisions may also have the effect of delaying or preventing a change of control of our company, even if this change of control would benefit our shareholders.

We do not expect to pay dividends in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

None.

Use of Proceeds from Public Offerings of Common Stock

In February 2014, we closed our IPO of 9,200,000 shares of our common stock, at a price to the public of approximately $17.72 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act of

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1933, as amended (the "Securities Act") pursuant to a registration statement on Form S-1 (File No. 333-192900), which was declared effective by the SEC on February 3, 2014. The offering closed on February 13, 2014. The managing underwriter in the offering was Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. We raised approximately $142.0 million from the IPO, net of underwriters’ discounts and commissions, and offering expenses.

As of September 30, 2015, we have used approximately $16.6 million of the net proceeds of our IPO for the following purposes:


•	approximately $9.8 million in expenses incurred by the Company in connection with the Special Meeting and the subsequent changes in the Company’s management,


•	approximately $2.0 million in research and development expenditures, including the development of Emixustat in Europe as well as other VCM-based product candidates,


•	approximately $4.4 million in general and administrative expenditures, and


•	approximately $0.4 million in property and equipment purchases.

To date, we have not used any proceeds of our IPO for sales and marketing expenditures. The amounts and timing of our actual expenditures will depend on numerous factors, including the success of our studies, changes in business strategy, the amount of cash used in or generated by our operations and the extent to which we exercise co-promotion rights under our collaboration agreements.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 31, 2014 pursuant to Rule 424(b) under the Securities Act. Pending the uses described, we maintain the cash received in money market funds, as well as corporate debt securities, commercial paper, and certificates of deposit.

Share Repurchases

During the nine months ended September 30, 2015, there were no purchases of shares of common stock made by, or on behalf of, the Company or any "affiliated purchaser," as defined by Rule 10b-18 of the Exchange Act.

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ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits



Exhibit Number		Description

31.1		Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxely Act of 2002
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxely Act of 2002
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

* Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

** In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, irrespective of any general incorporation language contained in any such filing, and otherwise is not subject to liability under these sections.

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SIGNATURES

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



ACUCELA INC.
Dated:	November 12, 2015
BY:		/s/ Ryo Kubota
		Ryo Kubota
		Chairman of the Board, Chief Executive Officer and President
		(Principal Executive Officer)




BY:		/s/ John E. Gebhart
		John E. Gebhart
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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