UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

For the fiscal year ended December 31, 2019

OR

Commission File Number 001-38653

 

Principia Biopharma Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Registrant’s telephone number, including area code: (650) 416-7700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES ☐ NO ☒

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 ☒ NO ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

 

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.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐ NO ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The Nasdaq Global Select Market on June 30, 2019, was $540.0 million.

The number of shares of Registrant’s Common Stock outstanding as of March 3, 2020 was 33,008,896.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement relating to the 2020 Annual Meeting of Stockholders, to be filed with the U.S. Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

 

 

 

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Table of Contents

 

 

 

Unless the context suggests otherwise, references in this Annual Report on Form 10-K (the “Annual Report”) to “Principia,” the “Company,” “we,” “us,” and “our” refer to Principia Biopharma Inc., a Delaware corporation.

 

 

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Annual Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included under Part I, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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PART I

Item 1. Business.

Overview

We are a late-stage biopharmaceutical company focused on developing novel therapies for immune-mediated diseases. Our proprietary Tailored Covalency^® platform enables us to design and develop reversible covalent and irreversible covalent, small molecule inhibitors with potencies and selectivities that we believe will rival injectable biologics, but with the convenience of an oral or topical therapy. Our overall portfolio includes rilzabrutinib, PRN2246/SAR442168, PRN473 Topical, PRN1371 and our oral immunoproteasome inhibitor program. We retain full, worldwide rights to rilzabrutinib, PRN473 Topical, PRN1371 and our oral immunoproteasome inhibitor program, and have an ongoing collaboration with Sanofi for PRN2246/SAR442168. The company has prioritized the portfolio and our current clinical pipeline includes rilzabrutinib (formerly known as PRN1008), PRN473 Topical, and PRN2246/SAR442168. Our lead candidate, rilzabrutinib, a wholly owned Bruton Tyrosine Kinase (BTK) inhibitor, is in a Phase 3 trial for the treatment of pemphigus (pemphigus vulgaris (PV) and pemphigus foliaceus (PF)), and in a Phase 1/2 trial for the treatment of Immune Thrombocytopenia (ITP). In addition, we anticipate initiating a Phase 2 trial of rilzabrutinib for the treatment of IgG4-Related Disease (RD).

The following chart summarizes the status of the drug candidates in our current pipeline:

 

 

Our BTK Franchise

We have developed a BTK inhibitor franchise that encompasses two differentiated oral drug candidates, rilzabrutinib and PRN2246/SAR442168, and one topical drug candidate, PRN473 Topical. Our most advanced drug candidate, rilzabrutinib, is designed to form a reversible covalent bond with the BTK enzyme. This bond confers enhanced selectivity and potential durable potency, which we believe will enable long-term, systemic treatment of chronic immunological disorders. The second drug candidate in our BTK franchise is PRN2246/SAR442168, an irreversible covalent BTK inhibitor that we designed to cross the blood-brain barrier and modulate immune cell function in the brain for the treatment of multiple sclerosis, or MS, and potentially other central nervous system, or CNS, diseases. The third drug candidate in our BTK franchise is PRN473 Topical, a topical reversible covalent BTK inhibitor that we designed for immune-mediated diseases that could benefit from localized application to the skin with low to no systemic exposure.

BTK Inhibitor for Immune-Mediated Diseases: Rilzabrutinib

We are developing rilzabrutinib for the treatment of multiple immune-mediated diseases, the first of which is pemphigus, a rare, chronic skin disease with considerable unmet medical need for safe, rapidly acting and effective treatments that do not rely on the significant use of high dose corticosteroids, or CS. The current standard of care for pemphigus typically consists of CS in high doses

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which may be given in combination with Rituxan, a B cell depleting agent. It is well documented that chronic use of CS has serious and often long-term morbidities including infections, type II diabetes, osteoporosis, and cardiovascular effects, and CS can be associated with mortality as well. We elected to develop rilzabrutinib for pemphigus in part because it is a generalizable model for other autoantibody-driven diseases.

 

Pemphigus

We initiated a global Phase 3 pivotal trial, the PEGASUS study, of rilzabrutinib in pemphigus in November 2018. This is a randomized, double-blind, placebo-controlled, clinical trial in patients with PV, along with a smaller number of pemphigus foliaceus, or PF, patients. Rilzabrutinib has been granted orphan drug designation by the U.S. Food and Drug Administration, or FDA, for the treatment of PV and by the European Commission, for treatment of pemphigus (including both PV and PF). If supported by the trial data, regulatory approvals for pemphigus rather than for PV will be sought in most territories apart from the United States, where an approval for the treatment of PV alone will be sought. We anticipate data from the Phase 3 pivotal trial in the second half of 2021.  

We have completed Part A and Part B of an open-label Phase 2 clinical trial. Part A enrolled 27 patients with newly diagnosed (mild to moderate) and relapsed (mild to severe) pemphigus with a Pemphigus Disease Activity Index, or PDAI, ranging from 8-45 (including both PV and PF) according to Shimizu classification (Shimizu et al 2014). In March 2019, this data was presented at the 2019 American Academy of Dermatology (AAD) Annual Meeting as a late-breaking presentation. Twenty-four patients completed the full 12 weeks of active treatment with oral rilzabrutinib and low dose corticosteroids (LDCS; ≤0.5 mg/kg/day) and 12 weeks of follow-up. The primary endpoint was control of disease activity (CDA), where new lesions cease to form, and existing lesions begin to heal, at week four. Secondary endpoints included complete remission (CR) rates and reduction in anti-desmoglein autoantibody levels. The study achieved the primary endpoint of CDA on low dose CS in 54% of patients at week four. The CDA results were generally consistent across all major subgroups. At week 12, CDA occurred in 73% of patients. Of 24 patients who completed the study, after 12 weeks of treatment, 17% achieved CR by week 12 and 25% by week 24. Rilzabrutinib was generally well-tolerated. The most frequently reported treatment related adverse events were nausea, abdominal pain (upper), headache, and infection in 15%, 11%, 11%, and 11% of patients, respectively.  

Part B enrolled 15 patients diagnosed with newly diagnosed or relapsed pemphigus, and was conducted to assess the impact of 24 weeks of active treatment with oral rilzabrutinib and low dose CS (LDCS; ≤0.5 mg/kg/day). In Part B, a starting dose of 400mg once daily was tested and determined to be less effective, and at the recommendation of the Safety Monitoring Committee, all patients were escalated to twice daily dosing. We announced data from Part B in December 2019. Among the 15 patients in Part B, nine (60%) achieved CDA by four weeks of treatment on low dose CS (≤ 0.5 mg/kg/day). 12 patients (80%) achieved CDA by 12 weeks of treatment. Six patients (40%) reached CR after 24 weeks of treatment, and nine patients (60%) achieved a PDAI score of 1 or 0. Rilzabrutinib was well tolerated in Part B, and safety was consistent with the Phase 2 Part A clinical trial. Data from the Phase 2 Part B trial will be submitted for presentation at an upcoming medical conference.

ITP

Our second clinical program is rilzabrutinib for the treatment of immune thrombocytopenia, or ITP, a rare and often chronic autoimmune disease in which the blood levels of platelets, a key component to normal blood clotting, drop to unsafe levels. We have an ongoing Phase 1/2 clinical trial in ITP with a rilzabrutinib active treatment period of 24 weeks. In July 2019, we announced an amendment to the clinical trial protocol to add a long-term extension cohort for responders and to allow flexibility to enroll additional patients if we determine additional data would help inform Phase 3 design. We are using the data collected from the ongoing Phase 1/2 trial to prepare for our potential pivotal program.

We presented interim results from our Phase 1/2 clinical trial at the 61^st American Society of Hematology (ASH) Annual Meeting in December 2019. Thirty-one heavily pretreated patients (median of six prior therapies) were treated with starting doses of rilzabrutinib of 200 mg once daily, 400 mg once daily, 300 mg twice daily, and 400 mg twice daily respectively, with intra-patient dose escalation allowed every four weeks, and with patients having a median treatment duration of 12 weeks (range, 0.1-41.9). Of the 31 patients, 39% (80% confidence interval (CI) 28, 50), irrespective of dose and duration of treatment, achieved the trial’s primary endpoint of ≥2 consecutive platelet counts of ≥50,000/µL, separated by at least five days, and increased by ≥20,000/µL from baseline, without requiring rescue medication. In addition, 45% (80% CI 34, 57) of enrolled patients achieved any two platelet counts ≥50,000/µL. Most patients who achieved the primary endpoint had a platelet count >30,000/µL after the first week of treatment. Preliminary data on 13 patients treated at higher doses (300 mg and 400 mg twice daily) and who had completed at least 12 weeks of therapy, demonstrated a response rate of 54% (80% CI 37, 70) and 62% (80% CI 44, 77) for both endpoints respectively. Rilzabrutinib was well-tolerated at all doses studied, whether given as a monotherapy or with allowed concomitant ITP therapy (thrombopoietin receptor agonists and/or steroids), with no reported treatment related bleeding or thrombotic events. Related treatment emergent adverse events, or TEAEs, were reported in 35% of patients and were all grade 1 or 2.

IgG4-RD

Our third clinical program is rilzabrutinib for the treatment of IgG4- RD, an immune-mediated disease of chronic inflammation and fibrosis that, if left untreated, can lead to severe morbidity including organ dysfunction and organ failure, which can be fatal. We anticipate initiating a Phase 2 clinical trial in IgG4-RD in the first half of 2020.

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Beyond pemphigus, ITP and IgG4-RD, we believe there are numerous immune-mediated diseases for which rilzabrutinib may have therapeutic benefit. Rilzabrutinib has demonstrated clinical and preclinical efficacy in a number of disease-relevant mechanisms, including rapid anti-inflammatory effects, neutralization of pathogenic autoantibodies and blockade of production of new autoantibodies. The collective preclinical and clinical data suggests that rilzabrutinib has the potential to reshape the treatment of a wide range of immune-mediated diseases.

Topical BTK Inhibitor for Immune-Mediated Diseases: PRN473 Topical

PRN473 Topical, an additional wholly owned drug candidate, is a reversible covalent BTK inhibitor and will be our third BTK inhibitor to enter clinical development. Given the abundance of immune cells in skin and their role in immune-mediated diseases, PRN473 Topical is being developed for immune-mediated diseases that could benefit from localized application to the skin. We initiated a Phase 1, randomized, double blind, placebo-controlled, single and multiple dose trial to evaluate its safety, tolerability and pharmacokinetics. The trial is being conducted in Australia and is anticipated to be completed in 2020.

BTK Inhibitor for CNS Diseases: PRN2246/SAR442168

PRN2246/SAR442168 is designed to treat MS and potentially other CNS diseases, in part by inhibiting B cells and other immune cells in the brain. During neuro-inflammation, the number of B cells in the brain increases and such increase is thought to play a central role in the pathology of MS and other CNS diseases. In late 2017, we formed a collaboration with Sanofi under which we received a $40.0 million upfront payment and are eligible to receive milestone payments of up to an aggregate of $765.0 million and tiered royalties up to the mid-teens on future sales. Under our agreement, we received $25.0 million in milestones in 2018 and a $30.0 million milestone in June 2019.

We have completed our development efforts under the early development plan and Sanofi is responsible for further clinical development. In February 2020, Sanofi announced data for their Phase 2b clinical trial in relapsing MS. Specifically, Sanofi announced that PRN2246/SAR442168 met its primary endpoint, significantly reduced disease activity associated with MS as measured by magnetic resonance imaging, or MRI, and was well tolerated in the Phase 2b trial with no new safety findings. Sanofi also announced that it anticipates initiating four Phase 3 clinical trials in relapsing-remitting (RMS), primary progressive (PPMS) and secondary progressive (SPMS) forms of MS in the middle of 2020. We hold an option to fund a portion of Phase 3 development costs in return for, at our discretion, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in royalty rates up to the high-teens.

In February 2019, Phase 1 clinical data was presented at the 2019 Americas Committee for Treatment and Research in Multiple Sclerosis (ACTRIMS) Annual Meeting. In the Phase 1 trial in over 70 healthy volunteers, PRN2246/SAR442168 was found to be well tolerated at all dose levels studied and all treatment-related treatment-emergent adverse events were mild in nature. BTK occupancy increased in a dose dependent manner; high levels of peripheral BTK occupancy were achieved after single doses of 30 mg and higher. In the multiple-ascending dose (MAD) portion of the study, BTK occupancy after 10 days approached maximal levels in the lowest dose group (7.5 mg) studied. In a dedicated arm of the trial (120 mg), human CNS exposure was confirmed in cerebral spinal fluid in all participants in the arm, highlighting the potential for PRN2246/SAR442168 to impact B cell-driven inflammation in both the periphery and CNS.

Oral Immunoproteasome Program

We have discovered multiple series of highly selective, oral small molecule inhibitors of the immunoproteasome. In June 2017, we formed a collaboration with AbbVie Biotechnology Limited, or AbbVie, with an upfront payment of $15.0 million, to develop therapies to bring the power of oral proteasome inhibition safely into the field of immunology for the treatment of inflammation and autoimmune disorders. In March 2019, we announced a mutual agreement with AbbVie to end our collaboration and to reacquire rights to the program, following an assessment by AbbVie that there was no longer a strategic fit of our highly selective inhibitors’ biologic profiles relative to AbbVie’s desired disease areas of focus. There are no further financial obligations between us. Our wholly owned program is in the late lead optimization phase. We are assessing the biology of our lead candidates in order to determine the appropriate development opportunities in immune-mediated diseases.

FGFR Inhibitor for Solid Tumors: PRN1371

PRN1371, an additional wholly-owned drug candidate, is an inhibitor of Fibroblast Growth Factor Receptor, or FGFR, designed for the treatment of solid tumors. FGFR controls tissue homeostasis, or tissue maintenance and regeneration, and is a clinically validated target in multiple solid-tumor indications. We discovered and developed an irreversible FGFR inhibitor to treat FGFR-driven solid tumors, and presented data from our Phase 1 multicenter, dose escalation clinical trial in May 2019 at the American Association for Cancer Research “Bladder Cancer: Transforming the Field” meeting. In the dose escalation portion of the Phase 1 clinical trial with 36 patients, PRN1371 was found to be well tolerated. While this portion of the trial was not designed to assess efficacy, stable disease was observed after two 28-day treatment cycles in 11 out of 36 patients. The most common treatment related adverse event was hyperphosphatemia, a known side effect of FGFR inhibitors. With a well-tolerated and pharmacologically active dose of 35 mg identified, we initiated the expansion cohort of our Phase 1 clinical trial in patients with metastatic urothelial carcinoma (mUC) having FGFR alterations. In January 2020, we announced we suspended the PRN1371 clinical program, after assessing competitive trial results of non-FGFR molecules in metastatic bladder cancer, the progress of our clinical trials and the remaining cost

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and obstacles to commercialization, to focus our portfolio on immune-mediated diseases. Nine bladder cancer patients with FGFR alterations had enrolled in the expansion cohort: of those, two patients had a partial response and three patients had stable disease. While we have announced suspension of efforts on PRN1371, the drug demonstrated activity and was well tolerated.

Tailored Covalency^® Platform

Our proprietary Tailored Covalency platform enables us to reproducibly develop molecules, like rilzabrutinib, which have the potential to be best-in-class and highly differentiated based on their mode of action, selectivity and target residence time. We believe that we can rapidly discover and advance our drug candidates to clinical trials as compared to standard methods. Our approach has the potential to address historically undruggable targets that underlie many diseases with high unmet medical need. We believe that our covalent drug candidates, if approved, will significantly improve treatment paradigms and clinical outcomes for patients.

Leadership

We are led by an experienced management team with an unwavering commitment and focus on serving patients with immune-mediated diseases. Collectively, our executives have contributed to the research, development, approval and launch of several established drugs in immunology and oncology, including Rituxan, Ocrevus, Xolair, Avastin, Tarceva, Kyprolis, Nulojix, and Xofluza.

Our Strategy

Our goal is to become the leader in the discovery, development and commercialization of highly selective, irreversible covalent and reversible covalent, oral and topical therapies focused on immune-mediated diseases. To achieve this goal, we intend to:

Our Approach and Platform—Tailored Covalency

We are challenging the premise of drug design by using our proprietary Tailored Covalency^® platform to create therapies that are optimized for residence time, the duration of time that a drug binds to its target. We believe that our platform enables us to purpose-design and develop small molecule inhibitors of enzymes and receptor ligands with potencies and selectivities that rival those

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of injectable biologics yet maintain the convenience of an oral or topical treatment. Compared to other small molecules, the properties of our drug candidates have the potential to improve efficacy while minimizing both off-target effects and total exposure.

Key properties and potential benefits of our Tailored Covalency platform include:

 

 

To develop our drug candidates, we select highly sought-after targets that have been difficult to inhibit using standard small molecule efforts. Small molecule drugs derive their effect by interacting with target proteins in locations known as binding pockets. Guided by molecular modeling, we design small molecule drug candidates with two components, or keys, that fit the non-covalent features (the first lock) and the covalent elements (the second lock) of the target in the binding pocket. We believe that this “double lock-and-key” solution results in small molecules with high selectivity for their targets, thus reducing off-target activity. In contrast, the single-key solution typical of many standard small molecule drugs may allow the molecule to bind to multiple targets, which can lead to poor selectivity and result in unintended side effects. We believe our double lock-and-key solution has contributed to our ability to purpose-design multiple drug candidates for specific indications.

The following diagram depicts our double lock-and-key solution:

 

 

We use proprietary biochemical and cellular assays that are developed in-house to measure and subsequently optimize a drug’s target residence time. Standard small molecule drugs have a short residence time and, therefore, require dosing regimens that sustain minimum concentration levels in the blood at all times to maintain beneficial effects on the target. In preclinical studies, we observed that the drug optimized using biochemical and cellular residence time assays can result in a long residence time in vivo. Our clinical experience with rilzabrutinib, a reversible covalent BTK inhibitor, has further supported this result and confirmed that a low

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concentration of rilzabrutinib in blood for just a few hours is sufficient to inhibit, as measured by occupancy, BTK in the desired inhibition range of 60-100% over a period of 24 hours. We believe this minimizes both off-target effects and total exposure of the drug while achieving high clinical benefit.

By optimizing for target residence time, our drug candidates remain bound to the target but otherwise clear the body rapidly, as exemplified in the figure below:

 

 

Our suite of covalent technologies that we incorporate into our drug designs falls into two general categories that can be used to optimize residence time:

Our proprietary tools enable us to purpose-design drug candidates that are both highly selective and optimized for target residence time. This new approach to small molecule drug discovery is both highly efficient by industry standards and reproducible.

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We utilize our proprietary assays to measure target engagement from human tissue, such as blood, confirming that our drug candidates are absorbed and bind to their target following dosing. We have leveraged these assays as built-in clinical biomarkers to enable early determination of efficacious exposure requirements for each drug candidate, thus allowing for clear decision points and selection of dose ranges for our clinical trials. We believe the rapid cycle time of our approach leads to a heightened probability of technical success, or PTS, as shown in the following graphic.

 

 

We are expanding our wholly owned pipeline by continually innovating and discovering additional novel therapies. We intend to remain at the forefront of covalent drug discovery by investing in new technologies that will expand the druggable target space that is addressable with our Tailored Covalency approach.

Our Development Programs

In tailoring molecules for specific diseases, our platform has already yielded a pipeline of oral, and topical, potent and selective drug candidates.

Bruton’s Tyrosine Kinase Franchise

Overview

Our ability to tailor drug candidates to specific diseases with our Tailored Covalency platform is best illustrated with our BTK inhibitor franchise. The franchise encompasses two potentially transformative oral drug candidates and one potentially transformative topical drug candidate that we have designed to exhibit specific properties. Rilzabrutinib is an oral small molecule with potent and durable action, designed for use as chronic therapy for moderate to serious immune-mediated diseases. PRN2246/SAR442168 is an oral small molecule designed to cross the blood-brain barrier to reach aberrant immune cells inside the CNS with relatively low doses and high potency, to treat MS and other CNS diseases. PRN473 Topical is a reversible covalent BTK inhibitor, which is being developed for immune-mediated diseases that could benefit from localized application to the skin.

BTK is present in the signaling pathways of most types of white blood cells except for T cells and plasma cells. Our inhibitors selectively target BTK inside these cells, and inhibition of this enzyme results in the immediate blockade and down-regulation of several cellular activities that drive autoimmunity and inflammation.

The ability to impact both early and later processes of autoimmunity halts multiple propagators of the autoimmune cascade without depleting B cells. Inhibition of BTK results in rapid anti-inflammatory effects, neutralization of pathogenic autoantibodies, and blocks the production of new autoantibodies. Inflammation and autoantibodies are the key drivers in many immune-mediated diseases such as pemphigus, ITP, and IgG4-RD. The action of BTK inhibition offers broad activity compared to other agents in the treatment of immune-mediated diseases without the long-term impact of B cell depletion or the inconvenience of injectable therapies.

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We believe this profile of a clinically reversible, targeted-immunomodulation therapy, as shown in the table below, should have broad applicability across multiple immunological diseases:

 

 

The graphic below illustrates several areas where there is scientific rationale and/or clinical data to support the development of BTK inhibitors as a therapeutic modality. The “Industry Potential Future Indications” listed below are, as noted, potential and included for illustrative purposes only.

 

 

While there are many potential indications for the use of a BTK inhibitor, we have made a strategic decision to focus on developing rilzabrutinib, our wholly owned BTK inhibitor, in high unmet need indications. We have partnered PRN2246/SAR442168, our BTK inhibitor for CNS diseases, with Sanofi in order to maximize its value in indications such as MS, where large clinical development programs are required. We believe that the oncology market for BTK inhibitors is well addressed with currently approved and in-development first-generation BTK inhibitor molecules. While these first-generation BTK inhibitors have made significant contributions to the treatment of hematological malignancies, their adverse effects provided the inspiration for our development of next generation molecules more suitable for the chronic immune-mediated diseases we seek to address. Therefore, we intend to focus our efforts for our wholly-owned drug candidates initially on the smaller, immune-mediated disease indications.

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Rilzabrutinib for the Treatment of Pemphigus

We are developing rilzabrutinib for pemphigus because the characteristics of the disease present an opportunity for rilzabrutinib to demonstrate its multiple benefits, including rapid anti-inflammatory effects, neutralizing the effects of pathogenic autoantibodies and blocking the production of new autoantibodies without depleting B cells. PV, the predominant type of pemphigus in most countries, is an orphan indication with clinical endpoints suitable for regulatory approval. In March 2019, data from the completed open-label Phase 2 Part A trial of rilzabrutinib in patients with PV were presented as a Late Breaker at the 2019 AAD annual meeting. The primary efficacy endpoint of the Phase 2 Part A trial – CDA within four weeks – was reached by 54% of patients and rilzabrutinib was generally well tolerated. In December 2019, we announced data from the Phase 2 Part B trial. Among the 15 patients dosed in Part B, nine patients (60%) achieved CDA within four weeks on low dose CS, 12 patients (80%) achieved CDA by week 12 and six patients (40%) achieved complete remission (CR) after 24 weeks of treatment. Nine patients (60%) achieve a PDAI score of 1 or 0. Safety was consistent with Part A and in Part B rilzabrutinib was well tolerated with no treatment related serious adverse event reported. In November of 2018, we initiated the PEGASUS study, a global, randomized, double-blind, placebo-controlled, pivotal, Phase 3 clinical trial of rilzabrutinib in patients with moderate to severe pemphigus. We have conducted our Phase 2 pemphigus clinical trial in five non-U.S. countries, and we anticipate that our Phase 3 trial will include patients in over 15 countries, including the United States. In December 2019, we announced accelerated enrollment timelines in our Phase 3 trial that project data in the second half of 2021 as opposed to the first half of 2022. In anticipation of seeking broader approvals for pemphigus, including both PV and PF, in territories outside the United States, the trial will include some PF patients.

Disease Background

Pemphigus is a group of rare, potentially life-threatening, chronic diseases characterized by acantholysis, or the loss of intercellular adhesion among keratinocytes, which results in erosions and blisters of the skin and mucous membrane. The major forms of pemphigus are induced by pathogenic autoantibodies acting against intercellular adhesion proteins in the epidermis of skin and mucous membrane called desmosomes. As a result, the upper layer of the epidermis can split away from its base and result in the erosions and blisters characteristic of the disease. Widespread skin and mucous membrane involvement impairs this very important barrier to microbes and can result in life-threatening systemic infections.

The two major clinical variants of pemphigus are PV and PF. Typically, PV and PF occur in adults between 40 and 60 years old. PV affects both the skin and mucous membrane whereas PF affects only the skin. PV is caused when pathogenic autoantibodies attack dsg-3 or both dsg-3 and dsg-1, and is more prevalent in people of Middle Eastern descent. PF is caused when pathogenic autoantibodies attack dsg-1. The estimated worldwide prevalence of pemphigus is approximately 150,000 to 180,000 patients. Prevalence in the United States is estimated to be approximately 40,000 of which approximately 80% consists of PV patients. Prevalence in Europe is estimated to be approximately 80,000 of which approximately 80% consists of PV patients. Approximately 75% of PV patients, in the United States and Europe, present with moderate or severe PV. Given the fatal nature of this disease, we believe that the majority (90% plus) of these patients require treatment. The current patient population consists mostly of relapsed patients who require ongoing treatment. Worldwide, the annual incidence of new cases has been estimated to be between one and five cases per million of population.

Limitations of Current Therapies

The current focus of pemphigus treatment is to decrease blister formation on the skin and mucous membranes and to promote healing of blisters and erosions with the least amount of medication required to achieve disease control. CS are the mainstay of currently available PV therapies. It is well documented that CS have serious and often long-term morbidities including infections, type II diabetes, osteoporosis and cardiovascular effects, and CS can be associated with mortality as well. In patients who are newly diagnosed or those who experience relapses, prednisone, a CS, is typically administered for three to six months or longer until there is control of the disease. After control is achieved, prednisone is gradually tapered and, if required, another immunosuppressive agent, such as azathioprine, methotrexate or mycophenolate mofetil, is added to maintain disease control.

In June 2018, the FDA approved rituximab for the treatment of PV. Rituximab is an anti-CD20 antibody that is administered by infusion and is indicated for the treatment of hematological malignancies, rheumatoid arthritis, or RA, granulomatous polyangiitis, or GPA, and microscopic polyangiitis, or MPA. Anti-CD20 antibodies act by depleting B cells, a process that takes several months and requires an initial concomitant administration of high-dose CS. The associated risks are primarily severe infusion reactions, including anaphylaxis, and rare and serious infections that can be fatal. Furthermore, the long-term risks of chronic B cell depletion have not been fully characterized.

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Our Solution

Rilzabrutinib, an orally administered BTK inhibitor, has demonstrated the ability to rapidly induce clinical responses in the majority of patients independent of stage, severity, or duration of disease without the use of high-dose CS and their associated toxicities. Furthermore, rilzabrutinib delivers these benefits without affecting T cells or causing chronic B cell depletion (thus retaining most immune functions) and with reversibility of drug effects upon dose interruption. These attributes could make rilzabrutinib a first-in-class oral treatment for this debilitating orphan disease.

Phase 2 Clinical Trial of Rilzabrutinib in Pemphigus

We have completed Part A and Part B of our open-label Phase 2 clinical trial, Believe-PV, to evaluate rilzabrutinib’s potential to induce rapid onset of clinical response, enable tapering of CS, and lower autoantibody levels. Phase 2 Part A measured the efficacy, safety, tolerability and pharmacodynamics of rilzabrutinib in patients with newly diagnosed or relapsing, biopsy-proven, mild or severe PV (Pemphigus Disease Activity Index, or PDAI, of 8 to 45) for whom an initial period of rilzabrutinib monotherapy or combination with low doses of CS was judged to be clinically acceptable. Rilzabrutinib has been administered orally to patients with pemphigus, most of whom had PV confirmed by anti-desmoglein 3 antibodies, and a small number of whom, although originally diagnosed with PV, had a PF antibody profile. The Phase 2 Part A trial had an active treatment period of 12 weeks and a follow-up period of 12 weeks. The Phase 2 Part B trial increased the active treatment period to 24 weeks, with a follow-up period of four weeks and allowed patients with more severe PDAI scores up to 60.

The clinical efficacy endpoints of Part A and Part B of the Phase 2 clinical trial are based on global pemphigus guidelines, including control of disease activity, or CDA, where new lesions have stopped appearing and established lesions begin to heal, and complete remission, or CR, where all lesions are healed. Quantitative disease scores such as the PDAI, and Autoimmune Blistering Quality of Life, or ABQOL, are measured at each visit, as well as BTK occupancy in circulating white blood cells. The Part A and Part B primary endpoint was the proportion of patients able to achieve CDA on LDCS (≤ 0.5 mg/kg/day) (“low-dose” CS in the blistering diseases field) after 12 weeks (Part A) or after 24 weeks (Part B) of treatment.

The patient demographics of Part A of the Phase 2 trial are highly representative of a mixed population of newly diagnosed and relapsing pemphigus patients. The mean age is 52 years old (37-72) with an average disease duration of six years (range 0-25) and PDAI score of 19 points (range 8-43). Average body mass index was 27 kg/m2 (range 20-38). Similar numbers of men and women were studied (56% female). There were more relapsing patients (n=18) than newly diagnosed patients (n=9). The mean dose of CS (prednisone) at trial entry was 14 mg (range 0-30) per day. Among the population studied, anti-dsg3 antibody levels confirmed the diagnosis of PV in 23 (85%) patients. One (4%) patient was autoantibody negative, and three (11%) patients had only positive anti-dsg1 antibodies, suggesting a diagnosis of PF and not PV. Three of 27 patients had their dose of rilzabrutinib increased to 500 mg or 600 mg twice daily in response to increased disease activity, with all other patients remaining on 400 mg twice daily throughout the trial.

 

In Part A, 14 of 26 (54%) patients treated with rilzabrutinib met the primary endpoint of CDA on zero or low dose CS by the Day 29 visit. Two of 26 (8%) patients achieved CDA on zero CS by the Day 29 visit, demonstrating activity of rilzabrutinib without any CS. Four of 24 (17%) patients who completed the study had achieved CR on low-dose CS by the Day 85 visit.

 

In Part A, for CR, the mean dose of CS was 8 mg with a range from 1 to 20 mg. Key secondary endpoints included a median anti-DSG antibodies reduced by up to 65%, a median clinical CR duration after rilzabrutinib cessation of approximately two months, and the time to relapse from CDA/CR at the end of the 12 weeks of therapy was from 27 up to greater than 99 days.

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Rilzabrutinib was observed to lower both anti-dsg1 and anti-dsg3 levels, the two most prevalent pathogenic autoantibodies in patients with pemphigus. This effect was seen as early as the Day 29 visit. Furthermore, in most patients with initially elevated anti-dsg3, levels remained suppressed after cessation of rilzabrutinib treatment, suggesting a sustained effect beyond the 12-week active treatment period of rilzabrutinib on patients’ pemphigus-associated pathogenic autoantibodies.

In Part A, efficacy after four weeks of treatment was consistently seen across all subgroups with the exception of the one anti-desmoglein antibody-negative patient and three patients with a PF antibody profile. At week 12, two of the three PF patients had later clinical responses, on low-dose CS. In addition, at week 12, we saw an increased proportion of CDA achieved across the different subgroups that included relapsed PV patients.

Consistent with the observations from the Phase 1 trials in healthy volunteers, rilzabrutinib was well-tolerated in Part A of the Phase 2 pemphigus trial. No clinically significant laboratory, vital signs and/or electrocardiographic signals were observed. No treatment-related deaths, or adverse events leading to discontinuation of treatment were reported.

Three serious adverse events have been reported, only one of which was deemed by the investigator to be related to rilzabrutinib. The related event was a Grade 3 event of cellulitis, a bacterial skin infection that led to hospitalization and dose interruption for three days. The patient was retreated for a further two months without event recurrence.

The most frequent treatment-emergent adverse events, or TEAEs, independent of causality, were nausea (22%), headache (15%), abdominal pain upper (11%) and diarrhea (11%). The most frequent TEAEs deemed by the investigator to be related to rilzabrutinib therapy were nausea (15%), abdominal pain (upper) (11%), headache (11%) and infection (11%)— all mild or moderate in severity with the exception of the one event of cellulitis described above that resolved. Two patients on chronic anticoagulation medication (rivaroxaban) have been treated without bleeding complications. TEAEs are summarized in the table below.

Part A Treatment-Related, Treatment-Emergent Adverse Events: Phase 2 Incidence ≥ 10%

 

 

In Part A of the Phase 2 trial, we observed no reported incidences of major hemorrhage, atrial fibrillation, neutropenia or thrombocytopenia - events that have been reported with marketed BTK inhibitors.

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Analysis of the pharmacokinetic and pharmacodynamic endpoints revealed therapeutic levels of BTK occupancy in peripheral white blood cells in all but one patient; the pre-dose average at steady state was 78% (pre-dose target was ≥ 70-80%) and the average Day 1, 2-hour post-dose BTK occupancy was 82%. As would be expected due to the rapid systemic clearance and slow off-rate kinetics of rilzabrutinib from its target, plasma concentrations at trough (approximately 12 hours post-dose) were minimal while BTK occupancies remained high.

The Phase 2 Part B trial increased the active treatment period from 12 weeks to 24 weeks and confirmed the 400 mg twice a day dose. Patients started Part B on 400 mg once daily dosing, and it was determined to be less effective and at the recommendation of the Safety Monitoring Committee, all patients were escalated to twice daily dosing. Among the 15 patients dosed in Part B of the Phase 2 trial, nine (60%) achieved CDA by four weeks of treatment on low dose CS (≤ 0.5 mg/kg/day). 12 of 15 patients (80%) achieved CDA by 12 weeks of treatment. Six patients (40%) reached CR after 24 weeks of treatment, and nine patients (60%) achieved a PDAI score (a scoring system to indicate disease severity) of 1 or 0. Safety was consistent with Part A and rilzabrutinib was well-tolerated in Part B with no treatment related serious adverse event reported.

 

Design of the Phase 3 Clinical Trial of Rilzabrutinib in Pemphigus

We are currently enrolling patients in the PEGASUS study, a global, randomized, double-blind, placebo-controlled, pivotal, Phase 3 clinical trial of rilzabrutinib in approximately 120 patients with moderate to severe pemphigus. This trial is evaluating rilzabrutinib, dosed at 400 mg twice daily, versus placebo, using a background treatment of tapering doses of prednisone. The trial entry criteria include patients with moderate to severe pemphigus who are either newly diagnosed or relapsing with chronic disease. The demographics of this trial are anticipated to be similar to the Phase 2 trial which included a majority of PV patients and a small number of PF patients. This demographic will potentially represent three quarters of the pemphigus patient population. The primary endpoint is the ability of rilzabrutinib to achieve durable CR on very low-dose prednisone (≤ 5 mg/day) with 36 weeks of treatment. Durable CR is defined as a state in which all lesions have healed and no new lesions have appeared for a period of at least eight weeks by week 37. Key secondary endpoints include cumulative CS use, time to CR, and durable CR on ≤ 10 mg CS. After 36 weeks of treatment, all patients will have the option to be treated with active rilzabrutinib therapy in an open-label extension period of 24 weeks of treatment. The trial size of the Phase 3 is similar to those of two randomized, controlled, Phase 3 trials investigating rituximab in PV. Primary endpoint effect sizes are calculated by extrapolation of our Phase 2 data and recent historical data for rituximab as compared to placebo on a background of tapering prednisone. The clinical trial has been designed with an estimated statistical power of greater than 90%.

Canine Study of Rilzabrutinib Monotherapy in Pemphigus Foliaceus

Because pemphigus naturally occurs in both humans and dogs, primarily affecting the skin and paws of the dog, we were able to conduct a clinical trial of rilzabrutinib in dogs with PF. This canine clinical trial demonstrated the effects of rilzabrutinib as a monotherapy without the need for the usual care of CS, and the PDAI results shown in the graph below were similar to the results of our Phase 2 human clinical trial in pemphigus. The images of Dog #1 show progression over the course of the trial.

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Clinical Improvement in Canine Pemphigus with PRN1008 Monotherapy

Rilzabrutinib for the Treatment of ITP

We also are developing rilzabrutinib for the treatment of ITP. We believe there is a strong mechanistic rationale for BTK inhibition to be disease modifying in ITP. Furthermore, rilzabrutinib has demonstrated that it did not impact platelet aggregation in blood samples from either normal healthy volunteers or ITP patients, thereby potentially avoiding the bleeding and bruising risk typically associated with other BTK inhibitors. In December 2019, we presented interim data from our Phase 1/2 trial of rilzabrutinib in patients with ITP at the 61^st ASH Annual Meeting. Of the 31 enrolled patients, 39% (80% confidence interval (CI), 28%-50%) achieved the trial’s primary endpoint of two or more consecutive platelet counts of ≥ 50,000/µL, separated by at least five days, and increased by ≥20,000/µL from baseline, without requiring rescue medication. In addition, 45% (80% CI 34, 57) of enrolled patients achieved any two platelet counts ≥50,000/µL. Most patients who achieved the primary endpoint had a platelet count >30,000/µL by the first week of treatment. Preliminary data on 13 patients treated at higher doses (300mg and 400mg twice daily) and who had

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completed at least 12 weeks of therapy, demonstrated a response rate of 54% (80% CI 37, 70) and 62% (80% CI 44, 77) for both endpoints respectively. Rilzabrutinib has been well-tolerated at all doses studied, whether given as a monotherapy or with allowed concomitant ITP therapy (thrombopoietin receptor agonists and/or steroids), with no reported treatment related bleeding or thrombotic events. Related treatment emergent adverse events (TEAEs) were reported in 35% of patients and were all grade 1 or 2.

Disease Background

ITP is a rare and often chronic autoimmune disease where blood levels of platelets, a key component in normal blood clotting, drop to very low levels. Similar to pemphigus, ITP is an autoimmune disease driven by pathogenic autoantibodies. In the case of ITP, these pathogenic autoantibodies are targeting platelet glycoproteins. Autoantibody binding results in Fcg receptor-mediated destruction of platelets primarily by macrophages. Increased levels of circulating B cells excreting platelet glycoprotein antibodies have been reported in ITP patients. While ITP patients can be asymptomatic, they often have episodic nose and gum bleeding, frequent bruising and significant fatigue. Primary ITP, also known as idiopathic, occurs when ITP develops for no known reason. Secondary ITP is associated with other illnesses such as an infection or autoimmune disease, such as systemic lupus erythematosus, or occurs after transfusion or taking certain drugs, for example, certain drugs used to treat cancer. Patients also endure a poor quality of life due to the need to limit activities and monitor blood parameters to decrease the risk of serious bleeding. In 2018, according to a survey of 1,300 ITP patients published at the European Hematology Association, 36% of patients said having ITP had a high impact on their emotional well-being, severe fatigue being the most difficult impact for these patients to manage from an emotional perspective. The most severe medical issue in these patients was intracranial bleeds, which can be fatal. In cases of severe ITP, the five-year mortality rate due to intracranial bleeding in patients over 60 years of age is 47.8%, according to a retrospective study on bleeding risk with ITP published in the Archives of Internal Medicine.

While most pediatric cases go into spontaneous remission within six to 12 months, the majority of adult cases progress to chronic ITP, according to an international working group for ITP published by Blood. Worldwide, the incidence has been estimated to be between 10 and 20 cases per hundred thousand of population. There are approximately 330,000 people living with primary and secondary ITP in the United States and Europe, including approximately 70,000 people with chronic primary ITP in the United States and almost 90,000 in Europe. In addition, there are over 30,000 people living with chronic secondary ITP in the United States and 36,000 people living in Europe. Approximately 90% of chronic ITP patients continue to need additional therapy. Patients must be treated if their platelet levels drop to below 30,000 per mm³ to avoid potentially fatal intracranial bleeds; however most physicians treat patients if their platelet levels drop to between 50,000 to 60,000 per mm³. The optimal treatment for the vast majority of patients with chronic ITP is determined by their platelet level responses.

Limitations of Current Therapies

Current ITP therapy is divided into two distinct groups: first-line treatment to treat acute episodes of the disease, which typically last less than six months, and second-line therapy for chronic treatment and control of the disease. There is no current chronic treatment option that provides a safe and effective therapy that can be used to manage episodes, control the disease and prevent flares.

First-Line Treatments: A short course of CS or a single dose of intravenous immunoglobulin therapy, or IVIg, is typically used as a first-line treatment. While initial responses to CS offer a rapid onset of efficacy and a high initial response rate, at least 50% of patients ultimately relapse following tapering and will require additional therapy. It is well documented that CS have serious and often long-term morbidities, including serious infections, type II diabetes, osteoporosis and cardiovascular effects and can be associated with mortality as well. IVIg is often used as rescue therapy when platelet levels are extremely low to avoid immediate bleeding risks. However, it is not commonly used for chronic therapy due to its transient effects, significant toxicities, IV administration and high cost of treatment.

Second-Line Treatments and Beyond: There are several treatments used in chronic ITP. Nearly all patients receive treatment based on their platelet counts and symptoms, according to American Society of Hematology guidelines. Most patients receive either a thrombopoietin receptor agonist, or TPO-RA, or rituximab as second-line, and then are treated upon relapse with whichever of those two drugs was not used initially. Splenectomy, the surgical removal of the spleen, was once considered to be the standard of care for second-line treatment of ITP. However, due to the surgical risks and the lifetime heightened risk of serious bacterial infections it has been replaced by TPO-RA, a class of drugs that are aimed at increasing platelet production but have no ability to stop platelet destruction. Currently, there are three approved TPO-RA, romiplostim, a weekly subcutaneous injection, eltrombopag, a daily oral tablet, and avatrombopag, a daily oral tablet. Rituximab is often used off-label as a second-line treatment for ITP in adults due to its strong short-term response rates. However, poor long-term efficacy and unknown safety are considered to be drawbacks. The FDA approved fostamatinib disodium hexahydrate, an oral inhibitor of spleen tyrosine kinase, or Syk. At time of FDA approval, in its clinical program, fostamatinib had demonstrated efficacy in about 18% of patients and had been associated with diarrhea, hypertension, liver toxicity, neutropenia and fetal toxicity.

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The key unmet needs in ITP are treatments that work beyond first line and have better durability and a more rapid onset. Currently available treatment options are limited by short duration of response and safety concerns, leaving significant numbers of ITP patients without reasonable treatment options. While the introduction of TPO-RA has been very advantageous, there are few options that effectively target the underlying cause of ITP in the majority of patients, pathogenic antibody production, and subsequently stop destruction of platelets and prevent low platelet production. The current treatments that target pathogenic autoantibodies are limited by toxicities, route of administration (IV), relapse rates and risk of infection.

Our Solution

We are developing rilzabrutinib as an oral drug for the treatment of primary and secondary ITP. We believe that rilzabrutinib is highly suited to address the most common underlying cause of ITP—pathogenic autoantibodies—through prevention of Fcg—mediated destruction of platelets by splenic and circulating macrophages, neutralization of pathogenic autoantibodies and the blocking of the production of new autoantibodies, without depleting B cells. These mechanisms have been shown to stop the platelet destruction that otherwise results in low platelet counts in ITP patients. Thus, we believe rilzabrutinib has the potential to be an effective oral drug that reduces the untoward effects often seen with more invasive or broader immune suppression. In contrast to other BTK inhibitors, rilzabrutinib has demonstrated that it did not impact platelet aggregation in blood samples from either normal healthy volunteers or ITP patients.

Ongoing Phase 1/2 Clinical Trial of Rilzabrutinib in ITP

We are conducting an open-label adaptive Phase 1/2 trial in up to 60 patients with relapsed primary or secondary ITP who have no other approved or available treatment options and two or more recorded platelet counts of<30,000/µL within 15 days prior to treatment. Patients are dosed orally with active therapy for 24 weeks, after which there will be a four week follow-up period to determine safety, PK, PD and durability. Intra-patient dose-escalation is permitted every 28 days depending on clinical response, with four dosing levels studied. Initially, dosing levels include 200 mg daily, 400 mg daily, 300 mg twice daily and 400 mg twice daily, currently all patients are being dosed at 400 mg twice daily. This Phase 1/2 trial is being conducted at multiple sites in the United States and Europe. This trial will inform the Phase 3 trial design and a potential path to approval. We are using the data collected from the ongoing Phase 1/2 trial to prepare for our potential pivotal program.

We presented interim data, on 31 patients, at the 61^st ASH annual meeting in December 2019. The patient demographics of this Phase 1/2 trial include a heavily pretreated population. The mean age was 50 years old (range 21-74) with an average disease duration of 7.8 years (0.5-42.4), a median number of prior therapies of six (1-41) and median baseline platelet count of 13,000/µL (3,000/µL - 28,000/µL). Similar numbers of men and women were studied (58% female). There were mostly primary ITP patients (n=29). Among the population studied patients had been previously treated, and had an inadequate response: eight (26%) had splenectomies, 26 (84%) were on CS, 17 (55%) were on TPO-RA, 11 (35%) were on IVIG/Anti-D, and ten (32%) were on rituximab. There were also 21 patients (68%) on ≥ one concomitant ITP medications.

Irrespective of dose and duration of treatment, of the 31 patients, 39% (80% CI 28, 50), achieved the trial’s primary endpoint of ≥2 consecutive platelet counts of ≥50,000/µL, separated by at least five days, and increased by ≥20,000/µL from baseline, without requiring rescue medication. In addition, 45% (80% CI 34, 57) of enrolled patients achieved any two platelet counts ≥50,000/µL. Most patients who achieved the primary endpoint had a platelet count >30,000/µL by the first week of treatment. Preliminary data on 13 patients treated at higher doses (300mg and 400mg twice daily) and who had completed at least 12 weeks of therapy, demonstrated a response rate of 54% (80% CI 37, 70) and 62% (80% CI 44, 77) for both endpoints respectively. In the image below you can see the individual response rates at both once a day (QD) and twice a day (BID) dosing.

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As presented at the December 2019 ASH annual meeting, rilzabrutinib has been well-tolerated at all doses studied, whether given as a monotherapy or with allowed concomitant ITP therapy (thrombopoietin and/or steroids), with no reported treatment related bleeding or thrombotic events. Related treatment emergent adverse events (TEAEs) were reported in 35% of patients and were all grade 1 or 2. The most frequent TEAEs deemed by the investigator to be related to rilzabrutinib therapy were nausea (26%), diarrhea (23%), abdominal distension (10%) and fatigue (10%) — all mild or moderate in severity.

Preclinical Data

We presented preclinical data in 2017 which indicated that the addition of therapeutically relevant concentrations of rilzabrutinib did not interfere with normal platelet aggregation responses in blood samples from both healthy volunteers and ITP patients. These results contrast with ibrutinib, the leading marketed BTK inhibitor, which demonstrated in the same preclinical study a significant reduction in platelet aggregation responses in blood samples from healthy volunteers.

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Rilzabrutinib for the Treatment of IgG4-Related Disease

Disease Background

IgG4-RD is an immune-mediated disease of chronic inflammation and fibrosis that, if left untreated, can lead to severe morbidity including organ dysfunction and organ failure, which can be fatal. IgG4-RD typically manifests with multiple organ involvement including but not limited to exocrine glands, GI tract organs (liver, pancreas), and kidneys. The American College of Rheumatology (ACR) and the European League Against Rheumatism (EULAR) published new IgG4-RD diagnosis and treatment guidelines in the January 2020 issue of Arthritis and Rheumatology. While awareness and recognition of IgG4-RD is growing,  the exact prevalence remains unknown, with estimates ranging from 40,000 to 180,000 in the United States alone.

Limitations of Current Therapies

Treatment is typically glucocorticoids (GCs), however, patients often relapse after GCs are tapered and thus require chronic GC dosing, which can lead to severe and debilitating side effects. Rituximab has been shown to have an effective clinical response; however, patients frequently relapse after treatment as well. Recent advances in the field have led to recognition of this disease and the many unmet needs for the patients diagnosed with it.

Our Solution

We believe rilzabrutinib can potentially lead to positive outcomes in IgG4-RD by impacting many of the driving features of the disease, including inflammation, allergic components (IgE and eosinophils), monocytes, macrophages (involved in fibrosis), and B cells implicated in initiation and maintenance of disease. We anticipate initiating a Phase 2 clinical trial in the first half of 2020.

PRN473 Topical for the Treatment of Immune-mediated Diseases

PRN473 Topical, an additional wholly owned drug candidate, is a reversible covalent BTK inhibitor in a topical formulation. Given the abundance of immune cells in skin and their role in immune-mediated diseases, PRN473 Topical is being developed for immune-mediated diseases that could benefit from localized application to the skin.  

Design of the Phase 1 Clinical Trial of PRN473 Topical in Healthy Volunteers

We have initiated a Phase 1, randomized, double-blind, placebo-controlled, ascending single dose trial with a repeat dose arm to evaluate the safety, tolerability and pharmacokinetics of PRN473 Topical in healthy adult participants. The trial is being conducted in Australia and is anticipated to be completed in 2020.

PRN2246/SAR442168 for the Treatment of Multiple Sclerosis

We designed PRN2246/SAR442168, another BTK inhibitor in clinical development, as a potential therapy for diseases characterized by neuro-inflammation. PRN2246/SAR442168 is an oral, irreversible covalent BTK inhibitor that was designed to access the brain and spinal cord by crossing the blood-brain barrier and, subsequently, to impact local immune cells within the CNS, including B cells. We have entered into a collaboration agreement with Sanofi for development of PRN2246/SAR442168, have completed our Phase 1 clinical trial of PRN2246/SAR442168, and have confirmed human CNS exposure in a dedicated arm of that trial. Sanofi has taken on all further development activities. In February 2020, Sanofi announced data for the Phase 2b clinical trial in relapsing MS. Specifically, Sanofi announced that PRN2246/SAR442168 met its primary endpoint, significantly reduced disease activity associated with MS as measured by MRI and was well tolerated in the Phase 2b trial with no new safety findings. Sanofi also announced that it anticipates initiating four Phase 3 clinical trials in relapsing-remitting (RMS), primary progressive (PPMS) and secondary progressive (SPMS) forms of MS in the middle of 2020.

Collaboration with Sanofi

In November 2017, we entered into a strategic collaboration with Sanofi, or the Sanofi Agreement, for an exclusive license to PRN2246/SAR442168 and backup molecules in MS and potentially other CNS diseases. Under the Sanofi Agreement, we were responsible for completing Phase 1, and Sanofi is responsible for all further clinical development activities. We have completed the Phase 1 trials and Sanofi is taking on all further development activities.  We and Sanofi each have been responsible for certain early development costs, and Sanofi is responsible for all further development and commercialization costs, subject to our Phase 3 option described below. Sanofi announced that it anticipates initiating four Phase 3 clinical trials in relapsing and progressive forms of MS in the middle of 2020.

In December 2017, we received a $40.0 million upfront payment and are eligible to receive development, regulatory and commercial milestones of up to an aggregate of $765.0 million as well as royalties up to the mid-teens. We hold an option to fund a portion of Phase 3 development costs in return for, at our discretion, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in rates up to the high-teens. In May 2018, we amended the Sanofi

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Agreement to include additional activities under the early development plan and to modify the definition of one of the milestone payments. In 2018, we received a total of $25.0 million in milestones for the achievement of multiple early development milestones.  In 2019, we received a $30.0 million milestone payment from Sanofi for the initiation of the Phase 2b clinical trial of PRN2246/SAR442168 in relapsing MS.

Disease Background

MS is considered an inflammatory autoimmune disease of the central nervous system that leads to attacks on the surrounding covers of nerve cells, known as the myelin sheath. The disease is characterized by demyelination and neurodegeneration that manifests clinically as worsening physical disability and other deficits. Although the precise etiology of MS remains unclear, the key pathophysiology is the formation of lesions caused by an aberrant inflammatory cascade. Clinical symptoms include numbness, difficulty walking, visual loss, loss of coordination and muscle weakness. The course of MS is highly varied and unpredictable. About 45% of patients experience ambulatory or walking impairment after the onset of the disease. Many components of the immune system are involved in the disease, including T cells, cytokines and B cells. B cells in the CNS are linked to severity of disease and may be due to chronic, inflammation-inducing B cell generating tissue in the CNS. BTK is critical for B cell differentiation, activation and maturation and also regulates the activation of other immune cells in the periphery and CNS.

 

Approximately 400,000 patients suffer from MS in the United States and globally there are approximately 2.3 million diagnosed patients, approximately 50% of whom are treated with drug therapy. The size of the MS market is expected to be approximately $24.0 billion in 2025. While there are many approved therapies for relapsing forms of MS, there are limited options for patients with progressive forms of MS.

 

Limitations of Current Therapies

Current treatments primarily target cytokine behavior; suppress T cell activation, proliferation, migration, and CNS infiltration; and inhibit B cell activity. These therapies have demonstrated efficacy predominantly in patients whose disease is characterized by an active inflammatory component—mainly relapsing-remitting MS, or RRMS, and relapsing secondary progressive MS, or SPMS—but have proven less effective in patients with primary progressive MS, or PPMS. Optimal management of MS should target inflammation on both sides of the blood-brain barrier. Most drugs are more efficacious in RRMS and generally target T cell activation and cytokines. To date the only approved therapy for PPMS is the recently approved B cell–depleting monoclonal antibody, ocrelizumab.

Our Solution

The role of B cells in the pathogenesis of MS has been clinically validated through the successful clinical use of ocrelizumab, which selectively depletes peripheral CD20-expressing B cells. B cells increase in number in the brain during neuro-inflammation, and they are thought to play a central role in MS pathology through multiple mechanisms including antigen presentation, cytokine secretion and antibody production. The second validation of the mechanism comes from a Merck KGaA Phase 2 trial studying the BTK inhibitor, evobrutinib, in relapsing MS patients that met its primary endpoint of clinically meaningful reductions of gadolinium-containing contrast agents when compared to placebo. Gadolinium normally cannot pass from the bloodstream into the brain or spinal cord due to the blood-brain barrier, but during active inflammation within the brain or spinal cord, as during an MS relapse, the blood-brain barrier is disrupted, allowing gadolinium to pass through and mark areas of active inflammation. In data presented at American Committee for Treatment and Research in Multiple Sclerosis, ACTRIMS, 2019, Dallas TX, evobrutinib 75 mg QD and BID significantly reduced the number of T1 Gd+ lesions vs placebo in patients with active RMS (relapsing MS) over 24 weeks of treatment. A trend towards a reduction in ARR (annual relapse rate) was seen with evobrutinib 75mg QD and BID. A dose response relationship was observed for both measures. These results would seem to represent clinical proof of concept for a BTK inhibitor in the treatment of MS.

Accumulating evidence also suggests that microglial cells play a critical role in the inflammatory cascade in neuro-inflammatory disorders and preclinical studies demonstrated the importance of the microglial function in antibody-mediated demyelination. Thus, penetration of the CNS and periphery would give PRN2246/SAR442168 the potential to target multiple pathways involved in the initiation and propagation of CNS inflammation and autoimmune diseases such as MS. As an oral drug candidate designed to reach not only peripheral but also central pathogenic autoantibodies within the CNS, we believe PRN2246/SAR442168 represents a unique opportunity to affect this devastating disease.

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B cells are key drivers in MS, regulating autoimmunity and neuro-inflammatory responses. The action of BTK inhibition on both sides of the blood-brain barrier potentially offers broad activity, compared to other agents in the treatment of MS, to target systemic autoimmunity and local CNS inflammation. This profile of a targeted CNS penetrant immunosuppressive or immunomodulator, as shown in the table below, may have broad applicability in MS and across other neuro-inflammatory diseases.

 

 

Phase 2b Clinical Trial of PRN2246/SAR442168 in MS

Sanofi conducted a Phase 2b trial, which was a randomized, double-blind, placebo-controlled, cross-over, 12-week dose-ranging trial evaluating PRN2246/SAR442168 in patients with recurring MS. In one group, patients (n=60) received one of four doses of PRN2246/SAR442168 for the first 12 weeks, then crossed over to placebo for four weeks. The other group of patients (n=60) received four weeks of placebo before crossing over to one of four doses of PRN2246/SAR442168, providing data that can be utilized in estimating a dose-response curve and minimizing exposure to placebo. In February 2020, Sanofi announced that PRN2246/SAR442168, met the primary endpoint in the Phase 2b clinical trial. Sanofi also announced that it anticipates initiating four Phase 3 clinical trials in relapsing and progressive forms of MS in the middle of 2020.

As announced by Sanofi, PRN2246/SAR442168, an oral, brain-penetrant, selective small molecule, significantly reduced disease activity associated with MS as measured by MRI, and was well tolerated in the Phase 2b trial with no new safety findings. Sanofi further announced that in the trial, PRN2246/SAR442168 demonstrated a dose-response relationship in the reduction of new active gadolinium (Gd)-enhancing T1-hyperintense brain lesions after 12 weeks of treatment. Sanofi will use the data from the Phase 2b trial to inform selection of the Phase 3 dose. Sanofi also announced that, as of the date of its announcement, 95% of eligible patients in the Phase 2b study enrolled in the long-term safety follow-up study.  

Sanofi expects to present results from its Phase 2b trial, including advanced imaging endpoints, at an upcoming medical conference.

According to Sanofi, its four Phase 3 trials will investigate the effects of PRN2246/SAR442168 on MS relapse rates, disability progression, and underlying central nervous system damage. The Phase 3 trials are planned across the MS spectrum including: Relapsing-Remitting (RMS) vs. Aubagio^®; Primary Progressive (PPMS) vs. placebo, and Secondary Progressive (SPMS) vs. placebo.  Sanofi estimated its target submission dates for the studies as the first half of 2024 for RMS and the first half of 2025 for both PPMS and SPMS.

Phase 1 Clinical Trial of PRN2246/SAR442168

Principia conducted a Phase 1 trial, which was a first-in-human randomized, double-blind, placebo-controlled trial to evaluate the safety and tolerability of five single ascending dose, or SAD, cohorts (5 to 120 mg), and five multiple ascending dose, or MAD, cohorts (7.5 to 90 mg once daily) of PRN2246/SAR442168 in healthy subjects. Secondary objectives included assessment of pharmacokinetics (PK) and a pharmacodynamic (PD) assessment of peripheral BTK occupancy. The study enrolled 94 subjects, 74 of whom received study drug while the remaining 20 subjects received placebo.  The MAD cohorts consisted of ten days of treatment. In an additional cohort, cerebral spinal fluid (CSF) exposure was measured through lumbar puncture after a single 120 mg dose. The data was presented at the 2019 ACTRIMS annual meeting.  

 

PRN2246/SAR442168 exposure increased with dose and with the expected rapid absorption and clearance profile. BTK occupancy increased in a dose dependent manner—high levels of peripheral BTK occupancy were achieved after single doses of 30 mg and higher. In the MAD portion of the study, after 10 days, BTK occupancy approached maximal levels in the lowest dose group (7.5 mg) studied.  CSF exposure was achieved in all subjects who underwent lumbar puncture, confirming blood-brain barrier

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permeability. The potential to impact B cell driven inflammation in the CNS will be evaluated in the next phase of development. PRN2246/SAR442168 was well tolerated in the study, with all treatment related events being mild in nature (Grade 1). There were no clinically significant or drug related changes in vital signs, ECG parameters, or laboratory values except for one mild treatment related event of decreased platelet count in a participant that presented with low (not clinically significant) platelet values at screening. Study drug was withdrawn following dosing on day 9 and the AE was considered resolved 15 days after onset.

Preclinical data

In preclinical studies, we observed effects on disease-relevant B cell and Fc-mediated mechanisms, which we believe support the rationale for use of PRN2246/SAR442168 in the treatment of MS. We observed dose-dependent protection from disease induction in a mouse model of experimental autoimmune encephalomyelitis, or EAE, a neuro-inflammatory model with similarities to human MS, with durable BTK target occupancy confirmed for up to 24 hours in both the periphery and CNS of treated mice. We believe these results provide evidence that PRN2246/SAR442168 has the potential to address both peripheral and neuro-inflammation driven by B cells, macrophages and microglia.

Oral Immunoproteasome Inhibitor Program

We believe selective blockade of protein degradation in immune cells by inhibiting the immunoproteasome has potential for the treatment of immunological diseases. We are applying our Tailored Covalency approach to purpose-design highly selective, oral small molecule inhibitors of the immunoproteasome, which exists only in immune cells. By selectively blocking unique targets in the immunoproteasome, our molecules are designed to alter undesired immune responses including pro-inflammatory cytokine production, aberrant T cell function and effects on antigen presentation.

We have discovered multiple series of highly selective, oral small molecule inhibitors of the immunoproteasome. Selective inhibitors of the immunoproteasome have demonstrated activity in preclinical autoimmune and inflammatory studies. These inhibitors are better tolerated than other proteasome and immunoproteasome inhibitors, in part because they spare the constitutive proteasome. Therefore, our inhibitors have potential utility in multiple autoimmune diseases.

In June 2017, we entered into a collaboration agreement with AbbVie to develop therapies to bring the power of oral proteasome inhibition safely into the field of immunology for the treatment of inflammation and autoimmune disorders. Under this collaboration agreement, we received a $15.0 million upfront payment in June 2017.  In March 2019, we announced a mutual agreement with AbbVie to end our collaboration and to reacquire rights to the program following an assessment by AbbVie that there was no longer a strategic fit of our highly selective oral immunoproteasome inhibitors’ biologic profiles relative to AbbVie’s desired disease areas of focus.  We and AbbVie agreed to conclude the collaboration effective March 2019. There are no further financial obligations between AbbVie and us.

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PRN1371 FGFR Inhibitor Program

We believe that complete inhibition of an oncogenic target is necessary for the treatment of cancer, and that next-generation, irreversible covalent drugs have typically out-performed the traditional, reversible predecessors. Furthermore, we used our Tailored Covalency approach to design PRN1371, an oral irreversible inhibitor, to be highly selective for fibroblast growth factor receptors, or FGFR, 1-4 in order to avoid the toxicities that have plagued many of the previous FGFR inhibitors and potentially limited their utility. In January 2020, we announced we suspended the PRN1371 clinical program to focus our portfolio on immune-mediated diseases.

Our Solution

The dose-escalation portion of our Phase 1 trial in an “all-comer” metastatic oncology patient population has identified a well-tolerated 35 mg daily dose with favorable pharmacodynamic data to advance into future clinical trials in solid tumors, with an initial focus on metastatic bladder cancer. The irreversible covalent binding allows for a highly potent effect on the target protein, and we believe that the selectivity profile of PRN1371 has led to the enhanced tolerability observed to date. Several of the stable disease patients remained on treatment for over 12 months, suggesting both sustained benefit for these highly pre-treated patients, as well as tolerability of the drug. We initiated the expansion cohort of our Phase 1 clinical trial in patients with metastatic urothelial carcinoma (mUC) having FGFR alterations. Nine bladder cancer patients with FGFR alterations had enrolled in the expansion cohort: of those, two patients had a partial response and three patients had stable disease. While we have announced suspension of efforts on PRN1371, the drug demonstrated activity and was well tolerated.

Pharmacokinetics, Pharmacodynamics, Efficacy and Safety

Length of treatment of the 36 patients dosed in the dose-escalation portion of our Phase 1 trial varied from days to well over 12 months in several patients.

PRN1371 was rapidly absorbed following oral administration and rapidly cleared from the body, with a short plasma half-life of approximately one and a half hours. Robust increases of greater than 60% in the biomarker of serum phosphate were seen at the recommended expansion cohort dose of 35 mg daily.

As presented at the AACR Bladder Cancer: Transforming the Field meeting in May 2019, administration of PRN1371 daily doses up to 35 mg was well-tolerated, with the higher dose level of 25 mg twice daily having noticeably more adverse events. Six of the 26 serious adverse events, or SAEs, occurring in five patients were deemed by the investigator to be related to PRN1371. Five were seen with twice-daily dosing and included nausea (n=two), vomiting, creatinine increase, and depressed level of consciousness, and one was seen with a daily dose of 35 mg with subcapsular cataract. No study discontinuations were attributed to adverse events in the dose escalation study.

With a well-tolerated and pharmacologically active dose identified, we initiated the expansion cohort of our Phase 1 clinical trial in patients with metastatic urothelial carcinoma (mUC) having FGFR alterations. In January 2020, we announced that we have decided to suspend the PRN1371 program to focus the portfolio on immune-mediated diseases. While we have announced suspension of efforts on PRN1371, as of February 2020, nine metastatic bladder cancer patients had enrolled in the expansion portion of the study and two partial responses have been noted in this cohort.

Cumulatively, as of a safety data lock of July 2019, 41 patients had received PRN1371, 36 in the dose escalation cohort and five bladder cancer patients in the expansion cohort. Two patients from the dose escalation cohort continued on treatment subsequent to the completion of this portion of the study. Overall, a total of 30 SAEs have occurred in the course of the study. One patient in the expansion cohort exited the study early due to two SAEs of small bowel obstruction which were assessed as not related to study drug. The most common treatment emergent adverse events (>10%) observed in the study are shown in the table below.

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Number of Patients With Treatment Emergent Adverse Events Up to July 2019 by Severity

 

 

Our Intellectual Property

Intellectual Property

Intellectual property is critical to our business and we use it to protect our drug candidates, platform technologies, novel biological discoveries such as new uses for targets we are pursuing, and to maintain our competitive edge. We choose intellectual property protection that would provide the most robust protection for the asset that is being protected. For example, since patents provide the strongest form of intellectual protection for marketed drugs, we file for patent protection for our clinical candidates. During the discovery phase of our drug candidates, we pursue patent protection for composition of matter, including drug product, method of use, process of manufacture, and key intermediates. During the development phase of our drug candidates we continue to file patent applications as new inventions are made such as polymorphic forms, formulations, commercial processes, and new uses to increase our commercial success. Since patent protection is a territorial right, we file for patent protection for our drug candidates in at least major pharmaceutical markets such as the United States, Canada, Japan, European Union, Eurasia, China, South Korea, Australia and Mexico. As of February 2020, we have over 25 issued U.S. patents and over 30 patents issued outside of the United States.

Occasionally, it may be necessary or useful for the conduct of our business to obtain rights to third-party intellectual property. We usually obtain rights to third-party intellectual property through exclusive or non-exclusive license or through assignment. For example, we have obtained exclusive licenses under the UC Agreements, to patents and patent applications covering our platform technologies under which we can make, have make, use, have use, sell, have sell, import, or have import products covered by these applications, including five licensed patents as of June 2018. Issued patents and any patents issuing from these applications in United States and abroad would expire between 2024 and 2033 without any potential patent term extensions. However, if we are not able to obtain rights to third-party intellectual property necessary or useful to our business on reasonable commercial terms, our business could be materially harmed.

Patent Term Extension and Patent Term Adjustment

The term of a patent in most countries, including the United States, is 20 years from the effective filing date of the patent assuming maintenance fees are paid, the patent has not been terminally disclaimed, and the patent has not been invalidated through administrative and/or court proceedings. For pharmaceutical products, however, the patent term covering the approved product, can be extended beyond the 20-year term if certain statutory and regulatory requirements are satisfied. In the United States one way the patent term of a patent covering the approved pharmaceutical product can be extended is under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension, or PTE, of up to five years, but not to exceed fourteen years of patent term, for a patent covering an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process. In the future, if and when our drug candidates are approved by the FDA or foreign regulatory authorities, we will apply for patent term extensions on patents covering the approved products if the patents are eligible for such extension.

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In addition, in the United States a patent term may be extended by patent term adjustment or PTA, which compensates a patent for administrative delays by the U.S. Patent and Trademark Office, or USPTO, in examining and granting a patent unless the patent is terminally disclaimed over an earlier filed patent. PTE and PTA extensions are not mutually exclusive; however, extension under the PTA does not have any extension limits. We cannot however provide any assurance that any of our present or future patents will be eligible for patent term adjustment or patent term extension.

The patent portfolio for our platform technologies and most advanced programs is summarized below.

Tailored Covalency Platform Technologies

The patent portfolio for the Tailored Covalency platform technologies includes both our own issued and pending patents and a series of issued patents and patent applications licensed exclusively to us as part of our license agreements with the Regents of the University of California. Issued patents and patents issuing from the applications will expire between 2024 and 2038 without any potential patent term extensions.

Rilzabrutinib

Rilzabrutinib is a reversible covalent inhibitor of BTK and is based on our proprietary Tailored Covalency platform. The patent portfolio for rilzabrutinib includes issued patents and patent applications wholly owned by us and a patent/patent application as part of the UC Agreements. The wholly owned patent portfolio includes issued patents and patent applications covering composition of matter, methods of making, method of use, intermediates, and pharmaceutical compositions for site specific delivery. The issued composition of matter patents covering rilzabrutinib in United States and abroad will expire in 2033 without any potential patent term extensions. Additional patents and patents issuing from pending patent applications expire between 2032 and 2037 without any potential patent term extensions.

PRN2246/SAR442168

PRN2246/SAR442168 is an irreversible covalent inhibitor of BTK and is purpose-designed to cross the blood-brain barrier to enable treatment of inflammatory diseases within the CNS. The patent portfolio for PRN2246/SAR442168 includes issued patents and patent applications wholly owned by us. The wholly owned patent portfolio includes patents and patent applications covering composition of matter, method of use and pharmaceutical compositions for site specific delivery of PRN2246/SAR442168. The issued composition of matter patent covering PRN2246/SAR442168 in the United States and abroad will expire in 2036 without any potential patent term extensions.

PRN473 Topical

PRN473 Topical is a topical covalent BTK inhibitor. The patent portfolio for PRN473 Topical includes issued patents and patent applications wholly owned by us and covers composition of matter, methods of making, method of use, intermediates, and pharmaceutical compositions. The issued composition of matter patent covering PRN473 Topical in the United States and abroad will expire in 2033 without any potential patent term extensions.

PRN1371

PRN1371 is an irreversible covalent inhibitor of FGFR. The patent portfolio for PRN1371 includes issued patents and patent applications wholly owned by us and covers composition of matter, methods of making, method of use, intermediates, and pharmaceutical compositions. The issued composition of matter patent covering PRN1371 in the United States and abroad will expire in 2035 without any potential patent term extensions.

Immunoproteasome Inhibitor

We are designing oral inhibitors of the immunoproteasome. These inhibitors reduce production of a number of cytokines for the treatment of autoimmune disorders. The patent applications cover composition of matter (including compounds and pharmaceutical compositions) as well as methods of use. One application will expire in 2035, and the others will expire in 2038 without any potential patent term extensions.

Our ability to protect and maintain intellectual property protection for our drug candidates and platform technologies depends on breadth of claims in issued patents in the United States and abroad and our ability to enforce them. Since the patent prosecution process is an unpredictable process, there are no assurances that patent applications we have filed or licensed from third parties will result in the issuance of patents. In addition, we cannot predict the scope of claims that may be allowed and whether they would be enforceable. In addition, if there are any third party dominating patent(s) that cover our drug candidates, it will impact our ability to

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commercialize our drug candidates until we obtain a license to such patent(s). If we are unsuccessful in obtaining a license to the patent on reasonable terms or the patentee is unwilling to give us a license, we may have to bring administrative proceedings such as inter party review, post grant proceeding, opposition proceedings to cancel the blocking patent claims, or invalidation proceeding in a court of law. This could result in substantial costs to us or delay in commercialization of our drug candidates even if we are successful. Additionally, since the drug development and regulatory review process is lengthy and unpredictable, it is possible that patents covering such drug candidates may expire prior to commercialization or remain in force for a short duration following commercialization thereby reducing our marketing exclusivity which may adversely affect our business and financial condition.

For the conduct of our research and development activities we may use services of third parties such as contractors, scientific advisors, and consultants and may have to disclose our proprietary information to such third parties. We protect our intellectual property in these situations by entering into service or consulting agreements with such third parties under which they are obligated to assign any invention arising from the services to us, maintain our proprietary information confidential, and not use confidential information of others. These agreements may however be breached by the above parties and we may not have adequate remedies for any breach. In addition, to the extent, that the above parties utilize intellectual property of others in their work for us without our knowledge, disputes may arise as to the ownership of resulting invention and know-how which may adversely impact our business.

In addition to patent protection, we utilize trade secrets to protect proprietary information related to our research tools, know how, continuing technological innovation relating to our platform technologies and to help maintain our competitive advantage. We own two registered trademarks for “Principia Biopharma” and “Tailored Covalency.” We enter into confidentiality agreements with our employees, contractors, scientific advisors, and consultants to protect our proprietary information. Trade secrets and know-how can be difficult to protect, and we anticipate that with respect to our platform technologies, these trade secrets and know-how may over time be disseminated within the industry through independent development.

Our Licenses and Collaborations

Sanofi License Agreement related to PRN2246/SAR442168

In November 2017, we entered into the Sanofi Agreement for an exclusive license to PRN2246/SAR442168 and backup molecules for development in MS and potentially other CNS diseases. Under the Sanofi Agreement, we will complete Phase 1, and Sanofi will take on all further development activities. We and Sanofi were each responsible for certain early development costs, and Sanofi will be responsible for all further development and commercialization costs, subject to our Phase 3 option described below.

Sanofi has an exclusive license for PRN2246/SAR442168 and its backups for the CNS field, which includes indications of the central nervous system, retina and ophthalmic nerve. We have agreed not to develop other BTK inhibitors within the CNS field, and Sanofi has agreed not to develop PRN2246/SAR442168 or its backups for any indications outside the CNS field. In the event that we cease all development and commercialization of our other BTK inhibitors or unilaterally decide to offer Sanofi a field expansion, Sanofi could expand its field upon payment to us of a field expansion payment as well as potential milestones and royalties as related to the expanded field.

In December 2017, we received a $40.0 million upfront payment. Under the Sanofi Agreement, we may receive development, regulatory and commercial milestones up to an aggregate of $765.0 million, as well as tiered royalties up to the mid-teens. After our receipt of the Phase 2 data, the briefing package for Sanofi’s end of Phase 2 meeting with the FDA, and the Phase 3 plan and budget we will decide whether to exercise our option to fund a portion of the development costs of Phase 3 trials. In return for our portion of the development costs, we may elect either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in tiered royalties up to the high-teens. Only the additional royalty option would be available if we develop rilzabrutinib for major enumerated indications overseen by the FDA’s Division of Pulmonary, Allergy and Rheumatology Products or in the event of a certain change of control involving us and certain Sanofi competitors. Royalties are subject to specified reductions and are payable, on a product-by-product and country-by-country basis until the later of the date that all of our patent rights that claim a composition of matter of such product expire in such country, the date of expiration of regulatory exclusivity for such product in such country, or the date that is ten years from the first commercial sale of such product in such country.

In May 2018, we amended the Sanofi Agreement to include additional activities under the early development plan and to modify the definition of one of the milestone payments. In 2018, we received a total of $25.0 million for the achievement of multiple early development milestones. In 2019, we received a $30.0 million milestone payment from Sanofi for the initiation of the Phase 2b clinical trial of PRN2246/SAR442168.

The Sanofi Agreement expires on a country-by-country basis upon expiration of all royalty payment obligations for all products in such country, except in the case of the United States, if we elect to fund a portion of Phase 3 development costs and share in profits and losses in the United States. Either party may terminate the Sanofi Agreement in the event of an uncured material breach by the other party or a bankruptcy or insolvency of the other party. Subject to certain exceptions, we may terminate the Sanofi Agreement with respect to specific patents licensed under the agreement in the event that Sanofi challenges the validity, enforceability or patentability of such patents. Sanofi may terminate the Sanofi Agreement either in its entirety or on a regional basis upon prior written notice to us, including a shorter notice period in the event of a safety concern or failure of the product to successfully complete certain early-stage development studies. Upon any termination, all licenses granted to Sanofi under the Sanofi Agreement terminate.

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Sanofi has the right to terminate the Sanofi Agreement upon prior written notice to us in the event of our change of control. Additionally, if the agreement is not terminated in the event of any such change of control as a result of an acquisition of our business by certain competitors of Sanofi, our right to receive a share in profits and losses in the United States will cease, and we will only have the right to receive increased tiered royalties up to the high-teens in the event we exercise our option to fund a portion of Phase 3 development costs.

AbbVie Development and License Agreement related to Oral Immunoproteasome Inhibitors

In June 2017, we entered into the AbbVie Agreement related to the research and development of oral immunoproteasome inhibitors and received an upfront payment of $15.0 million. In March 2019, we announced a mutual agreement with AbbVie to end our collaboration and to reacquire rights to the program, following an assessment by AbbVie that there is no longer a strategic fit of our highly selective oral immunoproteasome inhibitors’ biologic profiles relative to AbbVie’s desired disease areas of focus. There are no further financial obligations between AbbVie and us.

University of California License Agreements

In November 2009, we entered into a license agreement, or the First Agreement, with the Regents of the University of California, or the Regents, which was amended in October 2010, February 2011, and amended and restated in May 2012. In September 2011, we entered into a separate license agreement, or the Second Agreement, with Regents which was amended and restated in December 2013. We refer to the First Agreement and the Second Agreement together as the UC Agreements. Under the UC Agreements, the Regents have granted to us exclusive, worldwide licenses, with the right to grant sublicenses, under the Regents’ patent rights in certain patent applications to make, use, sell, offer for sale, and import products and services and practice methods covered by such patent applications in all fields of use.

We have paid the Regents license fees of $30,000 and $10,000 under the First Agreement and the Second Agreement, respectively, and we are required to pay the Regents annual license maintenance fees equal to $30,000 and $10,000 for the First Agreement and Second Agreement, respectively, prior to launching any licensed product. We may be obligated to make one-time regulatory and development milestone payments under the First Agreement or the Second Agreement for future drug candidates. We are obligated to pay the Regents tiered royalty payments in the low single digits on net sales of the licensed products. The royalty is payable under the First Agreement or the Second Agreement, but not both. For licensed products under the First Agreement, we have to pay a minimum annual royalty payment of $50,000 beginning in the calendar year after the first commercial sale of a licensed product occurs. The royalties are subject to standard reductions and are payable until the patents upon which such royalties are based expire or are held invalid. The patents issuing under the First Agreement will expire between 2024 and 2030 and under the Second Agreement will expire in 2033, subject to any potential patent term extensions. Additionally, we are obligated to pay the Regents payments on non-royalty licensing revenue we receive from our sub-licensees for products covered by UC patents that were identified and developed by us or any third parties. The UC Agreements require us to make IPO milestone payments under each of the First Agreement and Second Agreement upon the closing of an IPO. Pursuant to the UC agreements, we made IPO milestone payments totaling approximately $140,000 to the Regents in early October 2018.

Under the UC Agreements, we are required to diligently proceed with the development, manufacture, regulatory approval, and sale of licensed products which include obligations to meet certain development-stage milestones within specified periods of time and to market the resulting licensed products in sufficient quantity to meet market demand. We have the right and option to extend the date by which we must meet any milestone in one year extensions by paying an extension fee for second and subsequent extensions, provided we can demonstrate we made diligent efforts to meet the milestone.

These UC Agreements with the Regents continue until the expiration or abandonment of the last of the patent rights licensed under the applicable First or the Second Agreement unless terminated by operation of law. We may terminate the license under the Agreements wholly or on a country-by-country basis without cause at any time by giving prior written notice to the Regents. The Regents may terminate one or both of the Agreements for an uncured breach by us of a material term of the Agreement(s) in question.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary drugs. While we believe that our knowledge, experience and scientific resources provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any drug candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

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We are aware of several other drug candidates in earlier stages of development as potential treatments for the indications that we intend to target. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs that are safer, more effective, more convenient, less expensive or with a more favorable label than rilzabrutinib, PRN2246/SAR442168, PRN473 Topical or any other drug candidate that we may develop. Our competitors also may obtain FDA or other regulatory approvals for their drug candidates more rapidly than we may obtain approval for our drug candidates, which could result in our competitors establishing a strong market position before we are able to enter the market. Many of the companies against which we are competing, or against which we may compete in the future, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved drugs than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

BTK Inhibitors

There are a number of BTK inhibitors in development. These competitive BTK inhibitors span across multiple indications that may or may not be targeted with our BTK inhibitor franchise. We are aware of many different companies including pharmaceutical and biopharmaceutical companies that are developing BTK inhibitors for immune-mediated diseases, including AbbVie, AstraZeneca, Biogen, Bristol-Myers Squibb, Genentech, Gilead, Innocare, Merck KGaA, Novartis, and Taiho. Certain of these are at a similar stage of development as rilzabrutinib. We are aware of one other company, Merck KGaA, developing a BTK inhibitor for MS. Currently, we are not aware of other topical BTK inhibitors in the clinic.

Pemphigus

Only one drug, rituximab, has been approved for the treatment of PV in the United States. In Europe, CS and azathioprine are the only approved therapies for the treatment of pemphigus. Other treatments commonly used for pemphigus include various other immunosuppressants and IVIg. We are also aware of FcRn-targeted molecules being developed for the treatment of pemphigus.

ITP

Steroids and IVIg are commonly used as first-line treatment for the treatment of ITP. Splenectomy, thrombopoietin receptor agonists such as romiplostim and eltrombopag, the off-label use of anti-CD20 rituximab, as well as the recently approved Syk inhibitor, fostamatinib, are used as second-line or third-line treatment for the disease. FcRn-targeted molecules are currently in development for ITP.

MS

Current treatments primarily target cytokine behavior; suppress T cell activation, proliferation, migration and CNS infiltration; and inhibit B cell activity. These therapies have demonstrated efficacy predominantly in patients whose disease is characterized by an active inflammatory component—mainly RRMS or SPMS—but have proven less effective in patients with PPMS. Optimal management of MS should target inflammation on both sides of the blood-brain barrier.

Commercialization Plans

Our aim is to become a fully integrated biopharmaceutical company. Doing so will enable us to pursue our mission to significantly improve the lives of patients suffering from immune-mediated diseases. Our initial focus for our wholly owned drug candidates is to develop them in smaller immune-mediated disease indications allowing us to efficiently commercialize our drug candidates in the United States on our own and potentially worldwide in the longer term. We have initiated the process for preparing for commercial launch of rilzabrutinib in pemphigus. We, however, may establish collaborations with pharmaceutical companies to leverage their capabilities to maximize the potential of our drug candidates. For our program addressing larger patient populations, we have entered into a collaboration with Sanofi and they are responsible for commercialization of PRN2246/SAR442168. We believe this approach will allow us to successfully commercialize our wholly owned candidates while relying on our partner for more resource intensive programs.

Manufacturing and Supply

We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of our drug candidates for preclinical testing and clinical development, as well as for manufacture of any drugs that we may commercialize. To date, we have obtained active pharmaceutical ingredients, or API, for rilzabrutinib, PRN2246/SAR442168, PRN473 Topical and PRN1371 for our preclinical testing and clinical development from

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different third-party API and drug product manufacturers in multiple global regions. We obtain our preclinical and clinical supplies from these manufacturers on a purchase order basis and currently do not have long-term supply arrangements in place. We are in the process of implementing a redundant and globally diverse supply chain for rilzabrutinib utilizing third party manufacturers in China, Europe and North America. For all of our drug candidates, we intend to identify and qualify redundant manufacturers, with long-term agreements in place, prior to submission of a new drug application, or NDA, to the FDA and/or a marketing authorization application to the European Medicines Agency. Rilzabrutinib, PRN2246/SAR442168 and PRN473 Topical are compounds of low molecular weight, generally called small molecules. They can be manufactured in reliable and reproducible synthetic processes from readily available starting materials. The chemistry is amenable to scale-up and does not require unusual equipment in the manufacturing process. We expect to continue to develop drug candidates that can be produced cost-effectively at contract manufacturing facilities.

Government Regulation

Government authorities in the United States at the federal, state and local level and in other countries regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug products. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific for each regulatory authority, submitted for review, and approved by the regulatory authority.

U.S. Drug Development

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and its implementing regulations. Drugs also are subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or post-market may subject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product recalls or market withdrawals, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.

Any of our future drug candidates must be approved by the FDA through an NDA process before they may be legally marketed in the United States. The process generally involves the following:

The data required to support an NDA are generated in two distinct developmental stages: preclinical and clinical. The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for any future drug candidates will be granted on a timely basis, or at all.

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Preclinical Studies and IND

The preclinical developmental stage generally involves laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which support subsequent clinical testing. The sponsor must submit the results of the preclinical studies, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational product to humans, and must become effective before human clinical trials may begin. Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal studies to assess the potential for adverse events and in some cases to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations for safety/toxicology studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things, to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time, the FDA raises concerns or questions related to one or more proposed clinical trials and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.

Clinical Trials

The clinical stage of development involves the administration of the investigational product to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Furthermore, each clinical trial must be reviewed and approved by an Institutional Review Board (IRB) for each institution at which the clinical trial will be conducted to ensure that the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative, and must monitor the clinical trial until completed. There also are requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.

A sponsor who wishes to conduct a clinical trial outside of the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an NDA. The FDA will accept a well-designed and well-conducted foreign clinical trial not conducted under an IND if the trial was conducted in accordance with GCP requirements and the FDA is able to validate the data through an onsite inspection if deemed necessary.

Clinical trials generally are conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may overlap.

Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.

Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the drug, findings from animal or in vitro testing

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that suggest a significant risk for human subjects and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure.

Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether a trial may move forward at designated check points based on access to certain data from the trial. Concurrent with clinical trials, companies usually complete additional animal studies and also must develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product and, among other things, companies must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that drug candidates do not undergo unacceptable deterioration over their shelf life.

NDA Review Process

Following completion of the clinical trials, data are analyzed to assess whether the investigational product is safe and effective for the proposed indicated use or uses. The results of preclinical studies and clinical trials are then submitted to the FDA as part of an NDA, along with proposed labeling, chemistry and manufacturing information to ensure product quality and other relevant data. In short, the NDA is a request for approval to market the drug for one or more specified indications and must contain proof of safety and efficacy for a drug. The application may include both negative and ambiguous results of preclinical studies and clinical trials, as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and efficacy of a product’s use or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the investigational product to the satisfaction of the FDA. FDA approval of an NDA must be obtained before a drug may be marketed in the United States.

Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a significant user fee. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on NDAs for drug candidates designated as orphan drugs, unless the drug candidate also includes a non-orphan indication.

In addition, under the Pediatric Research Equity Act, an NDA or supplement to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan drug designation.

The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.

The FDA reviews all submitted NDAs before it accepts them for filing, and may request additional information rather than accepting the NDA for filing. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has ten months, from the filing date, in which to complete its initial review of a new molecular entity NDA and respond to the applicant, and six months from the filing date of a new molecular entity NDA designated for priority review. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs, and the review process is often extended by FDA requests for additional information or clarification.

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Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether they comply with cGMP requirements. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The FDA also may audit data from clinical trials to ensure compliance with GCP requirements. Additionally, the FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions, if any. The FDA is not bound by recommendations of an advisory committee, but it considers such recommendations when making decisions on approval. The FDA likely will reanalyze the clinical trial data, which could result in extensive discussions between the FDA and the applicant during the review process. After the FDA evaluates an NDA, it will issue an approval letter or a Complete Response Letter, or CRL. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A CRL indicates that the review cycle of the application is complete and the application will not be approved in its present form. A CRL usually describes all of the specific deficiencies in the NDA identified by the FDA. The CRL may require additional clinical data, additional pivotal Phase 3 clinical trial(s) and/or other significant and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. If a CRL is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, the FDA may decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than the applicant interpret the same data.

Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.

Orphan Drugs

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of disease or condition will be recovered from sales of the product.

Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition 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 to market the same drug for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity by means of greater effectiveness, greater safety or providing a major contribution to patient care or in instances of drug supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different indication but that could be used off-label in the orphan indication. Orphan drug exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval before we do for the same product, as defined by the FDA, for the same indication we are seeking approval, or if a drug candidate is determined to be contained within the scope of the competitor’s product for the same indication or disease. If one of our products designated as an orphan drug receives marketing approval for an indication broader than that which is designated, it may not be entitled to orphan drug exclusivity.

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In the European Union, the European Medicines Agency’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union. Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating, or serious and chronic condition when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biological product or where there is no satisfactory method of diagnosis, prevention, or treatment, or, if such a method exists, the medicine must be of significant benefit to those affected by the condition. In the European Union, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity following approval for the approved therapeutic indication. This period may be reduced to six years if, at the end of the fifth year, the orphan drug designation criteria are no longer met, including where it is shown that the drug is sufficiently profitable not to justify maintenance of market exclusivity. In the European Union, a marketing authorization for an orphan designated product will not be granted if a similar drug has been approved in the European Union for the same therapeutic indication, unless the applicant can establish that its product is safer, more effective or otherwise clinically superior. A similar drug is a product containing a similar active substance or substances as those contained in an already authorized product. Similar active substance is defined as an identical active substance, or an active substance with the same principal molecular structural features (but not necessarily all of the same molecular features) and which acts via the same mechanism.

Post-Approval Requirements

Following approval of a new product, the manufacturer and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and record-keeping requirements, requirements to report adverse experiences, and comply with promotion and advertising requirements, which include restrictions on promoting drugs for unapproved uses or patient populations (known as “off-label use”) and limitations on industry-sponsored scientific and educational activities. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such uses. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Further, if there are any modifications to the drug, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA or supplemental NDA, or sNDA, which may require the development of additional data or preclinical studies and clinical trials.

The FDA may also place other conditions on approvals including the requirement for a Risk Evaluation and Mitigation Strategy, or REMS, to assure the safe use of the product. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.

Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following initial marketing. The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

Other U.S. Regulatory Matters

Research and development activities prior to product approval and manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in the United States in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, or HHS, the Department of Justice, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade

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Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments.

For example, in the United States, prescription drug manufacturers must comply with federal fraud and abuse, data privacy, transparency, and other healthcare laws. These laws include the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce or reward referrals, including the purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act.

Federal civil and criminal false claims laws, including the civil False Claims Act, which can be enforced by private citizens through civil whistleblower and qui tam actions, prohibit, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. Pharmaceutical companies have been prosecuted under these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-covered, uses.

Federal civil and criminal statutes prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of, or payment for, healthcare benefits, items or services.

Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities also are potentially subject to federal and state consumer protection and unfair competition laws.

Payments made to institutions, physicians and other healthcare providers are subject to federal and state regulations, including the Physician Payments Sunshine Act, or the Sunshine Act. The Sunshine Act requires certain manufacturers of drugs, devices, biologicals and medical supplies, with certain exceptions, to report annually to CMS information related to payments and other transfers of value to physicians and other healthcare providers, as prescribed by such law, and teaching hospitals and ownership and investment interests held by physicians and their immediate family members.

Personally identifiable information, under certain conditions, is also subject to data privacy and security regulation by both federal and state governments. The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their implementing regulations, imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information on covered entities and business associates that perform services for covered entities that involve individually identifiable health information.

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive recordkeeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

Many states have similar healthcare statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Certain states require the posting of information relating to clinical studies, pharmaceutical companies to implement a comprehensive compliance program that includes a limit on expenditures for, or payments to, individual medical or health professionals and track and report gifts and other payments made to physicians and other healthcare providers, and certain state and local jurisdictions require the registration of pharmaceutical sales representatives.

The failure to comply with any of these laws or regulatory requirements may subject a pharmaceutical manufacturer to possible legal or regulatory action. Depending on the circumstances, failure to comply with these laws can result in significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, diminished profits and future earnings, integrity oversight and reporting obligations, and the curtailment or restructuring of operations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially affect our business in an adverse way. Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the

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recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.

U.S. Patent-Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of any future drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act. The Hatch-Waxman Act permits restoration of the patent term of up to five years as compensation for patent term lost during product development and FDA regulatory review process. Patent-term restoration, however, cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent-term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may apply for restoration of patent term for our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of a NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Coverage and Reimbursement

Sales of our products will depend, in part, on the extent to which our products will be covered and the adequacy of reimbursement by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. In the United States no uniform policy of coverage and reimbursement for drug products exists. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting reimbursement policies, but also have their own methods and approval process apart from Medicare coverage and reimbursement determinations. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products will be made on a payor-by-payor basis. As a result, the coverage determination process is often a time consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.

The United States government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price-controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. For example, the ACA contains provisions that may reduce the profitability of drug products through increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. Adoption of general controls and measures, coupled with the tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceutical drugs.

The Medicaid Drug Rebate Program, or MDRP, requires pharmaceutical manufacturers to enter into and have in effect a National Drug Rebate Agreement, or NDRA, with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. The ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. On March 23, 2018, the Centers for Medicare & Medicaid Services, or CMS, finalized updates to the NDRA, or the Updated

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NDRA, for the first time in 27 years, to incorporate a number of legislative and regulatory changes, including changes to align with certain provisions of the ACA. In order to have any approved products covered by Medicaid and, if applicable, Medicare Part B, we will be required to enter into the Updated NDRA.

The ACA also expanded the universe of Medicaid utilization by enlarging the population potentially eligible for Medicaid drug benefits. Additionally, CMS has proposed to expand Medicaid rebate liability to the territories of the United States. For a drug product to receive federal reimbursement under the Medicaid or Medicare Part B programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. As of 2010, the ACA expanded the types of entities eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, as 340B drug prices are determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.

As noted above, the marketability of any products for which we receive regulatory approval for commercial sale may suffer if third-party payors fail to provide sufficient coverage and reimbursement. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and adequate reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

In addition, in most foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing and reimbursement vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly lower.

Healthcare Reform

The United States and some foreign jurisdictions are considering or have enacted a number of reform proposals to change the healthcare system. There is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by federal and state legislative initiatives, including those designed to limit the pricing, coverage, and reimbursement of pharmaceutical products, especially under government-funded health care programs, and increased governmental control of drug pricing.

The ACA is one example of such federal legislation and has substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. There remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the Trump administration, to repeal, replace, delay or circumvent certain aspects of the ACA. Although comprehensive repeal legislation has not been passed, legislation affecting the implementation of certain taxes under the ACA, as well as efforts to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole,” have been passed. Congress may still consider additional legislation to repeal, or repeal and replace, other elements of the ACA. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. It is unclear how this decision, future decisions, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA.

In addition to the changes brought about by the ACA, other legislative changes have been proposed and adopted, including aggregate reductions of Medicare payments to providers of 2% per fiscal year and reduced payments to several types of Medicare providers. Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2020 contained further drug price control measures that could be enacted during the budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of Health and Human Services, or HHS has already solicited feedback on some of these measures and has implemented others under its existing authority. For example, in May 2019,

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CMS issued a final rule to allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective on January 1, 2019. Although a number of these and other measures may require additional authorization to become effective, Congress and the Trump administration have each indicated that they will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Employees

As of March 3, 2020, we had 103 full-time employees. All of our employees work in our South San Francisco, California, facility.  None of our employees are represented by a labor union or covered by a collective bargaining agreement.

Available Information

Our website is www.principiabio.com. We use our website as a channel of distribution for company information, and routinely post press releases, presentations and other information on the investor relations page on our website.  

We file or furnish electronically with the U.S. Securities and Exchange Commission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make copies of these reports available free of charge through our investor relations section of our website as soon as reasonably practicable after we file or furnish them with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding the Company and other issuers that file electronically with the SEC.

Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this annual report on Form 10-K or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

 

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Item 1A. Risk Factors.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Annual Report on Form 10-K, including our consolidated financial statements and related notes before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your original investment. This Annual Report on Form 10-K also contains forward-looking statements and estimates that involve risks and uncertainties. These statements, like all statements in this report, speak only as of the date of this Annual Report on Form 10-K (unless another date is indicated), and, except as required by law, we undertake no obligation to update or revise these statements in light of future developments. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.

Risks Related to Limited Operating History and Financial Position

We are a late-stage biopharmaceutical company with a limited operating history. We have never generated any revenue from product sales and may never be profitable.

We are a late-stage biopharmaceutical company focused on developing small molecule drugs for the treatment of unmet medical needs in immune-mediated diseases. We have a limited operating history that may make it difficult to evaluate the success of our business to date and to assess our future viability. In addition, biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Our operations have been limited to organizing and staffing our company, business planning, raising capital, identifying potential drug candidates, establishing licensing and partnering arrangements, undertaking various research and preclinical studies and conducting clinical trials of our drug candidates.

We have never generated any revenue from product sales and have incurred cumulative net losses since we commenced operations. For the twelve months ended December 31, 2019 and 2018, we recorded a net loss of $53.8 million and net income of $18.2 million, respectively. As of December 31, 2019, we had an accumulated deficit of $185.7 million. We expect that it will be several years, if ever, before we have a drug candidate ready for commercialization. We expect to incur increasing levels of operating expenses, and continue to incur net operating losses, for the foreseeable future as we seek to advance our drug candidates. The net operating losses that we incur may fluctuate significantly from quarter to quarter and year to year.

To become and remain profitable, we must develop and eventually commercialize a product with significant product revenue. This will require us to be successful in a range of challenging activities, including, but not limited to:

These challenging activities will increase our operating expenses substantially. We may never succeed in these activities and, even if we succeed in commercializing one or more of our drug candidates, we may never generate revenues that are significant or large enough to achieve profitability. In addition, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown challenges. Because of these numerous risks and uncertainties, we are unable to accurately predict the timing or

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amount of increased expenses or when, or if, we will be able to generate product revenues or achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis and we will continue to incur substantial research and development and other expenditures to develop and market additional drug candidates. Our failure to become and remain profitable could decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will require substantial funding to finance our operations, complete the development and any commercialization of our drug candidates and evaluate future drug candidates. If we are unable to raise funding when needed, we may be forced to delay, reduce or eliminate our product development programs or other operations.

Since our inception, we have used substantial amounts of cash to fund our operations, and we expect our expenses to increase substantially in the foreseeable future. Developing our drug candidates and conducting clinical trials for the treatment of pemphigus, immune thrombocytopenia, or ITP, IgG4-Related Disease, dermatological conditions and any other indications that we may pursue in the future, as well as potentially funding a portion of the costs for Phase 3 clinical trials for treatment of multiple sclerosis, or MS, will require substantial amounts of capital. We will also require a significant additional amount of capital to commercialize any approved products. Accordingly, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, initiate clinical trials of, and seek marketing approval for, our drug candidates. Our expenses could increase beyond expectations if the U.S. Food and Drug Administration, or FDA, or other regulatory authorities require us to perform preclinical, clinical and other studies in addition to those that we currently anticipate. In addition, if we obtain marketing approval for any of our drug candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to continue to incur increasing costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Any such funding may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

As of December 31, 2019, our cash, cash equivalents and marketable securities totaled $367.8 million. Based on our planned operations, we expect our existing cash, cash equivalents and marketable securities as of December 31, 2019, will enable us to fund our current planned operations for at least the next twelve months. In addition, other factors may arise causing us to need additional capital resources sooner than anticipated. We anticipate that we will need to raise substantial additional funds in the future to fund our operations. Our future capital requirements will depend on many factors, including, but not limited to:

Adequate additional financing may not be available when we need it, on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts, or grant rights to develop and market drug candidates, such as rilzabrutinib, that we would otherwise develop and market ourselves.

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Risks Related to the Development and Commercialization of our Drug Candidates

Clinical drug development is a lengthy, expensive and uncertain process. The results of preclinical studies and early clinical trials are not always predictive of future results. Any drug candidate that we advance into clinical trials may not achieve favorable results in later clinical trials, if any, or receive marketing approval.

The research and development of drugs is an extremely risky industry. Only a small percentage of drug candidates that enter the development process ever receive marketing approval. Before obtaining marketing approval from regulatory authorities for the sale of any drug candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our drug candidates in humans. Clinical testing is expensive and can take many years to complete, and its outcome is uncertain.

The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not be further developed or have favorable results in later studies or trials. Clinical trial failure may result from a multitude of factors including, but not limited to, flaws in study design, dose selection, placebo effect, patient enrollment criteria and failure to demonstrate favorable safety or efficacy traits. As such, failure in clinical trials can occur at any stage of testing. A number of companies in the biopharmaceutical industry have suffered setbacks in the advancement of their drug candidates into later stage clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding results in earlier preclinical studies or clinical trials. Based upon negative or inconclusive results, we may decide, or regulatory authorities may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from preclinical trials and clinical trials are susceptible to varying interpretations, and regulatory authorities may not interpret our data as favorably as we do, which may further delay, limit or prevent development efforts, clinical trials or marketing approval. Furthermore, as more competing drug candidates within a particular class of drugs proceed through clinical development to regulatory review and approval, the amount and type of clinical data that may be required by regulatory authorities may increase or change.

We currently have three drug candidates in clinical development, and their risk of failure is high. We are unable to predict if these drug candidates or any of our future drug candidates that advance into clinical trials will prove safe or effective in humans or will obtain marketing approval. Our lead drug candidate, rilzabrutinib, has only been tested in a limited number of patients and healthy volunteers.

If we are unable to complete preclinical studies or clinical trials of current or future drug candidates, due to safety concerns, or if the results of these trials are not sufficient to convince regulatory authorities of their safety or efficacy, we will not be able to obtain marketing approval for commercialization. Even if we are able to obtain marketing approval for any of our drug candidates, those approvals may be for indications or dose levels that deviate from our desired approach or may contain other limitations that would adversely affect our ability to generate revenue from sales of those products. Additionally, patent rights are of limited duration, and patents protecting such drug candidates might expire before, or soon after, we obtain marketing approval leaving us open to competition from biosimilar or generic products. Moreover, if we are not able to differentiate our product against other approved products within the same class of drugs, or if any of the other circumstances described above occur, our business would be harmed and our ability to generate revenue from that class of drugs would be severely impaired.

Enrollment and retention of subjects in clinical trials is expensive and time consuming and could result in significant delays and additional costs in our product development activities, or in the failure of such activities.

We may encounter delays in enrolling, or be unable to enroll and retain, a sufficient number of subjects to complete any of our clinical trials. In addition, certain of our drug candidates are designed to treat orphan indications for which there exist limited patient populations, and we may have to compete for patients if competing drug candidates are also conducting trials, which could result in delays or failure in achieving enrollment of a sufficient number of patients to conduct our 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 of the patient population required for analysis of the trial’s primary endpoints, the nature of the trial protocol, our ability to recruit clinical trial investigators with the appropriate competencies and experience, the existing body of safety and efficacy data with respect to the drug candidate, the number and nature of competing products or drug candidates and ongoing clinical trials of competing drug candidates for the same indication, the proximity of subjects to clinical trial sites, the eligibility criteria for the clinical trial and our ability to obtain and maintain subject consents.

Furthermore, any negative results that we may report in preclinical studies or clinical trials of our drug candidates may make it difficult or impossible to recruit and retain subjects in other clinical trials of that same drug candidate. Delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our drug candidates. Failures in planned subject enrollment or retention may result in increased costs or program delays and could render further development of drug candidates impossible.

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As a company, we have never completed a Phase 3 program or obtained marketing approval for any drug candidate and we may be unable to successfully do so for any of our drug candidates.

We are currently conducting a Phase 3 trial of rilzabrutinib for pemphigus, a Phase 2 extension trial of rilzabrutinib in pemphigus, a Phase 1/2 trial of rilzabrutinib for ITP, and a Phase 1 trial of PRN473 Topical for immune-mediated diseases. In addition, we anticipate initiating a Phase 2 trial of rilzabrutinib in IgG4-RD. We may need to conduct additional clinical trials before initiating any other future Phase 3 clinical trials. The conduct of Phase 3 clinical trials and the submission of a successful new drug application, or NDA, with the FDA or other regulatory authorities, is a complicated process. As an organization, we have never successfully conducted a Phase 3 clinical trial and have limited experience in preparing, submitting and prosecuting regulatory filings, and have not submitted an NDA in the U.S. or other marketing authorization in a foreign jurisdiction before. Consequently, even if our current and planned clinical trials are successful, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to an NDA submission and approval of our drug candidates. In addition, we expect to rely on Sanofi to conduct the Phase 3 trial of PRN2246/SAR442168 under the terms of our collaboration agreement. Failure to commence or complete, or delays in, our planned clinical trials would prevent us from or delay us in commercializing our drug candidates, and failure to successfully complete any of these activities in a timely manner for any of our drug candidates could have a material adverse impact on our business and financial performance.

Our Tailored Covalency platform is novel and unproven, and our strategy relies on discovering, developing and commercializing highly differentiated small molecules using this platform. We may be unable to identify biological targets that work well with our platform or discover and develop new small molecules utilizing our platform.

Our Tailored Covalency platform relies on our ability to successfully identify well-established biological targets that have been historically difficult to inhibit in an effective and safe manner, and subsequently relies on our ability to create drug candidates with relevant levels of potency and selectivity for these targets. This approach to drug discovery is unproven and may not yield any drug candidates viable for regulatory approval or commercial sale. All of our drug candidates are in various stages of development, and none of these candidates have been approved for commercial sale. We cannot assure you that we will be able to successfully identify relevant targets or develop new small molecules to build a pipeline of drug candidates, or that there are a significant number of relevant targets appropriate for our platform. Even if we are able to identify targets for our platform, our efforts to create drug candidates for such targets may not be successful. If our approach does not generate or result in drug candidates with improved features, including effectiveness and dosing convenience, relative to competitive products, or that are not differentiated from other drug candidates in development, either through their efficacy, safety, or toxicity profile or otherwise, our product development activities, business and prospects would be harmed. Furthermore, the covalent drug candidates we develop using our platform may have adverse effects that are unknown and would harm our prospects.

If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our drug candidates.

Before obtaining regulatory approval for the sale of our drug candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our drug candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and the outcome is uncertain. Despite preclinical and early clinical trial data, any drug candidate can unexpectedly fail at any stage of further preclinical or clinical development. The historical failure rate for drug candidates is high. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our proposed indications. In particular, we have conducted certain preclinical studies of our drug candidates rilzabrutinib, PRN2246/SAR442168 and PRN473 Topical, which are in various stages of clinical trials, and we do not know whether these drug candidates will perform in clinical trials as they have performed in preclinical studies. In addition, if our clinical results are not successful, we may terminate the clinical trials for a drug candidate and abandon any further research or studies of the drug candidate. Any delay in, or termination of, our clinical trials will delay and possibly preclude the filing of any NDAs with the FDA and, ultimately, our ability to commercialize our drug candidates and generate product revenues.

We may announce preliminary, interim or top-line data from our clinical trials that may change as more patient data become available, and as the data is subject to typical audit procedures that could result in material changes in the final data.

From time to time, we may announce preliminary, interim or top-line data from our clinical trials. Preliminary, interim and top-line data from clinical trials are subject to the risk that one or more of the clinical outcomes may materially change from the preliminary data as patient enrollment continues, enrolled patients continue to progress through the trial, and more patient data become available. Preliminary, interim and top-line data also remain subject to typical audit procedures that may result in the final audited data being materially different from the preliminary data we previously announced. As a result, preliminary, interim and top-line data should be viewed with caution until the final data are available. Adverse differences between preliminary, interim or top-

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line data and final data could impact the regulatory approval of, and significantly harm the prospects of, any drug candidate that is impacted by the applicable data.

Serious adverse events, undesirable side effects or toxicities, or other unexpected properties of our drug candidates could limit the commercial potential of such drug candidates.

To date, we have tested our drug candidates in a limited number of patients and healthy volunteers. As we continue our development of these drug candidates and initiate additional preclinical studies or clinical trials of these or future drug candidates, if any serious adverse events, unacceptable levels of toxicity, undesirable side effects or unexpected characteristics may emerge, it could cause us to abandon these drug candidates or limit their development to more narrow uses, lower dose levels or subpopulations in which the serious adverse events, unacceptable levels of toxicity, undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk/benefit perspective. For example, marketed Bruton’s Tyrosine Kinase, or BTK, inhibitors have reported incidences of major hemorrhage, atrial fibrillation or thrombocytopenia, and we could observe such incidences in the future.

Even if our drug candidates initially show promise in early clinical trials, the side effects of drugs are frequently only detectable after they are tested in large Phase 3 clinical trials or, in some cases, after they are made available to patients on a commercial scale after approval. Sometimes, it can be difficult to determine if the serious adverse or unexpected side effects were caused by the drug candidate or another factor, especially in subjects who may suffer from other medical conditions and may be taking other medications. Regulatory authorities may draw different conclusions or require additional testing to confirm any such determination.

If serious adverse or unexpected side effects are identified during development and are determined to be attributable to or result from our drug candidate, we may be required to discontinue the development program or the regulatory authorities may refuse to approve the drug candidate. Drug-related side effects could also affect subject recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects.

In addition, if one or more of our drug 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:

Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug candidate, if approved, and could harm our business, results of operations and prospects.

If we are unable to commercialize our drug candidates, if approved, or if we experience significant delays in doing so, our business will be harmed.

Our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful development and eventual commercialization of our drug candidates, if approved. Even if we or our collaborators successfully develop and commercialize any of rilzabrutinib, PRN2246/SAR442168 or PRN473 Topical, we may not be successful in developing and commercializing our other drug candidates or other drug candidates we may develop, and our commercial opportunities may be limited. The success of our drug candidates will depend on many factors, including, but not limited to, the following:

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If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully obtain approval for and commercialize our drug candidates, which would harm our business.

We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our drug candidates.

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our drug candidates, including:

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Regulatory delays are part of drug discovery, with the FDA issuing 540 clinical holds in 2017. We have experienced regulatory delays in the past and may experience such delays in the future. In the event of a delay, we work closely and collaboratively with the regulatory authority to address their concerns. In our case, the original investigational new drug applications, or INDs, for rilzabrutinib in rheumatoid arthritis, or RA, and ITP were placed on clinical hold by the FDA due to concerns with a preclinical study finding. We conducted additional preclinical studies that investigated the relation of the finding to the gut/brain axis and reconfirmed that the finding was not adverse. The clinical holds were lifted, and rilzabrutinib now has open INDs in the United States including PV, ITP, and RA. No other regulatory authority imposed such delays on our rilzabrutinib program.

If we are required to conduct additional clinical trials or other testing of our drug candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our drug candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

Product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be amended or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our drug candidates, could allow our competitors to bring products to market before we do, and could impair our ability to successfully commercialize our drug candidates, if approved, any of which may harm our business and results of operations. 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 termination or suspension of a clinical trial. Any of these occurrences may harm our business, financial condition and prospects significantly. Any termination of any clinical trial of our drug candidates will harm our commercial prospects and our ability to generate revenues.

The design or our execution of clinical trials may not support regulatory approval.

The design or execution of a clinical trial can determine whether its results will support regulatory approval and flaws in the design or execution of a clinical trial may not become apparent until the clinical trial is well advanced or completed. In some instances, there can be significant variability in safety or efficacy results between different trials of the same drug candidate due to numerous factors, including changes or variations in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any clinical trials we may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our drug candidates.

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Further, the FDA and comparable foreign regulatory authorities have substantial discretion in the approval process and in determining when or whether regulatory approval will be obtained for any of our drug candidates. Our drug candidates may not be approved even if they achieve their primary endpoints in current or future Phase 3 clinical trials or registration trials. For example, while the FDA generally requires two adequate and well-controlled Phase 3 trials to support a marketing application, we plan to pursue an application for rilzabrutinib for PV on the basis of a single pivotal Phase 3 trial. The FDA or other non-U.S. regulatory authorities may disagree with our trial design and our interpretation of data from preclinical studies and clinical trials, or our plans to support our marketing applications with a single pivotal trial, or may have divergent requirements for our trials or approval. In addition, any of these regulatory authorities may change requirements for the approval of a drug candidate even after reviewing and providing comments or advice on a protocol for a pivotal Phase 3 clinical trial that has the potential to result in FDA or other regulatory authorities’ approvals. In addition, any of these regulatory authorities may also approve a drug candidate for fewer or more limited dose levels or indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials. The FDA or other non-U.S. regulatory authorities may not approve the labeling claims that we believe would be necessary or desirable for the successful commercialization of our drug candidates, if approved. Failure to successfully obtain regulatory approval could have a material adverse impact on our business and financial performance.

Certain of our current clinical trials are being conducted outside the United States, and the FDA may not accept data from trials conducted in foreign locations.

Certain current clinical trials of our drug candidates are being conducted outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In general, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to label the product in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. Moreover, when studies are conducted only at sites outside of the United States, the FDA generally does not provide advance comment on the clinical protocols for the studies, and therefore there is an additional potential risk that the FDA could determine that the study design or protocol for a non-U.S. clinical trial was inadequate, which would likely require us to conduct additional clinical trials.

Conducting clinical trials outside the United States also exposes us to additional risks, including risks associated with:

We cannot assure you that the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from such clinical trials, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of our drug candidates.

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Even if we receive marketing approval, we may not be able to successfully commercialize our drug candidates due to unfavorable pricing regulations or third-party coverage and reimbursement policies, which could make it difficult for us to sell our drug candidates profitably.

Obtaining coverage and reimbursement approval for a product from a third-party payor, including governmental healthcare programs such as Medicare and Medicaid, private health insurers, managed care organizations, and other third-party payors, is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of such product to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses, and in some countries, we may lose eligibility for coverage even after obtaining it. Interim reimbursement levels for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors, by any future laws limiting drug prices and by any future relaxation of laws that presently restrict imports of product from countries where they may be sold at lower prices than in the United States.

Additionally, coverage and reimbursement policies for drug products can differ significantly from payor to payor as there is no uniform policy of coverage and reimbursement for drug products among third‑party payors in the United States. While third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, they also have their own methods and approval process apart from Medicare determinations. There may be significant delays in obtaining coverage and reimbursement as the process of determining coverage and reimbursement is often time‑consuming and costly which will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage or adequate reimbursement will be obtained. It is difficult to predict at this time what government authorities and third‑party payors will decide with respect to coverage and reimbursement for our drug products.

We cannot be sure that reimbursement will be available for any product that we commercialize and, if coverage and reimbursement are available, what the level of reimbursement will be. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with branded therapeutics and therapeutics administered under the supervision of a physician. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

We may not be able to obtain or maintain orphan drug designations or exclusivity for our drug candidates, which could limit the potential profitability of our drug candidates, if approved.

Regulatory authorities in some jurisdictions, including the United States, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States, or if it affects more than 200,000, there is no reasonable expectation that sales of the drug in the United States will be sufficient to offset the costs of developing and making the drug available in the United States. Generally, if a drug with an orphan drug designation subsequently receives the first marketing approval for an indication for which it receives the designation, then the drug is eligible for a seven-year period of marketing exclusivity during which the FDA may not approve another marketing application for the same drug for the same indication, except in limited circumstances, such as if a subsequent application demonstrates that its product is clinically superior. During an orphan drug’s exclusivity period, however, competitors may receive approval for drugs with different active moieties for the same indication as the approved orphan drug, or for drugs with the same active moiety as the approved orphan drug, but for different indications. Orphan drug exclusivity could block the approval of one of our products for seven years if a competitor obtains approval for a drug with the same active moiety intended for the same indication before we do, unless we are able to demonstrate that grounds for withdrawal of the orphan drug exclusivity exist or that our product is clinically superior. Further, if a designated orphan drug receives marketing approval for an indication broader than the rare disease or condition for which it received orphan drug designation, it may not be entitled to exclusivity. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan drug designation.

We have received orphan drug designation for rilzabrutinib from the FDA for the treatment of pemphigus vulgaris, or PV, and from the European Commission for the treatment of pemphigus. We have also received orphan drug designation for rilzabrutinib from the FDA for the treatment of ITP. We intend to pursue orphan drug designation for other future drug candidates as applicable.

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Obtaining orphan drug designations is important to our business strategy; however, obtaining an orphan drug designation can be difficult, and we may not be successful in doing so. Even if we were to obtain orphan drug designation for a drug candidate, we may not obtain orphan exclusivity, and any such exclusivity, if attained, may not effectively protect the drug from the competition of different drugs for the same condition, which could be approved during the exclusivity period. Additionally, after an orphan drug is approved, the FDA could subsequently approve another application for the same drug for the same indication if the FDA concludes that the later drug is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug exclusive marketing rights in the United States also may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. The failure to obtain an orphan drug designation for any drug candidates we may develop, the inability to maintain that designation for the duration of the applicable period, or the inability to obtain or maintain orphan drug exclusivity could reduce our ability to make sufficient sales of the applicable drug candidate to balance our expenses incurred to develop it, which would have a negative impact on our operational results and financial condition.

Even if any of our drug candidates receive marketing approval, they may fail to achieve the degree of market acceptance by physicians, patients, hospitals, healthcare payors and others in the medical community necessary for commercial success.

If any of our drug candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. For example, high-dose corticosteroids, or CS, can be used to treat pemphigus, and physicians may continue to rely on these treatments rather than adopt rilzabrutinib as a preferred treatment method, in part because CS are relatively inexpensive. The degree of market acceptance of our drug candidates, if approved for commercial sale, will depend on a number of factors, including but not limited to:

If some or all of our drug candidates do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable.

Even if any of our drug candidates receive marketing approval, they will be subject to the negotiation and approval of package insert language on efficacy and safety and other regulatory approval requirements including significant post-marketing regulatory requirements.

Any regulatory approvals that we may receive for our drug candidates will require surveillance to monitor the safety and efficacy of the drug candidate, may contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, and may include burdensome post-approval study or risk management requirements.  For example, the FDA may require a REMS in order to approve our drug candidates, which could entail requirements for a medication guide, physician communication plans or additional elements, such as “black box” warnings on the packaging, to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.  In addition, if the FDA or foreign regulatory authorities approve our drug candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for our drug candidates will be subject to extensive and ongoing regulatory requirements.  These requirements include submissions of safety and other post-marketing information and reports, registration and continued compliance with current good manufacturing practices, or cGMPs, and good clinical practices, or GCPs, and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations and standards.  If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facilities where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. In addition, failure to comply with applicable FDA and foreign regulatory requirements may, either before or after product approval, if any, subject our company to administrative or judicially imposed sanctions, including but not limited to:

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The occurrence of any event or penalty described above may inhibit our ability to commercialize our drug candidates and generate revenue.

 

If any of our drug candidates receive marketing approval, we will be subject to applicable fraud and abuse, transparency, government price reporting, and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

 

Although we do not currently have any marketed products, if we obtain FDA approval for any of our drug candidates and begin commercializing those products in the United States, our operations will be subject, either directly or indirectly through our customers and third party payors, to various U.S. federal and state fraud and abuse, transparency and other healthcare laws and regulations, and similar laws in other jurisdictions in which we conduct our business. These laws may impact, among other things, our research and proposed sales, marketing and education programs and constrain the business of financial arrangements and relationships with healthcare providers, physicians and other parties through which we market, sell and distribute our products for which we obtain marketing approval. The laws that may affect our ability to operate include, but are not limited to: the federal Anti-Kickback Statute; federal civil and criminal false claims laws, such as the False Claims Act (FCA); HIPAA; federal and state consumer protection and unfair competition laws; the federal transparency requirements under the Physician Payments Sunshine Act; state and foreign law equivalents of each of these federal laws; and state and foreign laws that require pharmaceutical companies to implement compliance programs.  Many of these laws are discussed in detail in “Item 1. Business” above.

We currently have a limited commercial team and no sales force. If we are unable to establish effective commercial capabilities or enter into agreements with third parties to sell or market our drug candidates, we may not be able to effectively sell or market our drug candidates, if approved, or generate product revenue.

We have limited sales, marketing or distribution capabilities or experience, and we currently do not have a sales force for the marketing, sales and distribution of any of our drug candidates that are able to obtain regulatory approval. To achieve commercial success for any approved product for which we retain sales and marketing responsibilities, we must either develop a sales and marketing organization, which would be expensive and time consuming, or outsource these functions to third parties. In the future, we may choose to build a focused sales and marketing infrastructure to sell, or participate in sales activities with our collaborators for, some of our drug candidates if and when they are approved.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a drug candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

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If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any medicines that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our drug candidates or may be unable to do so on terms that are favorable to us. In entering into third-party marketing or distribution arrangements, any revenue we receive will depend upon the efforts of the third parties and we cannot assure you that such third parties will establish adequate sales and distribution capabilities or devote the necessary resources and attention to sell and market our medicines effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our drug candidates.

Even if we obtain FDA approval of any of our drug candidates, we may never obtain approval or commercialize such products outside of the United States, which would limit our ability to realize their full market potential.

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and may require additional preclinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our failure to obtain regulatory approval in any country may delay or have negative effects on the process for regulatory approval in other countries. We do not have any drug candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining commercial approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, our ability to realize the full market potential of our products will be harmed.

Risks Related to our Business Operations

We may expend our limited resources to pursue a particular drug candidate or indication and fail to capitalize on drug candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we must prioritize our research programs and will need to focus our drug candidates on the potential treatment of certain indications. As a result, we may forego or delay pursuit of opportunities with other drug candidates or for other indications that may have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and drug candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular drug candidate, we may also relinquish valuable rights to that drug candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate.

We expect to expand our development, regulatory and operational capabilities and, as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

As of December 31, 2019, we had 92 full-time employees. As we advance our research and development programs and continue to operate as a public company, we expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of clinical development, quality, regulatory affairs and, if any of our drug candidates receives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must:

Our future financial performance and our ability to develop, manufacture and commercialize our drug candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert financial and other

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resources, and a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

Our future success depends on our ability to retain key employees, consultants and advisors and to attract, retain and motivate qualified personnel.

We are highly dependent on the services of Martin Babler, who serves as our President and Chief Executive Officer, David M. Goldstein, who serves as our Chief Scientific Officer, and Ken Brameld, who serves as our Vice President of Drug Discovery. Although we have entered into employment agreements with them, they are not for a specific term and each of them may terminate their employment with us at any time, though we are not aware of any present intention of any of these individuals to leave us.

Our industry has experienced a high rate of turnover in recent years. Our ability to compete in the highly competitive biopharmaceuticals industry depends upon our ability to attract, retain and motivate highly skilled and experienced personnel with scientific, medical, regulatory, manufacturing and management skills and experience. We conduct our operations in the San Francisco Bay Area, a region that is home to many other biopharmaceutical companies as well as many academic and research institutions, resulting in fierce competition for qualified personnel. We may not be able to attract or retain qualified personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical companies. Many of the other biopharmaceutical companies against which we compete have greater financial and other resources, different risk profiles and a longer history in the industry than we do. Our competitors may provide higher compensation, more diverse opportunities and/or better opportunities for career advancement. Any or all of these competing factors may limit our ability to continue to attract and retain high quality personnel, which could negatively affect our ability to successfully develop and commercialize our drug candidates and to grow our business and operations as currently contemplated.

Our future growth may depend, in part, on our ability to operate in foreign markets, where we would be subject to additional regulatory requirements and other risks and uncertainties.

Our future profitability may depend, in part, on our ability to commercialize our drug candidates in foreign markets for which we may rely on collaboration with third parties. We are not permitted to market or promote any of our drug candidates before we receive marketing approval from the applicable regulatory authority in that foreign market, and we may never receive such marketing approval for any of our drug candidates. To obtain marketing approval in many foreign countries, we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our drug candidates, and we cannot predict success in these jurisdictions. If we obtain approval of our drug candidates and ultimately commercialize our drug candidates in foreign markets, we would be subject to additional risks and uncertainties, including:

A majority of patients for certain of our drug candidates are in Europe and if foreign sales of our drug candidates are adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs, our business and its financial operations will be harmed.

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We face substantial competition, which may result in others discovering, developing or commercializing products more quickly or marketing them more successfully than us.

The development and commercialization of new drug products is highly competitive. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products that we may develop or that would render any products that we may develop obsolete or non-competitive. Our competitors already have drugs that apply to or treat the target indications that we are focused on, even if not oral or topical, and our competitors also may obtain marketing approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. We also compete with alternative treatments, even if such treatments are more invasive or not as effective.

Other products, from AbbVie, AstraZeneca, Beigene and JNJ/Janssen, that are in the same class as some of our drug candidates have already been approved in oncology. With respect to our BTK inhibitor programs in immunology, we are aware of several other companies that are or may be developing competing BTK inhibitor drug candidates, including AbbVie, AstraZeneca, Biogen, Bristol-Myers Squibb, Genentech, Gilead, Innocare, Merck KGaA, Novartis, and Taiho. As more drug candidates within a particular class of drugs proceed through clinical development to regulatory review and approval, the amount and type of clinical data that may be required by regulatory authorities may increase or change. Consequently, the results of our clinical trials for drug candidates in that class will likely need to show a risk/benefit profile that is competitive with or more favorable than those products and drug candidates in order to obtain marketing approval or, if approved, a product label that is favorable for commercialization. If the risk/benefit profile is not competitive with those other products or drug candidates, we may have developed a product that is not commercially viable, that we are not able to sell profitably or that is unable to achieve favorable pricing or reimbursement. In such circumstances, our future product revenue and financial condition would be adversely affected.

Many of our competitors listed above have longer operating histories and significantly greater financial resources and expertise in research and development, manufacturing, preclinical studies, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do.

Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and enrolling patients for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

The key competitive factors affecting the success of all of our programs are likely to be the efficacy, safety, convenience, cost and availability of reimbursement for drug candidates arising from such programs. If we are not successful in developing, commercializing and achieving higher levels of reimbursement than our competitors, we will not be able to compete against them and our business would be harmed.

Our internal information technology systems, or those of our third-party CROs or other contractors or consultants, may fail or suffer security breaches, loss or leakage of data, and other disruptions, which could potentially expose us to liability or otherwise adversely affecting our business.

We are increasingly dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary course of business, we collect, store and transmit confidential information (including but not limited to intellectual property, proprietary business information and personal information). It is critical that we do so in a secure manner to maintain the confidentiality, integrity and availability of such confidential information. We also have outsourced elements of our operations to third parties, and as a result we manage a number of third-party contractors who have access to our confidential information.

Despite the implementation of security measures, given their size and complexity and the increasing amounts of confidential information that they maintain, our internal information technology systems and those of our third-party CROs and other contractors and consultants are potentially vulnerable to breakdown or other damage or service interruptions, system malfunctions, natural disasters, terrorism, war and telecommunication and electrical failures, as well as security breaches from inadvertent or intentional actions by our employees, contractors, consultants, business partners, and/or other third parties, or from cyber-attacks by malicious third parties (including the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity, privacy and availability of information), which may compromise our system infrastructure or lead to unauthorized or inappropriate use or disclosure of our confidential information. In addition, as our trials advance in locations across the world, our employees or other parties we work with may be required to travel or send data across international borders with increasing frequency, which may increase our exposure to cyberattacks and other information security incidents or interruptions. To the extent that any of these incidents were to result in a loss of, or damage to, our data or applications, or inappropriate use or disclosure of confidential or proprietary information, we could incur liability and

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reputational damage and the further development and commercialization of our drug candidates could be delayed. Even the perception that such an incident has occurred could harm our reputation and our business.

While to our knowledge we have not experienced any such system failure, accident or security breach to date, we cannot assure you that our data protection efforts and our investment in information technology will prevent significant breakdowns, data leakages, breaches in our systems or other cyber incidents that could have a material adverse effect upon our reputation, business, operations or financial condition. For example, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs and the development of our drug candidates could be delayed. In addition, the loss of clinical trial data for our drug candidates could result in delays in our marketing approval efforts and significantly increase our costs to recover or reproduce the data. Furthermore, significant disruptions of our internal information technology systems or security breaches could result in the loss, misappropriation, and/or unauthorized access, use, or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), which could result in financial, legal, business and reputational harm to us. For example, any such event that leads to unauthorized access, use, or disclosure of personal information, including personal information regarding our clinical trial subjects or employees, could harm our reputation directly, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.

The 2017 comprehensive tax reform bill and possible future changes in tax laws or regulations could adversely affect our business and financial condition.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017, or the Tax Act, which significantly revised the Internal Revenue Code of 1986, as amended. Future guidance from the U.S. Internal Revenue Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. The foregoing items, as well as any other future changes in tax laws, could have a material adverse effect on our business, cash flow, financial condition, or results of operations. In addition, it is uncertain if and to what extent various states will conform to the Tax Act or any newly enacted federal tax legislation.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

We have incurred substantial losses during our history and do not expect to become profitable in the near future, and we may never achieve profitability. Unused losses for the tax year ended December 31, 2017 and prior tax years will carry forward to offset future taxable income, if any, until such unused losses expire. Unused losses generated after December 31, 2017 will not expire and may be carried forward indefinitely but will be only deductible to the extent of 80% of current year taxable income in any given year. In addition, both our current and our future unused losses and certain other tax attributes may be subject to limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if we undergo an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in our equity ownership by certain stockholders over a rolling three-year period. As a result, our pre-2018 net operating loss carryforwards may expire prior to being used, our net operating loss carryforwards generated in 2018 and thereafter will be subject to a percentage limitation and, if we undergo an ownership change, our ability to use all of our pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset our post-change income or taxes may be limited. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. As a result, even if we attain profitability, we may be unable to use all or a material portion of our NOLs and other tax attributes, which could adversely affect our future cash flows.

Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.

We are subject to taxation in certain U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the Tax Cuts and Jobs Act of 2017, changes in the mix of our profitability from state to state, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.

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Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. For example, we do not carry earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and uninsured damage and loss. Some of the policies we currently maintain include general liability, property, auto, workers’ compensation, products liability and directors’ and officers’ insurance policies. Our insurance is expensive and we do not know if we will be able to maintain existing insurance with adequate levels of coverage. Our insurance policies contain exclusions that may apply to our risks. Some risks may not be insurable on commercially reasonable terms, or at all. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

We or the third parties upon whom we rely may be adversely impacted by natural disasters, health epidemics, including the recent COVID-19 outbreak, political crises, and other catastrophic events or events outside of our control, which could materially impact our business results.

Our corporate headquarters is located in South San Francisco, California near recent wildfires and major geologic faults that have experienced earthquakes in the past. If a natural disaster, power outage, public health crisis, act of terrorism, malicious computer virus or other events outside of our control impacts our employees, or prevents us from using, or damages all or a significant portion of our property or facilities, including our headquarters, research facilities, clinical trial sites or the property or facilities of our manufacturers, suppliers or third-party service providers, our business and operating results could suffer. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur time delays and substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, and may not have adequate insurance to compensate us for losses we may incur from any such significant events, which could have a material adverse effect on our business. For example, we do not carry earthquake insurance.

As another example, in December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, cases have been confirmed in multiple regions of the world in which we, or third parties upon whom we rely, have planned or ongoing clinical trial sites, manufacturing facilities or other business operations. If the COVID-19 outbreak does not subside, we may experience significant disruptions that could materially impact our business. We may need to limit operations or implement limitations, including work from home policies, and may experience limitations in employee resources. In addition, the COVID-19 outbreak could result in reduced operations of third-party manufacturers upon whom we rely, disrupt our supply chain, or otherwise limit our ability to obtain sufficient materials to manufacture our drug candidates. Furthermore, our clinical trials may be affected by the COVID-19 outbreak. Site initiation, patient enrollment and trial data collection may be delayed or stalled due to prioritization of hospital resources toward the COVID-19 outbreak, patient or staff unwillingness to visit hospitals and participate in our trials, or quarantines that may impede patient or staff movement and study drug availability at trial sites, interrupt healthcare services or otherwise prevent patient compliance with clinical trial protocols. We may experience delays in receiving approval from local or regional IRBs or regulatory authorities to initiate or modify our planned clinical trials. The global outbreak of COVID-19 continues to rapidly evolve, is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, our third-party drug manufacturing capabilities, healthcare systems or the global economy as a whole. However, these effects could have a material impact on our operations.

Risks Related to our Reliance on Third Parties for Clinical Testing and Manufacturing

We rely on third parties to conduct our clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. As a result, we are and expect to remain dependent on third parties to conduct our ongoing, and any future, clinical trials of our drug candidates, or any other drug candidates we may develop. The timing of the initiation and completion of these trials will therefore be partially controlled by such third parties and may result in delays to our development programs. Specifically, we expect CROs, clinical investigators, and consultants to play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs and other third parties does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, Australian Therapeutic Goods Administration and comparable foreign regulatory authorities for all of our drug candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical trial investigators and clinical trial sites. If we or any of our CROs or clinical trial sites fail to comply with applicable GCP requirements, the data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical

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trials must be conducted with product produced under cGMP. Our failure to comply with these regulations may require us to stop and/or repeat clinical trials, which would delay the marketing approval process.

There is no guarantee that any such CROs, clinical trial investigators or other third parties on which we rely will devote adequate time and resources to our development activities or perform as contractually required. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If any of these third parties fails to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, otherwise performs in a substandard manner, or terminates its engagement with us, the timelines for our development programs may be extended or delayed or our development activities may be suspended or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in such clinical trials unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible. In addition, clinical trial investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA or any comparable foreign regulatory authority concludes that the financial relationship may have affected the interpretation of the trial results, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any marketing application we submit to the FDA or any comparable foreign regulatory authority. Any such delay or rejection could prevent us from further developing or commercializing our drug candidates.

We contract with third parties for the manufacture and supply of drug candidates for use in preclinical testing and clinical trials, which supply may become limited or interrupted or may not be of satisfactory quality and quantity.

We do not have any manufacturing facilities. We produce in our laboratory relatively small quantities of compounds for evaluation in our research programs. We rely, and expect to continue to rely, on third parties for the manufacture of our drug candidates for preclinical and clinical testing, as well as for commercial manufacture if any of our drug candidates are approved. We do not have any long-term contractual arrangements with manufacturers and instead rely on third parties to manufacture our drug candidates on a purchase-order basis. We currently have limited manufacturing arrangements, and we cannot be certain that we will be able to establish redundancy in manufacturers for our drug candidates, which could lead to reliance on a limited number of manufacturers for one or more of our drug candidates. This reliance increases the risk that we will not have sufficient quantities of our drug candidates or products, if approved, or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.

Furthermore, all entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contract manufacturers for our drug candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in clinical trials must be manufactured in accordance with cGMP requirements. These regulations govern manufacturing processes and procedures, including record keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants, or to inadvertent changes in the properties or stability of our drug candidates that may not be detectable in final product testing. In mid-February 2019, a third-party manufacturer of the active pharmaceutical ingredient, or API, of our drug product rilzabrutinib informed us that a mechanical failure at its facility may have compromised a batch of our API. We are engaged in ongoing discussions with the manufacturer related to this batch, and we are not dependent on this batch to supply our ongoing clinical trials of rilzabrutinib. However, we may suffer economic losses related to this incident, including but not limited to amounts advanced to this manufacturer related to this API batch, the costs of the necessary starting materials and intermediates that were produced or procured elsewhere prior to being sent to this manufacturer for API production, and costs of replacement starting materials and intermediates. Our previously filed insurance claim for such losses has been denied.

We or our contract manufacturers must supply all necessary documentation in support of an NDA on a timely basis and must adhere to the FDA’s good laboratory practice, or GLP, regulations and cGMP regulations enforced by the FDA through its facilities inspection program. Comparable foreign regulatory authorities may require compliance with similar requirements. The facilities and quality systems of our third-party manufacturers must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our drug candidates. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturers for compliance with cGMP regulations.

In the event that any of our manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on a timely basis or on acceptable terms, if at all. In particular, any replacement of our manufacturers could require significant effort and expertise because there may be a limited number of qualified replacements. In some cases, the technical skills or technology required to manufacture our drug candidates may be unique or proprietary to the original manufacturer and we may have difficulty transferring such skills or technology to another third party and a feasible alternative may not exist. These factors would increase our reliance on such manufacturer or require us to obtain a license

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from such manufacturer in order to have another third party manufacture our drug candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop drug candidates in a timely manner or within budget.

Our, or a third party’s, failure to execute on our manufacturing requirements, or to do so on commercially reasonable terms and comply with cGMP could adversely affect our business in a number of ways, including but not limited to:

We, or our third-party manufacturers, may be unable to successfully scale-up the manufacturing process for our drug candidates to provide sufficient quality and quantity, which would delay or prevent us from conducting clinical trials, developing our drug candidates and commercializing our drugs.

In order to conduct clinical trials of our drug candidates or commercialize our drugs, we will need to manufacture them in large quantities. We, or our third-party manufacturers, may be unable to successfully increase the manufacturing capacity for any of our drug candidates in a timely or cost-effective manner, or at all. In addition, quality issues may arise during scale-up activities. If we or our third-party manufacturers are unable to successfully scale up the manufacture of our drug candidates in sufficient quality and quantity, the development, testing and clinical trials of that drug candidate may be delayed or become infeasible, and marketing approval or commercial launch of any resulting product may be delayed or not obtained, which could significantly harm our business.

Existing or changes in methods of drug candidate manufacturing or formulation may result in additional costs or delays.

As drug candidates progress through preclinical to clinical-stage trials to marketing approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize yield, manufacturing batch size, minimize costs and achieve consistent quality and results. Such changes carry the risk that they will not achieve these intended objectives. For example, although we have data regarding rilzabrutinib’s long-term stability, rilzabrutinib is being developed as an amorphous solid, and in the event the solid crystallizes unexpectedly, the drug candidate or the drug product may not be useable or its effectiveness may be altered requiring an interruption or delay to ongoing clinical development due to a need to demonstrate bioequivalent performance of drug candidate or drug product. Any of these changes could cause our drug candidates to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our drug candidates or jeopardize our ability to commercialize our drug candidates and generate any revenue.

Our employees, clinical trial investigators, CROs, consultants, vendors and any potential commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, clinical trial investigators, CROs, consultants, vendors and potential commercial partners. Misconduct by these parties could include failures to comply with (i) FDA laws and regulations or those of comparable foreign regulatory authorities, including those laws that require the reporting of true, complete and accurate information, (ii) manufacturing standards, (iii) laws and regulations in the United States and abroad relating to data privacy and security, fraud and abuse, government price reporting, transparency reporting requirements, and healthcare laws and regulations in the United States and abroad, (iv) laws that require the true, complete and accurate reporting of financial information or data, or (v) insider trading laws. Such misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation.

We have adopted a code of conduct applicable to all of our employees, as well as an insider trading policy, disclosure program and other applicable policies and procedures, but it is not always possible to identify and deter employee misconduct. Although we

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take measures to protect against misconduct, the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant adverse impact on our business, including the imposition of significant civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, imprisonment, integrity oversight and reporting requirements, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations.  In addition, our employees, consultants, vendors and other third parties involved in our business could engage in conduct or activities that could generate negative publicity or social media attention or have other adverse consequences to our business. As a result of the rapid spread of information online, even activities that are unrelated to our business operations could have a negative impact on our reputation by virtue of our association with such individuals or entities, which could further harm our reputation.

Risks Related to our Licensing and Other Strategic Agreements

We may not realize the benefits of any collaborations or strategic alliances that we have entered into or may enter into in the future for the development and commercialization of our drug candidates.

The development, manufacture and potential commercialization of our drug candidates will require substantial additional capital to fund expenses. We have entered into collaboration and license agreements with multiple licensees and in the future may seek and form additional strategic alliances, or create joint ventures or collaborations or enter into acquisitions or additional licensing arrangements with third parties that we believe will help to accelerate or augment our development and commercialization efforts. These transactions can entail numerous operational and financial risks, and we cannot be certain that we will achieve the financial and other benefits that led us to enter into such arrangements. When we collaborate with a third party for development and commercialization of a drug candidate, we relinquish some or all of the control over, as well as a portion of potential financial benefits of, the future success of that drug candidate to such third party.

We are party to a license agreement, or the Sanofi Agreement, that we entered into with Genzyme Corporation, a wholly owned subsidiary of Sanofi, for an exclusive license to PRN2246/SAR442168 and backup molecules for development in relapsing and progressive MS and other diseases of the central nervous system, or CNS. This agreement provides us with a strategic development and commercialization partner for our drug candidate PRN2246/SAR442168. Under the Sanofi Agreement, we are entitled to receive development, regulatory and commercial milestones that could total up to an aggregate of $765.0 million, as well as tiered royalties up to the mid-teens. We hold an option to fund a portion of Phase 3 development costs in return for, at our discretion, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in rates up to the high-teens. Only the additional royalty option would be available if we develop rilzabrutinib for major enumerated indications overseen by the FDA’s Division of Pulmonary, Allergy and Rheumatology Products or if we experience a change of control involving certain Sanofi competitors. In addition, if we exercise our option to fund a portion of Phase 3 development costs in exchange for a profit and loss sharing arrangement or additional worldwide royalty, we may in the future need to raise capital to support the resulting multiyear financial commitment.  If capital is not available to us on acceptable terms, as and when needed, our business and prospects would be adversely impacted and we would not receive the full potential financial benefit of the Sanofi Agreement. In addition, if Sanofi is delayed in its development efforts or fails to adequately commercialize PRN2246/SAR442168 following regulatory approval, or fails to pursue PRN2246/SAR442168 in all key markets, our receipt of such payments could be delayed or adversely impacted. If Sanofi elects to terminate the agreement or cease its development of PRN2246/SAR442168, we would not receive the full potential financial benefit of our agreement and may be required to seek another commercial partner for PRN2246/SAR442168.

We may, in the future, decide to collaborate with other pharmaceutical companies for the development and potential commercialization of our other drug candidates in the United States or other countries or territories of the world. We will face significant competition in seeking appropriate collaborators. We may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our drug candidates for many reasons, including because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our drug candidates as having the requisite potential to demonstrate safety and efficacy. If and when we collaborate with a third party for development and commercialization of a drug candidate, we can expect to relinquish some or all of the control over the future success of that drug candidate to such third party. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the following:

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The collaborator may also consider alternative drug candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our drug candidate, or may decide alone or together with us to terminate a collaboration. For example, in March 2019, we announced a mutual agreement with AbbVie to end our collaboration and for us to reacquire rights to the program. We may also be restricted under any license agreements from entering into agreements on certain terms or at all with potential collaborators. For example, we are restricted under our existing collaboration agreement from additional licenses in specified fields. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators and changes to the strategies of the combined company. As a result, we may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, or a collaboration is terminated, we may have to curtail the development of such drug candidate, reduce or delay one or more of our other development programs, delay the potential commercialization or reduce the scope of any planned sales or marketing activities for such drug candidate, or increase our expenditures and undertake development, manufacturing or commercialization activities at our own expense. If we elect to increase our expenditures to fund development, manufacturing or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our drug candidates or bring them to market and generate product revenue. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our drug candidates or bring them to market and generate product sales revenue, which would harm our business prospects, financial condition and results of operations.

We may wish to acquire rights to future assets through acquisitions, in-licensing or other collaborations in the future, but may not realize the benefits of any such arrangements.

We may in the future seek and form strategic alliances, create joint ventures or collaborations or enter into acquisitions or additional licensing arrangements with third parties for products or technologies that we believe will complement or augment our development and commercialization efforts.

These transactions can entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business and diversion of our management’s time and attention in order to manage a collaboration or develop acquired products, drug candidates or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the collaboration or combining the operations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business. As a result, if we enter into collaboration agreements, strategic partnerships or license new products, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture, which could delay our timelines or otherwise adversely affect our business.

We also cannot be certain that, following a strategic or in-licensing transaction, we will achieve the revenue or specific net income that justifies such transaction or such other benefits that led us to enter into the arrangement. Failure to realize the benefits of any collaborations or strategic alliances may further cause us to curtail the development of a drug candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any planned sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense.

Risks Related to our Intellectual Property

If we are unable to obtain and maintain sufficient intellectual property protection for our drug candidates, or if the scope of the intellectual property protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our drug candidates and research programs. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel discoveries and technologies that are important to our business. We have certain issued composition of matter patents for compounds, pharmaceutical compositions, formulations and process patents for uses and methods of treatment and processes for making compounds in the United States and other countries, we have certain patent applications pending, and we may seek additional patents in the future. Our pending and future patent applications may not result in

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patents being issued which protect our drug candidates or their intended uses or which effectively prevent others from commercializing competitive technologies, products or drug candidates.

Obtaining and enforcing patents is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications, or maintain and/or enforce patents that may issue based on our patent applications, at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development results before it is too late to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, contract research organizations, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach these agreements and disclose such results before a patent application is filed, thereby jeopardizing our ability to seek patent protection.

The patent position of biopharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation, resulting in court decisions, including Supreme Court decisions, that increase uncertainties as to the ability to enforce patent rights in the future. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States, or vice versa.

Further, we may not be aware of all third-party intellectual property rights potentially relating to our drug candidates or their intended uses, and as a result the impact of such third-party intellectual property rights upon the patentability of our own patents and patent applications, as well as the impact of such third-party intellectual property upon our freedom to operate, is highly uncertain. Patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our patents or pending patent applications may be challenged in the courts or patent offices in the United States and abroad. For example, we may be subject to a third party pre-issuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in post-grant review procedures, oppositions, derivations, reexaminations or inter partes review proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated, or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.

If we fail to comply with our obligations in our intellectual property licenses from third parties, we could lose license rights that are important to our business.

We are a party to an intellectual property license agreement with The Regents of the University of California, or Regents, under which Regents has granted to us an exclusive license, with the right to grant sublicenses under Regents’ patent rights relating to our Tailored Covalency platform, to make, use, sell, offer for sale, and import products and services and practice methods covered by such patent rights in the United States and in other countries where Regents may lawfully grant such a license and in all fields of use, and we may enter into additional license agreements in the future. Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our current and future licensors may have the right to reduce the scope of our rights or terminate these agreements, in which event we may not be able to develop and market any product that is covered by these agreements and would adversely impact our existing collaboration agreements under which we have sublicensed such rights. Termination of this license for failure to comply with such obligations or for other reasons, or reduction or elimination of our licensed rights under it or any other license, may result in our having to negotiate new or reinstated licenses on less favorable terms or our not having sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business and financial condition.

The risks described elsewhere pertaining to our intellectual property rights also apply to the intellectual property rights that we in-license, and any failure by us or our licensors to obtain, maintain, defend and enforce these rights could have a material adverse effect on our business. In some cases we do not have control over the prosecution, maintenance or enforcement of the patents that we license, and may not have sufficient ability to provide input into the patent prosecution, maintenance and defense process with respect to such patents, and our licensors may fail to take the steps that we believe are necessary or desirable in order to obtain, maintain, defend and enforce the licensed patents.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

Because we rely on third parties to research and develop and to manufacture our drug candidates, we must share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, third-party contractors and

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consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s independent discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

In addition, these agreements typically restrict the ability of our advisors, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with will likely expect to be granted rights to publish data arising out of such collaboration and any joint research and development programs may require us to share trade secrets under the terms of our research and development or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

We may rely on trade secret and proprietary know-how which can be difficult to trace and enforce and, if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and drug candidates, we also rely on trade secrets, particularly with respect to our Tailored Covalency platform, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. Elements of our drug candidates, including processes for their preparation and manufacture, may involve proprietary know-how, information, or technology that is not covered by patents, and thus for these aspects we may consider trade secrets and know-how to be our primary intellectual property. Any disclosure, either intentional or unintentional, by our employees, the employees of third parties with whom we share our facilities or third party consultants and vendors that we engage to perform research, clinical trials or manufacturing activities, or misappropriation by third parties (such as through a cybersecurity breach) of our trade secrets or proprietary information could enable competitors to duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

Trade secrets and know-how can be difficult to protect. We require our employees to enter into written employment agreements containing provisions of confidentiality and obligations to assign to us any inventions generated in the course of their employment. We and any third parties with whom we may, in the future, share facilities with, will enter into written agreements that include confidentiality and intellectual property obligations to protect each party’s property, potential trade secrets, proprietary know-how, and information. We further seek to protect our potential trade secrets, proprietary know-how, and information in part, by entering into non-disclosure and confidentiality agreements with parties who are given access to them, such as our corporate collaborators, outside scientific collaborators, contract research organizations, contract manufacturers, consultants, advisors and other third parties. Despite these efforts, we cannot ensure that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information, and any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. Moreover, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be harmed.

To the extent that consultants, contractors, collaborators or employees apply technological information independently developed by them or by others to our drug candidates, disputes may arise as to the proprietary rights in such information, which may not be resolved in our favor. With our consultants, contractors, outside scientific collaborators, and employees who work with our confidential and proprietary technologies, we enter into agreements that typically include invention assignment obligations. However, these consultants, contractors, collaborators, and employees may terminate their relationship with us, and we cannot preclude them indefinitely from dealing with our competitors. If our trade secrets become known to competitors with greater experience and financial resources, the competitors may copy or use our trade secrets and other proprietary information in the advancement of their products, methods or technologies.

In the future, we may need to obtain additional licenses of third-party technology that may not be available to us or are available only on commercially unreasonable terms, and which may cause us to operate our business in a more costly or otherwise adverse manner that was not anticipated.

From time to time we may be required to license technology from additional third parties to further develop or commercialize our drug candidates. Should we be required to obtain licenses to any third-party technology, including any such patents required to manufacture, use or sell our drug candidates, such licenses may not be available to us on commercially reasonable terms, or at all. The

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inability to obtain any third-party license required to develop or commercialize any of our drug candidates could cause us to abandon any related efforts, which could seriously harm our business and operations.

We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent which might adversely affect our ability to develop and market our products.

We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third party patent and pending application in the United States and abroad that is relevant to or necessary for the commercialization of our drug candidates in any jurisdiction.

The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our products are not covered by a third-party patent or may incorrectly predict whether a third party’s pending application will issue with claims of relevant scope. In addition, because patent applications can take many years to issue, there may be currently pending applications unknown to us that may later result in issued patents upon which our drug candidates may infringe. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our drug candidates. Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products.

In addition, we are aware of an issued U.S. patent owned by Pharmacyclics, Inc., which was acquired by AbbVie, with certain claims directed to an inhibited tyrosine kinase comprising an irreversible BTK inhibitor having a covalent bond to a cysteine residue of a BTK. We are also aware of other issued U.S. patents owned by Pharmacyclics with certain claims directed to compounds having a certain structure which includes a Michael acceptor moiety or formulations thereof. We are also aware that counterparts to those U.S. patents have issued and/or are pending in Australia, Canada, China, Europe, Japan, the United States and elsewhere. Pharmacyclics or a third party may assert that the sale of our BTK inhibitor drug candidates infringes one or more of these or other patents. Although we believe that the claims of these patents relevant to our BTK inhibitor drug candidates (rilzabrutinib and PRN2246/SAR442168) would likely be held invalid, we cannot provide any assurances that a court or an administrative agency would agree with our assessment. We have not attempted to obtain a license to these patents. If we decide to seek a license to these patents, we cannot guarantee that we would be able to obtain such a license on commercially reasonable terms, or at all, which could materially and adversely affect our business.

We cannot ensure that patent rights relating to inventions described and claimed in our pending patent applications will issue or that patents based on our patent applications will not be challenged and rendered invalid and/or unenforceable.

We have pending U.S. and foreign patent applications in our portfolio, however, we cannot predict:

We cannot be certain that the claims in our pending patent applications directed to our drug candidates and/or technologies will be considered patentable by the U.S. Patent and Trademark Office, or USPTO, or by patent offices in foreign countries. One aspect of the determination of patentability of our inventions depends on the scope and content of the “prior art,” information that was or is deemed available to a person of skill in the relevant art prior to the priority date of the claimed invention. There may be prior art of which we are not aware that may affect the patentability of our patent claims or, if issued, affect the validity or enforceability of a patent claim. The examination process may require us to narrow our claims, which may limit the scope of patent protection that we may obtain. Even if the patents are issued based on our patent applications, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, patents in our portfolio may not adequately exclude third parties from practicing relevant technology or prevent others

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from designing around our claims. If the breadth or strength of our intellectual property position with respect to our drug candidates is threatened, it could dissuade companies from collaborating with us to develop and threaten our ability to commercialize our drug candidates. In the event of litigation or administrative proceedings, we cannot be certain that the claims in any of our issued patents will be considered valid by courts in the United States or foreign countries.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

Should any of these events occur, they could significantly harm our business, results of operations and prospects.

If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our drug candidates.

Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our drug candidates without infringing the intellectual property and other proprietary rights of third parties. Third parties may allege that we have infringed or misappropriated their intellectual property. Litigation or other legal proceedings relating to intellectual property claims, with or without merit, is unpredictable and generally expensive and time consuming and, even if resolved in our favor, is likely to divert significant resources from our core business, including distracting our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating expenses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our drug candidates. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we were sued for patent infringement, we would need to demonstrate that our drug candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity may be difficult. For example, in the United States, proving invalidity in court requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management, legal and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse

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effect on our business and operations. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing drug candidate or product. Alternatively, we may be required to obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing drug candidate. However, we may not be able to obtain any required license on commercially reasonable terms, or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our drug candidates, force us to cease some of our business operations, or require substantial investment and/or time to alter our products, processes, methods, or other technologies, all of which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

We may become involved in lawsuits to defend or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents, trademarks, copyrights or other intellectual property. In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property rights. Even if we detect such infringement or misappropriation, to counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management, legal and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could materially adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Moreover, we cannot assure you that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management, legal and scientific personnel could outweigh any benefit we receive as a result of the proceedings.

Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.

Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patents, any patents that may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other confidential information of former employers or competitors. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may become subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement, or that we or these individuals have, inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of a former employer or competitor.

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While we may litigate to defend ourselves against these claims, even if we are successful, litigation could result in substantial costs and could be a distraction to management. If our defenses to these claims fail, in addition to requiring us to pay monetary damages, a court could prohibit us from using technologies or features that are essential to our drug candidates, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. Moreover, any such litigation or the threat thereof may adversely affect our reputation, our ability to form strategic alliances or sublicense our rights to collaborators, engage with scientific advisors or hire employees or consultants, each of which would have an adverse effect on our business, results of operations and financial condition.

We may not be able to protect our intellectual property rights throughout the world.

Patents are of national or regional effect, and filing, prosecuting and defending patents on all of our drug candidates throughout the world would be prohibitively expensive. As such, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Further, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. In addition, certain developing countries, including China and India, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors and licensees may have limited remedies if patents are infringed or if we or our licensors or licensees are compelled to grant a license to a third party, which could diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our drug candidates.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs. Patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act (the Leahy-Smith Act), signed into law on September 16, 2011, could increase those uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. After March 2013, under the Leahy-Smith Act, the United States transitioned to a first inventor to file system in which, assuming that the other statutory requirements are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuities fees and various other governmental fees on patents and/or patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent and/or patent application. The USPTO and various foreign governmental patent agencies also require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application

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include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our drug candidates, our competitive and financial position would be adversely affected.

We may become subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may be subject to claims that former employees, collaborators or other third parties have an interest in our patents or other intellectual property as an inventor or co-inventor. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. Inventorship disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties involved in developing our drug candidates or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to resolve these and other claims challenging inventorship and/or ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Patent terms may be inadequate to protect our competitive position on our drug candidates for an adequate amount of time.

Patent rights are of limited duration. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such drug candidates are commercialized. Even if patents covering our drug candidates are obtained, once the patent life has expired for a product, we may be open to competition from biosimilar or generic products. A patent term extension based on regulatory delay may be available in the United States. However, only a single patent can be extended for each marketing approval, and any patent can be extended only once, for a single product. Moreover, the scope of protection during the period of the patent term extension does not extend to the full scope of the claim, but instead only to the scope of the product as approved. Laws governing analogous patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single patent family. Additionally, we may not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced.

Risks Related to our Industry

Product liability lawsuits against us could cause us to incur substantial liabilities and could limit our commercialization of any drug candidates that we may develop.

We face an inherent risk of product liability exposure related to the testing of our drug candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our drug candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

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Although we maintain product liability insurance coverage, it may not be adequate to cover all liabilities that we may incur. We anticipate that we will need to increase our insurance coverage as our drug candidates advance through clinical trials and if we successfully commercialize any products. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

Failure to comply with existing or future health and data protection laws and regulations could lead to government enforcement actions (which could include civil or criminal fines or penalties), private litigation, other liabilities, and/or adverse publicity. Compliance or the failure to comply with such laws and regulations could increase the costs of our products and services, could limit their use or adoption, and could otherwise negatively affect our operating results and business.

Regulation of data processing is evolving as federal, state, and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and security, and the collection, use, disclosure and cross-border transfer of data. We and any collaborators may be subject to current, new, or modified federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. In addition, we may obtain health information from third parties (including research institutions from which we obtain clinical trial data) that are subject to privacy and security requirements under the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH). Depending on the facts and circumstances, we could be subject to significant civil, criminal, and administrative liabilities or penalties if we knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.

In addition, in June 2018, California enacted the California Consumer Privacy Act of 2018, or CCPA, which went into effect on January 1, 2020. The CCPA gives California residents the right to access and require deletion of their personal information, the right to opt out of certain personal information sharing, and the right to detailed information about how their personal information is collected, used and shared. The CCPA provides civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Although the CCPA includes exemptions for certain clinical trials data, the law may increase our compliance costs and potential liability with respect to other personal information we collect about California residents. The CCPA has prompted a wave of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and adversely affect our business. Several foreign jurisdictions, including the European Union (EU), its member states, the United Kingdom, Japan and Australia, among others, have adopted legislation and regulations that increase or change the requirements governing the collection, use, disclosure and transfer of the personal information of individuals in these jurisdictions. These laws and regulations are complex and change frequently, at times due to changes in political climate, and existing laws and regulations are subject to different and conflicting interpretations, which adds to the complexity of processing personal data from these jurisdictions. Additionally, certain countries have passed or are considering passing laws that require local data residency and/or restrict the international transfer of data. These laws have the potential to increase costs of compliance, risks of noncompliance and penalties for noncompliance.

Certain international data protection laws, including the EU’s General Data Protection Regulation (GDPR) and EU member state implementing legislation, apply to health-related and other personal information of individuals in the EU. These laws impose strict obligations on the ability to process health-related and other personal information of individuals in the EU, including in relation to collection, use, disclosure and cross-border transfer of that information. These include several requirements relating to the consent of the individuals to whom the personal information relates, the information that companies must provide to individuals about how they collect, use and disclose personal information, individual rights to access and delete their personal information, notification of data breaches to authorities and affected individuals, and the security and confidentiality of the personal data. The GDPR prohibits the transfer of personal data to countries outside of the European Economic Area (EEA) such as the United States, which are not considered by the European Commission to provide an adequate level of data protection. Switzerland has adopted similar restrictions. Although there are legal mechanisms to allow for the transfer of personal data from the EEA and Switzerland to other countries, including the United States, they are subject to legal challenges and uncertainty about compliance with EU data protection laws remains. Such mechanisms may not be available or applicable with respect to the personal data processing activities necessary to research, develop, and market our products and services. For example, ongoing legal challenges in Europe to the mechanisms allowing companies to transfer personal data across national borders could result in further limitations on the ability to engage in cross-border data transfers, particularly if governments are unable or unwilling to reach new or maintain existing agreements that support such transfers. The GDPR allows EU member states to make additional laws and regulations further limiting the processing of genetic, biometric, health data, or other personal data. Failure to comply with these laws, where applicable, can result in the imposition of significant regulatory fines and penalties of up to the greater of €20 million or 4% of annual global turnover (revenue).

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Further, the United Kingdom’s withdrawal from the EU has created uncertainty with regard to data protection regulation in the United Kingdom. In particular, it is unclear whether the United Kingdom will enact data protection legislation equivalent to the GDPR and how data transfers to and from the United Kingdom will be regulated following the transition period that will be in effect until December 31, 2020 (the “Transition Period”).

Compliance with U.S. and international data protection laws and regulations could require us to take on more onerous obligations in our contracts, restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions. Failure to comply with these laws and regulations could result in government enforcement actions (which could include significant civil, criminal or administrative penalties, fines or sanctions), private litigation, and/or adverse publicity and could negatively affect our operating results and business. Moreover, clinical trial subjects, employees and other individuals about whom we or our collaborators obtain personal information, as well as the providers who share this information with us, may limit our ability to collect, use and disclose the information. Claims that we have violated individuals’ privacy rights, failed to comply with data protection laws, or breached our contractual obligations related to security or data privacy, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.

Changes in healthcare law and implementing regulations, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict, and may have a significant adverse effect on our business and results of operations.

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of drug candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any drug candidates for which we obtain marketing approval. Among policy makers and payors in the United States and elsewhere, including in the European Union, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act, substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act, among other things: (i) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and expanded rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well; (ii) established a branded prescription drug fee that pharmaceutical manufacturers of branded prescription drugs must pay to the federal government; (iii) expanded the list of covered entities eligible to participate in the 340B drug pricing program by adding new entities to the program; (iv) established a new Medicare Part D coverage gap discount program, in which manufacturers must now agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; (v) extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; (vi) expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; (vii) established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and (viii) established a Center for Medicare and Medicaid Innovation at the Centers for Medicare & Medicaid Services, or CMS, to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Additionally, CMS promulgated regulations in 2018 that will give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Affordable Care Act for plans sold through such marketplaces. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017, or Tax Act, included a provision which repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of

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2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” In July 2018, CMS published a final rule permitting further collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Act. While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business. We continue to evaluate the Affordable Care Act and its possible repeal and replacement, as it remains uncertain the extent to which any such changes may impact our business or financial condition.

Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011 and subsequent laws, which began in 2013 and, due to subsequent legislative amendments to the statute, including the BBA, will remain in effect through 2027 unless additional Congressional action is taken. New laws may result in additional reductions in Medicare and other healthcare funding, which may adversely affect customer demand and affordability for our products and, accordingly, the results of our financial operations. Additional changes that may affect our business include the expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which will first affect physician payment in 2019. At this time, it is unclear how the introduction of the Medicare quality payment program will impact overall physician reimbursement.

Also, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contained further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. On January 31, 2019, the HHS Office of Inspector General, proposed modifications to the federal Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers working with these organizations. Although a number of these and other proposals may require additional authorization to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. For example, since 2016, Vermont requires certain manufacturer identified by the state to justify their price increases.

Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (“Right to Try Act”) was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drugs, once marketing approval is obtained.

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In the European Union, coverage and reimbursement status of any drug candidates for which we obtain regulatory approval are provided for by the national laws of EU Member States. The requirements may differ across the EU Member States. Also at a national level, actions have been taken to enact transparency laws regarding payments between pharmaceutical companies and health care professionals.

We may be subject to applicable fraud and abuse, transparency, government price reporting, and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any future drug candidates we may develop and any drug candidates for which we obtain marketing approval. Our current and future arrangements with healthcare providers, physicians, third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may affect the business or financial arrangements and relationships through which we would market, sell and distribute our products. Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. The laws that may affect our ability to operate include, but are not limited to:

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We have entered into consulting and scientific advisory board arrangements with physicians and other healthcare providers, including some who could influence the use of our drug candidates, if approved. Because of the complex and far-reaching nature of these laws, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. We could be adversely affected if regulatory agencies interpret our financial relationships with providers who may influence the ordering of and use our drug candidates, if approved, to be in violation of applicable laws.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

Ensuring that our business arrangements with third parties comply with applicable healthcare laws and regulations will likely be costly. If our operations are found to be in violation of any of these laws or any other current or future governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, diminished profits and future earnings, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could substantially disrupt our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to significant criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. We can face serious consequences for violations.

U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations, or, collectively, Trade Laws, prohibit, among other things, companies and their employees, agents, clinical research organizations, legal counsel, accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Trade Laws also include restrictions or prohibitions on transactions and dealings with certain embargoed or sanctioned countries, governments, persons, and entities. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have conducted and have ongoing clinical trials in international locations, and may in the future initiate additional studies or trials in countries other than the United States. We also have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We expect our non-U.S. activities to increase over time, and we expect to rely on third parties for research, preclinical studies, and clinical trials and/or to obtain necessary permits, licenses, patent registrations, and other marketing approvals. There is no certainty that all of our employees, agents or contractors will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. We may be held liable for activity in violation of Trade Law by our personnel, agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activity. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our ability to attract and retain employees and our business, prospects, operating results and financial condition.

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Our business activities may be subject to the Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010 (“UK Bribery Act”), and other similar anti-bribery and anti-corruption laws of other countries in which we operate.

We have conducted and have ongoing studies in international locations, and may in the future initiate additional studies in countries other than the United States. Our business activities may be subject to the FCPA, the UK Bribery Act and other similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate. The FCPA generally prohibits companies and their employees and third-party intermediaries from offering, promising, giving or authorizing the provision of anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in many other countries, hospitals are owned and operated by the government, and doctors and other employees working at such hospitals would be considered foreign officials under the FCPA. Recently, the SEC and Department of Justice have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies. There is no certainty that all of our employees, agents or contractors, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, disgorgement, other sanctions and remedial measures and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our ability to attract and retain employees and our business, prospects, operating results and financial condition.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We, and the third parties with whom we share our facilities, are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Each of our operations involve the use of hazardous and flammable materials, including chemicals and biological and radioactive materials. Each of our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. We could be held liable for any resulting damages in the event of contamination or injury resulting from the use of hazardous materials by us or the third parties with whom we share our facilities, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research and development. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

The withdrawal of the United Kingdom (the “U.K.”) from the European Union (the “E.U.”), commonly referred to as “Brexit,” may adversely impact our ability to obtain regulatory approvals of our drug candidates in the E.U., result in restrictions or imposition of taxes and duties for importing our drug candidates into the E.U., and may require us to incur additional expenses in order to develop, manufacture and commercialize our drug candidates in the E.U.

 

Following the result of a referendum in 2016, the U.K. left the E.U. on January 31, 2020, commonly referred to as Brexit.  Pursuant to the formal withdrawal arrangements agreed between the U.K. and the E.U., the U.K. will be subject to a transition period until December 31, 2020, or the Transition Period, during which E.U. rules will continue to apply.  Negotiations between the U.K. and the E.U. are expected to continue in relation to the customs and trading relationship between the U.K. and the E.U. following the expiration of the Transition Period.  

 

Since a significant proportion of the regulatory framework in the U.K. applicable to our business and our drug candidates is derived from E.U. directives and regulations, Brexit, following the Transition Period, could materially impact the regulatory regime with respect to the development, manufacture, importation, approval and commercialization of our drug candidates in the U.K. or the E.U. For example, as a result of the uncertainty surrounding Brexit, the European Medicines Agency (the “EMA”) relocated to Amsterdam from London. Following the Transition Period, the U.K. will no longer be covered by the centralized procedures for obtaining E.U-wide marketing authorization from the EMA and, unless a specific agreement is entered into, a separate process for authorization of drug products, including our drug candidates, will be required in the U.K., the potential process for which is currently

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unclear. Moreover, in the U.S., tariffs on certain U.S. imports have recently been imposed, and the E.U. and other countries have responded with retaliatory tariffs on certain U.S. exports. We cannot predict what effects these and potential additional tariffs will have on our business, including in the context of escalating global trade and political tensions. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our drug candidates in the U.K. or the E.U. and restrict our ability to generate revenue and achieve and sustain profitability. In addition, we may be required to pay taxes or duties or be subjected to other hurdles in connection with the importation of our drug candidates into the E.U., or we may incur expenses in establishing a manufacturing facility in the E.U. in order to circumvent such hurdles. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the U.K. or the E.U. for our drug candidates, or incur significant additional expenses to operate our business, which could significantly and materially harm or delay our ability to generate revenues or achieve profitability of our business. Any further changes in international trade, tariff and import/export regulations as a result of Brexit or otherwise may impose unexpected duty costs or other non-tariff barriers on us. These developments, or the perception that any of them could occur, may significantly reduce global trade and, in particular, trade between the impacted nations and the U.K. It is also possible that Brexit may negatively affect our ability to attract and retain employees, particularly those from the E.U.

Foreign Currency and Exchange Rate Risk

We contract with third parties outside of the United States for the manufacture and supply of drug candidates, and to conduct clinical trials and other research and development activities. While the majority of our contractual obligations are denominated in U.S. dollars, we are indirectly exposed to fluctuations in foreign currency exchange rates in connection with the liabilities incurred by us in these relationships.  Any decline in the exchange rate of the U.S. dollar compared to the functional currency of our manufacturers and other vendors could increase our costs, which may limit our growth or otherwise adversely affect our financial and operating results. We do not currently hedge our exposures to foreign currency fluctuations.

Risks Related to Ownership of our Common Stock

The stock price of our common stock has been and is likely to continue to be volatile or may decline regardless of our operating performance and you could lose all or part of your investment.

The market price of our common stock has been volatile and is likely to continue to be volatile in response to numerous factors, many of which are beyond our control, including:

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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many biopharmaceutical companies. Stock prices of many biopharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

 

We may sell additional equity or debt securities to fund our operations, which may result in dilution to our stockholders and impose restrictions or limitations on our business.

In October 2019, we filed a shelf registration statement on Form S-3 (Registration No. 333-234038) that allows us to sell up to an aggregate of $300 million of our common stock. As of the date of this filing, we have sold approximately $242 million of common stock pursuant to the Form S-3. If we raise additional funds through the issuance of additional debt or equity securities, it may result in dilution to our existing stockholders and/or fixed payment obligations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as redeeming our shares, making investments, issuing additional equity, limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict. As a result, comparing our operating results on a period-to-period basis may not be meaningful. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated guidance we may provide.

We will have broad discretion in the use of our cash and cash equivalents and may not use them effectively.

We cannot specify with any certainty the particular uses of our cash and cash equivalents, but we currently expect such uses will include our ongoing clinical development of rilzabrutinib and PRN473 Topical, our ongoing preclinical development of our other drug candidates and our other research and development activities. We will have broad discretion in the application of our cash and cash equivalents, which we may spend or invest in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. Pending their use, we may invest our cash and cash equivalents in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

Our failure to meet the continued listing requirements of the Nasdaq Global Select Market could result in a delisting of our common stock.

If we fail to satisfy the continued listing requirements of the Nasdaq Global Select Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

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We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:

Further, the JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition time to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with new or revised accounting standards applicable to public companies. Specifically, we have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following September 18, 2023, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could result in sanctions or other penalties that would harm our business.

As a result of being a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002 and the rules and regulations of the Nasdaq Global Select Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement. Preparing to comply with the independent registered public accounting firm attestation requirement may require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts.

We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

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If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

We do not intend to pay dividends for the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

The concentration of our stock ownership will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Based upon shares outstanding as of December 31, 2019, our executive officers, directors and the holders of more than 5% of our outstanding common stock, in the aggregate, beneficially owned approximately 63% of our common stock. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:

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In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. A Delaware corporation may opt out of this provision by express provision in its original certificate of incorporation or by amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of this provision.

These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. This provision does not apply to actions arising under the Exchange Act, or any claim for which the federal courts have exclusive jurisdiction.

Our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, referred to as the Federal Forum Provision. However, as disclosed in our Current Report on Form 8-K filed with the SEC on April 22, 2019, in light of the Sciabacucchi decision issued by the Delaware Court of Chancery in December 2018, finding that provisions similar to the Federal Forum Provision are not valid under Delaware law, we do not currently intend to enforce the Federal Forum Provision unless the Sciabacucchi decision is appealed and the Delaware Supreme Court reverses the decision. If the Delaware Supreme Court affirms the Delaware Chancery Court’s decision, we intend to seek approval by our stockholders to amend the amended and restated certificate of incorporation at our next regularly-scheduled annual meeting of stockholders to remove the invalid provision.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our current principal executive office is located in South San Francisco and consists of approximately 47,500 square feet of space under a lease that expires in February 2026.

We lease our facility and do not own any real property. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.

Item 3. Legal Proceedings.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. In the future, we may receive claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to

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establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

Our common stock has been listed on The Nasdaq Global Select Market under the symbol “PRNB” since September 14, 2018.

 

Holders of Common Stock

As of March 3, 2020, there were 28 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our common stock represented by these record holders.

Dividend Policy

We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, future debt instruments may materially restrict our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.

Performance Graph

This graph is not “soliciting material” or deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to liabilities under that Section, and shall not be deemed incorporated by reference into any filing of the company under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”), whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

The following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Biotechnology Index. An investment of $100 is assumed to have been made in our common stock and each index at our IPO price of $17.00 on September 14, 2018 (the first day of trading of our common stock) and its relative performance is tracked through December 31, 2019. Pursuant to applicable SEC rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on our common stock to date. The stockholder returns shown on the graph below are based on historical results and are not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

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Recent Sales of Unregistered Securities

During the year ended December 31, 2019 and pursuant to our 2018 Equity Incentive Plan, we granted stock options to purchase up to an aggregate of 1,418,000 shares of our common stock to our employees and directors at a weighted-average exercise price of $35.32 per share and 1,975,841 shares remain available for future issuance at December 31, 2019. The sales of these securities were deemed to be exempt from registration under Rule 701 promulgated under the Securities Act, as transactions pursuant to compensatory benefit plans or contracts relating to compensation as provided under Rule 701.

In December 2019, we issued 23,456 shares of common stock to a holder of our outstanding warrants upon the holder’s exercise pursuant to a cashless exercise provision. The warrants had an exercise price of $8.99 per share. The shares of common stock were issued by us in reliance on Section 4(a)(2) of the Securities Act.

Use of Proceeds from the IPO

There has been no material change in the planned use of the IPO proceeds as described in our final prospectus filed with the SEC on September 17, 2018 pursuant to Rule 424(b)(4) of the Securities Act.

Issuer Purchases of Equity Securities

None.

Item 6. Selected Financial Data.

The following tables summarize our selected consolidated financial data for the periods and as of the dates indicated. We have derived our selected consolidated statements of operations data for the years ended December 31, 2019, 2018, and 2017 from our audited consolidated financial statements and related notes included elsewhere in this report.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the consolidated financial and other data below in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included in Part II, Item 8, Financial Statements, of this Form 10-K.

 

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Item 7. 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 consolidated financial statements and the related notes to those statements included elsewhere in this report. This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled “Risk Factors” and elsewhere in this report.

Overview

We are a late-stage biopharmaceutical company focused on developing potential treatments for immune-mediated diseases. Our proprietary Tailored Covalency^® platform enables us to design and develop reversible covalent and irreversible covalent, small molecule inhibitors with potencies and selectivities that we believe will rival those of injectable biologics, but with the convenience of an oral or topical treatment. We retain full, worldwide rights to rilzabrutinib, PRN473 Topical, PRN1371 and our oral immunoproteasome inhibitor program, and have established an ongoing collaboration with Sanofi for PRN2246/SAR442168.

Since commencing operations in 2011, we have devoted substantially all our resources to identifying and developing our drug candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these operations. Our clinical pipeline programs include rilzabrutinib for the treatment of pemphigus (pemphigus vulgaris (PV) and pemphigus foliaceus (PF)); rilzabrutinib for the treatment of immune thrombocytopenia (ITP); rilzabrutinib for the treatment of IgG4-Related Disease (RD); PRN473 Topical, a reversible covalent BTK inhibitor being developed for immune-mediated diseases that could benefit from localized application to the skin; and PRN2246/SAR442168, an irreversible BTK inhibitor which crosses the blood-brain barrier, for the treatment of multiple sclerosis (MS) and other central nervous system (CNS) diseases. In January 2020, we announced suspension of PRN1371, an inhibitor of Fibroblast Growth Factor Receptor (FGFR) designed for the treatment of solid tumors, to focus our portfolio on immune-mediated diseases.

In parallel, we are evaluating rilzabrutinib in a Phase 1/2 clinical trial in ITP, and recently amended the clinical trial protocol to add a long-term extension cohort for responders and to allow for the flexibility to enroll additional patients if we determine additional data would help inform the Phase 3 design. We presented positive data from our Phase 1/2 trial at the 61st ASH Annual Meeting in December 2019. We anticipate reporting Phase 2 data for rilzabrutinib in ITP in the second half of 2020.

In January 2020, we announced an expansion in the development of rilzabrutinib into IgG4-RD, an immune-mediated disease of chronic inflammation and fibrosis that, if left untreated, can lead to severe morbidity including organ dysfunction and organ failure. We anticipate initiating a Phase 2 clinical trial for rilzabrutinib in IgG4-RD in the first half of 2020.

Beyond pemphigus, ITP, and IgG4-RD, we believe there are numerous immune-mediated diseases for which rilzabrutinib may have therapeutic benefit. We anticipate commercializing rilzabrutinib, if approved, by developing our own sales organization targeting dermatologists, hematologists and rheumatologists at specialized centers in the United States.

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Since inception and through December 31, 2019, we have financed our operations primarily with proceeds totaling $541.0 million from our initial public offering (“IPO”) and a subsequent equity offering in October 2019, private placements of our convertible preferred stock and convertible notes and with payments totaling $110.0 million from license and research collaborations. We received a $30.0 million milestone payment in 2019 and milestone payments totaling $25.0 million in 2018 from our collaboration agreement with Sanofi. In 2017, we received non-refundable upfront payments of $40.0 million and $15.0 million from our collaboration agreements with Sanofi and AbbVie, respectively.

In October 2019, we completed an equity offering of 8,625,000 shares of our common stock (which included 1,125,000 shares of our common stock issued and sold pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $28.00 per share. We received net proceeds of approximately $226.5 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

On September 13, 2018, our Registration Statement on Form S-1 filed in connection with our IPO was declared effective by the SEC. In connection with our IPO, we issued and sold an aggregate of 7,187,500 shares of common stock, including 937,500 shares issued and sold pursuant to the underwriters’ full exercise of their overallotment option to purchase additional shares, at an offering price to the public of $17.00 per share. Proceeds from the IPO, net of underwriting discounts and commissions, were $113.6 million. In connection with the completion of our IPO in September 2018, all then outstanding shares of convertible preferred stock were converted into 15,760,102 shares of common stock. In addition, warrants to purchase 12,285,434 shares of our convertible preferred stock were converted into warrants to purchase shares of common stock. In August 2018, we sold 3,474,668 shares of Series C convertible preferred stock at a price of $14.3898 per share for net proceeds of $49.8 million.

As of December 31, 2019, we held cash, cash equivalents and marketable securities totaling $367.8 million. We do not have any products for sale and have not generated any product revenue since our inception. To date, all our revenue has been generated from payments received from our agreements with Sanofi and AbbVie. We have incurred significant operating losses since the commencement of our operations. As of December 31, 2019, we have an accumulated deficit of $185.7 million. We expect to continue to incur significant expenses as we advance our drug candidates and expand our pipeline through clinical development, the regulatory approval process and, if successful, commercial launch activities. If after reviewing the Phase 2 data, we elect to exercise our option to fund a portion of Phase 3 development under the Sanofi Agreement, we will be required to share in certain development costs. Furthermore, we expect to incur additional costs associated with operating as a public company. Based on our planned operations, we believe our cash, cash equivalents and marketable securities at December 31, 2019 are sufficient to fund our operations for at least the next 12 months from the issuance date of these financial statements.

Sanofi Agreement

In November 2017, we entered into a strategic collaboration agreement with Sanofi, or the Sanofi Agreement, for an exclusive license to PRN2246/SAR442168 and backup molecules for development in MS and other CNS diseases. Under the Sanofi Agreement, we have completed the Phase 1 trials and Sanofi is taking on all further development activities. We and Sanofi are each responsible for certain early development costs, and Sanofi is responsible for all further development and commercialization costs, subject to our Phase 3 option described below.

Sanofi has an exclusive license for PRN2246/SAR442168 and its backups for the CNS field, which includes indications of the central nervous system, retina and ophthalmic nerve. We have agreed not to develop other BTK inhibitors within the CNS field, and Sanofi has agreed not to develop PRN2246/SAR442168 or its backups for any indications outside the CNS field. In the event we cease all development and commercialization of our other BTK inhibitors or unilaterally decide to offer Sanofi a field expansion, Sanofi could expand its field upon a field expansion payment to us, as well as potential milestones payments and royalties within the expanded field.

Under the amended Sanofi Agreement, we may receive development, regulatory and commercial milestone payments of up to an aggregate of $765.0 million, as well as royalties up to the mid-teens. We have an option to fund a portion of Phase 3 development costs in return for, at our option, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in royalties up to the high-teens. Only the additional royalty option would be available if we develop

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rilzabrutinib for major enumerated indications overseen by the FDA’s Division of Pulmonary, Allergy and Rheumatology Products or if we experience a change in control involving certain Sanofi competitors. Royalties are subject to specified reductions and are payable, on a product-by-product and country-by-country basis until the later of the date that all of our patent rights that claim a composition of matter of such product expire in such country, the date of expiration of regulatory exclusivity for such product in such country, or the date that is ten years from the first commercial sale of such product in such country.

AbbVie Agreement

In June 2017, we entered into a collaboration agreement with AbbVie, or the AbbVie Agreement, to research and develop oral immunoproteasome inhibitors and received an upfront payment of $15.0 million. In March 2019, we announced a mutual agreement with AbbVie to end our collaboration and to reacquire rights to the program following an assessment by AbbVie that there was no longer a strategic fit of our highly selective oral immunoproteasome inhibitors’ biologic profiles relative to AbbVie’s desired disease areas of focus. We and AbbVie agreed to conclude the collaboration effective March 2019. There are no further financial obligations between AbbVie and us.

 

University of California License Agreements

In November 2009 and September 2011, we entered into license agreements with the Regents of the University of California, or the Regents, which were subsequently amended and restated at various dates (the “UC Agreements”). Under the UC Agreements, the Regents have granted to us exclusive, worldwide licenses, with the right to grant sublicenses, under the Regents’ patent rights in certain patent applications to make, use, sell, offer for sale, and import products and services and practice methods covered by such patent applications in all fields of use.

We have paid the Regents license fees of $40,000 in total under the UC Agreements and are required to pay annual license maintenance fees totaling $40,000 prior to launching any licensed product. We may be obligated to make one-time regulatory and development milestone payments under the UC Agreements for future drug candidates and are obligated to pay tiered royalty payments in the low single digits on net sales of the licensed products. Additionally, we are obligated to pay the Regents payments on non-royalty licensing revenue we receive from our sub-licensees for products covered by UC patents. Pursuant to the UC Agreements, we also made IPO milestone payments to the Regents totaling approximately $140,000 in October 2018.

Under the UC Agreements, we are required to diligently proceed with the development, manufacture, regulatory approval, and sale of licensed products which include obligations to meet certain development-stage milestones within specified periods of time and to market the resulting licensed products in sufficient quantity to meet market demand. We have the right and option to extend the date by which we must meet any milestone in one year extensions by paying an extension fee for second and subsequent extension, provided we can demonstrate we made diligent efforts to meet the milestone.

Components of Operating Results

Revenue

To date, all our revenue has been generated from payments pursuant to our collaboration arrangements with Sanofi and AbbVie.

In connection with the Sanofi Agreement, we received a $40.0 million non-refundable upfront payment in December 2017, additional milestone payments totaling $25.0 million in 2018 for successful development activities under the early development plan, and a $30.0 million clinical development milestone payment in 2019 for the initiation of Sanofi’s Phase 2b clinical trial of PRN2246/SAR442168. We identified the following performance obligations under our Sanofi Agreement: (i) granting a license of rights to PRN2246/SAR442168, (ii) transferring of technology (know-how) related to PRN2246/SAR442168, and (iii) performance of research and development services related to our responsibilities under the early development plan. We concluded that the delivered license was not distinct at the inception of the arrangement due to our proprietary expertise with respect to the licensed compound and related developmental participation under the agreement, which was required for Sanofi to fully realize the value from the delivered license. Therefore, we combined these performance obligations as one unit of accounting and recognized the $40.0 million upfront payment and the aggregate of $25.0 million in milestone payments ratably over the performance period, which ended as of December 31, 2018.

On January 1, 2019, we adopted Accounting Standards Codification (“ASC”) No. 2014-09, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective approach. We concluded upon analysis that there is no adjustment necessary to revenue recognized through December 31, 2018 under ASC 606 for the Sanofi Agreement. All deliverables under ASC 605 and all performance obligations under ASC 606 had been completed as of December 31, 2018. In June 2019, we received a $30.0 million milestone payment from Sanofi for achieving a clinical development milestone and recognized the full payment as revenue. For the years ended December 31, 2019, 2018 and 2017, we recognized $30.0 million, $63.1 million and $1.9 million in revenue from Sanofi, respectively. There was no deferred revenue related to the Sanofi Agreement at December 31, 2019 and 2018.

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In connection with the AbbVie Agreement, we received a $15.0 million non-refundable upfront payment in June 2017. Prior to the adoption of ASC 606, we concluded under ASC 605 that the delivered license was not distinct at the inception of the arrangement due to our proprietary expertise with respect to the licensed compounds and related ongoing research participation under the AbbVie Agreement, which was required for AbbVie to fully realize the value from the licensed compound. Therefore, the $15.0 million received related to this combined unit of accounting was recognized as revenue ratably over the performance period, which as of December 31, 2018, was estimated to continue through the fourth quarter of 2019.

On January 1, 2019, we adopted ASC 606 using the modified retrospective approach. Upon adoption, the fixed non-refundable and non-creditable upfront payment of $15.0 million received in 2017 was determined to be the transaction price. Revenue was recognized based on a measurement of progress toward the completion of the performance obligation of providing research services for two years, subject to an extension for up to six months. The measurement was calculated using an input-method based on research costs incurred by us during each reporting period compared to the total projected research costs to provide research services by us pursuant to the AbbVie Agreement. Such costs included external direct costs and internal direct labor consisting of the efforts of certain of our employees that dedicated their time providing research services pursuant to the AbbVie Agreement. Based on this methodology, we concluded that under ASC 606, approximately $9.8 million in revenue should be recognized through December 31, 2018, as compared to $9.4 million under ASC 605. We recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date. In March 2019, we and AbbVie agreed to end our collaboration. Therefore, we recognized the remaining balance of the transaction price of $5.2 million in the first quarter of 2019, upon termination of the AbbVie Agreement. Revenue related to AbbVie for the years ended December 31, 2019, 2018 and 2017 was $5.2 million, $6.0 million and $3.4 million, respectively. There was no deferred revenue related to the AbbVie Agreement at December 31, 2019. Deferred revenue related to the AbbVie Agreement was $5.6 million at December 31, 2018.

Operating Expenses

We classify our operating expenses into two categories: research and development and general and administrative.

Research and Development

Our research and development expenses account for a significant portion of our operating expenses and relate to expenses incurred in connection with research and development activities, including the preclinical and clinical development of our drug candidates. These expenses primarily consist of preclinical and clinical expenses; payroll and personnel expenses, including stock-based compensation, for our research and development employees; consulting costs, laboratory supplies and facilities costs. We expense both internal and external research and development costs as they are incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as an expense as the related services are performed.

Our external research and development expenses consist primarily of:

With respect to internal costs, several of our departments support multiple clinical programs, and we do not allocate those costs by clinical program. Internal research and development expenses consist primarily of personnel-related costs, facilities and infrastructure costs, certain laboratory supplies and non-capitalized equipment used for internal research and development activities.

We expect our research and development expenses to increase over the next several years as we continue to execute on our business strategy, advance our current programs and expand our research and development efforts, and pursue regulatory approvals of any of our drug candidates that successfully complete clinical trials.

General and Administrative

General and administrative expenses consist primarily of payroll and personnel related expenses, including stock-based compensation, for our personnel in finance, legal, human resources, business and corporate development and other administrative functions, professional consulting fees for legal and accounting services, costs related to our intellectual property and other allocated costs, such as facility expenses not otherwise allocated to research and development, and infrastructure costs.

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We expect our general and administrative expenses to increase as a result of operating as a public company. Additional expenses include those related to compliance with the rules and regulations of the SEC and the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services.

Other Income (Expense), Net

Other income (expense), net, consists primarily of changes in fair value related to the outstanding convertible preferred stock warrant liability and the convertible notes redemption features liability.

Interest Income

Interest income is primarily related to interest earned on our marketable securities.

Interest Expense

Interest expense consists primarily of interest expense related to our debt obligation, and the accretion of non-cash debt discounts related to the beneficial conversion features of our convertible notes, the convertible notes redemption features and the convertible preferred stock warrants.

 

Results of Operations

Comparison of the Years Ended December 31, 2019 and 2018

The following table summarizes our results of operations for the years ended December 31, 2019 and 2018 (dollars in thousands):

 

 

Revenue

Revenue for the year ended December 31, 2019 was $35.2 million, consisting of a $30.0 million clinical development milestone payment received in connection with the Sanofi Agreement and a portion of the upfront payments received in connection with the AbbVie Agreement. Revenue for the year ended December 31, 2018 was $69.1 million, consisting of a portion of the upfront and additional payments we received in connection with the Sanofi Agreement and a portion of the upfront payment received in connection with the AbbVie Agreement.

The clinical development milestone payment of $30.0 million received in 2019 under the Sanofi Agreement was recognized as revenue when earned in the second quarter of 2019. The aggregate payments of $65.0 million received in 2017 and 2018 under the Sanofi Agreement were recognized ratably over the estimated performance period ended December 31, 2018, and we recorded approximately $63.1 million in revenue related to the Sanofi Agreement for the year ended December 31, 2018.

The nonrefundable upfront payment under the AbbVie Agreement was recognized ratably over the estimated performance period, and we recorded approximately $5.2 million and $6.0 million in revenue related to the AbbVie Agreement for the years ended December 31, 2019 and 2018, respectively.

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Research and Development Expenses

Research and development expenses were $74.1 million for the year ended December 31, 2019, an increase of $33.6 million, compared to $40.5 million for the year ended December 31, 2018. The increase was primarily driven by a $13.7 million increase in personnel related expenses, a $11.4 million increase in external rilzabrutinib program costs due to the initiation of a global Phase 3 trial in pemphigus in November 2018 and certain manufacturing campaigns to supply drug products for our rilzabrutinib clinical trials, and a $5.4 million increase in other unallocated research and development expenses, mainly facility costs related to our move to our new office space in February 2019. The increase in personnel related expenses is due to increased research and development headcount and increased stock-based compensation expenses.

The following table summarizes research and development expenses (in thousands):

 

 

General and Administrative Expenses

General and administrative expenses were $19.8 million for the year ended December 31, 2019, an increase of $8.4 million, compared to $11.5 million for the year ended December 31, 2018. The increase was primarily driven by a $7.6 million increase in personnel related expenses due to increased headcount expenses and increased stock-based compensation expenses.

Other Income (Expense), Net

There was no other income (expense), net, for the year ended December 31, 2019. Other expense, net, was $0.7 million for the year ended December 31, 2018 and primarily included expense related to the remeasurement and conversion of our preferred stock warrants upon our IPO.

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Interest Income

Interest income for the years ended December 31, 2019 and 2018 was $5.0 million and $1.7 million, respectively, and consists primarily of interest income earned on our cash, cash equivalents and marketable securities. The increase of $3.3 million is mainly due to higher balances of marketable securities in 2019 as compared to 2018.

Comparison of the Years Ended December 31, 2018 and 2017

The following table summarizes our results of operations for the years ended December 31, 2018 and 2017 (dollars in thousands):

 

 

Revenue

Revenue for the year ended December 31, 2018 was $69.1 million, consisting of a portion of the upfront payment received in connection with the AbbVie Agreement and a portion of the upfront and additional payments we received in connection with the Sanofi Agreement. Revenue for the year ended December 31, 2017 was $5.2 million, consisting of portions of the upfront payments received in connection with the AbbVie Agreement and Sanofi Agreement, which were signed in June and November 2017, respectively.

The aggregate payments of $65.0 million under the Sanofi Agreement were recognized ratably over the performance period, and we recorded $63.1 million and $1.9 million in revenue related to the Sanofi Agreement for the years ended December 31, 2018 and 2017, respectively.

The nonrefundable upfront payment under the AbbVie Agreement was recognized ratably over the estimated performance period, and we recorded $6.0 million and $3.4 million in revenue related to the AbbVie Agreement for the years ended December 31, 2018 and 2017, respectively.

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Research and Development Expenses

Research and development expenses were $40.5 million for the year ended December 31, 2018, an increase of $15.1 million, compared to $25.4 million for the year ended December 31, 2017. The increase was primarily driven by a $9.9 million increase in external rilzabrutinib program costs, a $4.9 million increase in personnel related expenses, and a $1.2 million increase in other unallocated research and development costs, partially offset by a decrease of $0.8 million in costs related to PRN2246/SAR442168. The increase in rilzabrutinib program costs was mainly due to various manufacturing campaigns to supply drug products for our rilzabrutinib clinical trials and the initiation of a global Phase 3 trial in pemphigus in November 2018. The increase in personnel related expenses was mainly due to our R&D headcount increase as we build out our R&D team.

The following table summarizes research and development expenses (in thousands):

 

 

General and Administrative Expenses

General and administrative expenses were $11.5 million for the year ended December 31, 2018, an increase of $5.0 million, compared to $6.4 million for the year ended December 31, 2017. The increase was primarily driven by an increase in personnel and facility expenses. The increase in personnel costs was related to increased headcount during 2018 as we built out our organization. The increase in facility costs was due to certain rent expense recognition starting from August 1, 2018, the date when we gained access to our new leased premises, which we commenced occupancy in February 2019.  

Other Income (Expense), Net

Other expense, net, for the year ended December 31, 2018 was $0.7 million compared to other income, net, of $5.1 million for the year ended December 31, 2017. Other expense, net, for the year ended December 31, 2018 included $0.7 million of expense related to the conversion of our preferred stock warrants upon our IPO. Other income, net, for the year ended December 31, 2017 was primarily due to a net change of $5.1 million in 2017 for the fair values of the convertible note redemption features and the fair values of the outstanding convertible preferred stock warrants.

Interest Income

Interest income for the year ended December 31, 2018 was $1.7 million, related to our investments in marketable securities. Interest income for the year ended December 31, 2017 was insignificant.

Interest Expense

There was no interest expense for the year ended December 31, 2018. Interest expense for the year ended December 31, 2017 was $7.2 million, comprised of $5.5 million of debt discounts and $1.7 million of accrued interest expense on the convertible notes, which were converted into preferred stock in December 2017.

Liquidity and Capital Resources

Since inception and through December 31, 2019, we have financed our operations primarily with proceeds totaling $541.0 million from our IPO and a subsequent equity offering in October 2019, private placements of our convertible preferred stock and convertible notes and with payments totaling $110.0 million from license and research collaborations. As of December 31, 2019 and 2018, we held cash, cash equivalents and marketable securities totaling $367.8 million and $180.6 million, respectively.

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We do not have any products for sale and have not generated any product revenue since our inception. As of December 31, 2019, all our revenue has been generated from the non-refundable upfront and milestone payments received from our collaboration agreements with Sanofi and AbbVie. For the years ended December 31, 2019, 2018 and 2017, we recorded a net loss of $53.8 million, net income of $18.2 million and a net loss of $28.7 million, respectively. As of December 31, 2019, we have an accumulated deficit of $185.7 million, and we do not expect positive cash flows from operations for the foreseeable future. We expect to continue to incur significant expenses and net operating losses as we advance our clinical drug candidates and expand our pipeline, seek regulatory approval and, if successful, proceed to commercial launch activities. Furthermore, we expect to incur additional costs associated with operating as a public company. In addition, we do not yet have a sales organization or commercial infrastructure. Accordingly, we will incur significant expenses to develop a sales organization and/or commercial infrastructure in advance of generating any commercial product sales. As a result, we will need substantial additional capital to support our operating activities. We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as potential collaboration agreements with third parties.

Based on our planned operations, we believe our cash, cash equivalents and marketable securities at December 31, 2019 are sufficient to fund our operations for at least the next 12 months from the issuance date of these financial statements.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

See our “Risk Factors” elsewhere in this report for a description of additional risks associated with our substantial capital requirements.

Cash Flows

The following table summarizes cash flows for each of the periods presented below (in thousands):

 

 

Net cash provided by (used in) operating activities

During the year ended December 31, 2019, net cash used in operating activities was $42.5 million, which resulted from a net loss of $53.8 million adjusted for changes in operating assets and liabilities and non-cash charges. Non-cash charges included $12.2 million in stock-based compensation and $1.8 million in depreciation and amortization, partially offset by $1.6 million from the

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amortization of discounts on marketable securities. Changes in operating assets and liabilities included a decrease of $5.2 million in deferred revenue and a decrease of $2.1 million in accounts payable, partially offset by a $6.8 million increase in accrued liabilities.

During the year ended December 31, 2018, net cash used in operating activities was $21.2 million, which resulted from net income of $18.2 million adjusted for changes in operating assets and liabilities and non-cash charges. Non-cash charges included $2.8 million in stock-based compensation, $0.6 million related to the change in fair value of the convertible preferred stock warrant liability, $0.7 million for deferred rent and $0.3 million for depreciation and amortization. Changes in operating assets and liabilities included a decrease of $44.1 million in deferred revenue, an increase of $2.2 million in prepaid expenses and other assets, an increase of $1.0 million in accounts payable and an increase of $2.0 million in accrued liabilities.

During the year ended December 31, 2017, net cash provided by operating activities was $26.8 million, which resulted from a net loss of $28.7 million adjusted for changes in operating assets and liabilities and non-cash charges. We received nonrefundable upfront payments of $40.0 million and $15.0 million from the Sanofi Agreement and the AbbVie Agreement, respectively. We recorded revenues of approximately $1.9 million and $3.4 million related to Sanofi and AbbVie, respectively, for the year ended December 31, 2017. The remaining $49.8 million was recorded as deferred revenue at December 31, 2017. Other changes in operating assets and liabilities included increases of $1.3 million and $2.0 million in accounts payable and accrued liabilities, respectively, partially offset by a decrease of $0.8 million in prepaid expenses and other current assets. Non-cash charges included debt discount amortization of $5.5 million, the conversion of accrued interest expense of $1.7 million into preferred stock, stock-based compensation and depreciation expenses of $1.0 million and $0.2 million, respectively, partially offset by a $5.1 million net gain related to changes in the fair values of the redemption features liability and convertible preferred stock warrant liability.

Net cash used in investing activities

During the year ended December 31, 2019, net cash used in investing activities was $182.6 million and is primarily the result of purchases in excess of maturities of marketable securities of $180.5 million and purchases of property and equipment of $2.2 million.

During the year ended December 31, 2018, net cash used in investing activities was $146.9 million and is primarily the result of purchases in excess of maturities of marketable securities of $145.8 million and purchases of laboratory and computer equipment of $1.1 million.

During the year ended December 31, 2017, net cash used in investing activities was $90,000 for the purchase of laboratory and computer equipment.

Net cash provided by financing activities

During the year ended December 31, 2019, net cash provided by financing activities was $230.1 million, resulting from net proceeds of $226.5 million from the equity offering of our common stock in October 2019 and $3.7 million from issuances of common stock upon exercise of options and participation in the employee stock purchase plan.

During the year ended December 31, 2018, net cash provided by financing activities was $161.9 million and includes $110.6 million of net proceeds, after deducting underwriting discounts, commissions and offering costs, from our IPO of our common stock, $49.8 million of proceeds from our Series C preferred stock issuance and $1.5 million from the issuance of common stock pursuant to our equity incentive plans.

During the year ended December 31, 2017, net cash provided by financing activities was $8.4 million, consisting of $8.1 million of proceeds from the issuance of convertible notes and $0.3 million of proceeds from the issuance of common stock.

Off-Balance Sheet Arrangements

We currently do not have, and did not have during the periods presented, any off-balance sheet arrangements, as defined under SEC rules.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2019 (in thousands):

 

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Our corporate headquarters are located in South San Francisco, California, where we lease approximately 47,500 square feet of office, research and development, and laboratory space starting February 2019, for a seven-year period with an option to extend for another seven-year period, subject to certain conditions. Our previous lease, which expired on January 31, 2019, was for 30,000 square feet of office, research and development, and laboratory space in South San Francisco.

JOBS Act

The JOBS Act permits an “emerging growth company” such as ours to take advantage of an extended transition time to comply with new or revised accounting standards applicable to public companies. We have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, which extension runs until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates as of the end of our second fiscal quarter, or June 30th, exceeds $700.0 million, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of our 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 financial statements, as well as the reported 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.

Revenue Recognition

Effective January 1, 2019, we adopted ASC 606 using the modified retrospective approach. Under this approach, we recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following 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 entity satisfies 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 and services we transfer 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, 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 have entered into licensing and collaboration agreements that are within the scope of ASC 606. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under such licensing and collaboration agreements, we perform the five-step model under ASC 606. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. 

Licenses of Intellectual Property:  If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promised goods or services, 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 progress for purposes of recognizing revenue from non-refundable, upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

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Milestone Payments:  At the inception of each arrangement that includes development, regulatory and/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 using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or that of our licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received or the underlying activity has been completed. 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 of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue in the period of adjustment. 

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 any of our licensing arrangements.

Research and Development Expense Accruals

We accrue and expense research and development expense related to services performed by third parties based upon actual work completed in accordance with agreements established with such third parties. This process involves identifying services that have been performed and estimating the level of service performed and the associated contractual cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of clinical trial accruals accordingly on a prospective basis.

The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven timing of payments. To date, we have not experienced any material differences between estimated clinical trial expenses and actual clinical trial expenses.

Stock-based Compensation

We use the Black-Scholes valuation model to estimate the grant date fair value of stock option awards with time-based vesting terms. Stock-based compensation expense is recognized based on the grant date fair value on a straight-line basis over the requisite service period and is reduced for forfeitures as they occur. The determination of fair value for stock-based awards on the date of grant using an option-pricing model requires us to make certain assumptions that represent our best estimates of volatility, risk-free interest rate, expected life and dividend yield. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These assumptions include:

Options granted to non-employee consultants are re-measured at the current fair value at the end of each reporting period until the underlying equity instruments vest. Stock-based compensation expense for non-employee consultants was insignificant for all periods presented.

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Determination of the estimated fair value of our common stock on grant dates prior to our IPO

Prior to the IPO, the estimated fair value of our common stock was determined by our board of directors, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, including factors that may have changed from the date of the most recent valuation through the date of the grant. The factors considered by our board of directors include, but are not limited to: the prices at which we sold shares of our convertible preferred stock to outside investors in arms-length transactions; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; our results of operations, financial position and capital resources; current business conditions and projections; the lack of marketability of our common stock; the hiring of key personnel and the experience of management, progress of our research and development activities; our stage of development and material risks related to its business; the fact that the option grants involve illiquid securities in a private company; and the likelihood of achieving a liquidity event, such as an IPO or sale, in light of prevailing market conditions. Subsequent to the IPO, we estimate at the date of grant the fair value of the option to buy our underlying common stock, which is traded publicly on the Nasdaq Global Select Market.

We have periodically determined the estimated fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountant’s Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid. The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, our board of directors considered the following methods:

For the valuations of our common stock performed in August 2017, December 2017, March 2018, June 2018 and July 2018, we used a hybrid of the OPM and PWERM methods to determine the estimated fair value of our common stock.

Our board of directors and management develop best estimates based on application of these approaches and the assumptions underlying these valuations, giving careful consideration to the advice from our third-party valuation specialist. Such estimates involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

Determination of the fair value of our common stock on grant dates following our IPO

The fair values of each granted option to buy underlying common stock is estimated, based on the price of our common stock as reported by the Nasdaq Global Select Market, at the date of grant.

Stock-based compensation expense was $12.2 million, $2.8 million and $1.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, we had $36.2 million of total unrecognized stock-based compensation expenses which we expect to recognize over a weighted-average period of 2.9 years.

We have not recognized, and we do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation expense as a result of the full valuation allowance on our deferred tax assets including deferred tax assets related to our net operating loss carryforwards.

Income Taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured at the balance sheet

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date using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the underpayment of income taxes.

As of December 31, 2019, our total deferred tax assets were $45.9 million. The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, we have provided for a full valuation allowance against our deferred tax assets.

Recent Accounting Pronouncements

The information required by this item is included in Note 2, Significant Accounting Policies, to the Consolidated Financial Statements included elsewhere in Part II, Item 8, of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rate sensitivities. We had cash, cash equivalents and marketable securities of $367.8 million and $180.6 million as of December 31, 2019 and 2018, respectively, which consisted primarily of money market funds and fixed income, investment grade securities with contractual maturities of less than two years.

We have established guidelines regarding the diversification of our investments in approved instruments, their credit quality ratings and maturities. The primary objective of our investment activities is to preserve principal balances and provide liquidity. Our investments as of December 31, 2019 included $276.0 million in short-term marketable securities and $52.3 million in long-term marketable securities. Because our investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant. Based on our investment portfolio at December 31, 2019, a hypothetical 1% movement in market interest rates would result in a $1.9 million change in the fair value of our investments. Such losses would only be realized if we were to sell the investments prior to their maturities. We had no debt outstanding as of December 31, 2019.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Principia Biopharma Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Principia Biopharma Inc. (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2013.

Redwood City, California

March 10, 2020

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PRINCIPIA BIOPHARMA INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

See accompanying notes.

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PRINCIPIA BIOPHARMA INC.

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

 

 

See accompanying notes.

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PRINCIPIA BIOPHARMA INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 

See accompanying notes.

 

 

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PRINCIPIA BIOPHARMA INC.

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

 

 

 

See accompanying notes.

 

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PRINCIPIA BIOPHARMA INC.

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

See accompanying notes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Description of Business

We, Principia Biopharma Inc. (“Principia”), are a late-stage biopharmaceutical company focused on developing potential treatments for immune-mediated diseases. We were incorporated on October 6, 2008, began operations in February 2011, and are headquartered in South San Francisco, California.

Initial Public Offering

On September 13, 2018, our Registration Statement on Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”) for our initial public offering (“IPO”). In connection with the IPO, we issued and sold an aggregate of 7,187,500 shares of common stock, including 937,500 shares issued and sold pursuant to the underwriters’ full exercise of their over-allotment option to purchase additional shares, at an offering price to the public of $17.00 per share. Proceeds from the IPO, net of underwriting discounts and commissions, were $113.6 million. In connection with the completion of the IPO in September 2018, all the outstanding shares of convertible preferred stock were converted into 15,760,102 shares of common stock. In addition, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock.

In connection with our IPO, on September 18, 2018, our certificate of incorporation was amended and restated to provide for 500,000,000 authorized shares of common stock with a par value of $0.0001 per share and 20,000,000 authorized shares of preferred stock with a par value of $0.0001 per share.

Subsequent Equity Offering

In October 2019, we completed an equity offering of 8,625,000 shares of our common stock (which included 1,125,000 shares of our common stock issued and sold pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $28.00 per share. We received net proceeds of approximately $226.5 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of Principia and our wholly-owned Australian subsidiary. All intercompany accounts, transactions and balances have been eliminated.

Use of Estimates

The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Significant estimates include amounts to determine the fair value of common stock-based awards, warrants, and other issuances, embedded derivatives, accruals for research and development costs and uncertain tax positions, and the estimated periods of performance used in the determination of collaboration revenues. We base our estimates on historical experience and on various other market specific and relevant assumptions that our management believes to be reasonable under the circumstances. Actual results could differ materially from our estimates.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. Our cash and cash equivalents are maintained with a limited number of financial institutions in the United States. Amounts on deposit have exceeded and will continue to exceed federally insured limits. We have not experienced any losses on our cash deposits. Additionally, we have established guidelines regarding the diversification of our investments in approved instruments, their credit quality ratings and maturities. The guidelines are designed to preserve principal balances and provide liquidity. Cash, cash equivalents and marketable securities totaled $367.8 million and $180.6 million at December 31, 2019 and 2018, respectively.                                   

We are subject to a number of risks similar to other late-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical studies or clinical trials, our reliance on third parties or partners to conduct our clinical trials, the need to obtain regulatory and marketing approvals for our drug candidates or to rely on partners to do so, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of our drug candidates, our right to develop and commercialize our drug candidates pursuant to the terms and

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conditions of the licenses granted to us, protection of proprietary technology, the ability to make or collect milestone, royalty or other payments due, or due to us, under any license or collaboration agreements, and the need to secure and maintain adequate manufacturing arrangements with third parties. If we do not successfully commercialize or partner any of our drug candidates, we will be unable to generate product revenue or achieve profitability.

Cash and Cash Equivalents

We consider all highly liquid financial instruments with original maturities of 90 days or less at the date of purchase to be cash equivalents. Cash equivalents are stated at fair value.

Marketable Securities

We carry marketable securities consisting primarily of money market funds, U.S. Treasury securities and obligations of government-sponsored enterprises and corporate bonds and commercial paper. Marketable securities with maturities greater than 90 days at the time of purchase and that mature less than one year from the consolidated balance sheet date are classified as short-term. Marketable securities with a maturity date greater than one year at each balance sheet date are classified as long-term. All of our marketable securities are considered available-for-sale and carried at estimated fair values on the consolidated balance sheets. Unrealized gains or losses are excluded from net income and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity on the consolidated balance sheets. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on marketable securities are included in other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest earned on marketable securities is included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts and such amortization and accretion are included as a component of interest income.

Restricted Cash

As of December 31, 2019 and 2018, we had $0.6 million in long-term restricted cash for a lease security deposit. This amount is separated from cash and cash equivalents on the consolidated balance sheets.

Segments

We have one operating segment. Our chief operating decision maker, our President and Chief Executive Officer, manages our operations on a consolidated basis in assessing performance and allocating resources.

Property and Equipment

Property and equipment consist of laboratory equipment, computer equipment, furniture and fixtures and leasehold improvements and are stated at cost, net of accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets generally ranging from two years for computer equipment to five years for office furniture and fixtures. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term.

Leases

We enter into lease agreements for our laboratory and office facilities. These leases are classified as operating leases. Rent expense is recognized on a straight-line basis over the term of the lease. The difference between rent expense recognized and rental payments is recorded as deferred rent in the consolidated balance sheets.

Lease incentives and allowances provided by our landlord for the construction of leasehold improvements are recorded as lease incentive obligations as the related construction costs are incurred, up to the maximum aggregate allowances. Lease incentive obligations are classified as a component of deferred rent and are amortized on a straight-line basis over the lease term as a reduction of rent expense.

Revenue Recognition

Effective January 1, 2019, we adopted Accounting Standards Codification (“ASC”) No. 2014-09, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective approach. Under this approach, we recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following 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

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performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies 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 and services we transfer 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, 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 have entered into licensing and collaboration agreements that are within the scope of ASC 606. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under such licensing and collaboration agreements, we perform the five-step model under ASC 606. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.

Licenses of Intellectual Property:  If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promised goods or services, 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 progress for purposes of recognizing revenue from non-refundable, upfront fees. We evaluate the measure of progress 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 using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or that of our licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received or the underlying activity has been completed. 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 of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue in the period of adjustment. 

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 any of our licensing arrangements.

The impact of the adoption of ASC 606 on the accompanying consolidated balance sheet as of January 1, 2019 was as follows (in thousands):

 

The impact of the adoption of ASC 606 on our consolidated statement of operations for the year ended December 31, 2019 was as follows (in thousands):

 

During the year ended December 31, 2019, we did not recognize any revenue from performance obligations satisfied in previous periods.

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Convertible Preferred Stock Warrants

In connection with the issuance of certain convertible notes in 2016 and 2017, we issued warrants to purchase our capital stock. Freestanding warrants to purchase our convertible preferred stock were recorded as a liability on our consolidated balance sheets because the underlying shares of convertible preferred stock are contingently redeemable, which, therefore, may obligate us to transfer assets to settle those warrants. The warrants are subject to revaluation at each balance sheet date, with changes in fair value recognized as a component of other income (expense), net, on the consolidated statements of operations.

Upon the completion of our IPO in September 2018, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock. We re-valued the convertible preferred stock warrants upon completion of our IPO and reclassified the estimated fair value of the warrants to additional paid-in capital. See Note 8, Debt Obligation, for additional information.

Convertible Notes Redemption Features

We recorded a derivative liability related to redemption features embedded within our convertible notes. The convertible notes issued in 2016 and 2017 included features that were determined to be an embedded derivative requiring bifurcation and separate accounting. This bifurcated redemption feature was initially recorded at fair value and was subject to revaluation at each balance sheet date. Changes in fair value were recognized as a component of other income (expense), net, on the consolidated statements of operations. In December 2017, the convertible notes and interest payable were converted into Series B-3 preferred stock and the convertible notes redemption features liability was determined to have a fair value of zero as of December 31, 2017. See Note 8, Debt Obligation, for additional information.

Research and Development Expenses

Research and development expenses consist primarily of personnel costs, including salaries, benefits and stock-based compensation, costs related to clinical and preclinical studies, contract manufacturing, consulting fees, laboratory supplies, and allocated overhead and facility occupancy costs. Research and development costs are expensed as incurred. Non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are capitalized and expensed as the goods are delivered or the related services are performed. Costs associated with co-development activities are included in research and development expenses, with any reimbursement of costs by our collaboration partners reflected as a reduction of research and development expenses.

Stock-based Compensation

We use the Black-Scholes valuation model to estimate the grant date fair value of stock option awards with time-based vesting terms. The determination of fair value for stock-based awards on the date of grant using an option-pricing model (“OPM”) requires management to make certain assumptions regarding a number of variables. Stock-based compensation expense is recognized based on the grant date fair value on a straight-line basis over the requisite service period and is reduced for forfeitures as they occur. Equity-based payments granted to non-employees are recorded at grant date fair value and are re-measured at the current fair value at the end of each reporting period until the underlying equity instruments vest. Non-employee stock-based compensation expense was immaterial for all periods presented.

Income Taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured at the balance sheet date using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted.

We record uncertain tax positions on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the underpayment of income taxes.

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Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in stockholders’ equity (deficit) of a business enterprise during a period, resulting from transactions from non-owner sources, and consists primarily of unrealized gains or losses related to our available-for-sale marketable securities, which are carried at estimated fair values on the consolidated balance sheets.

Net Income (Loss) per Share

Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted net income (loss) per share includes the effect of potentially dilutive securities, which include outstanding warrants and stock options if the effect of their inclusion would be dilutive. In periods of net loss, diluted net loss per share is the same as basic net loss per share as the inclusion of potentially dilutive securities in the calculation would be anti-dilutive.

We have issued securities other than common stock that participate in dividends to the extent declared (“Participating Securities”), and therefore utilize the two-class method to calculate net income (loss) per share. These Participating Securities include Series A, Series B-1, Series B-2, Series B-3 and Series C redeemable convertible preferred stock. The two-class method requires a portion of net income (loss) to be allocated to the Participating Securities to determine net income (loss) attributable to common stockholders. Net income (loss) attributable to common stockholders is equal to the net income (loss) less dividends paid on preferred stock with any remaining earnings allocated in accordance with the bylaws between the outstanding common and redeemable convertible preferred stock as of the end of each period. In September 2018, upon our IPO, all shares of convertible preferred stock were converted into an equal number of shares of common stock.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), we meet the definition of an emerging growth company, and have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

Recently Adopted Accounting Standards Updates

In November 2016, the FASB issued accounting standard update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption is permitted. We early adopted ASU 2016-18 during the fourth quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Entities have the option of applying either a full retrospective approach to all periods presented, or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. We adopted ASC No. 2014-09 on January 1, 2019 using the modified retrospective method of transition applied to contracts that were not completed at January 1, 2019. Therefore, comparative information will not be adjusted and the impact of the transition is reflected as an adjustment to the opening accumulated deficit. A completed contract is a contract for which all, or substantially all, of the revenue was recognized in accordance with revenue guidance in effect before the date of initial application. The new revenue recognition standard differs from the previous accounting standard in many respects, such as in the accounting for variable consideration and the measurement of progress toward completion of performance obligations.

Recently Issued Accounting Standards or Updates Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative

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disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, permitting another transition method for ASU 2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We expect to adopt ASU 2016-02 as of January 1, 2020 under this new alternative transition method. While we do not expect a material impact from adoption on our statements of operations or comprehensive income (loss), we do expect to record a material increase in our assets and liabilities on the balance sheet upon adoption of this standard. Upon adoption, we expect to recognize a right-of-use asset and a lease liability for the property lease related to our corporate headquarters.

In June 2018, the FASB issued ASU No. 2018-07, Compensation–Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted. We do not expect a material impact from adoption on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We do not expect a material impact from adoption on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The guidance will be applied using a modified retrospective approach with the cumulative effect recognized as an adjustment to retained earnings. A prospective transition approach is required for debt securities that have recognized an other-than-temporary impairment prior to the effective date. We do not expect a material impact from adoption on our consolidated financial statements and related disclosures.

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. We determine fair value using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

Level 1 inputs include quoted prices in active markets for identical assets or liabilities.

Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 inputs include unobservable inputs that are supported by little or no market activity and are significant to the fair value of the underlying asset or liability. Such inputs reflect our best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires our management to make judgments and consider factors specific to the asset or liability.

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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 were as follows (in thousands):

 

 

 

The carrying amounts of accounts payable and accrued liabilities approximate their fair values due to their short-term maturities. Our Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly. There were no transfers of assets or liabilities between the fair value measurement levels during the years ended December 31, 2019 and 2018.

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4. Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following as of December 31, 2019 and 2018 (in thousands):

 

 

All our marketable securities are considered available-for-sale. There were no sales of available-for-sale marketable securities in any of the periods presented. The carrying value of marketable securities that were in unrealized loss positions totaled approximately $119.5 million as of December 31, 2019. We have determined that (i) we do not have the intent to sell any of these investments, and (ii) it is not more likely than not that we will be required to sell any of these investments before recovery of the entire amortized cost basis. We anticipate that we will recover the entire amortized cost basis of such securities and have determined there were no other-than-temporary impairments associated with any of these marketable securities before recovery of the entire amortized cost basis during the year ended December 31, 2019. At December 31, 2019, the remaining contractual maturities of long-term marketable securities were less than two years.

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5. Balance Sheet Components

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statements of cash flows (in thousands):

 

 

Property and equipment as of December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

Depreciation and leasehold improvement amortization expenses were $1.8 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively.

 

Prepaid expenses and other current assets as of December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

 

Other long-term assets as of December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

6. License and Collaboration Agreements

Sanofi

In November 2017, we entered into a strategic collaboration agreement with Sanofi, or the Sanofi Agreement, for an exclusive license to PRN2246/SAR442168 and backup molecules for development in multiple sclerosis (“MS”) and other central nervous system (“CNS”) diseases. Under the Sanofi Agreement, we have completed the Phase 1 trials and Sanofi is taking on all further development activities. We and Sanofi each have been responsible for certain early development costs, and Sanofi is responsible for all further development and commercialization costs, subject to our Phase 3 option described below.

Sanofi has an exclusive license for PRN2246/SAR442168 and its backups for the CNS field, which includes indications of the CNS, retina and ophthalmic nerve. We have agreed not to develop other BTK inhibitors within the CNS field, and Sanofi has agreed not to develop PRN2246/SAR442168 or its backups for any indications outside the CNS field. In the event we cease all development and commercialization of our other BTK inhibitors or unilaterally decide to offer Sanofi a field expansion, Sanofi could expand its field upon a field expansion payment to us as well as potential milestone payments and royalties within the expanded field.

In December 2017, we received a $40.0 million upfront payment from Sanofi. In May 2018, we amended the Sanofi Agreement to include additional activities under the early development plan and to modify the definition of one of the milestone payments. Pursuant to the amendment, we received a $10.0 million payment in July 2018 for the completion of a major part of the Phase 1 trial.

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In August 2018, we received a $5.0 million payment for the successful completion of preclinical toxicology studies. In November 2018, we received $10.0 million in additional payments from Sanofi for successful development activities of PRN2246/SAR442168 related to the early development plan. In June 2019, we received a $30.0 million milestone payment from Sanofi for the initiation of the Phase 2b clinical trial of PRN2246/SAR442168.

Under the amended Sanofi Agreement, we may receive development, regulatory and commercial milestone payments of up to an aggregate of $765.0 million, as well as royalties up to the mid-teens. We have an option to fund a portion of Phase 3 development costs in return for, at our option, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in royalties up to the high-teens. The additional royalty option would only be available if we develop rilzabrutinib for major enumerated indications overseen by the Division of Pulmonary, Allergy and Rheumatology Products of the U.S. Food and Drug Administration (the “FDA”) or if we experience a change in control involving certain Sanofi competitors. Royalties are subject to specified reductions and are payable, on a product-by-product and country-by-country basis until the later of the date that all of our patent rights that claim a composition of matter of such product expire in such country, the date of expiration of regulatory exclusivity for such product in such country, or the date that is ten years from the first commercial sale of such product in such country.

We identified the following performance obligations under the Sanofi Agreement: (i) granting a license of rights to PRN2246/SAR442168, (ii) transferring of technology (know-how) related to PRN2246/SAR442168, and (iii) providing research and development services related to our responsibilities under the early development plan. We concluded that the delivered license is not distinct at inception of the arrangement due to our proprietary expertise with respect to the licensed compound and related developmental participation under the agreement, which is required for Sanofi to fully realize the value from the delivered license. Therefore, we combined these performance obligations as one unit of accounting and recognized the $40.0 million upfront payment and an aggregate of $25.0 million in milestone payments over the performance period under the Sanofi Agreement, which ended in December 2018.

On January 1, 2019, we adopted ASC 606 using the modified retrospective approach. The transaction price was determined to be $65.0 million, which includes the $40.0 million upfront payment we received from Sanofi in December 2017 and an aggregate of $25.0 million in milestone payments received in 2018. All potential future milestones and other payments were considered constrained at the inception of the Sanofi Agreement since we could not conclude it is probable that a significant reversal in the amount recognized will not occur. Upon adoption of ASC 606, we also determined that variable considerations related to certain milestones not previously recognized were constrained because they were not probable, due to the inherent uncertainty related to the achievement of these milestones. In May 2019, we achieved a clinical development milestone upon Sanofi’s initiation of its Phase 2b clinical trial of PRN2246/SAR442168 and Sanofi was obligated to make a $30.0 million milestone payment to us. As the amount due for the clinical development milestone was no longer constrained, we increased the transaction price under ASC 606 by $30.0 million from inception through June 30, 2019. As of June 30, 2019, we fully recognized the $30.0 million milestone payment to us as revenue as all performance obligations had been completed. We will re-evaluate the transaction price in each reporting period relating to potential future milestones as uncertain circumstances are resolved or other changes in events occur.

We concluded upon analysis that there is no adjustment necessary in revenue recognized through December 31, 2018 under ASC 606 for the Sanofi Agreement. All deliverables under ASC 605 and all performance obligations under ASC 606 had been completed as of December 31, 2018. For the years ended December 31, 2019, 2018 and 2017, we recognized $30.0 million, $63.1 million and $1.9 million in revenue from Sanofi, respectively. There was no deferred revenue related to the Sanofi Agreement at December 31, 2019 and 2018.

AbbVie

In June 2017, we entered into a collaboration agreement with AbbVie, or the AbbVie Agreement, to research and develop oral immunoproteasome inhibitors and received an upfront payment of $15.0 million. We identified the following performance obligations under the AbbVie Agreement: (i) granting a license of rights to certain licensed compounds to develop and commercialize oral immunoproteasome inhibitors, (ii) transferring of technology (know-how) related to the oral immunoproteasome inhibitors program, and (iii) providing research and development services during the two-year research period, which can be extended for up to six months. We determined that each of these performance obligations individually is not distinct, rather each one represents a component of a single performance obligation of the contract. Prior to the adoption of ASC 606, we concluded under ASC 605 that the delivered license did not have standalone value at the inception of the arrangement due to our proprietary expertise with respect to the licensed compounds and related ongoing research participation under the AbbVie Agreement, which is required for AbbVie to fully realize the value from the licensed compound. Therefore, the $15.0 million received related to this combined unit of accounting was being recognized as revenue ratably over the estimated performance period, which was estimated to continue through the fourth quarter of 2019.

On January 1, 2019, we adopted ASC 606 using the modified retrospective approach. Upon adoption, the fixed, non-refundable and non-creditable upfront payment of $15.0 million received in 2017 was determined to be the transaction price. Revenue is

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recognized based on a measurement of progress toward the completion of the performance obligation of providing research services for two years, which was subject to an extension for up to six months. The measurement is calculated using an input-method based on research costs incurred by us during each reporting period compared to the total research costs projected to provide research services by us pursuant to the AbbVie Agreement. Such costs include external direct costs and internal direct labor consisting of the efforts of certain of our employees that dedicate their time providing research services pursuant to the AbbVie Agreement. Based on this methodology, we concluded that under ASC 606, approximately $9.8 million in revenue should be recognized through December 31, 2018, as compared to $9.4 million under ASC 605.  We recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date.

In March 2019, we and AbbVie agreed to conclude the collaboration and as of the date of termination, there were no further financial obligations between us. We recognized the remaining balance of the transaction price of $5.2 million in revenue in March 2019, upon termination of the AbbVie Agreement. For the years ended December 31, 2019, 2018 and 2017, we recognized $5.2 million, $6.0 million and $3.4 million in revenue from AbbVie, respectively. There was no deferred revenue related to the AbbVie Agreement at December 31, 2019. Deferred revenue related to the AbbVie Agreement was $5.6 million at December 31, 2018.

University of California License Agreements

In November 2009 and September 2011, we entered into license agreements with the Regents of the University of California, or the Regents, which were subsequently amended and restated at various dates (the “UC Agreements”). Under the UC Agreements, the Regents have granted to us exclusive, worldwide licenses, with the right to grant sublicenses, under the Regents’ patent rights in certain patent applications to make, use, sell, offer for sale, and import products and services and practice methods covered by such patent applications in all fields of use.

We have paid the Regents license fees of $40,000 in total under the UC Agreements and are required to pay annual license maintenance fees totaling $40,000 prior to launching any licensed product. We may be obligated to make one-time regulatory and development milestone payments under the UC Agreements for future drug candidates and are obligated to pay tiered royalty payments in the low single digits on net sales of the licensed products. Additionally, we are obligated to pay the Regents payments on non-royalty licensing revenue we receive from our sub-licensees for products covered by UC patents. Pursuant to the UC Agreements, we also made IPO milestone payments to the Regents totaling approximately $140,000 in October 2018.

Under the UC Agreements, we are required to diligently proceed with the development, manufacture, regulatory approval, and sale of licensed products which include obligations to meet certain development-stage milestones within specified periods of time and to market the resulting licensed products in sufficient quantity to meet market demand. We have the right and option to extend the date by which we must meet any milestone in one year extensions by paying an extension fee for second and subsequent extension, provided we can demonstrate we made diligent efforts to meet the milestone.

7. Commitments and Contingencies

Leases

Our corporate headquarters are located in South San Francisco, California. In April 2018, we signed a lease (the “Lease Agreement”) for approximately 47,500 square feet of office, research and development and laboratory space with occupancy commencing on February 1, 2019 for a seven year period with an option to extend for another seven year period subject to certain conditions. Pursuant to the April 2018 Lease Agreement, we provided a letter of credit to the landlord for $0.6 million which was recorded as long-term restricted cash at December 31, 2019 and 2018. The Lease Agreement allows for a landlord provided tenant improvement allowance of up to $7.1 million to be applied to the cost of construction of tenant improvements to the new leased premises. The Lease Agreement also provides, and we have utilized, an option through July 1, 2019 for an additional tenant improvement allowance of up to $1.2 million to be applied to the costs of tenant improvements. The additional tenant improvement allowance used in connection with this option is amortized and was added to monthly rent payments upon completion of the tenant improvements in May 2019. Reimbursable construction costs incurred were recorded as a leasehold improvement with a corresponding lease incentive obligation, which was classified as a component of deferred rent. Amounts that were reimbursed under the tenant improvement allowance were recorded as deferred rent and are being amortized as a reduction to rent expense over the lease term. We utilized the aggregate amount of allowances available to us and have recorded $8.3 million of tenant improvement costs as leasehold improvements as of December 31, 2019.

We recognize rent expense on a straight-line basis over the non-cancellable lease term and record the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Where leases contain escalation clauses, rent abatements, and/or concessions such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. We recorded tenant improvement allowances as deferred rent and the associated expenditures as leasehold improvements. Leasehold improvements are being amortized over the shorter of their estimated useful life or the term of the lease. We do not assume renewals in our determination of the lease term unless renewals are deemed by management to be reasonably assured at lease inception. We have determined that our lease related to the Lease Agreement commenced on August 1, 2018, when we had right to use or control physical access to the new leased premises.

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Future minimum lease payments for operating leases at December 31, 2019 are as follows (in thousands):

 

 

Our previous lease, which expired on January 31, 2019, was for 30,000 square feet of office, research and development, and laboratory space in South San Francisco. It was subject to several amendments to secure additional space, sublease certain office and laboratory space and/or extend the lease term. In 2015, we entered into agreements to sublease certain office and laboratory space to two different subtenants. Pursuant to the sublease agreements, we received sublease payments of $0.1 million for year ended December 31, 2017, which were recognized as an offset to rent expense. Both subleases were terminated during 2017.

 

We recorded rent expense of $3.1 million and $2.7 million for the years ended December 31, 2019 and 2018, respectively, and rent expense, net of sublease payments, of $1.6 million for the year ended December 31, 2017.

Indemnifications

We are required to recognize a liability for the fair value of any obligations we assume upon the issuance of a guarantee. We have certain agreements with licensors, licensees, collaborators and service providers that contain indemnification provisions. In such provisions, we typically agree to indemnify the licensor, licensee collaborator or service provider against certain types of third party claims. The maximum amount of the indemnifications is usually not limited. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for expenses related to indemnification issues for any periods presented.

We indemnify each of our officers and directors for certain events or occurrences, subject to certain limitations, while the officer or director is or was serving at our request in such capacity, as permitted under Delaware law and in accordance with our certificate of incorporation, our bylaws and certain indemnification agreements between us and each of our directors and officers. The term of the indemnification period lasts as long as an officer or a director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity. The maximum amount of potential future indemnification is unlimited; however, we currently hold director and officer liability insurance. This insurance allows the transfer of risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations for any period presented.

8. Debt Obligation

Convertible Note Financing

In August 2016, we entered into a Note and Warrant Purchase Agreement (the “Convertible Note Agreement”), as amended in September 2016 and March 2017, with certain of our existing investors, pursuant to which we issued convertible notes (the “Notes”) in the aggregate amount of $21.5 million. The Notes had an annual interest rate of 8.0% and a maturity date of December 31, 2017. At the time of issuance of the Notes in 2016 and 2017, we determined that a beneficial conversion feature existed based on the amount by which the fair value of the underlying shares of Series B-3 preferred stock exceeded the effective conversion rate of the Notes. An incremental debt discount of $0.5 million and $1.9 million was recorded related to this beneficial conversion feature in 2017 and 2016, respectively.

Notes Redemption Features Liability

The Notes also had redemption features that were determined to be an embedded derivative requiring bifurcation and separate accounting. The fair value of the embedded derivative upon issuance was determined to be $3.4 million and $1.9 million for the Notes issued in 2016 and 2017, respectively, and was recognized as a debt discount and as a derivative liability on the consolidated balance sheets. The embedded derivative associated with the Notes required re-measurement to fair value using Level 3 inputs while the Notes were outstanding at the end of each reporting period.

In December 2017, the holders of the Notes exercised their option to convert the Notes and accrued interest into Series B-3 convertible preferred stock. In connection with the conversion, we issued 1,968,561 shares of Series B-3 convertible preferred stock at

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$11.9907 per share in a non-cash transaction and derecognized our convertible notes payable and related notes interest payable. Upon conversion, the fair value of the convertible notes redemption features liability was re-measured to zero.

Prior to the conversion, we determined the fair value of the convertible notes redemption features liability based on a lattice model that utilizes projected outcomes and the probability of those outcomes. The inputs used to determine the estimated fair value of the derivative instrument included the probability of an underlying event triggering the exercise of the redemption features and its timing. The fair value measurement was based upon significant inputs not observable in the market at each valuation date. The inputs included our evaluation of the likelihood of various settlement scenarios for the convertible notes, including the probabilities of (a) subsequent preferred stock sales at various price ranges, (b) the completion of an IPO, (c) a change in control of the company, (d) conversion of the Notes upon maturity, and (e) repayment of the notes upon maturity. The settlement scenarios that would have triggered payments under the redemption features included the conversion to a future round of financing at a discounted price and a change in control prior to the conversion or repayment of the Notes. The other scenarios would not have triggered payment under the redemption features.

Changes in fair value related to the notes redemption features liability were recorded as a component of other income (expense), net. The following table summarizes the changes in fair value during the year ended December 31, 2017 (in thousands):

 

 

In September 2018, upon our IPO, all shares of convertible preferred stock were converted into an equal number shares of common stock.

Preferred Stock Warrant Liability

In connection with the issuance of the Notes, we issued warrants to purchase our capital stock. Upon conversion of the Notes into Series B-3 preferred stock on December 29, 2017, we determined the total number of shares underlying such warrants to be 168,046 shares of our capital stock at an exercise price of $8.99 per share. The warrants are exercisable upon the issuance date and have a five-year term. The estimated fair value of the warrants upon issuance, of $1.1 million, was determined using an option pricing model. We recorded the fair value of the warrants at issuance as a debt discount and as a convertible preferred stock warrant liability. The debt discount was accreted using the effective interest method as additional interest expense over the term of the Notes. The estimated fair value of the warrants was subject to re-measurement at each reporting period. As of December 31, 2017, the fair value of the outstanding warrants was $1.5 million. In September 2018, upon our IPO, all the preferred stock warrants were converted into warrants to purchase shares of common stock.

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In September 2011, in connection with entering into a debt facility agreement, we issued warrants to purchase 4,954 shares of Series A convertible preferred stock at a price of $9.0839 per share. The warrants have a 10-year term and can be exercised by paying cash or converted into the number of shares of convertible preferred stock equal in value to the intrinsic value of the warrants (“Net Exercises”). The estimated fair value of the warrants was subject to re-measurement at each balance sheet date. As of December 31, 2017, the fair value of outstanding Series A warrants was $27,000. In September 2018, all Series A shares of warrants were net exercised and 3,576 shares of common stock were issued.

The following table summarizes the changes in the estimated fair value of our convertible preferred stock warrant liability related to Series A and Series B-3 warrants for the years ended December 31, 2018 and 2017 (in thousands):

 

 

The fair value of the preferred stock warrants was determined using a hybrid approach that takes into account the probability of IPO and non-IPO liquidity events. The non-IPO liquidity event scenario uses an option pricing model to allocate the total enterprise value to the various securities within our capital structure based on future expectations. The IPO scenario also uses an option pricing model to estimate the value of the warrant in the case of an IPO. The two OPM models’ inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction. The fair values of our convertible preferred stock warrant liability related to Series A and Series B-3 warrants totaled approximately $1.6 million as of December 31, 2017. As of December 31, 2018, no preferred stock warrants were outstanding.

Interest expense

We had no interest expense during the years ended December 31, 2019 and 2018. Interest expense of approximately $7.2 million was recognized during the year ended December 31, 2017, which included $5.5 million of accretion of debt discounts related to the beneficial conversion features, the convertible notes redemption features liability and the convertible preferred stock warranty liability, and $1.7 million of accrued interest expense on the Notes which was converted into preferred stock in December 2017.

9. Convertible Preferred Stock

We have issued two classes of stock, convertible preferred stock and common stock. Convertible preferred stock is carried at issuance price, net of issuance costs.

In August 2018, we sold 3,474,668 shares of Series C convertible preferred stock at a price of $14.3898 per share for net proceeds of $49.8 million. Upon the completion of the IPO in September 2018, all the outstanding shares of the convertible preferred stock were converted into 15,760,102 shares of common stock, including shares of Series C convertible preferred stock that was issued in August 2018. In addition, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock.  

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As of December 31, 2018, we had no remaining shares of convertible preferred stock issued or outstanding. As of December 31, 2017, convertible preferred stock consisted of the following (in thousands, except share numbers):

 

 

Series A Preferred Stock

In 2011 and 2012, we sold a total of 4,408,893 shares of Series A convertible preferred stock, at a price per share of $9.0839, for gross proceeds of approximately $40.1 million.

Series B Preferred Stock

In April 2014, we completed the first tranche (“Series B-1”) of our Series B round of financing. Pursuant to the financing terms, we issued 2,527,221 shares of Series B-1 convertible preferred stock at $9.9923 per share for gross cash proceeds of $25.3 million.

The Series B purchase agreement contemplated the sale in an additional closing, the second tranche (“Series B-2”), of up to 2,106,014 additional shares of our Series B preferred stock for aggregate gross proceeds of approximately $25.3 million. Series B-2 closed in November 2014 after we met the pre-defined milestones. Under the terms of the stock purchase agreement, we issued 2,106,014 shares of Series B-2 convertible preferred stock at $11.9907 per share for gross cash proceeds of approximately $25.3 million.

In July 2015, we completed another financing with existing investors for Series B-3 convertible preferred stock. Pursuant to the financing terms, we issued 1,274,745 shares of Series B-3 convertible preferred stock at $11.9907 per share for gross cash proceeds of approximately $15.3 million.

In December 2017, the holders of the outstanding convertible notes exercised their option to convert the Notes and accrued interest into Series B-3 convertible preferred stock. In connection with the conversion, we issued 1,968,561 shares of Series B-3 convertible preferred stock at $11.9907 per share in a non-cash transaction.

Prior to their conversion upon closing of the IPO, the significant rights and obligations of our convertible preferred stock were as follows:

Voting Rights—Each holder of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock are convertible. So long as 20% of the shares of convertible preferred stock remain outstanding, the holders of such shares of preferred stock are entitled to elect five members of our Board of Directors.

Dividends—Holders of Series A, B-1, B-2, and B-3 convertible preferred stock are entitled to receive non-cumulative dividends, at the rate of 8.0%, 8.8%, 10.56%, and 10.56% per annum, respectively, for each share of Series A, B-1, B-2, and B-3 convertible preferred stock outstanding, when, as, and if declared by our Board of Directors. These dividends are payable in preference to common stock dividends. To date, we have not declared or paid any dividends.

Liquidation—In the event of any liquidation, dissolution, or winding up of the company, the holders of Series A, B-1, B-2, and B-3 convertible preferred stock shall be entitled to receive payment from all assets legally available at a liquidation preference of $9.0839, $9.9923, $11.9907, and $11.9907 per share, respectively. In the event that the available funds and assets are insufficient for full payment to the holders of convertible preferred stock on a per-share basis as outlined above, our entire assets and funds legally available for distribution shall be distributed ratably among the holders of convertible preferred stock in proportion to the liquidation preference amount each such holder is otherwise entitled to receive. Upon completion of the distribution of assets as set forth above, all of the remaining assets, if any, shall be distributed ratably among the holders of preferred stock and common stock pro rata based on the number of shares of common stock held by each (assuming full conversion of all preferred stock to common stock at the then effective conversion rate).

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Conversion—Each share of convertible preferred stock is convertible at a 1:1 ratio at the option of the holder into fully paid and non-assessable shares of common stock. Conversion of each series of convertible preferred stock into common stock is automatic upon the earlier of (i) the closing of an IPO of our common stock, registered under the Securities Act of 1933, as amended, which results in aggregate proceeds equal to or exceeding $50.0 million to us, and the value of our shares immediately prior to the IPO is not less than $22.71 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like); or (ii) at any time upon the agreement of the holders of at least 60% of the then outstanding shares of preferred stock.

10. Stock-Based Compensation

Equity Incentive Plans

In August 2018, our Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants. The 2018 Plan initially reserved 2,270,000 of new shares for issuance with automatic annual increases on January 1 of each year equal to 4% of the total number of shares of our capital stock outstanding on the last day of the preceding year, or a lesser number of shares determined by our Board of Directors. The exercise price of stock options is determined to be the market price of our common stock on the date immediately preceding the date of grant. Options granted under the 2018 Plan typically will vest over a four-year period but may be granted with different vesting terms. Awards that expire or terminate without being exercised are added back to the number of shares available for issuance under the 2018 Plan.

Following our IPO and in connection with the effectiveness of the 2018 Plan, the 2008 Equity Incentive Plan (the “2008 Plan”) terminated and no further awards will be granted under that plan. All outstanding awards under the 2008 Plan will continue to be governed by their existing terms. The shares subject to stock options or other stock awards granted under the 2008 Plan and the shares that remained outstanding for issuance under the 2008 Plan were transferred into the 2018 Plan. As of December 31, 2019, there was an aggregate 5,863,621 shares of common stock authorized for issuance under the 2018 Plan.

Prior to its termination, the 2008 Plan provided for the grant of incentive and non-statutory stock options to eligible employees, officers, directors, advisors and consultants. Options granted under the 2008 Plan generally vest over a four-year period and vested options are exercisable from the vesting date and expire 10 years from the date of grant. The 2008 Plan allowed for early exercise of certain options prior to vesting. Upon termination of employment, the unvested shares are subject to repurchase at the original exercise price.

Stock Option Activity

The following table summarizes our stock option activity under our stock plans and related information:

 

 

The weighted-average fair values of stock options granted during the years 2019, 2018 and 2017 was $24.8, $10.5 and $4.3 per share, respectively. The total intrinsic value of options exercised during the years 2019, 2018 and 2017 was $8.6 million, $1.7 million and $0.1 million, respectively. The total fair value of stock options vested was $6.8 million, $2.6 million and $1.1 million during the years 2019, 2018 and 2017, respectively.

At December 31, 2019 and 2018, 25,081 shares and 33,882 shares, respectively, related to the early exercise of stock options, were subject to repurchase by us at the original exercise price in the event the optionee’s employment is terminated either voluntarily or involuntarily. We classify cash received from the exercise of unvested options as a short term liability. These liabilities were

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approximately $0.2 million as of December 31, 2019 and 2018, respectively, and were included in accrued liabilities on the consolidated balance sheets. Amounts from such liabilities are reclassified into common stock and additional paid-in capital as the shares vest, which is generally over 48 months.

Common shares are presented as outstanding on our consolidated balance sheets and consolidated statements of changes in convertible preferred stock and stockholders’ equity (deficit) as the shares vest and the underlying right of repurchase lapses.

Valuation Assumptions

We use the Black-Scholes valuation model to estimate fair value of stock options at the grant date. The Black-Scholes valuation model requires us to make certain estimates and assumptions, including assumptions related to the expected term, expected volatility, risk-free interest rate, and the expected dividend yield for our stock.

The fair values for the stock options granted to employees and non-employee directors were estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:

 

 

The valuation assumptions were determined as follows:

Stock Options Granted to Employees

Employee stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense, net of forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Employee stock-based compensation expense includes expenses related to options granted to employees and non-employee directors.

The following table summarizes total stock-based compensation expense related to our 2018 Equity Incentive Plan, 2008 Equity Incentive Plan and 2018 Employee Stock Purchase Plan (in thousands):

 

 

 

As of December 31, 2019, there was approximately $36.2 million of unamortized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted-average period of approximately 2.9 years. The weighted-average remaining contractual term of options outstanding at December 31, 2019 was 7.7 years.

 

Our stock-based compensation expense for the year ended December 31, 2019 includes approximately $0.7 million in expense related to modifications of stock options for members of our Board of Directors.

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Stock Options Granted to Outside Consultants

We did not grant any stock options to consultants for the years ended December 31, 2019 and 2017. For the year ended December 31, 2018, we granted to consultants a total of 1,101 stock options. Stock-based compensation expense related to outside consultants was insignificant for each of the years ended December 31, 2019, 2018 and 2017.

Employee Stock Purchase Plan

In September 2018, we adopted the 2018 Employee Stock Purchase Plan (the “ESPP”), which initially reserved 250,000 shares of our common stock for employee purchases under terms and provisions established by the Board of Directors, with automatic annual increases on January 1 of each year equal to the lesser of (a) 1% of the total number of shares of our common stock outstanding on the last day of the preceding year, or (b) 500,000 shares of our common stock. Under the ESPP, employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of common stock on the first trading day of each offering period or on the exercise date. The ESPP provides for consecutive 12-month offering periods. The offering periods may start on the first trading day on or after May 16 or November 16 of each year, except for the first offering period which commenced on September 13, 2018, the pricing date and the effective date of our registration statement. Contributions under the ESPP are limited to a maximum of 15% of an employee's eligible compensation. We recorded approximately $0.6 million and $0.2 million of stock-based compensation expense related to our ESPP for the years ended December 31, 2019 and 2018, respectively.

No income tax benefit has been recognized related to stock-based compensation expense, and no tax benefits have been realized from exercised stock options.

11. Net Income (Loss) per Share

Net income is allocated between our common stock and other participating securities based on their participation rights. Our preferred stock (see Note 9) represents participating securities. Additionally, during the periods in which we have net income, the diluted net income per share has been computed using the weighted average number of shares of common stock outstanding and other dilutive securities. For the periods presented with a net loss herein, the computation of basic earnings per share using the two-class method is not applicable as the participating securities do not have contractual rights and obligations to share in our losses.

The following table presents a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations and the calculation of basic and diluted net income (loss) per share (in thousands, except share and per share data):

 

 

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The following outstanding shares of common stock equivalents were excluded in the computation of diluted net income (loss) per share attributable to common stockholders, because their effect would have been antidilutive for the periods presented.

 

 

12. Income Taxes

Income (loss) before provision for income taxes consisted of the following (in thousands):

 

 

The income tax provision is summarized as follows:

 

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating losses and tax credit carryforwards.

The tax effects of significant items comprising our net deferred tax assets are as follows (in thousands):

 

ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Because of our recent history of operating losses, we believe that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, have provided a valuation allowance.

The valuation allowance increased by $11.7 million and decreased by $4.5 million and $8.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Net operating losses and tax credit carryforwards as of December 31, 2019 are as follows (amounts in thousands):

 

The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company does not expect any previous ownership changes, as defined under Section 382 and 383 of the Internal Revenue Code, to result in a limitation that will materially reduce the total amount of net operating loss carryforwards and credits that can be utilized. Subsequent ownership changes may affect the limitation in future years.

The effective tax rate of our provision for (benefit from) income taxes differs from the federal statutory income tax provision as follows:

 

 

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A reconciliation of our unrecognized tax benefits for the years ended December 31, 2019 and 2018 is as follows (in thousands):

 

There is approximately $15.0 million of unrecognized tax benefits included in our consolidated balance sheets. Because of our valuation allowance in the United States, none of the $15.0 million of uncertain tax positions would, if recognized, affect the effective tax rate. We do not believe that our unrecognized tax benefits will significantly change within the next 12 months.

It is our practice to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2019, we had no accrued interest and penalties related to uncertain tax positions.

We file federal, state and foreign income tax returns with varying statutes of limitations. A number of our tax returns remain subject to examination by the tax authorities. These include the U.S. federal and California returns for June 30, 2011 and later years.

13. Selected Quarterly Financial Data (Unaudited)

The following tables present certain unaudited quarterly financial information for the years ended December 31, 2019 and 2018 (in thousands, except per share amounts):

 

 

 

 

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019. Based on that evaluation, our Chief Executive officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management assessed our internal control over financial reporting as of December 31, 2019, the end of our fiscal year. Management based its assessment on criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our internal accounting and finance organization.

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2019. The results of management’s assessment were reviewed with the Audit Committee.

 

Attestation Report of the Registered Public Accounting Firm

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies.”

 

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required by this item regarding directors and director nominees, executive officers, the board of directors and its committees, certain corporate governance matters and compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information that will be contained in our definitive proxy statement to be filed with the SEC on Schedule 14A in connection with our 2020 Annual Meeting of Stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after December 31, 2019.

Item 11. Executive Compensation.

Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

See Index to Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K

All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto.

See part (b) below.

The following exhibits are filed herewith or incorporated by reference:

Exhibit Index

 

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Item 16. Form 10-K Summary

None.

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SIGNATURES

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

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

 

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