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EX-32.1 - EXHIBIT 32.1 - Protagonist Therapeutics, Incptgx10-qq3ex321.htm
EX-31.2 - EXHIBIT 31.2 - Protagonist Therapeutics, Incptgx10-qq3ex312.htm
EX-31.1 - EXHIBIT 31.1 - Protagonist Therapeutics, Incptgx10-qq3ex311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-37852 
 
PROTAGONIST THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
98-0505495
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
7707 Gateway Boulevard, Suite 140
Newark, California 94560-1160
 
(510) 474-0170
(Address, including zip code, of registrant’s principal
executive offices)
 
(Telephone number, including area code, of registrant’s principal
executive offices)
 
 
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934).  Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2017
Common Stock, $0.00001 par value
 
20,479,663



PROTAGONIST THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




PART I. – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

PROTAGONIST THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)

 
 
September 30, 2017
 
December 31, 2016
 
 
 
(Note 2)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
50,395

 
$
21,084

Restricted cash - current
10

 
10

Available-for-sale securities - current
43,191

 
56,515

Receivable from collaboration partner - related party
520

 

Research and development tax incentive receivable
885

 
2,241

Prepaid expenses and other current assets
2,703

 
3,394

Total current assets
97,704

 
83,244

Property and equipment, net
945

 
562

Restricted cash - noncurrent
450

 

Available-for-sale securities - noncurrent
11,316

 
10,150

Other assets

 
34

Total assets
$
110,415

 
$
93,990

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,267

 
$
1,163

Accrued expenses and other payables
8,241

 
5,272

Deferred revenue - related party
41,739

 

Total current liabilities
52,247

 
6,435

Deferred rent - noncurrent
332

 

Total liabilities
52,579

 
6,435

Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.00001 par value, 10,000,000 shares authorized; and no shares issued and outstanding as of September 30, 2017 and December 31, 2016

 

Common stock, $0.00001 par value, 90,000,000 shares authorized; 16,944,103 and 16,722,280 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

Additional paid-in capital
156,234

 
152,393

Accumulated other comprehensive gain (loss)
100

 
(245
)
Accumulated deficit
(98,498
)
 
(64,593
)
Total stockholders’ equity
57,836

 
87,555

Total liabilities and stockholders' equity
$
110,415

 
$
93,990


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


1


PROTAGONIST THERAPEUTICS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
License and collaboration revenue - related party
$
8,781

 
$

 
$
8,781

 
$

Operating expenses:
 
 
 
 
 
 
 
Research and development
11,168

 
5,561

 
34,457

 
16,882

General and administrative
2,593

 
1,577

 
8,708

 
4,387

Total operating expenses
13,761

 
7,138

 
43,165

 
21,269

Loss from operations
(4,980
)
 
(7,138
)
 
(34,384
)
 
(21,269
)
Interest income
155

 
54

 
479

 
93

Change in fair value of redeemable convertible preferred stock tranche and warrant liabilities

 

 

 
(4,719
)
Other expense

 

 

 
(34
)
Net loss
$
(4,825
)
 
$
(7,084
)
 
$
(33,905
)
 
$
(25,929
)
Net loss attributable to common stockholders
$
(4,825
)
 
$
(7,377
)
 
$
(33,905
)
 
$
(26,487
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.29
)
 
$
(0.87
)
 
$
(2.01
)
 
$
(8.62
)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
16,911,575

 
8,483,189

 
16,851,672

 
3,071,456


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2


PROTAGONIST THERAPEUTICS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(4,825
)
 
$
(7,084
)
 
$
(33,905
)
 
$
(25,929
)
Other comprehensive loss:
 
 
 
 
 
 
 
Gain on translation of foreign operations
73

 
75

 
324

 
73

Unrealized gain on available-for-sale securities
24

 
1

 
21

 
5

Comprehensive loss
$
(4,728
)
 
$
(7,008
)
 
$
(33,560
)
 
$
(25,851
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3


PROTAGONIST THERAPEUTICS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended
September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(33,905
)
 
$
(25,929
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
289

 
242

(Gain) loss on disposal of property and equipment
(62
)
 
34

Net amortization of premium on available-for-sale securities
497

 
82

Stock-based compensation
3,052

 
610

Change in fair value associated with redeemable convertible preferred stock tranche liability

 
4,194

Change in fair value of redeemable convertible preferred stock warrant liability

 
525

Changes in operating assets and liabilities:
 
 
 
Research and development tax incentive receivable
1,530

 
(1,229
)
Receivable from collaboration partner - related party
(520
)
 

Prepaid expenses and other assets
1,034

 
(183
)
Accounts payable
1,096

 
157

Accrued expenses and other payables
3,271

 
1,205

Deferred revenue - related party
41,739

 

Net cash provided by (used in) operating activities
18,021

 
(20,292
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment, net
(610
)
 
(295
)
Purchase of available-for-sale securities
(28,154
)
 
(6,396
)
Proceeds from maturities of available-for-sale securities
39,835

 
11,688

Net cash provided by investing activities
11,071

 
4,997

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of redeemable preferred stock, net of issuance costs

 
22,508

Proceeds from issuance of common stock upon exercise of stock options and purchases under employee stock purchase plan
789

 
143

Payment of deferred offering costs
(297
)
 

Proceeds from issuance of initial public offering, net of issuance cost

 
84,508

Net cash provided by financing activities
492

 
107,159

Effect of exchange rate changes on cash, cash equivalents and restricted cash
177

 
105

Net increase in cash, cash equivalents and restricted cash
29,761

 
91,969

Cash, cash equivalents and restricted cash, beginning of period
21,094

 
4,065

Cash, cash equivalents and restricted cash, end of period
$
50,855

 
$
96,034

SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES
 
 
 
Conversion of redeemable convertible preferred stock to common stock at closing of initial public offering
$

 
$
66,904

Settlement of fair value of redeemable convertible preferred stock liability
$

 
$
5,837

Accretion of redeemable convertible preferred stock
$

 
$
558

Deferred offering costs in accounts payable and accrued liabilities
$

 
$
860

Acquisition of equipment in trade-in
$
185

 
$

Purchase of property and equipment in accounts payable and accrued liabilities
$
6

 
$

Reclassification of preferred stock warrant liability to equity
$

 
$
1,005

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



Note 1. Organization and Description of Business

Protagonist Therapeutics, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 2006 and is headquartered in Newark, California. The Company is a clinical-stage biopharmaceutical company with a proprietary technology platform which is utilized to discover and develop novel peptide-based drugs to address significant unmet medical needs. Protagonist Pty Limited (“Protagonist Australia”) is a wholly-owned subsidiary of the Company and is located in Brisbane, Australia. Protagonist Australia was incorporated in Australia in September 2001. The Company became the parent of Protagonist Australia pursuant to a transaction in which all of the issued and outstanding capital stock of Protagonist Australia was exchanged for shares of the Company’s common stock and Series A preferred stock. The Company manages its operations as a single operating segment.

Liquidity

The Company has incurred net losses from operations since inception and has an accumulated deficit of $98.5 million as of September 30, 2017. The Company’s ultimate success depends on the outcome of its research and development activities. The Company expects to incur additional losses in the future and it anticipates the need to raise additional capital to fully implement its business plan.

In September 2017, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) which permits the offering, issuance, and sale by the Company of up to a maximum aggregate offering price of $200.0 million of its common stock.  Up to a maximum of $50.0 million of the maximum aggregate offering price of $200.0 million may be issued and sold pursuant to an At-The-Market financing facility under a sales agreement with Cantor Fitzgerald & Co.  As of September 30, 2017, the Company had not sold any securities pursuant to the shelf registration statement. The Company will also continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing, but there is no assurance that such financing will be available at terms acceptable to the Company, if at all.

Initial Public Offering

On August 10, 2016, the Company’s registration statement on Form S-1 (File Nos. 333-212476 and 333-213071) related to its initial public offering (“IPO”) of common stock became effective. The IPO closed on August 16, 2016, at which time the Company issued 7,500,000 shares of its common stock at a price of $12.00 per share. In addition, upon closing the IPO, all outstanding shares of the redeemable convertible preferred stock converted into 8,577,571 shares of common stock. There were no shares of redeemable convertible preferred stock outstanding at September 30, 2017 or December 31, 2016. In September 2016, the Company issued an additional 252,972 shares of its common stock at a price of $12.00 per share following the underwriters’ exercise of their option to purchase additional shares. The Company received an aggregate of $83.6 million in cash, net of underwriting discounts and commissions, after deducting offering costs paid by the Company.

Reverse Stock Split

In July 2016, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of the Company’s issued and outstanding common stock at a 1-for-14.5 ratio, which was effected on August 1, 2016. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, options to purchase common stock and per share amounts contained in the condensed consolidated financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that

5


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

are normally required by GAAP have been condensed or omitted, and accordingly the consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete consolidated financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s consolidated financial information. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other interim period or for any other future year.

The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 7, 2017.
 
Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates related to revenue recognition, accruals for research and development activities, stock-based compensation, and income taxes. Estimates related to revenue recognition include actual costs incurred versus total estimated budgeted cost of the Company's deliverables, actual costs incurred versus total estimated budgeted cost of variable consideration, and application of constraint in the determination of transaction price under its license and collaboration agreement with Janssen Biotech, Inc. (the "Janssen License and Collaboration Agreement"). Management bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to forecasted amounts and future events. Actual results may differ significantly from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and available-for-sale securities. Substantially all of the Company’s cash is held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. The primary focus of the Company’s investment strategy is to preserve capital and to meet liquidity requirements. The Company’s cash equivalents and available-for-sale securities are managed by external managers within the guidelines of the Company’s investment policy. The Company’s investment policy addresses the level of credit exposure by limiting concentration in any one corporate issuer and establishing a minimum allowable credit rating. To manage its credit risk exposure, the Company maintains its portfolio of cash equivalents and available-for-sale securities in fixed income securities denominated and payable in U.S. dollars. Permissible investments of fixed income securities include obligations of the U.S. government and its agencies, money market instruments including commercial paper and negotiable certificates of deposit, and highly rated corporate debt obligations and money market funds. The Company has not experienced any material credit losses on its investments.

Cash Equivalents

Cash equivalents that are readily convertible to cash are stated at cost, which approximates fair value. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash

Restricted cash consists of cash balances primarily held as security in connection with the Company’s corporate credit card and a letter of credit related to the Company's facility lease entered into in March 2017.

6


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Cash as Reported in Consolidated Statements of Cash Flows

Cash as reported in the unaudited condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and the restricted cash as presented on the consolidated balance sheets.

Cash as reported in the unaudited condensed consolidated statements of cash flows consists of (in thousands):
 
September 30,
 
2017
 
2016
Cash and cash equivalents
$
50,395

 
$
96,024

Restricted cash - current
10

 
10

Restricted cash - noncurrent
450

 

Cash balance in condensed consolidated statements of cash flows
$
50,855

 
$
96,034


Available-for-Sale Securities

All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Short-term marketable securities have maturities greater than three months but no longer than 365 days as of the balance sheet date. Long-term marketable securities have maturities of 365 days or longer as of the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest income.

Fair Value of Financial Instruments

Fair value accounting is applied to all financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis (at least annually). The carrying amount of the Company’s financial instruments, including cash equivalents, receivable from collaboration partner, accounts payable and accrued expenses and other payables approximates fair value due to their short-term maturities. See Note 4, Fair Value Measurements, regarding the fair value of the Company’s other financial assets and liabilities.
 
Revenue Recognition

Effective July 1, 2017, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606") using the full retrospective transition method.  The Company did not have any effective contracts within the scope of this guidance prior to July 1, 2017. Accordingly, the Company did not elect to use any of the practical expedients permitted related to adoption, and the adoption of ASC 606 had no impact on the Company's financial position, results of operations or liquidity. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.  Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.  The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct.  The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.    


7


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company entered into a license and collaboration agreement that became effective upon the resolution of regulatory requirements during the third quarter of 2017 which is within the scope of ASC 606, under which it has licensed certain rights to its PTG-200 product candidate to a third party and may enter into other such arrangements in the future. The terms of the arrangement include payment to the Company of one or more of the following: non-refundable, up-front license fees, development and regulatory and commercial milestone payments, and royalties on net sales of licensed products.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgement to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for the Company to use the same approach for all contracts. The Company expects to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. To date, the Company has not recognized any milestone payments resulting from its collaboration arrangement.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from its collaboration arrangement.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Research and Development Costs

Research and development costs are expensed as incurred, unless there is an alternate future use in other research and development projects or otherwise. Research and development costs include salaries and benefits, stock-based compensation expense, laboratory supplies and facility-related overhead, outside contracted services including clinical trial costs, manufacturing and process development costs for both clinical and preclinical materials, research costs, development milestone payments under license and collaboration agreements, and other consulting services.


8


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company accrues for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials, and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated services provided but not yet invoiced, and includes these costs in accrued expenses and other payables in the condensed consolidated balance sheets and within research and development expense in the condensed consolidated statements of operations. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers. The Company makes significant judgments and estimates in determining the accrued liabilities at each balance sheet date. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued liabilities and actual costs incurred. However, the status and timing of actual services performed, number of patients enrolled, and the rate of patient enrollment may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.

Research and Development Tax Incentive

The Company is eligible under the AusIndustry research and development tax incentive program to obtain a cash amount from the Australian Taxation Office. The tax incentive is available to the Company on the basis of specific criteria with which the Company must comply. Specifically, the Company must have annual turnover of less than AUD 20.0 million and cannot be controlled by income tax exempt entities. The research and development tax incentive is recognized as a reduction to research and development expense when the right to receive has been attained and funds are considered to be collectible. The tax incentive is denominated in Australian dollars and, therefore, the related receivable is remeasured into U.S. dollars as of each reporting date.

Under certain conditions, research and development activities conducted outside Australia (“overseas finding”) also qualify for the research and development tax incentive. Funds received for overseas finding are at a risk of clawback until substantiation that less than 50% of research and development expenditures for a project will be incurred overseas. A deferred tax incentive is recorded upon the cash receipt of the overseas finding funds and a reduction of research and development expense is not recognized until the Company can substantiate that more than 50% of the total project expenditure will occur in Australia.

When there is reasonable assurance that the grant will be received with remote risk of clawback, the relevant expenditure has been incurred, and the consideration can be reliably measured, the Company records the research and development incentive, including the overseas finding funds, as research and development tax incentive receivable and a reduction of research and development expenses to reflect that the funds are owed to the Company for the period the eligible costs are incurred.

Net Loss per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. The net loss attributable to common stockholders is calculated by adjusting the net loss of the Company for the accretion on the redeemable convertible preferred stock, if applicable. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders for all periods presented since the effect of potentially dilutive securities are anti-dilutive given the net loss of the Company.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and creates a new ASC Topic 606, Revenue from Contracts with Customers. Customers. Subsequent to May 2014, the FASB issued additional guidance that delayed the effective date and clarified various aspects of the new guidance, including principal versus agent considerations, identifying performance obligations and licensing, and also included other improvements and practical expedients. The Company adopted this new guidance effective July 1, 2017 using the full retrospective transition method. The Company did not have any effective

9


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

contracts within the scope of this guidance prior to July 1, 2017. Accordingly, the Company did not elect to use any of the practical expedients permitted under the transition guidance, and the adoption had no impact on the Company's previously reported financial position, results of operations or liquidity.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which is intended to simplify and improve how deferred income taxes are classified on the balance sheet. This guidance eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. The guidance is effective for annual periods beginning after December 15, 2016 and for interim periods within those annual periods, and early adoption is permitted. The Company adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or liquidity.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of accounting for employee share-based payment transactions, including income tax consequences, the determination of forfeiture rates, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is permitted. The Company adopted this guidance effective January 1, 2017 and has elected to recognize forfeitures of share-based payment awards as they occur on a prospective basis. The impact of the adoption of ASU 2016-09 was not material to the Company’s condensed consolidated financial statements. The adoption of this guidance did not have a material impact on the income tax effects of share-based payment awards as the resulting change in the Company's deferred income tax assets is fully offset by a corresponding deferred income tax asset valuation allowance.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires the presentation of changes in restricted cash or restricted cash equivalents on the statement of cash flows. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company early adopted this guidance effective March 31, 2017, and, accordingly, amounts generally described as restricted cash are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts of cash reflected on the accompanying consolidated statements of cash flows. The Company has adopted ASU 2016-18 retrospectively and has revised the prior period cash flows from investing activities, beginning cash balance, and ending cash balance to reflect the change in presentation of restricted cash. Other than the change in presentation in the accompanying consolidated statements of cash flows, the adoption of this guidance had no effect on the Company’s financial position, results of operations or liquidity.

Recently Issued Accounting Pronouncements Not Adopted as of September 30, 2017
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, (with the exception of short-term leases) at the commencement date, lessees will be required to recognize a lease liability and a right-of-use asset. Lessor accounting is largely unchanged, while lessees will no longer be provided with a source of off-balance sheet financing. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) are required to apply the modified retrospective transition method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective method does not require any transition accounting for leases that did not exist before the earliest comparative period presented. While the Company continues to evaluate the impact of this guidance on its consolidated financial statements and disclosures, it expects that its non-cancellable operating lease commitments will be subject to the new guidance and recognized as right-of-use assets and operating lease liabilities on the Company’s consolidated balance sheets, and that the adoption of this new guidance will not have a material impact on its results of operations or liquidity.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 and early adoption is permitted for fiscal years and interim periods within those years beginning after

10


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

December 15, 2018. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the classification of certain cash receipts and cash payments in the statements of cash flow to eliminate the diversity in practice related to eight specific cash flow issues. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements and disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance on the types of changes to the terms and conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements and disclosures.

Note 3. Janssen Collaboration Agreement

Agreement Terms

On May 26, 2017, the Company and Janssen Biotech, Inc., ("Janssen"), one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered into an exclusive license and collaboration agreement for the development, manufacture and commercialization of PTG-200 worldwide for the treatment of Crohn's disease ("CD") and ulcerative colitis ("UC"). Janssen is a related party to the Company as Johnson & Johnson Innovation - JJDC, Inc., a significant shareholder of the Company, and Janssen are both subsidiaries of Johnson and Johnson. PTG-200 is the Company’s oral Interleukin 23 receptor ("IL-23R") antagonist drug candidate currently in development. The Janssen License and Collaboration Agreement became effective on July 13, 2017. Upon the effectiveness of the agreement, the Company became eligible for and received a non-refundable, upfront cash payment of $50.0 million from Janssen.

Under the Janssen License and Collaboration Agreement, the Company granted to Janssen an exclusive worldwide license to develop, manufacture and commercialize PTG-200 and related IL-23R compounds for all indications, including CD and UC. The Company is responsible, at its own expense, for the conduct of the Phase 1 clinical trial for PTG-200, and Janssen will be responsible for the conduct of a potential Phase 2 clinical trial for PTG-200 in CD, including filing the Phase 2 IND. All such clinical trials will be conducted in accordance with a mutually agreed upon clinical development plan and budget. Development costs for the Phase 2 clinical trial will be shared between the parties on an 80%/20% basis, with Janssen assuming the larger share. Should Janssen elect to retain its license following completion of the Phase 2 clinical trial, it will be responsible, at its own expense, for the manufacture, continued development of, seeking regulatory approval for, and commercialization of PTG-200 worldwide. The parties’ development activities under the Janssen License and Collaboration Agreement through the Phase 2 clinical trial will be overseen by a joint governance structure which will have equal representation by both parties unless both parties mutually agree to disband such structure or the Company has provided written notice to Janssen of its intention to disband and no longer participate in such structure.

The Company is eligible to receive a $25.0 million payment upon filing of the Phase 2 IND. Following the conclusion of the planned Phase 2A portion of the Phase 2 clinical trial, if Janssen elects to maintain its license rights and continue the development of PTG-200 in the Phase 2B portion of such clinical trial (the “First Opt-in Election”), the Company would be eligible to receive a $125.0 million payment. Following the conclusion of the planned Phase 2B portion of the Phase 2 clinical trial, if Janssen elects again to maintain its license rights (the “Second Opt-in Election”), the Company would be eligible to receive a $200 million payment. In addition to the opt-in fees, the Company would be eligible to receive potential development, regulatory and sales milestone payments of up to an aggregate of $590.0 million, and tiered royalties paid as a percentage of Janssen’s worldwide net sales at rates ranging from ten to the mid-teens, with certain customary reductions under certain circumstances. If Janssen does not make either the First Opt-in Election or the Second Opt-in Election, the Janssen License and Collaboration Agreement will terminate. If Janssen does not make the Second Opt-in Election, or if at any time after the Second Opt-in Election, Janssen terminates the Janssen License and Collaboration Agreement, the Company would be obligated to pay Janssen a low single-digit royalty on worldwide net sales of PTG-200. The Company would also have an option to provide up

11


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

to 30% of the required U.S. details for PTG-200 to prescribers, using its own sales force personnel, upon commercial launch in the United States. If such right is exercised by the Company, the Company’s detailing costs would be reimbursed by Janssen at a mutually agreed cost per primary detailing equivalent.

The Janssen License and Collaboration Agreement contains customary representations, warranties and covenants by the Company and Janssen and includes an obligation by the Company not to develop or commercialize other compounds which also target IL-23R outside of the Janssen License and Collaboration Agreement until completion of the Phase 2B portion of the Phase 2 clinical trial. Each of the Company and Janssen is required to indemnify the other party against all losses and expenses related to breaches of its representations, warranties and covenants under the Janssen License and Collaboration Agreement.

The Janssen License and Collaboration Agreement remains in effect until the royalty obligations cease following patent and regulatory expiry, unless terminated earlier. Either the Company or Janssen may terminate the Janssen License and Collaboration Agreement for uncured material breach. Janssen retains the right to terminate the Janssen License and Collaboration Agreement for convenience and without cause on written notice of a certain period to the Company. Upon a termination of the Janssen License and Collaboration Agreement, all rights revert back to the Company, and in certain circumstances, if such termination occurs during ongoing clinical trials, Janssen would, if requested, provide certain financial and operational support to the Company for the completion of such trials.

Revenue Recognition

The Company identified the following material promises under the Janssen License and Collaboration Agreement: (1) the license related to PTG-200, (2) the performance of development services, including regulatory support, during Phase 1 clinical trial for PTG-200 through the filing of the IND by Janssen, and (3) compound supply services for Phase 1 and Phase 2 activities. The Company considered that the license has standalone functionality and is capable of being distinct. However, the Company determined that the license is not distinct from the development and compound supply services within the context of the agreement because the development and compound supply services significantly increase the utility of the intellectual property.

Specifically, the Company’s development, manufacturing and commercialization license can only provide benefit to Janssen in combination with the Company’s development services in the Phase 1 study. The intellectual property (“IP”) related to the peptide technology platform, which is proprietary to the Company, is the foundation for the development activities related to the treatment for CD. The compound supply services are a necessary and integral part of the development services as they could only be conducted utilizing the outcomes of these services. Given the development services under the Janssen Collaboration Agreement are expected to involve significant further development of the initial IP, the Company has concluded that the development and compound supply services are not distinct from the license, and thus the license, development services and compound supply services are combined into a single performance obligation. The nature of the combined performance obligation is to provide development and compound supply services to Janssen under the arrangement.

The Company also evaluated whether the fees related to the First Opt-in Election and Second Opt-in Election are options with material rights. These two options include additional sublicense rights and patent rights transferred to Janssen upon exercising both of these options. The Company concluded that Janssen’s opt in rights are not options with material rights because the $50.0 million upfront payment to the Company was not negotiated to provide incremental discount for the future opt in payments at the end of Phase 2A and Phase 2B. The option to “opt in” provides Janssen with a license for IP that has been improved from the license initially granted for a term in the case of the opt in after completion Phase 2A and then a perpetual license in the case of opt in after completion of Phase 2B. Therefore, the First Opt-in Election and Second Opt-in Election options are not considered to be material rights. The option fees will be recognized as revenue when, and if, Janssen exercises its options because the Company has no further performance obligations at that point.

For revenue recognition purposes, the Company determined that the duration of the contract begins on the effective date of July 13, 2017 and ends upon completion of Phase 2A activities. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. The Company analyzed the impact of Janssen terminating the agreement prior to the completion of Phase 2A and determined that there were significant economic penalties to Janssen for doing so. The Company believes that if Janssen terminates the agreement upon completion of Phase 2A, the forfeiture of the remaining license rights and payment of 50% of the remaining Phase 2 costs is not a significant economic

12


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

penalty when compared to paying $125 million as an opt in license fee to continue the use of the License. Thus, the duration of the contract is limited to the end of Phase 2A.

The Company determined that the transaction price of the Janssen License and Collaboration Agreement was $54.2 million as of September 30, 2017. In order to determine the transaction price, the Company evaluated all the payments to be received during the duration of the contract. The Company determined that the $50.0 million upfront payment, the $25.0 million payment payable upon filing of the Phase 2 IND, which is fully constrained as of September 30, 2017, and $4.2 million of estimated variable consideration for cost-sharing payments from Janssen for agreed upon services related to Phase 2 activities constituted consideration to be included in the transaction price, which is to be allocated to the combined performance obligation. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

As part of the evaluation for determining that the $25.0 million payment upon filing of Phase 2 IND is fully constrained as of September 30, 2017, the Company considered several factors, including the stage of development of PTG-200 and that achievement of the milestone is outside of the Company's control, and concluded that the filing of the Phase 2 IND is not probable at this time. If and when the filing of the Phase 2 IND becomes probable, the $25.0 million payment will be constrained by contra revenue amounts for payments that the Company expects to make for 20% of the cost of Phase 2 activities to be performed by Janssen. The additional potential development, regulatory and sales milestone payments of up to an aggregate of $590.0 million after the completion of Phase 2A activities that the Company is eligible to receive are outside the contract term and as such have been excluded from the transaction price. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Janssen and therefore have also been excluded from the transaction price. At the end of each reporting period, the Company will update its assessment of whether an estimate of variable consideration is constrained and update the estimated transaction price accordingly.

Variable consideration for cost-sharing payments related to agreed upon services for Phase 2 activities that the Company performs within the duration of the contract are included in the transaction price at an amount equal to 80% of the estimated budgeted costs for these activities, including primarily internal full-time equivalent effort and third party contract costs. The Company is responsible for 20% of the development costs for the Phase 2 clinical trial. Accordingly, a significant portion of this work is expected to be performed by Janssen. Because the Phase 2 clinical trial activity is related to the license, it is not capable of being distinct. This is because both the Company and Janssen cannot benefit from these activities absent the Phase 1 activities. As the Phase 2 activities for which the Company will share 20% of the cost activities are not capable of being distinct and are not separately identifiable within the context of the contract, they are not a distinct service that Janssen transfers to the Company. Therefore, the consideration payable to Janssen is accounted for as a reduction in the transaction price. The Company and Janssen make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the overall shared costs incurred. The Company accounts for cost-sharing payments from Janssen as increases in license and collaboration revenue in its consolidated statements of operations, while cost-sharing payments to Janssen are accounted for as reductions in license and collaboration revenue, or contra-revenue. Costs incurred by the Company related to agreed upon services for Phase 2 activities under the Janssen License and Collaboration Agreement are recorded as research and development expenses in its consolidated statements of operations.

In summary, the license, the development activities for Phase 1 activities and the agreed upon services for Phase 2 activities are combined as one performance obligation that will be performed over the duration of the contract, which is from the effective date of the Janssen License and Collaboration Agreement through to the completion of Phase 2A activities. Since the Company has determined that the combined performance obligation is satisfied over time, ASC 606 requires the Company to select a single revenue recognition method for the performance obligation that faithfully depicts the Company's performance in transferring control of the services. The guidance allows entities to use two methods to measure its progress toward complete satisfaction of a performance obligation:

1.
Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract (e.g. surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units of produced or units delivered); and

13


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

2.
Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation.

The Company concluded that it will utilize a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Janssen. In applying the cost-based input methods of revenue recognition, the Company uses actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of internal full-time equivalent effort and third-party contract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligations, which the Company believes will be fulfilled within the next 12 months. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company's performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company's performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.

For the three and nine months ended September 30, 2017, the Company recognized $8.8 million of license and collaboration revenue. This amount included $8.4 million of the transaction price for the Janssen License and Collaboration Agreement recognized based on proportional performance, and $0.4 million for other services related to Phase 2 activities performed by the Company on behalf of Janssen that are not included in the performance obligations identified under the Janssen License and Collaboration Agreement.

The following table presents changes in the Company’s contract assets and liabilities during the three and nine months ended September 30, 2017 (in thousands):
Three and nine months ended September 30, 2017
  
Balance at Beginning of Period
 
Additions
 
  
Deductions
 
  
Balance at End of Period
Contract assets:
  
 
 
 
 
 
 
 
 
 
 
 
 
 
       Receivable from collaboration partner - related party
 
$

 
$
520

 
 
$

 
 
$
520

Contract liabilities:
  
 
 
 
 
 
 
  
 
 
 
  
 
 
       Deferred revenue - related party
  
$

 
$
50,132

 
  
$
(8,393
)
 
  
$
41,739


Deferred revenue related to the Janssen License and Collaboration Agreement of $41.7 million as of September 30, 2017, which was comprised of the $50.0 million upfront payment and $0.1 million of cost sharing payments from Janssen for agreed upon services for Phase 2 activities, less $8.4 million of license and collaboration revenue recognized from the effective date of the contract, will be recognized as the combined performance obligation is satisfied. The Company also recorded a $0.5 million receivable from collaboration partner as of September 30, 2017 for cost sharing amounts payable from Janssen.

During the three months and nine months ended September 30, 2017, the Company did not recognize any revenue from amounts included in the contract asset and the contract liability balances at the beginning of the period or from performance obligations satisfied in previous periods. None of the costs to obtain or fulfill the contract were capitalized.

Note 4. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:


14


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

In determining fair value, the Company utilizes quoted market prices, broker or dealer quotations, or valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The following table presents the fair value of the Company’s financial assets and liabilities determined using the inputs defined above (in thousands).
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
47,638

 
$

 
$

 
$
47,638

Corporate bonds

 
7,495

 

 
7,495

Government bonds

 
47,013

 

 
47,013

Total financial assets
$
47,638

 
$
54,508

 
$

 
$
102,146

 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
11,270

 
$

 
$

 
$
11,270

Corporate bonds

 
21,841

 

 
21,841

Commercial paper

 
10,769

 

 
10,769

Government bonds

 
41,289

 

 
41,289

Total financial assets
$
11,270

 
$
73,899

 
$

 
$
85,169

 
The Company's corporate bonds, commercial paper and government bonds are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.


15


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Note 5. Balance Sheet Components

Cash Equivalents and Available-for-sale Securities

Cash equivalents and available-for-sale securities consisted of the following (in thousands):
 
September 30, 2017
 
Amortized
Cost
 
Gross Unrealized
 
 
 
Gains
 
Losses
 
Fair Value
Money market funds
$
47,638

 
$

 
$

 
$
47,638

Corporate bonds
7,502

 

 
(7
)
 
7,495

Government bonds
47,056

 

 
(44
)
 
47,012

Total cash equivalents and available-for-sale securities
$
102,196

 
$

 
$
(51
)
 
$
102,145

Classified as:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
$
47,638

Available-for-sale securities - current
 
 
 
 
 
 
43,191

Available-for-sale securities - noncurrent
 
 
 
 
 
 
11,316

Total cash equivalents and available-for-sale securities
 
 
 
 
 
 
$
102,145


 
December 31, 2016
 
Amortized
Cost
 
Gross Unrealized
 
 
 
Gains
 
Losses
 
Fair Value
Money market funds
$
11,270

 
$

 
$

 
$
11,270

Corporate bonds
21,886

 

 
(45
)
 
21,841

Commercial paper
10,769

 

 

 
10,769

Government bonds
41,316

 
2

 
(29
)
 
41,289

Total cash equivalents and available-for-sale securities
$
85,241

 
$
2

 
$
(74
)
 
$
85,169

Classified as:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
$
18,504

Available-for-sale securities - current
 
 
 
 
 
 
56,515

Available-for-sale securities - noncurrent
 
 
 
 
 
 
10,150

Total cash equivalents and available-for-sale securities
 
 
 
 
 
 
$
85,169


All available-for-sale securities - current held as of September 30, 2017 and December 31, 2016 had contractual maturities of less than one year. All available-for-sale securities - noncurrent held as of September 30, 2017 and December 31, 2016 had contractual maturities of at least one year but less than two years. There have been no material realized gains or losses on available-for-sale securities for the periods presented.


16


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Accrued Expenses and Other Payables

Accrued expenses and other payables consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Accrued clinical and research related expenses
$
5,864

 
$
3,617

Accrued employee related expenses
1,611

 
1,420

Accrued professional service fees
709

 
115

Other
57

 
120

Total accrued expenses and other payables
$
8,241

 
$
5,272



Note 6. Research Collaboration and License Agreement

In October 2013, the Company’s former collaboration partner decided to abandon a collaboration program with the Company and, pursuant to the terms of the agreement between the Company and the former collaboration partner, the Company elected to assume the responsibility for the development and commercialization of the product candidate. Upon the former collaboration partner’s abandonment, it assigned to the Company certain intellectual property arising from the collaboration and also granted the Company an exclusive license to certain background intellectual property rights of the former collaboration partner that relate to the products acquired by the Company. The nomination of PTG-300 as a development candidate triggered a $250,000 payment from the Company to the former collaboration partner, which the Company recorded as a research and development expense during the three months ended March 31, 2016. The initiation of a Phase 1 clinical study for PTG-300 during the second quarter of 2017 triggered an additional $250,000 payment obligation from the Company to the former collaboration partner, which the Company recorded as a research and development expense during the three months ended June 30, 2017. The Company has the right, but not the obligation, to further develop and commercialize the product and, if the Company successfully develops and commercializes PTG-300 without a partner, the Company will pay the former collaboration partner up to an additional aggregate of $28.5 million for the achievement of certain development and regulatory milestone events and up to an additional aggregate of $100.0 million for the achievement of certain sales milestone events. In addition, the Company will pay the former collaboration partner a low single digit royalty on worldwide net sales of the product until the later of 10 years from the first commercial sale of the product or the expiration of the last patent covering the product.

Note 7. Government Programs

Research and Development Tax Incentive

The Company recognized AUD 493,000 ($389,000) and AUD 1.1 million ($0.9 million) as a reduction of research and development expenses for the three and nine months ended September 30, 2017, respectively, in connection with the research and development tax incentive from Australia. The Company recognized AUD 181,000 ($145,000) and AUD 1.6 million ($1.2 million) as a reduction of research and development expenses for the three and nine months ended September 30, 2016, respectively, in connection with the research and development tax incentive from Australia. As of September 30, 2017, and December 31, 2016, the research and development tax incentive receivable was AUD 1.1 million ($0.9 million) and AUD 3.1 million ($2.2 million), respectively.

In March 2016, the Company received AUD 237,000 ($182,000) for overseas findings and recorded the funds as deferred tax incentive in accrued expenses and other payables on the condensed consolidated balance sheet due to the possibility that the funds could have to be repaid. In December 2016, the Company’s research and development project under the AusIndustry research and development tax incentive program was complete and the Company substantiated that more than 50% of the total project expenditures occurred in Australia. Therefore, the overseas finding related incentive amounts were no longer deemed to be at risk of clawback and the Company recognized such amounts in December 2016 as a reduction of research and development expenses for the overseas findings received in 2016.


17


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company has concluded that amounts received under the Janssen License and Collaboration Agreement should be classified as statutory income for Australian taxation purposes. On this basis they should not be included in the calculation of annual turnover for the purposes of determining eligibility for the refundable research and development tax offset.

SBIR Grant

In May 2017, the Company was awarded a Phase 2 Small Business Innovation Research ("SBIR") Grant from the National Institute of Diabetes and Digestive and Kidney Diseases ("NIDDK") of the National Institutes of Health ("NIH") in support of research aimed at developing biomarkers that define IL-23R target engagement by oral peptide antagonists and the effects of that engagement of downstream signaling. The total grant award was $1.3 million and is for the period from May 2017 to April 2019.

In July 2016, the Company was awarded a Phase 1 SBIR Grant from the National Institute of Heart and Lung Diseases of the NIH in support of pre-clinical research aimed at discovering and optimizing lead molecules as novel peptide mimetics of the natural hepcidin hormone. The total grant award was $219,000 and was for the period from August 2016 to January 2017.
    
In September 2015, the Company was awarded a Phase 1 SBIR Grant from the NIDDK of the NIH in support of research on orally stable peptide antagonists of IL-23R as potential treatments for IBD. The total grant award was $224,000 and was for the period from September 2015 to August 2016.

The Company recognizes a reduction to research and development expenses when expenses related to the grants have been incurred and the grant funds become contractually due from NIH. The Company recorded $103,000 and $123,000 as a reduction of research and development expenses for the three and nine months ended September 30, 2017. The Company recorded $66,000 and $135,000 as a reduction of research and development expenses for the three and nine months ended September 30, 2016. The Company recorded a receivable for $103,000 and $100,000 as of September 30, 2017 and December 31, 2016, respectively, to reflect the eligible costs incurred under the grants that are contractually due to the Company and such amounts are included in the prepaid expenses and other current assets on the condensed consolidated balance sheets.

Note 8. Commitments and Contingencies

In March 2017, the Company entered into a lease agreement for office and laboratory space located in Newark, California. The Company relocated its operations to the new facility in May 2017. The Company provided the landlord with a $450,000 letter of credit collateralized by restricted cash as security deposit for the lease, which expires in May 2024. The Company is entitled to tenant improvement allowances of approximately $469,000, any unused portion of which expires in December 2018. The Company records tenant improvement allowances as deferred rent when funds are received and associated capital expenditures as leasehold improvements that will be amortized over the shorter of their useful life or the remaining term of the lease.

The following table summarizes the Company's minimum lease payments related to the Newark facility as of September 30, 2017 (in thousands):
Year Ending December 31:
Amount
2017 (remaining three months)
$
264

2018
1,667

2019
1,941

2020
2,000

2021
2,059

Thereafter
5,228

Total minimum lease payments
$
13,159




18


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9. Preferred Stock Warrants

In April 2016, 1,999,998 shares of Series B redeemable convertible preferred stock were issued for cash proceeds of $20,000 in connection with the exercise of warrants. Immediately prior to the exercise of the warrants, the fair value of the warrants was remeasured at $1.0 million, determined using a hybrid method of the Option Pricing Model with a 67% weighted value per share and the probability-weighted expected return method (“PWERM”) with a 33% weighted value per share. Upon the exercise of warrants, the redeemable convertible preferred stock warrant liability of $1.0 million was reclassified to redeemable convertible preferred stock. In May 2016, the remaining warrants for the purchase of 2,000,000 shares of Series B redeemable convertible preferred stock expired unexercised.

The Company recorded a charge of $525,000 for the increase in the fair value of the redeemable convertible preferred stock warrant liability in the condensed consolidated statements of operations for the nine months ended September 30, 2016. There were no such charges incurred for the three and nine months ended September 30, 2017.

Note 10. Redeemable Convertible Preferred Stock Tranche Liability

In July 2015, the Company entered into the Series C Preferred Stock Purchase Agreement (“the Series C Agreement”) for the issuance of up to 80,337,411 shares of Series C redeemable convertible preferred stock at a price of $0.4979 per share, in multiple closings. The initial closing occurred on July 10, 2015, whereby 35,147,617 shares of Series C redeemable convertible preferred stock were issued for gross proceeds of approximately $17.5 million. According to the initial terms of the Series C Agreement, the Company could issue 45,189,794 additional shares under the same terms as the initial closing, in a subsequent closing (“Series C Second Tranche”) contingent upon the achievement of certain development milestones. On the date of the initial closing, the Company recorded a Series C redeemable convertible preferred stock liability of $1.0 million, as the fair value of the obligation/right to complete the Series C Second Tranche.

In March 2016, the Company completed the closing of the Series C Second Tranche and issued 45,189,794 shares of Series C redeemable convertible preferred stock for net cash proceeds of $22.5 million. At this time, the Series C redeemable convertible preferred stock liability was remeasured at $5.8 million, determined using a hybrid method of the Option Pricing Model with a 67% weighted value per share and the PWERM with a 33% weighted value per share. Upon the closing of the Series C Second Tranche, the Series C redeemable convertible preferred stock liability was terminated and the balance of the liability of $5.8 million was reclassified to redeemable convertible preferred stock. The Company recorded a charge of $4.2 million for the increase in the fair value of the Series C redeemable convertible preferred stock liability in the condensed consolidated statements of operations for the nine months ended September 30, 2016. There were no such charges incurred for the three months ended September 30, 2016 and the three and nine months ended September 30, 2017.

Note 11. Equity Plans

Equity Incentive Plan
              
In July 2016, the Company’s board of directors and stockholders approved the Company's 2016 Equity Incentive Plan (the “2016 Plan”) to replace the 2007 Stock Option Plan, which became effective upon the Company’s IPO. Under the 2016 Plan, 1,200,000 shares of the Company’s common stock were initially reserved for issuance of stock options, restricted stock units, and other awards to employees, directors, and consultants. Pursuant to the “evergreen” provision contained in the 2016 Plan, the number of shares reserved for issuance under the 2016 Plan automatically increases on January 1 of each year, starting on January 1, 2017 and continuing through (and including) January 1, 2026, by 4% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding fiscal year, or a lesser number of shares determined by the Company’s board of directors. As of September 30, 2017, the Company has reserved 1,868,891 shares of common stock for issuance under the 2016 Plan. The 2016 Plan is administered by the board of directors or a committee appointed by the board of directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. Options granted under the 2016 Plan expire no later than ten years from the date of grant. Employee stock options generally vest over a period of four years. Non-employee director initial stock options generally vest over a period of three years, and non-employee director annual refresher stock options generally vest over a period of approximately one year.

19


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Stock Options

Activity under the Company’s equity incentive plans is set forth below:
 
 
 
 
 
Options Outstanding
 
Options
Available for
Grant
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value (1)
 
 
 
 
 
 
 
 
 
(in millions)
Balances at December 31, 2016
164,328

 
2,393,829

 
$
10.39

 
8.79
 
 
Additional options authorized
668,891

 

 
 
 
 
 
 
Options granted
(403,000
)
 
403,000

 
$
12.08

 
 
 
 
Options exercised

 
(173,155
)
 
$
1.50

 
 
 
 
Options forfeited
85,930

 
(85,930
)
 
$
16.79

 
 
 
 
Balances at September 30, 2017
516,149

 
2,537,744

 
$
11.05

 
8.55
 
$
20.2

Options exercisable at September 30, 2017
 
 
811,539

 
$
8.72

 
8.03
 
$
8.2

Options vested and expected to vest at September 30, 2017
 
 
2,537,744

 
$
11.05

 
8.55
 
$
20.2

____________________
(1) The aggregate intrinsic values were calculated as the difference between the exercise price of the options and the closing price of the Company’s common stock on September 30, 2017. The calculation excludes options with an exercise price higher than the closing price of the Company's common stock on September 30, 2017.

During the nine months ended September 30, 2017, the estimated weighted-average grant-date fair value of common stock underlying options granted was $7.11 per share.

Employee Stock Options Valuation

The fair value of employee and director stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Expected term (in years)
6.08
 
4.16 - 5.70
 
5.50 - 6.08
 
4.16 - 5.94
Expected volatility
62.1%
 
62.8%
 
62.1% - 65.4%
 
62.5% - 64.8%
Risk-free interest rate
2.00%
 
1.38%
 
1.88% - 2.07%
 
1.27% - 1.38%
Dividend yield
 
 
 

Employee Stock Purchase Plan

In July 2016, the Company’s board of directors and stockholders approved the 2016 Employee Stock Purchase Plan (the “2016 ESPP”), which became effective upon the closing of the IPO. Under the 2016 ESPP, 150,000 shares of the Company’s common stock were initially reserved for issuance for employee purchases of the Company’s common stock. Pursuant to the “evergreen” provision contained in the 2016 ESPP, the number of shares reserved for issuance under the 2016 ESPP automatically increases on January 1 of each year, starting on January 1, 2017 and continuing through (and including) January 1, 2026 by the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding fiscal year, (ii) 300,000 shares, or (iii) such other number of shares determined by the Company’s board of directors. The 2016 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation. At the end of each offering period, eligible employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock at the beginning of the offering

20


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

period or at the end of each applicable purchase period. As of September 30, 2017, a total of 317,222 shares of common stock were reserved for issuance under the 2016 ESPP, and 48,668 shares have been issued.

Stock-Based Compensation

Total stock-based compensation expense was as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Research and development
$
600

 
$
285

 
$
1,399

 
$
360

General and administrative
607

 
163

 
1,653

 
250

Total stock-based compensation expense
$
1,207

 
$
448

 
$
3,052

 
$
610


As of September 30, 2017, total unrecognized stock-based compensation expense related to stock options totaled $11.7 million, which the Company expects to recognize over a weighted-average period of approximately 2.60 years years.

Note 12. Net Loss per Share Attributable to Common Stockholders

As the Company had net losses for the three and nine months ended September 30, 2017 and 2016, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net loss
$
(4,825
)
 
$
(7,084
)
 
$
(33,905
)
 
$
(25,929
)
Accretion of redeemable convertible preferred stock

 
(293
)
 

 
(558
)
Net loss attributable to common stockholders
$
(4,825
)
 
$
(7,377
)
 
$
(33,905
)
 
$
(26,487
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per common share, basic and diluted
16,911,575

 
8,483,189

 
16,851,672

 
3,071,456

Net loss per share attributable to common stockholders, basic and diluted
$
(0.29
)
 
$
(0.87
)
 
$
(2.01
)
 
$
(8.62
)

The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per share attributable to common stockholders computations for the three and nine months ended September 30, 2017 and 2016 because their inclusion would be anti-dilutive:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Options to purchase common stock
2,537,744

 
1,496,156

 
2,537,744

 
1,496,156

ESPP shares
26,610

 

 
26,610

 

Total
2,564,354

 
1,496,156

 
2,564,354

 
1,496,156



21


PROTAGONIST THERAPEUTICS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Note 13. Subsequent Event
On October 16, 2017, pursuant to the Company's shelf registration statement on Form S-3, the Company completed an underwritten public offering of 3,530,000 shares of common stock at a public offering price of $17.00 per share for total gross proceeds of $60.0 million. Net proceeds, after deducting underwriting commissions and offering costs, were approximately $56.2 million. The Company granted the underwriters an option to purchase up to 529,500 additional shares at the public offering price, less underwriting discounts and commissions, which expires on November 10, 2017.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this quarterly report (this “Quarterly Report”) on Form 10-Q and with our Audited Consolidated Financial Statements and related notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2017.

Forward-Looking Statements Collaboration

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks, uncertainties and other important factors. In particular, statements, whether expressed or implied, concerning, among other things, the potential for our programs, the timing of our clinical trials, the potential for eventual regulatory approval and commercialization of our product candidates and our potential receipt of milestone payments and royalties under our collaboration agreement with Janssen, future operating results or the ability to generate sales, income or cash flow are forward-looking statements. They involve risks, uncertainties and assumptions that are beyond our ability to control or predict, including those discussed in Part II, Item 1A, of this Quarterly Report. While we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.“Protagonist,” the Protagonist logo and other trademarks, service marks and trade names of Protagonist are registered and unregistered marks of Protagonist Therapeutics, Inc. in the United States and other jurisdictions.

Overview

We are a clinical-stage biopharmaceutical company with a proprietary technology platform which is utilized to discover and develop novel peptide-based drugs to address significant unmet medical needs. Our primary focus is on developing potential first-in-class oral targeted therapy-based peptide drugs that work by blocking biological pathways that are currently targeted by marketed injectable antibody drugs. Our initial lead peptide product candidates, PTG-100 and PTG-200, are based on this approach, and we believe these candidates have the potential to transform the existing treatment paradigm for inflammatory bowel disease ("IBD"), chronic gastrointestinal diseases consisting primarily of ulcerative colitis ("UC") and Crohn's disease ("CD").
PTG-100, a potential first-in-class oral, alpha-4-beta-7 ("α4β7") integrin antagonist, is currently in a global Phase 2B clinical trial for the treatment of moderate-to-severe UC that is anticipated to randomize approximately 240 patients at approximately 100 clinical sites. We anticipate conducting an interim futility analysis in early 2018 and completing this trial in the second half of 2018. Following evidence of a positive Phase 2B study in UC, we would anticipate conducting end-of-Phase 2 meetings with global health authorities and initiating a pivotal clinical development program in UC and CD in 2019. In addition, we intend to request a pre-Investigational New Drug ("IND") meeting with the Food and Drug Administration ("FDA") in early 2018 to discuss potential clinical development of PTG-100 in pouchitis, a rare condition that may be observed

22


in post-surgical IBD patients. PTG-200, a potential first-in-class oral Interleukin-23 receptor ("IL-23R") antagonist for the potential treatment of IBD, is expected to enter a Phase 1 clinical study in the fourth quarter of 2017. We have a worldwide license and collaboration agreement with Janssen Biotech, Inc. to co-develop and co-detail PTG-200 for all indications, including IBD, as described below in the section titled "Janssen License and Collaboration Agreement". In addition to PTG-100 and PTG-200, we are also developing an injectable hepcidin mimetic, PTG-300, for the potential treatment of anemia and iron overload related blood disorders, including rare diseases such as beta-thalassemia and myelodysplastic syndromes. PTG-300 is currently being studied in a Phase 1 clinical trial in healthy volunteers. Based on preliminary data to date, PTG-300 has demonstrated a dose-related reduction in serum iron, which persisted beyond 72 hours at higher dose levels. We believe that this effect provides pharmacodynamic-based proof-of-concept for PTG-300. PTG-300 has also shown a dose-dependent increase in blood exposure, and has been well tolerated, with no serious adverse events or dose-limiting toxicities to date. The most common adverse event was a transient and self-limited erythema (redness) at the injection site in some subjects at doses 10 mg or higher. We expect final top line data for PTG-300 will be available in the fourth quarter of 2017. Pending a successful pre-IND meeting with the FDA, we anticipate filing an IND in 2018 and initiating a potentially pivotal study in patients. Finally, we believe that our peptide technology platform will enable us to expand our pipeline with a third oral peptide to be selected for pre-clinical development in 2018 for the potential treatment of a non-IBD gastrointestinal disease.
We have not generated any revenue from product sales and we do not currently have any products approved for commercialization. We have never been profitable and have incurred net losses in each year since inception and we do not anticipate that we will achieve sustained profitability in the near term. Our net losses were $4.8 million and $33.9 million for the three and nine months ended September 30, 2017, respectively, and $7.1 million and $25.9 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017 we had an accumulated deficit of $98.5 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant research, development and other expenses related to our ongoing operations and product development, including clinical development activities under the Janssen License and Collaboration Agreement, and as a result, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approval for, our product candidates.

Janssen License and Collaboration Agreement

On May 26, 2017, we and Janssen Biotech, Inc., ("Janssen"), one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered into an exclusive license and collaboration agreement (the "Janssen License and Collaboration Agreement") for the development, manufacture and commercialization of PTG-200 worldwide for the treatment of CD and UC. Janssen is a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant shareholder of ours, and Janssen are both subsidiaries of Johnson and Johnson. During the third quarter of 2017, we became eligible for and received a non-refundable, upfront cash payment of $50.0 million from Janssen.
Under the Janssen License and Collaboration Agreement, we granted to Janssen an exclusive worldwide license to develop, manufacture and commercialize PTG-200 and related IL-23R compounds for all indications, including CD and UC. We are responsible, at our own expense, for the conduct of the Phase 1 clinical trial for PTG-200 and Janssen will be responsible for the conduct of a potential Phase 2 clinical trial for PTG-200 in CD, including filing the Phase 2 IND. All such clinical trials will be conducted in accordance with a mutually agreed upon clinical development plan and budget. Development costs for the Phase 2 clinical trial will be shared between the parties on an 80%/20% basis, with Janssen assuming the larger share. Should Janssen elect to retain its license following completion of the Phase 2 clinical trial, it will be responsible, at its own expense, for the manufacture, continued development of, seeking regulatory approval for, and commercialization of PTG-200 worldwide. The parties’ development activities under the Janssen License and Collaboration Agreement through the Phase 2 clinical trial will be overseen by a joint governance structure which will have equal representation by both parties unless both parties mutually agree to disband such structure or we have provided written notice to Janssen of our intention to disband and no longer participate in such structure.
We are eligible to receive a $25.0 million payment upon filing of the Phase 2 IND. Following the conclusion of the planned Phase 2A portion of the Phase 2 clinical trial, if Janssen elects to maintain its license rights and continue the development of PTG-200 in the Phase 2B portion of such clinical trial (the “First Opt-in Election”), we would be eligible to receive a $125.0 million payment. Following the conclusion of the planned Phase 2B portion of the Phase 2 clinical trial, if Janssen elects again to maintain its license rights (the “Second Opt-in Election”), we would be eligible to receive a $200.0 million payment. In addition to the opt-in fees, we are eligible to receive additional potential development, regulatory and sales milestone payments of up to an aggregate of $590.0 million, and tiered royalties paid as a percentage of Janssen’s worldwide net sales at rates ranging from ten to the mid-teens, with certain customary reductions under certain circumstances. If Janssen does not make either the First Opt-in Election or the Second Opt-in Election, the Janssen License and Collaboration Agreement will terminate. If Janssen does not make the Second Opt-in Election, or if at any time after the Second Opt-in Election, Janssen terminates the Janssen License and Collaboration Agreement, we would be obligated to pay Janssen a low single-digit royalty

23


on worldwide net sales of PTG-200. We would also have an option to provide up to 30% of the required U.S. details for PTG-200 to prescribers, using our own sales force personnel, upon commercial launch in the United States. If such right is exercised, our detailing costs would be reimbursed by Janssen, at a mutually agreed upon cost per primary detailing equivalent.
The Janssen License and Collaboration Agreement contains customary representations, warranties and covenants by us and Janssen and includes an obligation by us not to develop or commercialize other compounds which also target IL-23R outside of the Janssen License and Collaboration Agreement until completion of the Phase 2B portion of the Phase 2 clinical trial. We and Janssen are required to indemnify the other party against all losses and expenses related to breaches of its representations, warranties and covenants under the Janssen License and Collaboration Agreement.
The Janssen License and Collaboration Agreement remains in effect until the royalty obligations cease following patent and regulatory expiry, unless terminated earlier. Either we or Janssen may terminate the Janssen License and Collaboration Agreement for uncured material breach. Janssen retains the right to terminate the Janssen License and Collaboration Agreement for convenience and without cause on written notice of a certain period to us. Upon a termination of the Janssen License and Collaboration Agreement, all rights revert back to us, and in certain circumstances, if such termination occurs during ongoing clinical trials, Janssen would, if requested, provide certain financial and operational support to us for the completion of such trials.

Critical Accounting Polices and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgements, management employs critical accounting policies.

Revenue Recognition

Effective July 1, 2017, we adopted Accounting Standards Codification, or ASC Topic 606, Revenue from Contracts with Customers ("ASC 606") using the full retrospective transition method.  We did not have any effective contracts within the scope of this guidance prior to July 1, 2017. Accordingly, we did not elect to use any of the practical expedients permitted under the transition guidance, and the adoption had no impact on our previously reported financial position, results of operations or liquidity. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.  Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.  We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct.  We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.    

We entered into a license and collaboration agreement that became effective upon resolution of regulatory requirements during the third quarter of 2017 which is within the scope of ASC 606, under which we have licensed certain rights to our PTG-200 product candidate to a third party and may enter into other such arrangements in the future. The terms of the arrangement include payment to us of one or more of the following: non-refundable, up-front license fees, development and regulatory and commercial milestone payments, and royalties on net sales of licensed products.

Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the other performance obligation identified in the arrangement, we recognize revenue from non-refundable, up-front fees allocated to the

24


license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of proportional performance each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for us to use the same approach for all contracts. We expect to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the control of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability or achievement of each such milestone and any related constraint, and if necessary, adjust our estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. To date, we have not recognized any milestone payments resulting from our collaboration arrangement.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from our collaboration arrangement.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts payable to us are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

There have been no other material changes in our critical accounting policies during the nine months ended September 30, 2017, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 7, 2017.

Components of Our Results of Operations

License and Collaboration Revenue
Our license and collaboration revenue is derived from payments we receive under the Janssen License and Collaboration Agreement.
We identified the following material promises under the Janssen License and Collaboration Agreement: (1) the license related to PTG-200, (2) the performance of development services, including regulatory support, during Phase 1 clinical trial for PTG-200 through the filing of the IND by Janssen, and (3) compound supply services for Phase 1 and Phase 2 activities. We considered that the license has standalone functionality and is capable of being distinct. However, we determined that the license is not distinct from the development and compound supply services within the context of the agreement because the development and compound supply services significantly increase the utility of the intellectual property.

Specifically, our development, manufacturing and commercialization license can only provide benefit to Janssen in combination with our development services in the Phase 1 study. The intellectual property (“IP”) related to the peptide technology platform, which is proprietary to us, is the foundation for the development activities related to the treatment for CD. The compound supply services are a necessary and integral part of the development services as they could only be conducted

25


utilizing the outcomes of these services. Given the development services under the Janssen Collaboration Agreement are expected to involve significant further development of the initial IP, we have concluded that the development and compound supply services are not distinct from the license, and thus the license, development services and compound supply services are combined into a single performance obligation. The nature of the combined performance obligation is to provide development and compound supply services to Janssen under the arrangement.

We also evaluated whether the fees related to the First Opt-in Election and Second Opt-in Election are options with material rights. These two options include additional sublicense rights and patent rights transferred to Janssen upon exercising both of these options. We concluded that Janssen’s opt in rights are not options with material rights because the $50.0 million upfront payment to us was not negotiated to provide incremental discount for the future opt in payments at the end of Phase 2A and Phase 2B. The option to “opt in” provides Janssen with a license for IP that has been improved from the license initially granted for a term in the case of the opt in after completion Phase 2A and then a perpetual license in the case of opt in after completion of Phase 2B. Therefore, the First Opt-in Election and Second Opt-in Election options are not considered to be material rights. The option fees will be recognized as revenue when, and if, Janssen exercises its options because we have no further performance obligations at that point.

For revenue recognition purposes, we determined that the duration of the contract begins on the effective date of July 13, 2017 and ends upon completion of Phase 2A activities. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. We analyzed the impact of Janssen terminating the agreement prior to the completion of Phase 2A and determined that there were significant economic penalties to Janssen for doing so. We believe that if Janssen terminates the agreement upon completion of Phase 2A, the forfeiture of the remaining license rights and payment of 50% of the remaining Phase 2 costs is not a significant economic penalty when compared to paying $125 million as an opt in license fee to continue the use of the License. Thus, the duration of the contract is limited to the end of Phase 2A.

We determined that the transaction price of the Janssen License and Collaboration Agreement was $54.2 million as of September 30, 2017. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. We determined that the $50.0 million upfront payment, the $25.0 million payment payable upon filing of the Phase 2 IND, which is fully constrained as of September 30, 2017, and $4.2 million of estimated variable consideration for cost-sharing payments from Janssen for agreed upon services related to Phase 2 activities constituted consideration to be included in the transaction price, which is to be allocated to the combined performance obligation. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

As part of the evaluation for determining that the $25.0 million payment upon filing of Phase 2 IND is fully constrained as of September 30, 2017, we considered several factors, including the stage of development of PTG-200 and that achievement of the milestone is outside of our control, and concluded that the filing of the Phase 2 IND is not probable at this time. If and when the filing of the Phase 2 IND becomes probable, the $25.0 million payment will be constrained by contra revenue amounts for payments that we expect to make for 20% of the cost of Phase 2 activities to be performed by Janssen. The additional potential development, regulatory and sales milestone payments of up to an aggregate of $590.0 million after the completion of Phase 2A activities that we are eligible to receive are outside the contract term and as such have been excluded from the transaction price. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Janssen and therefore have also been excluded from the transaction price. At the end of each reporting period, we will update our assessment of whether an estimate of variable consideration is constrained and update the estimated transaction price accordingly.

Variable consideration for cost-sharing payments related to agreed upon services for Phase 2 activities that we perform within the duration of the contract are included in the transaction price at an amount equal to 80% of the estimated budgeted costs for these activities, including primarily internal full-time equivalent effort and third party contract costs. We are responsible for 20% of the development costs for the Phase 2 clinical trial. Accordingly, a significant portion of this work is expected to be performed by Janssen. Because the Phase 2 clinical trial activity is related to the license, it is not capable of being distinct. This is because both we and Janssen cannot benefit from these activities absent the Phase 1 activities. As the Phase 2 activities for which we will share 20% of the cost activities are not capable of being distinct and are not separately identifiable within the context of the contract, they are not a distinct service that Janssen transfers us. Therefore, the consideration payable to Janssen is accounted for as a reduction in the transaction price. We and Janssen make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the overall shared costs incurred. We account for cost-sharing payments from Janssen as increases in license and collaboration revenue in our consolidated statements of operations, while cost-sharing payments to Janssen are accounted for as reductions in license and collaboration revenue, or contra-revenue. Costs we incur related to agreed upon services for Phase 2 activities under the Janssen License and Collaboration Agreement are recorded as research and development expenses in our consolidated statements of operations.

26



In summary, the license, the development activities for Phase 1 activities and the agreed upon services for Phase 2 activities are combined as one performance obligation that will be performed over the duration of the contract, which is from the effective date of the Janssen License and Collaboration Agreement through to the completion of Phase 2A activities. Since we have determined that the combined performance obligation is satisfied over time, ASC 606 requires us to select a single revenue recognition method for the performance obligation that faithfully depicts our performance in transferring control of the services. The guidance allows entities to use two methods to measure its progress toward complete satisfaction of a performance obligation:

1.
Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract (e.g. surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units of produced or units delivered); and
2.
Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation.

We concluded that we will utilize a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer our performance obligation to Janssen. In applying the cost-based input methods of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of internal full-time equivalent effort and third-party contract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as we complete our performance obligations, which we believe will be fulfilled within the next 12 months. A cost-based input method of revenue recognition requires management to make estimates of costs to complete our performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete our performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
 
Research and Development Expenses

Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred, unless there is an alternative future use in other research and development projects or otherwise. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when payment has been made. In instances where we enter into agreements with third parties to provide research and development services to us, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service and may include upfront payments, monthly payments, and payments upon the completion of milestones or the receipt of deliverables.

Research and development expenses consist primarily of the following:
 
expenses incurred under agreements with clinical study sites that conduct research and development activities on our behalf;
employee-related expenses, which include salaries, benefits and stock-based compensation;
laboratory vendor expenses related to the preparation and conduct of pre-clinical, non-clinical, and clinical studies;
costs related to production of clinical supplies and non-clinical materials, including fees paid to contract manufacturers;
license fees and milestone payments under license and collaboration agreements; and
facilities and other allocated expenses, which include expenses for rent and maintenance of facilities, information technology, depreciation and amortization expense and other supplies.

We recognize the funds from grants under government programs as a reduction of research and development expenses when the related research costs are incurred. In addition, we recognize the funds related to our Australian research and development tax incentive that are not subject to refund provisions as a reduction of research and development expenses. The amounts are determined on a cost reimbursement basis and, as the incentive is related to our research and development expenditures and is non-refundable regardless of whether any Australian tax is owed, the amounts have been recorded as a

27


reduction of research and development expenses. The Australian research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured.

We allocate direct costs and indirect costs incurred to product candidates when they enter clinical development. For product candidates in clinical development, direct costs consist primarily of clinical, pre-clinical, and drug discovery costs, costs of supplying drug substance and drug product for use in clinical and pre-clinical studies, including clinical manufacturing costs, contract research organization fees, and other contracted services pertaining to specific clinical and pre-clinical studies. Indirect costs allocated to our product candidates on a program specific basis include research and development employee salaries, benefits, and stock-based compensation, and indirect overhead and other administrative support costs. Program-specific costs are unallocated when the clinical expenses are incurred for our early stage research and drug discovery projects, our internal resources, employees and infrastructure are not tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not provide financial information regarding the costs incurred for early stage pre-clinical and drug discovery programs on a program-specific basis prior to the clinical development stage. Our development and compound supply expenses incurred under the Janssen License and Collaboration Agreement are included in pre-clinical and drug discovery research expense. We initiated a Phase 1 clinical study of PTG-300 during the second quarter of 2017. We have presented separately in the table below costs associated with the PTG-300 program beginning in June 2017.

The following table summarizes our research and development expenses incurred during the respective periods (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Clinical and development expense - PTG 100
$
6,177

 
$
3,447

 
$
20,261


$
11,071

Clinical and development expense - PTG 300
1,505

 

 
2,035



Pre-clinical and drug discovery research expense
3,977

 
2,325

 
12,902


6,849

Milestone payment obligation to former collaboration partner

 

 
250

 
250

Less: Reimbursement of expenses under grants and incentives
(491
)
 
(211
)
 
(991
)

(1,288
)
Total research and development expenses
$
11,168

 
$
5,561

 
$
34,457


$
16,882


We expect our research and development expenses will increase as we progress our product candidates, including development activities under the Janssen License and Collaboration Agreement, advance our discovery research projects into the pre-clinical stage and continue our early stage research. The process of conducting research, identifying potential product candidates and conducting pre-clinical and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including pre-clinical data, clinical data, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. Our research and development programs may be subject to change from time to time as we evaluate our priorities and available resources.

General and Administrative Expenses

General and administrative expenses consist of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, benefits and stock-based compensation. Allocated expenses consist of expenses for rent and maintenance of facilities, information technology, depreciation and amortization expense and other supplies. We expect to incur additional expenses to support the growth of our operations and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of the national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services.

Interest Income

Interest income consists of interest earned on our cash, cash equivalents and available-for-sale securities.


28


Change in Fair Value of Redeemable Convertible Preferred Stock Tranche and Warrant Liabilities

Change in fair value of redeemable convertible preferred stock tranche and warrant liabilities consists of the remeasurement of the fair value of financial liabilities related to our obligation to sell additional redeemable convertible preferred stock shares in subsequent closings contingent upon the achievement of certain development milestones or approval of investors and warrants for the purchase of redeemable convertible preferred stock.

In connection with our Series C redeemable convertible preferred stock financing, we were obligated to sell additional shares of Series C redeemable convertible preferred stock in a subsequent closing contingent upon the achievement of certain development milestones or upon the approval of the investors. We recorded this redeemable convertible preferred stock tranche liability incurred as a derivative financial instrument liability at fair value on the date of issuance, and we remeasured the liability on each subsequent balance sheet date. In March 2016, upon closing of the second tranche of the Series C redeemable convertible preferred stock, the fair value of the tranche liability was remeasured and the liability was reclassified to redeemable convertible preferred stock.

In addition, in connection with the issuance of our Series B redeemable convertible preferred stock financing, we issued freestanding warrants to purchase shares of Series B redeemable convertible preferred stock. We accounted for these warrants as a liability in our condensed consolidated financial statements because the underlying instrument into which the warrants were exercisable contained redemption provisions that were outside our control. Upon the exercise of warrants in April 2016, the fair value of the redeemable convertible preferred stock warrant liability was remeasured and the liability was reclassified to redeemable convertible preferred stock. The remaining warrants expired unexercised in May 2016 and, accordingly, are no longer subject to remeasurement.

Results of Operations

Comparison of the Three Months Ended September 30, 2017 and 2016

 
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
 
2017
 
2016
 
Dollar Change
 
% Change
 
 
 
(In thousands)
 
 
License and collaboration revenue - related party
 
 
$
8,781

 
$

 
$
8,781

 
100

Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development (1)
 
 
11,168

 
5,561

 
5,607

 
101

General and administrative (2)
 
 
2,593

 
1,577

 
1,016

 
64

Total operating expenses
 
 
13,761

 
7,138

 
6,623

 
93

Loss from operations
 
 
(4,980
)
 
(7,138
)
 
2,158

 
(30
)
Interest income
 
 
155

 
54

 
101

 
*

Net loss
 
 
$
(4,825
)
 
$
(7,084
)
 
$
2,259

 
(32
)

_________________________ 
(1) Includes $0.6 million and $0.3 million of non-cash stock-based compensation expense for the three months ended September 30, 2017 and 2016, respectively.
(2) Includes $0.6 million and $0.2 million of non-cash stock-based compensation expense for the three months ended September 30, 2017 and 2016, respectively.
Percentage not meaningful

License and Collaboration Revenue

For the three months ended September 30, 2017, we recognized $8.8 million as license and collaboration revenue under the Janssen License and Collaboration Agreement. This amount included $8.4 million of the transaction price for the Janssen License and Collaboration Agreement recognized based on proportional performance as measured by actual costs incurred as a percentage of budgeted costs, and $0.4 million for other services related to Phase 2 activities performed by us on behalf of Janssen that are not

29


included in the performance obligations identified under the Janssen License and Collaboration Agreement. We did not recognize any license and collaboration revenue during the three months ended September 30, 2016.

Deferred revenue related to the Janssen License and Collaboration Agreement was $41.7 million as of September 30, 2017, and was comprised of the $50.0 million upfront payment and $0.1 million of cost sharing payments from Janssen for agreed upon services for Phase 2 activities, less $8.4 million of license and collaboration revenue recognized from the effective date of the contract. We also recorded a $0.5 million receivable from collaboration partner as of September 30, 2017 for cost sharing amounts payable from Janssen.

Research and Development Expenses

Research and development expenses increased $5.6 million, or 101%, from $5.6 million for the three months ended September 30, 2016, to $11.2 million for the three months ended September 30, 2017. The increase was primarily due to an increase of $2.7 million in PTG-100 clinical trial and development expenses, an increase of $1.7 million in pre-clinical development activities for PTG-200 related to the Janssen License and Collaboration Agreement and other pre-clinical and drug discovery efforts in support of our pipeline, and $1.5 million for PTG-300 Phase 1 clinical trial expenses. Research and development expenses for the three months ended September 30, 2017 include an increase in personnel costs due to increased research and development headcount from 24 employees at September 30, 2016 to 39 employees at September 30, 2017.

General and Administrative Expenses

General and administrative expenses increased $1.0 million, or 64%, from $1.6 million for the three months ended September 30, 2016, to $2.6 million for the three months ended September 30, 2017. The increase was primarily due to an increase of $0.9 million in personnel costs due to an increase in headcount to support the growth of our operations and an increase of $0.1 million in professional service fees.

Comparison of the Nine Months Ended September 30, 2017 and 2016
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
 
2017
 
2016
 
Dollar Change
 
% Change
 
 
 
(In thousands)
 
 
License and collaboration revenue - related party
 
 
$
8,781

 
$

 
$
8,781

 
100
Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development (1)
 
 
34,457

 
16,882

 
17,575

 
104
       General and administrative (2)
 
 
8,708

 
4,387

 
4,321

 
98
Total operating expenses
 
 
43,165

 
21,269

 
21,896

 
103
Loss from operations
 
 
(34,384
)
 
(21,269
)
 
(13,115
)
 
62
Interest income
 
 
479

 
93

 
386

 
*
Change in fair value of redeemable convertible preferred stock tranche and warrant liabilities
 

 
(4,719
)
 
4,719

 
100
Other expense
 
 

 
(34
)
 
34

 
100
Net loss
 
 
$
(33,905
)
 
$
(25,929
)
 
$
(7,976
)
 
31

_________________________ 
(1) Includes $1.4 million and $0.4 million of non-cash stock-based compensation expense for the nine months ended September 30, 2017 and 2016, respectively.
(2) Includes $1.7 million and $0.3 million of non-cash stock-based compensation expense for the nine months ended September 30, 2017 and 2016, respectively.
* Percentage not meaningful

License and Collaboration Revenue

For the nine months ended September 30, 2017, we recognized $8.8 million as license and collaboration revenue under the Janssen License and Collaboration Agreement. This amount included $8.4 million of the transaction price for the Janssen License

30


and Collaboration Agreement recognized based on proportional performance as measured by actual costs incurred as a percentage of budgeted costs, and $0.4 million for other services related to Phase 2 activities performed by us on behalf of Janssen that are not included in the performance obligations identified under the Janssen License and Collaboration Agreement. We did not recognize any license and collaboration revenue during the nine months ended September 30, 2016.

Deferred revenue related to the Janssen License and Collaboration Agreement was $41.7 million as of September 30, 2017, and was comprised of the $50.0 million upfront payment and $0.1 million of cost sharing payments from Janssen for agreed upon services for Phase 2 activities, less $8.4 million of license and collaboration revenue recognized from the effective date of the contract. We also recorded a $0.5 million receivable from collaboration partner as of September 30, 2017 for cost sharing amounts payable from Janssen.

Research and Development Expenses

Research and development expenses increased $17.6 million, or 104%, from $16.9 million for the nine months ended September 30, 2016, to $34.5 million for the nine months ended September 30, 2017. The increase was primarily due to an increase of $9.2 million in PTG-100 clinical trial and development expenses related primarily to Phase 2 clinical trial site start-up activities, an increase of $4.7 million in pre-clinical and clinical development activities for our other product candidates, including efforts toward the accelerated progression to Phase 1 initiation with PTG-300 prior to the third quarter of 2017, PTG-200 activities related to the Janssen License and Collaboration Agreement and other pre-clinical and drug discovery efforts in support of our pipeline, and $2.0 million for PTG-300 Phase 1 clinical trial expenses. Research and development expenses for the nine months ended September 30, 2017 include an increase in personnel costs due to increased research and development headcount from 24 employees at September 30, 2016 to 39 employees at September 30, 2017.

General and Administrative Expenses

General and administrative expenses increased $4.3 million, or 98%, from $4.4 million for the nine months ended September 30, 2016, to $8.7 million for the nine months ended September 30, 2017. The increase was primarily due to an increase of $2.4 million in personnel costs due to an increase in headcount to support the growth of our operations and increases of $0.9 million in professional service fees, $0.7 million in consulting and contracted labor expense, and $0.3 million in insurance expense due to the growth of our operations and operating as a public company.

Change in Fair Value of Redeemable Convertible Preferred Stock Tranche and Warrant Liabilities

The change in estimated fair value associated with redeemable convertible preferred stock tranche and warrant liabilities was a charge of $4.7 million for the nine months ended September 30, 2016 due to the settlement of Series C redeemable convertible preferred stock tranche liability in March 2016 and the fair value remeasurement of the outstanding warrant liability. There were no such items for the nine months ended September 30, 2017.

Liquidity and Capital Resources

Liquidity and Capital Expenditures

As of September 30, 2017, we had $104.9 million of cash, cash equivalents and available-for-sale securities and an accumulated deficit of $98.5 million. Our operations have been financed by net proceeds from the sale of shares of our capital stock and revenue from the Janssen License and Collaboration Agreement. During the third quarter of 2017 we became eligible for and received a non-refundable, upfront cash payment of $50.0 million from Janssen.

In September 2017, we filed a registration statement on Form S-3 with the Securities and Exchange Commission which permits the offering, issuance and sale by us of up to a maximum aggregate offering price of $200 million of our common stock. As of September 30, 2017, we had not sold any securities pursuant to the shelf registration statement. On October 16, 2017, we issued 3,530,000 shares of common stock pursuant to an underwriting agreement with Leerink Partners LLC and Barclays Capital Inc. as representatives of the several underwriters at a public offering price of $17.00 per share for gross proceeds of $60.0 million, resulting in net proceeds of approximately $56.2 million after deducting underwriting fees and offering expenses. We granted the underwriters an option to purchase up to 529,500 additional shares at the public offering price, less underwriting discounts and commissions, which expires on November 10, 2017.

Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

31



We believe, based on our current operating plan and expected expenditures, that our existing cash, cash equivalents and available-for-sale securities will be sufficient to meet our anticipated operating and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. If our planned pre-clinical and clinical trials are successful, or our other product candidates enter clinical trials or advance beyond the discovery stage, we will need to raise additional capital in order to further advance our product candidates towards potential regulatory approval. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing, but such financing may not be available at terms acceptable to us, if at all. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
 
the progress, timing, scope, results and costs of our pre-clinical studies and clinical trials for our product candidates, including the ability to enroll patients in a timely manner for our clinical trials;
the costs of and ability to obtain clinical and commercial supplies and any other product candidates we may identify and develop;
our ability to successfully commercialize the product candidates we may identify and develop;
the selling and marketing costs associated with our lead product candidates and any other product candidates we may identify and develop, including the cost and timing of expanding our sales and marketing capabilities;
the achievement of development, regulatory and sales milestones resulting in payments to us from Janssen under the Janssen License and Collaboration Agreement, and the timing of receipt of such payments, if any;
the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwide net sales of PTG-200, upon regulatory approval or clearance, if any;
the amount and timing of sales and other revenues from our lead product candidates and any other product candidates we may identify and develop, including the sales price and the availability of adequate third-party reimbursement;
the cash requirements of any future acquisitions or discovery of product candidates;
the time and cost necessary to respond to technological and market developments;
the extent to which we may acquire or in-license other product candidates and technologies;
costs necessary to attract, hire and retain qualified personnel; and
the costs of maintaining, expanding and protecting our intellectual property portfolio.

Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. If we do raise additional capital through public or private equity offerings or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. We currently have no credit facility and, with the exception of payments we may receive under the Janssen License and Collaboration Agreement and the proceeds from the sale of our common stock on October 16, 2017, we do not currently have any commitments for future external financing. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.

The following table summarizes our cash flows for the periods indicated (in thousands):

 
 
 
Nine Months Ended
September 30,
 
 
 
2017
 
2016
Cash provided by (used in) operating activities
 
$
18,021

 
$
(20,292
)
Cash provided by investing activities
 
$
11,071

 
$
4,997

Cash provided by financing activities
 
$
492

 
$
107,159




32


Cash Flows from Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2017 was $18.0 million, consisting of a net change of $48.1 million in net operating assets and liabilities and non-cash charges of $3.8 million, partially offset by our net loss of $33.9 million. The change in net operating assets and liabilities was due primarily to an increase of $41.7 million in deferred revenue related to the Janssen License and Collaboration Agreement, an increase of $4.4 million in accounts payable and accrued expenses related primarily to an increase in research and development activities and other general and administrative professional services, a decrease of $1.5 million in the Australian research and development tax incentive receivable and a decrease of $1.0 million in prepaid expenses and other assets, partially offset by an increase of $0.5 million in receivable from collaboration partner. The non-cash charges were primarily comprised of $3.1 million of stock-based compensation, $0.5 million of net amortization of premium on available-for-sale securities and $0.3 million of depreciation and amortization.

Cash used in operating activities for the nine months ended September 30, 2016 was $20.3 million, consisting of our net loss of $25.9 million and a net change of $0.1 million in net operating assets and liabilities, partially offset by non-cash charges of $5.7 million. The change in net operating assets and liabilities was due primarily to an increase of $1.2 million in the receivable related to the Australian research and development tax incentives and an increase of $0.2 million in prepaid expenses and other current assets related to advance payments of costs for research activities during the period, offset by a $1.4 million increase in accounts payable and accrued expenses and other payables related to an increase in research and development activities. The non-cash charges were primarily comprised of $4.2 million for the change in fair value associated with redeemable convertible preferred stock tranche liability, $0.6 million for stock-based compensation, $0.5 million for the change in fair value of convertible preferred stock warrant liability and $0.2 million for depreciation and amortization expense.

Cash Flows from Investing Activities

Cash provided by investing activities for the nine months ended September 30, 2017 was $11.1 million, consisting of maturities of available-for-sale securities of $39.8 million, partially offset by purchases of available-for-sale securities of $28.2 million and purchases of property and equipment of $0.6 million. Purchases of property and equipment were primarily related to purchases of scientific equipment.

Cash provided by investing activities for the nine months ended September 30, 2016 was $5.0 million, consisting of proceeds from maturities of available-for-sale securities of $11.7 million, partially offset by purchases of available-for-sale securities of $6.4 million and purchases of property and equipment of $0.3 million. Purchases of property and equipment were primarily related to the expansion of our laboratory and purchases of scientific equipment.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2017 was $0.5 million, consisting of proceeds of $0.8 million from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan, partially offset by payments of $0.3 million for deferred offering costs related to our S-3 filing during the third quarter of 2017.

Cash provided by financing activities for the nine months ended September 30, 2016 was $107.2 million, consisting of net proceeds of $84.5 million from our initial public offering, net proceeds of $22.5 million from the issuance of redeemable convertible preferred stock and proceeds of $0.1 million from the issuance of common stock upon exercise of stock options.

Contractual Obligations and Other Commitments

In March 2017, we entered into a lease agreement for office and laboratory space located in Newark, California. We relocated our operations to the new facility in May 2017. We provided the landlord with a $450,000 letter of credit collateralized by restricted cash as security deposit for the lease, which expires in May 2024. Under the terms of the lease, we are responsible for certain taxes, insurance and maintenance expenses.


33


The following table summarizes our contractual obligations as of September 30, 2017 (in thousands):
 
Payments Due by Period
Contractual Obligations:
Less Than 1 Year
 
1 to 3 Years
 
3 to 5 Years
 
More Than 5 Years
 
Total
Operating lease obligations
$
1,454

 
$
3,912

 
$
4,150

 
$
3,643

 
$
13,159

Total contractual obligations
$
1,454

 
$
3,912

 
$
4,150

 
$
3,643

 
$
13,159


Commitments Related to Our License and Collaboration Agreement with Janssen
Under the Janssen License and Collaboration Agreement, we share with Janssen certain development, regulatory and compound supply costs. The actual amounts that we pay Janssen or that Janssen pays us will depend on numerous factors, some of which are outside of our control and some of which are contingent upon the success of certain development and regulatory activities. Future development and commercialization payments to Janssen are not included in the table above as the timing and amounts of such payments are not determinable.
During the nine months ended September 30, 2017, there were no other material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 7, 2017.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements, as defined under SEC rules, including the use of structured finance, special purpose entities or variable interest entities.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities.

We had $104.9 million and $87.7 million in cash, cash equivalents and available-for-sale securities at September 30, 2017 and December 31, 2016, respectively. Cash and cash equivalents consist of cash, money market funds, commercial paper and government bonds. Available-for-sale securities consist of corporate bonds, commercial paper and government bonds. Short-term available-for-sale securities have maturities of greater than three months but no longer than 365 days as of the balance sheet date. Long-term available-for-sale securities have maturities of 365 days or longer as of the balance sheet date. Such interest earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been material. We had no outstanding debt as of September 30, 2017.

Approximately $2.5 million and $1.9 million of our cash balance was located in Australia at September 30, 2017 and December 31, 2016, respectively. Our expenses, except those related to our Australian operations, are generally denominated in U.S. dollars. For our operations in Australia, the majority of the expenses are denominated in Australian dollars. To date, we have not had a formal hedging program with respect to foreign currency, but we may do so in the future if our exposure to foreign currency becomes more significant. A 10% increase or decrease in current exchange rates would not have a material effect on our consolidated financial results of operations.

ITEM 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, under the supervision and, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated 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 Exchange Act) as of the end of the period covered by this Quarterly Report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weaknesses in our internal control over financial reporting described below.


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Material Weaknesses

In connection with the audit of our consolidated financial statements for the years ended December 31, 2015 and 2014, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The first material weakness related to a deficiency in the operation of our internal controls over the accounting for non-routine, complex equity transactions, which resulted in material post-closing adjustments to the convertible preferred stock, additional paid-in capital, interest expense, and gain from modification of the redeemable convertible preferred stock balances in the consolidated financial statements for the year ended December 31, 2013. Our lack of adequate accounting personnel has resulted in the identification of a second material weakness in our internal control over financial reporting for the years ended December 31, 2015 and 2014. Specifically, we did not, and have not historically, appropriately design and implement controls over the review and approval of manual journal entries and the related supporting journal entry calculations.

Remediation Plans

While we began to implement a plan to remediate the material weaknesses, we have not completed the implementation of this plan as of September 30, 2017. Accordingly, we continue to have the material weaknesses as of September 30, 2017. We can give no assurance that our current and planned implementation will remediate this deficiency in internal control or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our plan to remediate the material weaknesses has included implementing a new accounting software system, adding additional accounting personnel and performing reviews of manual journal entries. We completed the implementation of a new accounting system during the first quarter of 2017 to improve our information systems related controls. We recruited additional finance and accounting personnel to enhance segregation of duties. In addition, we will continue to utilize consultants with technical accounting expertise as needed, and we will establish formal written policies for our accounting function and processes.

Changes in Internal Control over Financial Reporting

Other than the aforementioned remediation actions, there have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

On September 26, 2017, Medical Diagnostic Laboratories, LLC ("MDL") filed a lawsuit for patent infringement against us relating to polypeptides that bind to and inhibit the IL-23 Receptor, specifically PTG-200. We have licensed PTG-200 to Janssen Biotech, Inc. for clinical development. We and Janssen believe we have meritorious defenses and we intend to defend ourselves against the claim. Due to the early stage of these proceedings, we are not able to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.

ITEM 1A.
RISK FACTORS

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations.  If any of these risks occur, our business, results of operations or financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.
 
We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 7, 2017.

Risks Related to Our Financial Position and Capital Requirements
 
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. We have never generated any revenue from product sales and may never be profitable.
 
We have incurred significant operating losses since our inception. Our net loss for the years ended December 31, 2016 and 2015 was approximately $37.2 million and $14.9 million, respectively, and $33.9 million for the nine months ended September 30, 2017. As of September 30, 2017, we had an accumulated deficit of $98.5 million. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to continue to incur significant research, development and other expenses related to our ongoing operations and product development, including clinical development activities under our exclusive license and collaboration agreement (the “Janssen License and Collaboration Agreement”) with Janssen Biotech, Inc., a Pennsylvania corporation (“Janssen”), and as a result, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approvals for, our peptide-based product candidates.
 
We do not anticipate generating revenue from sales of products for the foreseeable future, if ever, and we do not currently have any product candidates in registration or pivotal clinical trials. If any of our peptide-based product candidates fail in clinical trials or do not gain regulatory approval, or even if approved, fail to achieve market acceptance, we may never become profitable. Furthermore, any revenues generated from the Janssen License and Collaboration Agreement may not be sufficient alone to sustain our operations as there can be no assurance that we will receive any opt-in election fees, development, regulatory, or sales milestone payments, or royalties from Janssen in the future pursuant to the Janssen License and Collaboration Agreement. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations.
 
If one or more of our peptide-based product candidates is approved for commercial sale and we retain commercial rights, we anticipate incurring significant costs associated with manufacturing and commercializing such approved peptide-based product candidate. Therefore, even if we are able to generate revenue from the sale of any approved product, we may never become profitable.
 
We are an early clinical-stage biopharmaceutical company with no approved products and no historical product revenue, which makes it difficult to assess our future prospects and financial results.
 
We are an early clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of uncertainty. Our operations to date have been limited to developing our technology, undertaking pre-clinical studies and clinical trials of our pipeline candidates,

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including pre-clinical studies and clinical trials of PTG-100 and PTG-300 and pre-clinical studies of PTG-200, as well as our proprietary technology platform. We successfully filed a Clinical Trial Notification in Australia to support our completed Phase 1 clinical trial of PTG-100 and ongoing Phase 1 clinical trial of PTG-300. We have successfully filed a U.S. IND application, and regulatory submissions in other countries as well, to support our ongoing global Phase 2B study of PTG-100 in ulcerative colitis (“UC”). As an early clinical-stage company, we have not yet demonstrated an ability to generate revenue or successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields such as biopharmaceutical drug discovery and development. Consequently, the ability to accurately assess our future operating results or business prospects is significantly more limited than if we had a longer operating history or approved products on the market.
 
We expect that our financial condition and operating results will fluctuate significantly from period to period due to a variety of factors, many of which are beyond our control, including, but not limited to:
 
the clinical outcomes from the continued development of our product candidates;
 
potential side effects of our product candidates that could delay or prevent approval or cause an approved drug to be taken off the market;
 
 our ability to obtain, as well as the timeliness of obtaining, additional funding to develop, and potentially manufacture and commercialize our product candidates, including under the Janssen License and Collaboration Agreement;
 
competition from existing products directed against the same biological target or therapeutic indications of our product candidates as well as new products that may receive marketing approval;
 
the entry of generic versions of products that compete with our product candidates;
 
the timing of regulatory review and approval of our product candidates;
 
market acceptance of our product candidates that receive regulatory approval, if any;
 
our ability to establish an effective sales and marketing infrastructure directly or through collaborations with third parties;
 
the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;
 
the ability of third party manufacturers to manufacture in accordance with current good manufacturing practices (“cGMP”) our product candidates for the conduct of clinical trials and, if approved, for successful commercialization;
 
our ability as well as the ability of any third-party collaborators, to obtain, maintain and protect intellectual property rights covering our product candidates and technologies, and our ability to develop, manufacture and commercialize our product candidates without infringing on the intellectual property rights of others;
 
our ability to add infrastructure and manage adequately our future growth; and
 
our ability to attract and retain key personnel with appropriate expertise and experience to manage our business effectively.
 
Accordingly, the likelihood of our success must be evaluated in light of many potential challenges and variables associated with an early clinical-stage biopharmaceutical company, many of which are outside of our control, and past results, including operating or financial results, should not be relied on as an indication of future results.
 
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all.
 
Our operations have consumed substantial amounts of cash since inception. We conducted a Phase 1 clinical trial of PTG-100 in healthy volunteers, we have initiated a global Phase 2B clinical trial of PTG-100 in patients with moderate-to-severe UC, we have initiated a Phase 1 clinical study of PTG-300 in normal healthy volunteers, and we are preparing to initiate a Phase 1 clinical study of PTG-200 in the fourth quarter of 2017. Developing pharmaceutical product candidates, including

37


conducting pre-clinical studies and clinical trials, is expensive. We will require substantial additional future capital in order to complete clinical development and, if we are successful, to commercialize any of our current product candidates. If the U.S. Food and Drug Administration (“FDA”) or any foreign regulatory agency, such as the European Medicines Agency (“EMA”), requires that we perform studies or trials in addition to those that we currently anticipate with respect to the development of PTG-100, PTG-200, PTG-300 or any of our other product candidates, or repeat studies or trials, our expenses would further increase beyond what we currently expect, and any delay resulting from such further or repeat studies or trials could also result in the need for additional financing.
 
Further, in the event our Janssen License and Collaboration Agreement is terminated, we may not receive any development fees, milestone payments, or royalties under the Janssen License and Collaboration Agreement, and we would be required to fund all clinical development, manufacturing, and commercial activities for PTG-200, which would require us to raise additional capital or establish alternative collaborations with third-party collaboration partners, which may not be possible.
 
As of September 30, 2017, we had cash, cash equivalents and available-for-sale securities of $104.9 million. Based upon our current operating plan and expected expenditures, we believe that our existing cash, cash equivalents, and available-for-sale securities will be sufficient to fund our operations for at least the next 12 months. Our existing capital resources will not be sufficient to enable us to initiate any pivotal clinical trials. Accordingly, we expect that we will need to raise substantial additional funds in the future in order to complete clinical development or commercialize any of our product candidates. Our funding requirements and the timing of our need for additional capital are subject to change based on a number of factors, including:
 
the rate of progress and the cost of our studies of PTG-100, PTG-200, and PTG-300 and any other product candidates;
 
the number of product candidates that we intend to develop using our technology platform;
 
the costs of research and pre-clinical studies to support the advancement of other product candidates into clinical development;
 
the timing of, and costs involved in, seeking and obtaining approvals from the FDA and comparable foreign regulatory authorities, including the potential by the FDA or comparable regulatory authorities to require that we perform more studies than those that we currently expect;
 
the achievement of development, regulatory, and sales milestones resulting in the payment to us from Janssen under the Janssen License and Collaboration Agreement and the timing of receipt of such payments, if any;
 
changes or delays in our and/or Janssen’s development plans for PTG-200;
 
the costs of preparing to manufacture PTG-100, PTG-200 or PTG-300 on a scale sufficient to enable large-scale clinical trials and commercial supply;
 
the timing and cost of transitioning our product formulations into the formulations we intend to use in registration trials and commercialize;
 
the costs of commercialization activities if PTG-100, PTG-300 or any future product candidate is approved, including the formation of a sales force;
 
Janssen’s ability to successfully market and sell PTG-200, upon regulatory approval and clearance, in the United States and other countries;
 
the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwide net sales of PTG-200, upon regulatory approval and clearance, if any;
 
the sales price and availability of adequate third-party reimbursement for our product candidates that may receive regulatory approval, if any;
 
the degree and rate of market acceptance of any products launched by us or our partners;
 

38


the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
 
our need and ability to hire and retain additional personnel;
 
our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements; and
 
the emergence of competing technologies or other adverse market developments.
 
If our existing capital resources, future interest income, upfront payment and potential opt-in election fees, milestone payments, and royalties under the Janssen License and Collaboration Agreement are insufficient to meet future capital requirements, and if we are unable to obtain additional funding from equity offerings or debt financings, including on a timely basis, we may be required to:
 
seek collaborators for one or more of our peptide-based product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;
 
relinquish or license on unfavorable terms our rights to technologies or peptide-based product candidates that we otherwise would seek to develop or commercialize ourselves; or
 
significantly curtail one or more of our research or development programs or cease operations altogether.
 
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our peptide-based product candidates or technologies.
 
We may seek additional funding through a combination of equity offerings, debt financings, collaborations and/or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity securities, including any sale of up to $25.0 million worth of shares of our common stock pursuant to our Sales Agreement with Cantor Fitzgerald & Co. (the "Sales Agreement"), or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness and/or the issuance of certain equity securities could result in fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur debt and/or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations and/or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights to our proprietary technology platform or peptide-based product candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable terms.

Risks Related to Our Business and Industry
 
We are heavily dependent on the success of our lead product candidates, PTG-100 and PTG-300, which are in early-stage clinical development, and PTG-200, which is in pre-clinical development, and if any of these products fail to receive regulatory approval or are not successfully commercialized, our business would be adversely affected.
 
We currently have no product candidates that are in registration or pivotal clinical trials or are approved for commercial sale, and we may never be able to develop a marketable product. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted to our lead product candidates, PTG-100 and PTG-200 targeting inflammatory bowel disease (“IBD”) and PTG-300 which targets chronic iron overload disorders and ineffective erythropoiesis, and the development of other product candidates. We cannot be certain that PTG-100, PTG-200, PTG-300 or any other product candidates will receive regulatory approval or, if approved, be successfully commercialized. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of PTG-100, PTG-200, and PTG-300 will remain subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, each of which has differing regulations. In addition, even if approved, our pricing and reimbursement will be subject to further review and discussions with payors. We are not permitted to market any product candidate in the United States until after approval of a new drug application (“NDA”) from the FDA, or in any foreign countries until after approval of a marketing application by corresponding regulatory authorities. We completed a Phase 1 clinical trial for PTG-100 in June 2016 and have initiated a global Phase 2B clinical trial of PTG-100 in patients with moderate to severe UC. We also initiated a Phase 1 clinical trial for

39


PTG-300 in May 2017. We anticipate initiating a Phase 1 clinical trial of PTG-200 in the fourth quarter of 2017. We will need to conduct larger, more extensive clinical trials in the target patient population to support a potential application for regulatory approval by the FDA or corresponding regulatory authorities, and we do not expect to be in a position to do so for the near term. We may not receive any preferential or expedited review of any application for regulatory approval by virtue of the fact that our product candidates target biological pathways that are also targeted by currently marketed injectable antibody drugs, and our product candidates will be subject to the regulatory review processes applicable to completely new drugs.
 
We have not previously submitted an NDA to the FDA, or similar drug approval filings to comparable foreign authorities, for any product candidate, and we cannot be certain that any of our product candidates will be successful in clinical trial or receive regulatory approval. Filing an application and obtaining regulatory approval for a pharmaceutical product candidate is an extensive, lengthy, expensive and inherently uncertain process, and the regulatory authorities may delay, limit or deny approval of our product candidates for many reasons, including:
 
we may not be able to demonstrate that any of our product candidates are safe and effective to the satisfaction of the FDA or comparable foreign regulatory authorities;
 
the FDA or comparable foreign regulatory authorities may require additional pre-clinical studies or clinical trials prior to granting approval, which would increase our costs and extend the pre-approval development process;
 
the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or comparable foreign regulatory authorities for approval;
 
the FDA may disagree with the number, design, size, conduct or statistical analysis of one or more of our clinical trials;
 
contract research organizations (“CROs”) that we retain to conduct clinical trials may take actions outside of our control that materially and adversely impact our clinical trials;
 
the FDA or comparable foreign regulatory authorities may disagree with, or not accept, our interpretation of data from our pre-clinical studies and clinical trials;
 
the FDA may require development of a costly and extensive risk evaluation and mitigation strategy (“REMS”), as a condition of approval;
 
the FDA or other regulatory authorities may require post-marketing studies as a condition of approval;
 
the FDA may identify deficiencies in our manufacturing processes or facilities or those of our third-party manufacturers which would be required to be corrected prior to regulatory approval;
 
the success or further approval of competitor products approved in indications in which we undertake development of our product candidates may change the standard of care or change the standard for approval of our product candidate in our proposed indications; and
 
the FDA or comparable foreign regulatory authorities may change their approval policies or adopt new regulations.
 
Our peptide-based product candidates will require additional research, clinical development, manufacturing activities, regulatory approval in multiple jurisdictions (if regulatory approval can be obtained at all), securing sources of commercial manufacturing supply and building of or partnering with a commercial organization. We cannot assure you that our clinical trials for PTG-100 or PTG-300 or our planned clinical trials for PTG-200 will be initiated or completed in a timely manner or successfully, or at all. Further we cannot be certain that we plan to advance any other peptide-based product candidates into clinical trials. Moreover, any delay or setback in the development of any product candidate, in particular PTG-100, PTG-200, or PTG-300, would be expected to adversely affect our business and cause our stock price to fall.
 
If Janssen does not elect to continue the development of PTG-200 through an Opt-In Election, our business and business prospects would be significantly harmed.*
 
Under the terms of the Janssen Collaboration License and Agreement, Janssen is not obligated to make any additional payments to us as we have already received the upfront payment that was due in the third quarter of 2017 pursuant to the terms of the Janssen License and Collaboration Agreement, until such time as it affirmatively elects to continue to advance the

40


development of PTG-200 (the “First Opt-In Election”) within a period of time following completion date of the Phase 1 studies and the Phase 2A portion of the CD Phase 2 clinical trial and any related activities set forth in a clinical development plan (“Phase 2A Activities”). The timing of Janssen’s First Opt-In Election and whether Janssen elects to continue further clinical development of PTG-200 also affects the timing and availability of potential future milestone and royalty payments, if any. If the Phase 1 clinical trial or Phase 2 activities are terminated early, suspended for an extended period of time, or are otherwise unsuccessful, Janssen may determine not to elect to continue further clinical development of PTG-200, in which case, the Janssen License and Collaboration Agreement would terminate and our business and business prospects would be materially adversely affected.
 
There may be disagreements between Janssen and Protagonist during the term of the Janssen License and Collaboration Agreement, and if they are not settled amicably or in the favor of Protagonist, the result may harm our business.*
 
We are subject to the risk of possible disagreements with Janssen, including those regarding the development, manufacture, and commercialization of PTG-200, interpretation of the Janssen License and Collaboration Agreement, and ownership of proprietary rights. In addition, in certain circumstances, we may believe that a particular milestone has been achieved and Janssen may disagree with our belief. In that case, receipt of that milestone payment may be delayed or may never be received, which would adversely affect our financial condition and may require us to adjust our operating plans.
 
The joint governance structure contemplated by the Janssen License and Collaboration Agreement will cease to have decision-making authority once the development term ends, which will preclude our ability to participate in any further decision-making for PTG-200. Reliance on a joint governance structure also subjects us to the risk that changes in key management personnel who are members of the various joint committees may materially and adversely affect the functioning of these committees, which could significantly delay or preclude PTG-200 development and/or commercialization. As a result of possible disagreements with Janssen, we also may become involved in litigation or arbitration, which would be time-consuming for our management and employees and expensive.
 
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
 
Our business and future profitability is substantially dependent on our ability to successfully develop, obtain regulatory approval for and then successfully commercialize our most advanced peptide-based product candidates, PTG-100, which is in an ongoing global Phase 2B trial, PTG-300, which is in a Phase 1 clinical trial, and PTG-200, which is in pre-clinical development. We are not permitted to market or promote any of our peptide-based product candidates before we receive regulatory approval from the FDA, the EMA or any other foreign regulatory authority, and we may never receive such regulatory approval for any of our peptide-based product candidates. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of regulatory authorities. Approval policies, regulations and the types and amount of clinical and manufacturing data necessary to gain approval may change during the course of clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we have in development or may seek to develop in the future will ever obtain regulatory approval.
 
Our product candidates could fail to receive regulatory approval for many reasons, including the following: the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
 
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;
 
the results of clinical trials may fail to achieve the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
 
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
 
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data submitted in support of regulatory approval;
 
the data collected from pre-clinical studies and clinical trials of our peptide-based product candidates may not be sufficient to support the submission of an NDA, supplemental NDA, or other regulatory submissions necessary to

41


obtain regulatory approval in the United States or elsewhere;
 
we or our contractors may not meet the GMP and other applicable requirements for manufacturing processes, procedures, documentation and facilities necessary for approval by the FDA or comparable foreign regulatory authorities; and
 
changes to the approval policies or regulations of the FDA or comparable foreign regulatory authorities with respect to our product candidates may result in our clinical data becoming insufficient for approval.
 
The lengthy regulatory approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market PTG-100, PTG-200 and PTG-300, our lead product candidates, or any other product candidate, which would harm our business, results of operations and prospects significantly.
 
In addition, even if we were to obtain regulatory approval, regulatory authorities may approve our product candidates for fewer or more limited indications than what we requested approval for, may include safety warnings or other restrictions that may negatively impact the commercial viability of our product candidates, including the potential for a favorable price or reimbursement at a level that we would otherwise intend to charge for our products. Likewise, regulatory authorities may grant approval contingent on the performance of costly post-marketing clinical trials or the conduct of an expensive REMS, which could significantly reduce the potential for commercial success or viability of our product candidates. Any of the foregoing possibilities could materially harm the prospects for our product candidates and business and operations.
 
We have not previously submitted an NDA, a Marketing Authorization Application (“MAA”), or any corresponding drug approval filing to the FDA, the EMA or any comparable foreign authority for any peptide-based product candidate. Further, our product candidates may not receive regulatory approval even if we complete such filings. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.
  
Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. Clinical failure can occur at any stage of clinical development. Further, we have only recently initiated a Phase 2 clinical trial and have never conducted a Phase 3 clinical trial or submitted an NDA.
 
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical development process. The results of pre-clinical studies and early clinical trials of our product candidates and studies and trials of other products may not be predictive of the results of later-stage clinical trials. In addition to our planned pre-clinical studies and clinical trials, we expect to have to complete at least two large scale, well-controlled clinical trials to demonstrate substantial evidence of efficacy and safety for each product candidate we intend to commercialize. Further, given the patient populations for which we are developing therapeutics, we expect to have to evaluate long-term exposure to establish the safety of our therapeutics in a chronic dose setting. We have only recently initiated a Phase 2 clinical trial and have never conducted a Phase 3 clinical trial or submitted an NDA, and as a result, we have no history or track-record to rely on when entering these phases of the development cycle. For example, the results generated to date in pre-clinical studies and the Phase 1 clinical trial for PTG-100 do not ensure that the current Phase 2 clinical trial or later clinical trials will have similar results or be successful. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. Clinical trial failures may result from a multitude of factors including, but not limited to, flaws in trial design, dose selection, placebo effect, patient enrollment criteria and failure to demonstrate favorable safety and/or efficacy traits of the product candidate. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative or inconclusive results, we may decide, or regulators may require us, to conduct additional clinical trials or pre-clinical studies.
 
We may experience delays in ongoing clinical trials, and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:
 
obtaining regulatory approvals to commence a clinical trial;
 
reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
 
fraud or negligence on the part of CROs, contract manufacturing organizations (“CMOs”), consultants or contractors;
 

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obtaining institutional review board (“IRB”) or ethics committee (“EC”), approval at each site;
 
recruiting suitable patients to participate in a clinical trial;
 
having patients complete a clinical trial or return for post-treatment follow-up;
 
clinical sites deviating from the clinical trial protocol or dropping out of a clinical trial;
 
adding new clinical trial sites; or
 
manufacturing sufficient quantities of product candidate for use in clinical trials.
 
We could encounter delays if a clinical trial is modified, suspended or terminated by us, by the IRBs or ECs of the institutions in which such clinical trials are being conducted, by a Data Safety Monitoring Board, for such trial or by the FDA or other regulatory authorities. Such authorities may impose a modification, suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical trial protocols, inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed and our ability to generate product revenue from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
 
In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval.
 
Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be made more difficult or rendered impossible by multiple factors outside our control.
 
We may encounter delays in enrolling, be unable to enroll or maintain, a sufficient number of patients to complete any of our clinical trials. Patient enrollment and retention in clinical trials is a significant factor in the timing of clinical trials and depends on many factors, including the size and nature of the patient population, the nature of the trial protocol, the existing body of safety and efficacy data with respect to the study drug, the number and nature of competing treatments and ongoing clinical trials of competing drugs for the same indication, the proximity of patients to clinical trial sites and the eligibility criteria for the clinical trial. Furthermore, any negative results we may report in clinical trials of our product candidates may make it difficult or impossible to recruit and retain patients in other clinical trials of that same candidate. For example, we are aware of a number of therapies that are commercialized or are being developed for IBD and we expect to face competition from these investigational drugs or approved drugs for potential subjects in our clinical trials, which may delay the pace of enrollment in our planned clinical trials. Delays or failures in planned patient enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop our product candidates, or could render further development impossible.
 
All of our peptide-based product candidates other than PTG-100 and PTG-300 are in research or pre-clinical development and have not entered into clinical trials. If we are unable to develop, test and commercialize our peptide-based product candidates, our business will be adversely affected.
 
As part of our strategy, we also seek to discover, develop and commercialize a portfolio of new peptide-based product candidates in addition to PTG-100, PTG 200, and PTG-300. Research programs to identify appropriate biological targets pathways and product candidates require substantial scientific, technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including:
 
our financial and internal resources are insufficient;
 
our research methodology used may not be successful in identifying potential product candidates;

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competitors may develop alternatives that render our product candidates uncompetitive;
 
our other product candidates may be shown to have harmful side effects or other characteristics that indicate such product candidate is unlikely to be effective or otherwise unlikely to achieve applicable regulatory approval;
 
our product candidates may not be capable of being produced in commercial quantities at an acceptable cost, or at all; or
 
a product candidate may not be accepted by patients, the medical community, healthcare providers or third-party payors.
 
Our research and development strategy for our lead product candidates relies in large part on clinical data and results obtained from antibody and small molecule products that are approved or in late-stage development that could ultimately prove to be inaccurate or unreliable for use with our peptide-based product candidate approach.
 
As part of our strategy to mitigate clinical development risk for PTG-100 and PTG 200, we seek to develop peptide-based product candidates against validated biological targets and pathways that have been targeted by approved or later stage products in development. While we utilize pre-clinical in vivo and in vitro models as well as clinical biomarkers to assess potential safety and efficacy early in the candidate selection and development process, this strategy necessarily relies upon clinical data and other results obtained by third parties that may ultimately prove to be inaccurate or unreliable or otherwise not applicable to the indications in which we develop our peptide-based product candidates. We will have to conduct clinical trials to show the safety and efficacy of our peptide-based product candidates against the identified biological targets and pathways to show that our peptide-based product candidates can address the identified mechanism of action shown by these third party results. For example, PTG-100 is an α4ß7 integrin antagonist that targets the same target as the currently marketed injectable antibody drug, Entyvio®, approved for treatment in UC and CD, and PTG-200 targets the IL-23 biological pathway, which is a pathway targeted by the currently marketed injectable antibody drug, Stelara®, approved for treatment of psoriasis, psoriatic arthritis, and CD. If our interpretation of the third party clinical data and results from molecules directed against the same biological target or pathway or our pre-clinical in vivo and in vitro models prove inaccurate or our assumptions and conclusions about the applicability of our peptide-based product candidates against the same biological targets or pathways are incorrect or inaccurate, then our development efforts may prove unsuccessful or longer and more extensive and our research and development strategy and business and operations could be significantly harmed.
 
Our proprietary peptide platform may not result in any products of commercial value.
 
We have developed a proprietary peptide technology platform to enable the identification, testing, design and development of new product candidates. We cannot assure you that our peptide platform will work, nor that any of these potential targets or other aspects of our proprietary drug discovery and design platform will yield product candidates that could enter clinical development and, ultimately, be commercially valuable. Although we expect to continue to enhance the capabilities of our proprietary platform by developing and integrating existing and new research technologies, we may not be successful in any of our enhancement and development efforts. For example, we may not be able to enter into agreements on suitable terms to obtain technologies required to develop certain capabilities of our peptide platform. In addition, we may not be successful in developing the conditions necessary to simulate specific tissue function from multiple species, or otherwise develop assays or cell cultures necessary to expand these capabilities. If our enhancement or development efforts are unsuccessful, we may not be able to advance our drug discovery capabilities as quickly as we expect or identify as many potential drug candidates as we desire.
 
Our product candidates may cause undesirable side effects or have other properties impacting safety that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in limiting the commercial opportunity for our product candidates if approved.
 
Undesirable side effects that may be caused by our product candidates or caused by similar approved drugs or product candidates in development by other companies, could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or adverse events related to our product candidates. In such an event, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of our product candidates for any or all targeted indications. In addition, drug-related side effects could negatively affect patient recruitment or the ability of enrolled patients to complete the trial and even if our clinical trials are completed and our product candidate is approved, drug-related

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side effects could restrict the label or result in potential product liability claims. Any of these occurrences could significantly harm our business, financial condition and prospects significantly.
 
Moreover, since our product candidates PTG-100 and PTG-200 are being developed for indications for which injectable antibody drugs have been approved, we expect that our clinical trials would need to show a risk/benefit profile that is competitive with those existing products and product candidates in order to obtain regulatory approval or, if approved, a product label that is favorable for commercialization.
 
Additionally, if one or more of our product candidates receives marketing approval and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
 
regulatory authorities may withdraw approvals of such product;
 
regulatory authorities may require additional warnings on the label;
 
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
 
we could be sued and held liable for harm caused to patients; and
 
our reputation may suffer.
 
Any of these events could prevent us from achieving or maintaining market acceptance of the particular peptide-based product candidate which could significantly harm our business and prospects.
 
If there are any safety or efficacy results that cause the benefit-risk profile of PTG-200 to become unacceptable, the clinical development of PTG-200 would be delayed or halted, and as a result, Janssen may terminate the Janssen License and Collaboration Agreement, which would severely and adversely affect our business prospects, and may cause us to cease operations.*
 
PTG-200 may prove to have undesirable or unintended side effects or other characteristics adversely affecting its safety, efficacy or cost effectiveness that could prevent or limit its approval for marketing and successful commercial use, or that could delay or prevent the commencement and/or completion of clinical trials for PTG-200. If regulatory submissions requesting approval to market PTG-200 are submitted, after reviewing the data in such submissions, the FDA and regulatory agencies in other countries may conclude that the overall benefit-risk profile of PTG-200 treatment is unacceptable, and the clinical development of PTG-200 would be delayed or halted. Any of these events would severely harm our business and prospects.
 
Clinical trials by their nature examine the effects of a potential therapy in a sample of the potential future patient population. As such, clinical trials conducted with PTG-200 may not uncover all possible adverse events that patients treated with PTG-200 may experience. In collaboration with Janssen, we may in the future observe or report dose-limiting or other safety issues in potential future clinical trials of PTG-200. If such toxicities or other safety issues in any clinical trial of PTG-200 result in an unacceptable benefit-risk profile, then:
 
the commencement and/or completion of any future clinical trials would likely be delayed or prevented; or
 
additional, unforeseen trials, or preclinical studies may be required to be conducted.
 
The occurrence of any of these events may cause Janssen to abandon their development of PTG-200 entirely and terminate the Janssen License and Collaboration Agreement. Any termination of the Janssen License and Collaboration Agreement by Janssen would have a material adverse effect on our results of operations, financial condition, business prospects and the future of PTG-200.
 
We rely on third parties to conduct our pre-clinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or do not meet regulatory requirements or expected deadlines, we may not be able to obtain timely regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
 
We have relied upon and plan to continue to rely upon third party CROs to monitor and manage clinical trials and collect data for our pre-clinical studies and clinical programs. We rely on these parties for execution of our pre-clinical studies and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that their

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conduct meets regulatory requirements and that each of our studies and trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. Thus, we and our CROs are required to comply with good clinical practices (“GCPs”), which are regulations and guidelines promulgated by the FDA, the EMA and comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign regulatory authorities may not accept the data or require us to perform additional clinical trials before considering our filing for regulatory approval or approving our marketing application. We cannot assure you that upon inspection by a regulatory authority, such regulatory authority will determine that any of our clinical trials complies with GCPs. While we have agreements governing activities of our CROs, we may have limited influence over their actual performance and the qualifications of their personnel conducting work on our behalf. In addition, significant portions of the clinical studies for our peptide-based product candidates are expected to be conducted outside of the United States, which will make it more difficult for us to monitor CROs and perform visits of our clinical trial sites and will force us to rely heavily on CROs to ensure the proper and timely conduct of our clinical trials and compliance with applicable regulations, including GCPs. Failure to comply with applicable regulations in the conduct of the clinical studies for our peptide-based product candidates may require us to repeat clinical trials, which would delay the regulatory approval process.
 
Some of our CROs have an ability to terminate their respective agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated.
 
If any of our relationships with these third party CROs terminate, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our pre-clinical and clinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our peptide-based product candidates. As a result, our results of operations and the commercial prospects for our peptide-based product candidates would be harmed, our costs could increase substantially and our ability to generate revenue could be delayed significantly.
 
Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.
 
We face a variety of manufacturing risks and rely on third parties to manufacture our drug substance and clinical drug product and we intend to rely on third parties to produce commercial supplies of any approved peptide-based product candidate.
 
Our clinical trials must be conducted with product manufactured under current good manufacturing practices and for Europe and other major countries, International Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”) guidelines, and we rely on contract manufactures to manufacture and provide product for us that meet these requirements. We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our pre-clinical and clinical drug supplies and we lack the resources and the capability to manufacture any of our peptide-based product candidates on a clinical or commercial scale. We expect to continue to depend on contract manufacturers for the foreseeable future. In particular, as we proceed with the development and potential commercialization of PTG-100, we will need to increase the scale at which the drug is manufactured which will require the development of new manufacturing processes to potentially reduce the cost of goods. We will rely on our internal process research and development efforts and those of contract manufacturers to develop the GMP manufacturing processes required for cost-effective and large scale production. If these efforts are not successful in developing cost-effective processes and if the contract manufacturers are not successful in converting it to commercial scale manufacturing, then our development and/or commercialization of PTG-100 could be materially adversely affected. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Moreover, our contract manufacturers are the sole source of supply for our clinical product candidates, including PTG-100. If we were to experience an unexpected loss of supply for any reason, whether as a result of manufacturing, supply or storage issues or otherwise, we could experience delays,

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disruptions, suspensions or termination of our clinical study and planned development program, or be required to restart or repeat, any ongoing clinical trials.
 
We also rely on our contract manufacturers to purchase from third party suppliers the materials necessary to produce our peptide-based product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we use to manufacture our drugs and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our peptide-based product candidates for our clinical trials, and if approved, for commercial sale. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a peptide-based product candidate to complete the clinical trial, any significant delay in the supply of a peptide-based product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a contract manufacturer or other third party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our peptide-based product candidates. If our contract manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our peptide-based product candidates, the commercial launch of our peptide-based product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenue from the sale of our peptide-based product candidates.
 
If we submit an application for regulatory approval of any of our product candidates, the facilities used by our contract manufacturers to manufacture our product candidates will be subject to inspection and approval by the FDA or other regulatory authorities. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our peptide-based product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our peptide-based product candidates, if approved.
 
We may fail to obtain orphan drug designations from the FDA for our product candidates, as applicable, and even if we obtain such designations, we may be unable to maintain the benefits associated with orphan drug designation, including the potential for market exclusivity.*
 
Our strategy includes filing for orphan drug designation where available for our product candidates. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition, which is defined as one occurring in a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the United States. In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity.
 
We have not obtained orphan designation for any product candidates to date, although we believe some of the potential indications of our product candidates could qualify for orphan drug designation and the related benefits if approved for that indication. In March 2017, we filed a U.S. orphan drug application for PTG-300 for the treatment of patients with beta-thalassemia. In July 2017, we received a letter from the FDA stating that they could not grant the orphan designation at the current time and requested additional information to support the orphan designation. We plan to obtain clarity from the FDA and respond to the request for additional information within the 1 year time period provided by the FDA. Additionally, if PTG-100 or PTG-200 is developed for the treatment of pouchitis, pediatric IBD or an alternate orphan indication, we may plan to file for orphan drug designation with respect to such indication. Even if we obtain such designations, we may not be the first to obtain regulatory approval of a product candidate for the orphan-designated indication due to the uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the orphan-designated disease or condition. Further, even if we obtain orphan drug designation exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties may receive and be approved for the same condition, and only the first applicant to receive approval will receive the benefits of marketing exclusivity. Even after an orphan-designated product is approved, the FDA can

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subsequently approve a later drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior if it is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug, nor gives the drug any advantage in the regulatory review or approval process. In addition, while we may seek orphan drug designation for our product candidates, we may never receive such designations.
 
We may not be successful in obtaining or maintaining development and commercialization collaborations, and any potential partner may not devote sufficient resources to the development or commercialization of our product candidates or may otherwise fail in development or commercialization efforts, which could adversely affect our ability to develop certain of our product candidates and our financial condition and operating results.
 
Other than our Janssen License and Collaboration Agreement, we have no current collaborations for any of our product candidates. Even if we are able to establish other collaboration arrangements, any such collaboration, including the Janssen License and Collaboration Agreement, may not ultimately be successful, which could have a negative impact on our business, results of operations, financial condition and growth prospects. While we currently plan to enter into collaborations that are limited to certain identified territories, there can be no assurance that we would maintain significant rights or control of future development and commercialization of such product candidate. Accordingly, if we collaborate with a third party for development and commercialization of a product candidate, we may relinquish some or all of the control over the future success of that product candidate to the third party, and that partner may not devote sufficient resources to the development or commercialization of our product candidate or may otherwise fail in development or commercialization efforts, in which event the development and commercialization of the product candidate in the collaboration could be delayed or terminated and our business could be substantially harmed. In addition, the terms of any potential collaboration or other arrangement that we may establish may not be favorable to us or may not be perceived as favorable, which may negatively impact the price of our common stock. In some cases, we may be responsible for continuing development of a product candidate or research program under a collaboration, and the payments we receive from our partner may be insufficient to cover the cost of this development or may result in a dispute between the parties. Moreover, collaborations and sales and marketing arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain, which may be detrimental to the development of our other product candidates.
 
We are subject to a number of additional risks associated with our dependence on collaborations with third parties, the occurrence of which could cause our collaboration arrangements to fail. Conflicts may arise between us and partners, such as conflicts concerning the implementation of development plans, efforts and resources dedicated to the product candidate, interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any such conflicts arise, a collaborator could act in its own self-interest, which may be adverse to our interests. Any such disagreement between us and a partner could result in one or more of the following, each of which could delay or prevent the development or commercialization of our product candidates, and in turn prevent us from generating sufficient revenue to achieve or maintain profitability:
 
reductions in the payment of royalties or other payments we believe are due pursuant to the applicable collaboration arrangement;
 
actions taken by a partner inside or outside our collaboration which could negatively impact our rights or benefits under our collaboration; or
 
unwillingness on the part of a partner to keep us informed regarding the progress of its development and commercialization activities or to permit public disclosure of the results of those activities.
 
In addition, the termination of a collaboration may limit our ability to obtain rights to the product or intellectual property developed by our collaborator under terms that would be sufficiently favorable for us to consider further development or investment in the terminated collaboration product candidate, even if it were returned to us.
 
We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.
 
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors worldwide, including major multinational pharmaceutical companies, biotechnology companies, specialty pharmaceutical and generic pharmaceutical companies as well as universities and other research institutions.
 

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Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, and experienced marketing and manufacturing organizations. Mergers and acquisitions in our industry may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of newer technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing, on an exclusive basis, pharmaceutical products that are easier to develop, more effective or less costly than any product candidates that we are currently developing or that we may develop. If approved, our product candidates are expected to face competition from commercially available drugs as well as drugs that are in the development pipelines of our competitors.
 
Pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate advantages in efficacy, convenience, tolerability or safety in order to overcome price competition and to be commercially successful. If our competitors succeed in obtaining FDA, EMA or other regulatory approval or discovering, developing and commercializing drugs before we do or develop blocking intellectual property to which we do not have a license, there would be a material adverse impact on the future prospects for our product candidates and business.
 
We believe our principal competition in the treatment of IBD is from companies with approved agents in the following therapeutic classes, among others:
 
Infused α4ß7 antibody: Takeda Pharmaceutical Company
 
Infused IL-23 and IL-12 antibody: Johnson & Johnson
  
Injectable or infused anti-TNFα therapy: AbbVie, Johnson & Johnson, Amgen, Pfizer, UCB S.A., Boehringer Ingelheim, Merck
 
We are also aware of several companies developing therapeutic product candidates for the treatment of IBD, including, but not limited to AbbVie, Allergan, Atlantic Healthcare Plc, Aprogen (biosimilar TNF-α antibody in Phase 3) Arena Pharmaceuticals, Inc., AstraZeneca, Biogen, Boehringer Ingelheim (adalimumab biosimilar in Pre-Registration), Bristol-Myers Squibb, Celgene (mongersen sodium and ozanimod hydrochloride in Phase 3 clinical trials), Eli Lilly and Company, Galapagos/Gilead (filgotinib in Phase 3), Lycera Corp., Mitsubishi Tanabe Pharma Corporation, Pfizer (tofacitinib citrate in Pre-Registration), Roche/Genentech (etrolizumab in Phase 3), Samsung Bioepis (adalimumab biosimilar in Pre-Registration), Sandoz (adalimumab biosimilar in Phase 3), Shire, and UCB S.A.
 
We believe our principal competition in the treatment of chronic iron overload disorders, such as ß-Thalassemia, Myelodysplastic Syndromes, HH and SCD, will come from other pipeline products being developed by companies such as Acceleron (luspatercept in Phase 3), bluebird bio (LentiGlobin in Phase 3), Bristol-Myers Squibb, Emmaus Medical (glutamine in pre-registration), Gilead, Global Blood Therapeutics, Inc., La Jolla Pharmaceutical and Novartis AG, among others. We believe competition will also include approved iron chelation therapies that have been developed by Novartis AG and Apotex, among others.
 
We believe that our ability to successfully compete will depend on, among other things:
 
the efficacy and safety of our product candidates, in particular compared to marketed products and products in late-stage development;
 
the time it takes for our product candidates to complete clinical development and receive regulatory approval, if at all;
 
the ability to commercialize and market any of our product candidates that receive regulatory approval;
 
the price of our products, including in comparison to branded or generic competitors;
 
whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;

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the ability to protect intellectual property rights related to our product candidates;
 
the ability to manufacture and sell commercial quantities of any of our product candidates that receive regulatory approval; and
 
acceptance of any of our approved product candidates by physicians, payors and other healthcare providers.
 
Because our research approach depends on our proprietary technology platform, it may be difficult for us to continue to successfully compete in the face of rapid changes in technology. If we fail to continue to advance our technology platform, technological change may impair our ability to compete effectively and technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less competitive or not economical.
 
We have not yet negotiated our agreement with Janssen specifying all of the terms of our Co-Detailing Option and would need to develop our own internal sales force.*
 
Pursuant to the Janssen License and Collaboration Agreement, we have a co-detailing option, which, if PTG-200 is approved for commercial sale, allows us to elect to provide up to 30% of the PTG-200 selling effort in the United States with sales force personnel (the “Co-Detailing Option”). While the Janssen License and Collaboration Agreement includes the material terms of our Co-Detailing Option, Janssen and we mutually agreed to negotiate a separate agreement specifying the detailed activities and responsibilities in respect of the marketing and co-promotion of PTG-200 following our election to exercise our Co-Detailing Option. We will need to negotiate this separate agreement with Janssen and, as a result, Janssen may place restrictions or additional obligations on us, including financial obligations. Any restrictions or additional obligations may restrict our co-detailing activities or involve more significant financial or other obligations than we currently anticipate. In addition, we have no sales experience as a company. There are risks involved with establishing our own sales force capabilities. Developing an internal sales force and function will require substantial expenditures and will be time-consuming, may expose us to unforeseen costs and expenses, and we may not be able to effectively recruit, train or retain sales personnel. Accordingly, we may be unable to establish our own sales force which could effectively preclude our ability to take any advantage of participating in co-detailing PTG-200 in the United States. In addition, any sales force we establish may not be effective, or may be less effective than the any sales force that Janssen utilizes to promote PTG-200. In such event, the commercialization of PTG-200 may be adversely affected, which could materially and adversely affect any sales milestone payments or royalties we may receive under the Janssen License and Collaboration Agreement.
 
We currently have no marketing and sales organization. To the extent any of our peptide-based product candidates for which we maintain commercial rights is approved for marketing, if we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our peptide-based product candidates, we may not be able to effectively market and sell any peptide-based product candidates, or generate product revenue.*
 
We currently do not have a marketing or sales organization for the marketing, sales and distribution of pharmaceutical products. In order to commercialize any peptide-based product candidates that receive marketing approval, we would have to build marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. In the event of successful development of any of our product candidates, we may elect to build a targeted specialty sales force which will be expensive and time consuming. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. With respect to our peptide-based product candidates, we may choose to partner with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems, and in the case of the Janssen License and Collaboration Agreement, we may elect to exercise our Co-Detailing Option, which would require us to establish a U.S. sales team. If we are unable to enter into collaborations with third parties for the commercialization of approved products, if any, on acceptable terms or at all, or if any such partner does not devote sufficient resources to the commercialization of our product or otherwise fails in commercialization efforts, we may not be able to successfully commercialize any of our peptide-based product candidates that receive regulatory approval. If we are not successful in commercializing our peptide-based product candidates, either on our own or through collaborations with one or more third parties, our future revenue will be materially and adversely impacted.
 
Even if our peptide-based product candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, government payors (including Medicare and Medicaid programs), private insurers, and other third-party payors, or others in the medical community necessary for commercial success.
 

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If any of our peptide-based product candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, government payors, other third-party payors and other healthcare providers. If any of our approved peptide-based products fail to achieve an adequate level of acceptance, we may not generate significant revenue to become profitable. The degree of market acceptance, if approved for commercial sale, will depend on a number of factors, including but not limited to:
 
the efficacy and potential advantages compared to alternative treatments;
 
effectiveness of sales and marketing efforts;
 
the cost of treatment in relation to alternative treatments;
 
our ability to offer our peptide-based product candidates for sale at competitive prices;
 
the convenience and ease of administration compared to alternative treatments;
 
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
 
the