UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

For the fiscal year ended December 31, 2020

OR

Commission File Number 001-39615

 

CODIAK BIOSCIENCES, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Registrant’s telephone number, including area code: (617) 949-4100

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

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 Nasdaq Global Market on October 14, 2020, was $100,756,154. The registrant has elected to use October 14, 2020, which was the initial trading date of its common stock on the Nasdaq Global Market, as the calculation date because on June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) the registrant was a privately held company.

 

The number of shares of Registrant’s Common Stock outstanding as of March 12, 2021 was 21,994,076.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A relating to the 2021 Annual Meeting of Stockholders within 120 days of the end of the registrant’s fiscal year ended December 31, 2020. Portions of such definitive proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.

 

 

 

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Table of Contents

 

 

 

 

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SUMMARY OF THE MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS

 

Our business is subject to numerous risks and uncertainties that you should be aware of before making an investment decision, including those highlighted in the section entitled “Risk Factors.” These risks include, but are not limited to, the following:

 

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You should consider carefully the risks and uncertainties described below, in the section entitled “Risk Factors” and the other information contained in this prospectus, including our consolidated financial statements and the related notes, before you decide whether to purchase our common stock. The risks described above are not the only risks that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed above under “Summary of the Material Risks Associated with Our Business” and under the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed with the Securities and Exchange Commission as exhibits hereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

 

The forward-looking statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report on Form 10-K.

 

This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business and the markets for our product candidates. Information that is based on estimates,

 

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forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from our own internal estimates and research as well as from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. While we are not aware of any misstatements regarding any third-party information presented in this Annual Report on Form 10-K, their estimates, in particular as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

 

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PART I

Item 1. Business.

 

Overview

We are a clinical-stage biopharmaceutical company focused on pioneering the development of exosome-based therapeutics, a new class of medicines with the potential to transform the treatment of a wide spectrum of diseases with high unmet medical need. Exosomes have evolved as a intercellular transfer mechanisms for complex, biologically active macromolecules and have emerged in recent years as a compelling potential drug delivery vehicle. There have been no approved exosome-based therapeutics to date. By leveraging our deep understanding of exosome biology, we have developed our engineering and manufacturing platform, or engEx Platform, to expand upon the innate properties of exosomes to design, engineer and manufacture novel exosome therapeutics. We have utilized our engEx Platform to generate a deep pipeline of engineered exosomes, or engEx exosomes, aimed at treating a broad range of diseases, including oncology, neuro-oncology, neurology, neuromuscular disease, infectious disease and rare disease.

In September 2020, we initiated clinical trials of our lead engEx product candidates, exoSTING and exoIL-12, which are being developed to address solid tumors. To our knowledge, exoSTING and exoIL-12 are the first engineered exosomes to enter clinical development. In December 2020 and February 2021, we reported positive results from Part A of our Phase 1 clinical trial of exoIL-12 in healthy human volunteers. In this randomized, placebo controlled, double-blind study, exoIL-12 demonstrated a favorable safety and tolerability profile, with no local or systemic treatment-related adverse events and no detectable systemic exposure of IL-12. Results also confirmed retention of IL-12 at the injection site and prolonged pharmacodynamic effects. These results in healthy volunteers, which are consistent with our preclinical observations, provide validation of our engEx Platform and one of the founding principles of Codiak – that engineered exosomes can offer the opportunity to tailor therapeutic payloads to provide an active biological response while at the same time limiting unwanted side effects. We also have multiple preclinical and discovery programs that we are advancing either independently or through our strategic collaborations with Jazz Pharmaceuticals Ireland Limited and Sarepta Therapeutics, Inc.

On October 16, 2020, we completed our initial public offering, or our IPO, pursuant to which we issued and sold 5,500,000 shares of our common stock at a public offering price of $15.00 per share, resulting in net proceeds of $74.4 million, after deducting underwriting discounts and commissions and other offering expenses. On February 17, 2021, we issued and sold an additional 3,162,500 shares of our common stock at a public offering price of $21.00 per share, resulting in net proceeds of $62.0 million, after deducting underwriting discounts and commissions and other offering expenses.

Exosomes are naturally occurring, extracellular vesicles that have evolved as an intercellular messenger system to protect and deliver functional macromolecules, including nucleic acids, proteins, lipids and carbohydrates, between cells. These targeted messengers can transport and protect complex biologically active molecules that alter the function of recipient cells. The intrinsic immune-silent properties of exosomes, the ability to manipulate cell selectivity, or tropism, through exosome engineering and the ability for exosomes to deliver a broad range of payload options are distinct characteristics that support the potential of exosomes to serve as the foundation of a new class of medicines.

We designed our engEx Platform with two strategic priorities in mind: first, to develop exosome therapeutics engineered to deliver a broad set of biologically active drug molecules on the surface or inside the lumen of the exosome; and second, to manufacture exosomes reproducibly and at scale to pharmaceutical standards.

Our scientists have identified two exosomal proteins, PTGFRN and BASP1, that serve as scaffolds to enable our proprietary exosome engineering methods. Using our engEx Platform, we have demonstrated preclinically our ability to engineer exosomes to incorporate various types of biologically active drug molecules, either on the exosome surface, using PTGFRN as a scaffold, or inside the lumen of the exosome, using BASP1 as a scaffold, to target membrane or cytoplasmic and nuclear drug targets in specific cells. We believe that our engEx exosomes are uniquely positioned to enable specific targeting of critical cells and cellular pathways and

 

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thereby reduce off-target toxicity, which together enhance the therapeutic index for a wide array of drug types and therapeutic approaches.

Our current pipeline of engEx product candidates and discovery programs is shown below.

 

Expanding Pipeline of Proprietary Exosome Therapeutic Candidates

 

We are diversifying our development efforts with our engEx Platform across various therapeutic indications. Our initial engEx product candidates focus on two well-validated pathways in oncology, stimulator of interferon genes, or STING, agonism and the cytokine interleukin-12, or IL-12, engagement, and both candidates entered clinical trials for a variety of solid tumors in September 2020.

One of our lead programs, exoSTING, is an exosome therapeutic candidate engineered with our engEx Platform to carry our proprietary STING agonist inside the lumen of the exosome while expressing high levels of PTGFRN on the exosome surface to facilitate specific uptake in tumor-resident antigen-presenting cells, or APCs. We are developing exoSTING for the treatment of multiple solid tumors enriched in the target APCs, initially focused on metastatic head and neck squamous cell cancer, or HNSCC, triple-negative breast cancer, or TNBC, cutaneous squamous cell carcinoma, or cSCC, and anaplastic thyroid carcinoma, or ATC. exoSTING, which we believe has a best-in-class profile, has demonstrated encouraging preclinical activity. In September 2020, we initiated our Phase 1/2 clinical trial of exoSTING. We anticipate safety, biomarker and preliminary efficacy data by mid-2021.

Our other lead program, exoIL-12, is an exosome engineered using our engEx Platform to display IL-12 in a fully active form on the surface of the engEx exosome. PTGFRN is used as a scaffold to display IL-12 on the exosome surface which enables engagement of the IL-12 receptor on immune effector cells. We are developing exoIL-12 for the treatment of solid tumors where engagement of the IL-12 pathway has been well-characterized, such as melanoma, Merkel cell carcinoma, or MCC, Kaposi sarcoma, glioblastoma, or GBM, and TNBC. We are initially focused on early stage cutaneous T cell lymphoma, or CTCL. exoIL-12, which we believe has a best-in-class profile, has demonstrated encouraging preclinical activity. In September 2020, we initiated our Phase 1 clinical trial of exoIL-12. In December 2020 and February 2021, we reported positive results from Part A of our Phase 1 clinical trial of exoIL-12 in healthy human volunteers. In this randomized, placebo controlled, double-blind study, exoIL-12 demonstrated a favorable safety and tolerability profile, with no local or systemic treatment-related adverse events and no detectable systemic exposure of IL-12. Results confirmed the desired localization and retention of IL-12 at the injection site for at least 24 hours, as well as prolonged the production of T cell attractant chemokine IP-10 for 8-15 days depending upon dose. These results are consistent with our preclinical testing and confirm exoIL-12’s target product profile of local drug retention at the injection site, prolonged local

 

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pharmacodynamic activity, and lack of systemic IL-12 exposure. We plan to initiate the next portion (Part B) of the Phase 1 clinical trial, evaluating the safety and efficacy of exoIL-12, in CTCL patients at the optimal starting dose of 6 µg administered every other week, which we believe to be the optimal pharmacologically active dose based upon the healthy volunteer data from Part A of the trial and prior preclinical data with exoIL-12. We expect to see safety, biomarker and preliminary efficacy results from Part B of our Phase 1 clinical trial of exoIL-12 by year-end 2021.

Our third program, exoASO-STAT6, is an exosome engineered using our engEx Platform to overexpress PTGFRN to selectively target uptake in M2-polarized tumor-associated-macrophages, or TAMs. The drug modality carried by exoASO-STAT6 is an antisense oligonucleotide, or ASO, targeting the STAT6 transcription factor and is linked to the exosome surface. We plan to initially develop exoASO-STAT6, which we believe has a best-in-class profile, for primary and metastatic cancers of the liver, such as hepatocellular carcinoma, or HCC, pancreatic ductal adenocarcinoma, or PDAC, colorectal carcinoma, or CRC, and ovarian cancer. We are also exploring the utility of exoASO-STAT6 in GBM and leptomeningeal cancer disease, or LMD, and may further expand our development efforts into these M2-rich, intractable tumors of the central nervous system, or CNS.

The versatility of the engEx Platform has led to a deep pipeline with the potential to address diseases across a broad range of therapeutic areas. Preclinical activities of potential engEx product candidates in oncology, neuro-oncology, neurology, neuromuscular disease and infectious disease are underway.

We have entered into strategic collaborations with Jazz Pharmaceuticals Ireland Limited, or Jazz, and Sarepta Therapeutics, Inc., or Sarepta, to initiate new programs and bolster our engEx Platform, while retaining meaningful economics, and in the case of Jazz, meaningful commercialization rights. Our collaboration with Jazz is focused on the research, development and commercialization of exosome therapeutics to treat cancer, directed at up to five targets to be developed using our engEx Platform. As part of the agreement, Jazz paid us an upfront payment of $56.0 million. We are eligible to receive up to approximately $200.0 million in milestone payments per target plus tiered royalties on worldwide sales. Our collaboration with Sarepta is focused on the use of exosomes for non-viral delivery of adeno-associated virus, or AAV, gene-editing and RNA therapeutics to address five agreed targets associated with neuromuscular diseases. As part of the agreement, Sarepta paid us an upfront payment of $10.0 million. Should Sarepta wish to exercise its option with respect to a target, there is a $12.5 million option exercise fee for each target. Under the terms of the license agreement to be entered into upon such exercise, we will be eligible to receive a total of $192.5 million in development and regulatory milestones per target plus tiered royalties on worldwide sales. One of the selected targets is eligible to generate additional milestone payments on the achievement of certain development and regulatory milestones.

 

Founding of Codiak BioSciences

ARCH Venture Partners

We were co-founded by ARCH Venture Partners, a preeminent venture fund that catalyzes discoveries seeking to prevent, detect and cure diseases. Identifying exosomes as a possible platform for the development of multiple therapeutic products, ARCH Venture Partners incorporated Codiak in June 2015, negotiated a license agreement and sponsored research agreement with The University of Texas MD Anderson Cancer Center and Raghu Kalluri, M.D., Ph.D., and recruited executives, including Douglas Williams, Ph.D., our President and Chief Executive Officer, and Linda Bain, our Chief Financial Officer. ARCH Venture Partners also led efforts to organize our financing syndicate for our Series A and Series B financings and negotiated the combination with VL27, Inc. concurrent with our Series A financing in November 2015.

Flagship Pioneering

We were co-founded by Flagship Pioneering, which conceives, creates, resources, and develops first-in-category life sciences companies to transform human health and sustainability. In 2013 and 2014, members of the firm’s FlagshipLabs innovation unit were conducting explorations into cellular therapies through which they uncovered exosomes as a promising adjacent opportunity. The team recognized exosomes as a ubiquitous, natural and powerful mode of cellular communication; one that could not only harbor complex biological information, but also specifically engage with and enter cells of interest in vivo. These features of exosomes suggested a broad capability for creating novel therapeutics with high potency and perhaps little to no off-tissue effects, and with the ability to drug heretofore undruggable or inaccessible targets. The Flagship team further conceived that many of the tools they were exploring for cell engineering could also be used to modify exosome-

 

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producer cell lines with surface or luminal proteins and RNA molecules, which would in turn generate precision exosomes designed for targeted therapeutic applications. Flagship founded VL27 to hold the intellectual property estate established by FlagshipLabs. Upon the financing of Codiak in November 2015, VL27 merged into Codiak.

 

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Our strategy

Our vision is to establish Codiak as a leader in the emerging field of exosomal therapeutics by building a fully integrated biopharmaceutical company utilizing our novel engEx Platform to pioneer the discovery, development and commercialization of engineered exosome therapeutics that can have a transformative impact on the treatment of a wide spectrum of diseases with high unmet medical need. To achieve our vision, we are executing a strategy with the following key elements:

 

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Our pipeline

Our engEx Platform has generated a broad pipeline of engEx product candidates that we believe can have a transformative impact on the treatment of a wide spectrum of diseases with high unmet medical need, including in oncology, neuro-oncology, neurology, neuromuscular disease, infectious disease and rare disease.

Our current pipeline of engEx product candidates and discovery programs is shown below.

 

Expanding Pipeline of Proprietary Exosome Therapeutic Candidates

 

Our focus—leveraging innate properties of exosomes for targeted therapeutic delivery

Exosomes are naturally occurring, extracellular vesicles that have evolved as an intercellular messenger system to protect and deliver functional macromolecules, including nucleic acids, proteins, lipids and carbohydrates, between cells. They can be found in all tissues and biological fluids and it is believed that all cells have the capacity to make, secrete and receive exosomes. Exosomes can promote a change in the biological functions of recipient cells either by protein-to-protein signaling at the target cell surface or according to molecular instructions contained in the interior, or lumen, of the exosome and conveyed by cellular uptake into the

 

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cytoplasm or nucleus of the recipient cell where those molecules can engage with the appropriate signaling pathways.

Based on scientific literature, exosomes are known to facilitate maintenance of homeostasis by transmitting messages between cells, both in the local environment as well as systemically. In contrast, during disease, the quantity and composition of exosomes change and exosomes can play important roles in a broad range of diseases, either accentuating or alleviating disease, as well as in altering response to disease treatment.

 

Exosomes have emerged in recent years as a potential drug delivery vehicle to capitalize on their evolution as intercellular transfer mechanisms for complex, biologically active macromolecules. The size, structure and many functions of exosomes are similar to viruses and their natural capacity to deliver functional nucleic acid payloads has made exosomes an attractive non-viral system to optimize delivery of nucleic acids and numerous other payloads, such as peptides, proteins, antibodies, growth factors, enzymes, small molecules and vaccine antigens. Moreover, based upon available preclinical and early clinical experience, exosomes are believed to be intrinsically “immune-silent”, meaning that the body does not recognize them as foreign and does not elicit an immune-response against them, thus potentially allowing for repeat dosing of allogeneic exosomes. This property of repeat dosing of allogeneic exosomes is supported by our preclinical data as well as a number of clinical trials conducted by others in the past several years. In fact, even though blood products are typed for ABO, they contain large numbers of allogeneic exosomes and single or multiple doses have not been associated with unwanted immune-response.

We believe that exosome-based therapies have the potential to transform therapeutics across multiple drug types and therapeutic areas. The following distinct characteristics of exosomes support their potential to serve as the foundation of a new class of medicines:

We believe that the inherent properties of exosomes, as harnessed using our engEx Platform, have the potential to overcome many drug delivery challenges and enable the development of novel therapies that can address cellular targets and pathways that have essentially been undruggable with other therapeutic approaches.

Our engEx Platform

The key features and capabilities of our engEx Platform include our ability to:

 

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We designed our engEx Platform with two strategic priorities in mind and believe our significant investments to achieve these priorities give us a durable competitive advantage. First, we aimed to develop exosome therapeutics engineered to deliver a broad set of biologically active drug molecules on the surface or inside the lumen of the exosome. Second, we focused on manufacturing exosomes reproducibly and at scale to pharmaceutical standards.

 

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Our engEx Platform is built on a deep understanding of exosome biology and early investment in industrializing our exosome manufacturing capability. From the inception of Codiak, we have focused on solving two significant obstacles to the use of exosomes as a therapeutic approach. The first challenge was to assess preliminary observations from various laboratories suggesting that exosomes could be engineered using molecular scaffolds to incorporate biologically active payloads and deliver them to target cells to elicit defined biological effects. Our early attempts with previously known “scaffolds”, such as Lamp2b, pDisplay and certain tetraspanin proteins on the exosome surface, demonstrated low potency and significant heterogeneity of display, both unacceptable therapeutic features of a biologic drug.

To address this first challenge, we created highly purified, reference standard exosomes and conducted mass spectrometry analysis whereby prostaglandin F2 receptor negative regulator, or PTGFRN, and brain abundant membrane attached signal protein 1, or BASP1, were identified. The identification of PTGFRN and BASP1 by Codiak scientists provided the necessary scaffolds to achieve exosome engineering that has yielded, in our preclinical models, increased therapeutic activity and uniform incorporation of the desired biologically active molecule on our engEx exosomes. This activity and uniformity breakthrough enabled our engEx Platform and, we believe, solved the engineering challenge for exosome therapeutics. As of March 1, 2021, we have pending patent applications in the United States, or US, Australia, Brazil, Canada, Chile, China, Colombia, Eurasia, Europe, India, Israel, Japan, Korea, Mexico, New Zealand, Singapore, South Africa, Philippines, Ukraine and Thailand, on exosomes engineered to express PTGFRN, including two issued US patents; and pending applications covering exosomes engineered to express BASP1 in the US, Argentina, Australia, Canada, China, Europe, Eurasia, Israel, Japan, Korea, Mexico, New Zealand, Singapore and Taiwan.

 

Exosome Loading for our PTGFRN Scaffold vs. Other Exosomal Proteins Traditionally Used as Scaffolds

 

The figure above highlights the advantage of PTGFRN with respect to exosome loading when compared with conventional exosome scaffolds. A) GFP was fused to previously described exosome scaffolds (pDisplay, LAMP2B, Palm, CD63, CD81 and CD9) as well as PTGFRN and stable cell lines were generated expressing these reporter constructs. While cells demonstrated similar levels of GFP expression from the various scaffolds (measured by flow cytometry), the amount of GFP per exosome (measured by ELISA) was significantly higher when fused to PTGFRN than to other scaffolds. B) IL-7 PTGFRN exosomes cleared IL-7 receptor (IL-7R) expression on CD8+ T cells in a dose dependent manner 24 hours post-treatment, with approximately 1500 fold improvement of activity (EC50) compared to IL-7-pDisplay exosomes.

 

The second major obstacle to therapeutic exosome development was related to the methods of production of exosomes used in both research applications as well as previously conducted clinical testing. The cell sources, culture conditions and purification processes in use at that time were not acceptable for scale, method of exosome purification or product quality expected by regulatory authorities around the world. We focused on industrializing and modernizing engineered exosome production to accommodate large or small patient populations and with methods and quality attributes expected for state-of-the-art biologics. We believe our engEx Platform successfully removes the two major obstacles in exosome therapeutics creation and production.

 

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Exosome engineering

Our proprietary engEx Platform enables the precise engineering of novel exosome product candidates. Using our engEx Platform, we have demonstrated preclinically that we can engineer exosomes to incorporate various types of biologically active drug molecules either on the surface or inside the lumen of the exosome to target membrane or cytoplasmic and nuclear drug targets in specific cells. We have also demonstrated preclinically the capacity to alter multiple exosome properties through engineering, simultaneously allowing us to engage multiple pathways with the same engEx exosome, providing modular combinatorial opportunities. Our capacity to purposely modify the tropism of our exosomes to target a specific cell type/tissue, the improved tissue specific delivery afforded by compartmental dosing and our capacity to control retention of the exosome in the desired compartment, all contribute to enhancing the therapeutic index and, we believe, improve our chance of success. We believe that this enhanced therapeutic index is an important characteristic of well-tolerated and clinically active therapeutics and may allow us to drug previously “undruggable” targets by increasing potency while reducing the risk of off target effects.

 

 

Altering Tropism to Myeloid Cells

Targeting B cells and T cells

 

The figure above illustrates rational targeting of exosomes to specific immune cells and immune cell subtypes after intravenous administration in mice in vivo (left panels) and human immune cells in vitro (right panels). Exosomes derived from cell lines engineered to overexpress PTGFRN fused to an anti-CLEC9A antibody showed preferential uptake by Conventional Type 1 Dendritic Cells (cDC1) but not other immune cells (top left panel). Conversely, exosomes derived from cell lines engineered to overexpress PTGFRN fused to CD47 showed reduced uptake in primary human macrophages (top right panel). Exosomes were also targeted to lymphoid cells by overexpressing PTGFRN fusions to an anti-CD3 antibody in the case of T cells (bottom left panel) and CD40L in the case of B cells (bottom right panel). These results suggest that engEx exosomes can be targeted to specific immune cell types for therapeutic applications.

 

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Exosome tropism and compartmental dosing to expand therapeutic index

The proteins on the exosome surface determine the intrinsic cellular tropism of exosomes, analogous to viral capsid proteins dictating AAV tropism. We have developed a suite of tools, including noninvasive imaging and histological techniques, to enable us to carefully analyze the biodistribution and cellular uptake of our engineered exosomes, where tropism has been purposely modified using our engEx Platform, or unmodified exosomes, which naturally target certain cell types or tissues. This has allowed us to develop an understanding of the influence of route of administration of the exosomes on the pattern of uptake and interaction at the cellular level. We have observed a dramatic difference in tissue distribution with different injection routes in animal models. Imaging studies and histology have also revealed rapid distribution and pronounced tissue retention within body compartments (e.g. lung, subcutaneous space, tumor microenvironment) where exosomes are administered.

 

We have explored the distribution and cellular uptake of exosomes with numerous administration routes including intravenous, intra-peritoneal, oral, sub-cutaneous, intra-tumoral, intra-ocular, intra-muscular, inhaled, intra-cranial and intrathecal. Through this experimentation, using proprietary exosome identification and localization techniques developed at Codiak, we have confirmed that we can selectively target specific cell types—purposely direct the tropism of our engEx exosomes—in various tissues by engineering the surface proteome of the exosome. Our strategy involves matching the engineered or natural tropism for specific cell types with compartmental dosing—delivery to specific body compartments—for targeted delivery of our drug payloads. We believe we enhance the therapeutic index in this way by increasing target engagement and reducing the potential for off-target effects. Our preclinical studies have demonstrated selective delivery and pharmacodynamic effects of our engEx product candidates across multiple routes of administration. We believe these data highlight the flexibility and wide range of dosing options available to potentially facilitate the drugging of historically challenging targets by our engEx exosomes.

 

Customization of Exosome Pharmacokinetics with Compartmental Dosing and Cell Tropism

 

The figure above shows compartment-specific retention patterns 2 hours post-dosing via PET imaging of ⁸⁹ Zr-labelled reporter exosomes in non-human primates after IV and IP administration and in rats after ITh administration. Examples from multiple studies are displayed. Compartmental dosing of PTGFRN exosomes targets tissue resident macrophages. Dosing directly into the low-macrophage compartment of the brain and eye shows uptake into neurons. Exosome dosed intranasally and orally can be detected in the lung alveoli and intestines, respectively. Intramuscular dosed PTGFRN exosomes engage tissue resident innate immune cells and also drain to regional lymph nodes to interact with antigen presenting cells.

Manufacturing

Our proprietary manufacturing process is based on advanced biochemical engineering principles and is supported by a comprehensive set of methods for analytical characterization of both process and product. Our process format and technologies are designed to support scaling up or down to meet the demands of large or small patient populations, respectively. We have manufactured and released GMP engEx exosomes for our first two clinical programs, exoSTING and exoIL-12, from contract manufacturing organizations, or CMOs, using our

 

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production technology. Those manufacturing campaigns have been successfully run at the 2,000 liters fed-batch scale and 500 liters perfusion scale, which we believe is sufficient to support all phases of planned clinical development. In addition, we have successfully manufactured the exosome component for our exoASO-STAT6 program.

We have developed large-scale exosome manufacturing technologies meeting current regulatory expectations for product quality, which historically did not exist. The conventional way of producing exosomes for investigation as potential therapies was established in academia with the purpose of generating small amounts of material for scientific experiments and small pilot-scale clinical studies. This method generally consists of growing the exosome-producing cells in flasks, followed by a separation of the exosomes secreted in the liquid fraction by a complex sequence of centrifugation steps. This conventional approach is still used by both academia and other companies focused on exosomes.

Since our inception, it has been clear to us that the conventional approach was incompatible with our objective to industrialize the manufacturing of exosomes for therapeutic purposes and, therefore, radically different technical solutions were required. We developed, from the ground up, a robust and reproducible exosome manufacturing process, capable of large-scale operation, high productivity, purity and quality, assuring compliance with regulatory requirements, such as GMP. Given the complexity of exosomes and the lack of precedent in their large-scale production, this was a challenging task requiring significant investment. However our early focus and investment in building manufacturing expertise enabled us to successfully develop a highly efficient exosome production platform. As illustrated below, our approach more closely resembles a well-established monoclonal antibody manufacturing process as compared to the small-scale conventional exosome production method.

 

Comparison of Our Large-Scale Manufacturing Technology with Conventional Exosome Production Methods

 

The figure above compares our large-scale manufacturing platform (Codiak’s process) to the conventional method for producing exosomes (Conventional method). Our large-scale manufacturing platform starts with a well-characterized GMP bank of an engEx human cell line. The cells are expanded and transferred to an industrial scale bioreactor and cultured at high cell density in chemically defined media. The exosome-containing harvest is processed in a sequence of advanced chromatography and filtration steps to high purity. Each production run generates a large amount of GMP material that is ready for further processing to final vial fill. The conventional approach typically utilizes primary human cells grown in adherent T-flask or similar cell culture systems and serum-enriched media. The exosome-containing liquid

 

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phase is collected and further processed in a sequence of low-capacity centrifugation steps. Finally, the fraction containing purified exosomes is manually extracted from the centrifuge tubes and stored for further use.

We believe that our manufacturing process has overcome the historical challenges associated with exosome production in all critical technical areas, including cell source, cell culture and purification. Key competitive advantages of our manufacturing process versus conventional methods include:

The integration of these novel technologies into an optimized manufacturing process yields several major advantages:

 

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To complement our external manufacturing supply chain, we are establishing our own Phase 1/2 clinical manufacturing facility, or CMF, in Lexington, Massachusetts, which commenced operations in the fourth quarter of 2020. The CMF incorporates our proprietary processes and, once fully operational, will allow for the production of scalable quantities of engEx exosomes for the initial stages of drug discovery through clinical proof of concept studies for ourselves and our collaboration partners. We believe that the CMF will further reduce time to IND, enhance the speed with which we can incorporate technological advances into our manufacturing process, significantly reduce the costs of GMP manufacturing and strengthen our intellectual property position in the field. Functionally, we expect that it will cover all steps of the GMP exosome manufacturing process, including cell banking, upstream and downstream operation, exogenous exosome loading and clean up, as well as final vial fill. The GMP products will be tested and released by a co-located quality control, or QC, lab.

We believe that our CMF capacity will be sufficient to support the initial stages of drug discovery through clinical proof of concept studies for ourselves and our collaboration partners. For any programs that advance to later stage clinical trials and commercial stage, if approved, we currently envision two manufacturing scenarios. First, we plan to establish a long-term, strategic partnership with a premier CMO offering late-stage clinical and commercial capacity. Second, we have designed our CMF with the flexibility in the long-term to be expanded and potentially certified for late stage clinical and product launch manufacturing. Overall, we believe that the Phase 1/2 capacity of our CMF will support an expedited progression of our programs from inception to clinical stage. Furthermore, if our strategy for future late-stage clinical and commercial manufacturing materializes, we believe we will be able to efficiently move our most successful programs into pivotal trials.

Our programs

Our versatile engEx Platform has allowed us to develop several engEx therapeutic candidates that may be capable of treating diseases in a wide range of organs or tissues. We have initiated programs across multiple therapeutic areas with the goal of developing and delivering life changing medicines in diseases characterized by significant unmet need.

Our oncology programs

We believe our engEx Platform has broad therapeutic potential across a range of both solid tumors and hematological cancers. Our initial engEx product candidates focus on two well-validated pathways in oncology, STING agonism and IL-12-engagement. We advanced both candidates into clinical trials in September 2020. We also have multiple preclinical research programs that explore the applicability of our engEx exosomes across various pathways, drug modalities and cancer indications with high unmet need.

exoSTING for the treatment of solid tumors

Overview

exoSTING is an exosome therapeutic candidate engineered with our engEx Platform to carry our proprietary STING agonist inside the lumen of the exosome while expressing high levels of PTGFRN on the exosome surface to facilitate specific uptake in tumor-resident APCs. The STING pathway is a component of the innate immune system that detects cytoplasmic DNA and helps invoke an inflammatory response. Engagement of the STING pathway has been validated to elicit an anti-tumoral response, yet therapeutic development has been generally limited by non-selective cell delivery, off-target toxicity to important immune cells in the tumor and dose-related toxicity due to leakage of the STING agonist into the circulation. We believe exoSTING has the potential to overcome these limitations.

We are developing exoSTING for the treatment of multiple solid tumors with low levels of T cells and enriched in the target APCs, initially focused on metastatic HNSCC, TNBC, cSCC and ATC. We believe there are approximately 90,000 patients annually in the US with these cancers. exoSTING, which we believe has a best-in-class profile, has demonstrated encouraging preclinical activity. In September 2020, we initiated a Phase 1/2 clinical trial of exoSTING and we anticipate safety, biomarker and preliminary efficacy data by mid-2021.

 

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We believe exoSTING may also prove beneficial in certain neuro-oncology indications, such as GBM and LMD, should the results of our preclinical investigation support moving forward in those areas. We believe there is also a significant opportunity beyond the initial indications in our Phase 1/2 clinical trial in the numerous myeloid rich solid tumors, which show poor responses to the checkpoint inhibitors, or CPIs. We are also generating preclinical data with CPIs and exoIL-12 in combination with exoSTING to further expand options for clinical development with molecules that synergize with or enhance the responses to single agent exoSTING.

 

exoSTING Design

 

The figure above illustrates the design of exoSTING. The surface of exoSTING is enriched with PTGFRN (green) to facilitate selective uptake in tumor-resident APCs. The lumen of exoSTING is loaded with our proprietary CDN activator of the STING pathway

Free STING agonists for the treatment of solid tumors and historical challenges

The potential for targeting the STING pathway to elicit anti-tumor responses has been well-validated by several industry-sponsored clinical and preclinical programs investigating free STING agonist, or FSA, molecules. The majority of preclinical and clinical programs targeting the STING pathway to date have administered the FSA molecule, a cyclic di- nucleotide, or CDN, intra-tumorally, in an attempt to localize innate immune activation to the tumor microenvironment, or TME, where APCs and tumor antigens can be found. However, the ability to utilize FSAs as therapies to activate innate immunity in the TME has generally been hampered by absence of selectivity, poor drug-like activities, a short duration of tumor retention and systemic exposure, causing adverse events.

 

Injecting increasing doses of FSA intra-tumorally can cause cell death at the injection site and result in leakage of the FSA out of the tumor and into the blood. It is also likely that the systemic exposure to FSAs and activation of the STING pathway in sites distal to the TME interferes with the establishment of the necessary cytokine/chemokine gradients for productive immune-response to the tumor.

Our approach

We have engineered exoSTING to overcome the therapeutic limitations of FSAs. The role of natural exosomes in activating the STING pathway and in mediating immune surveillance is our primary rationale for developing exoSTING. In our exoSTING construct, a highly potent CDN molecule substitutes for genomic DNA and is designed to significantly enhance innate immune activation to attract T cells by establishment of chemokine gradients, facilitate APC presentation of tumor antigens to T cells and promote adaptive immunity to the tumor. Specifically, exoSTING consists of an exosome engineered with our engEx Platform to express high levels of PTGFRN on the exosome surface, with our proprietary, small molecule STING agonist loaded into the lumen of the exosome. The high-level display of PTGFRN in exoSTING promotes directed delivery of our CDN molecule into APCs in the TME to specifically engage the STING pathway in the desired target cell.

 

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We designed exoSTING to specifically target tumor resident APCs after intra-tumoral administration to mimic natural immune surveillance, which we believe can enhance the therapeutic index within the tumor and achieve systemic anti-tumor immunity, consistent with our preclinical results. In our studies using preclinical tumor-bearing animal models, we observed selective delivery of our CDN via exoSTING to APCs in the TME resulted in 100-fold greater activity compared to the FSA alone.

 

Anti-Tumor Response to exoSTING in Primary

and Distant Tumor Sites vs. free STING Agonist

 

The figure above shows that significant systemic anti-tumor activity was observed with exoSTING. B16F10 tumor cells were implanted both subcutaneously as well as intravenously. The mice were treated with a FSA or exoSTING on days 5, 8 and 11 at different doses as indicated. Primary tumor growth (left panel) of the subcutaneous tumor was measured. The secondary lung tumor burden was also evaluated on day 17 using histopathology. The number of secondary lung tumor nodules as evaluated by histology and complete tumor elimination (CR) of the lung metastasis is plotted (Right panel). Representative mouse lung images from the FSA and exoSTING group are shown. (Red arrow = tumor cells, green arrow = immune cells, ANL = adjacent lung tissue.) *p<0.05 by one-way ANOVA

We believe that specific delivery of exoSTING to APCs in the TME and retention in the tumor will overcome observed challenges to FSAs delivered intra-tumorally. This proposed advantage of exoSTING versus FSAs is supported by extensive preclinical data in mice and studies in non-human primates. Our own preclinical studies have further validated the potential of the STING pathway and suggest differentiation compared to the FSAs that are in advanced and early clinical testing by numerous biopharmaceutical companies. We initiated our Phase 1/2 clinical trial of exoSTING in September 2020 following the recent clearance of our investigational new drug application, or IND, and clinical trial authorization application, or CTA, and anticipate safety, biomarker and preliminary efficacy data by mid-2021.

 

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exoSTING preclinical data

In our preclinical mouse models, we observed that exoSTING, with the selective delivery of our CDN molecule to APCs in the TME, resulted in superior localized anti-tumor immune-response, indicated by interferon beta, or IFNß, production, T cell attracting chemokine release and influx and preservation/expansion of CD8+ T cells, compared to the delivery of FSAs intra-tumorally. See the figure below. The pattern of innate immune activation followed by adaptive immunity seen preclinically with exoSTING recapitulates the cadence of events noted for natural immune surveillance.

 

exoSTING Induced CD8+ T cell Recruitment to the Tumor

The figure above shows the immune histochemistry analysis of B16F10 tumors treated with intra-tumoral injection of either exoSTING or FSA. Samples were harvested at four hours or 24 hours following the first dose or the second dose of indicated treatment and the tumor samples were stained for macrophages and CD8+ T cells using immunohistochemistry. The left panel shows that injection of exoSTING lead to influx and enhancement of both CD8+ T cells as well as macrophages, whereas injection of FSA failed to recruit these immune cells. The number of CD8+ T cells was quantified and plotted (right panel). A statistically significant increase in number of CD8+ T cells was observed at both four hours and 24 hours following the second dose of exoSTING. In contrast, FSA treatment was not associated with sustained increase in CD8+ T cell infiltration. These results suggest that exoSTING mobilizes T cell infiltration into tumors with low levels of T cells.

Other published preclinical studies involving intra-tumoral administration of competitor FSAs have generated complex dose response curves with activity at low doses, but lack of anti-tumor immune-responses and systemic immune memory at higher doses. The loss of antitumor activity correlates with doses of FSAs that ablate infiltrating T cells in the tumor. In vitro studies with purified human immune cells showed selectivity of exoSTING uptake into APCs, but not T cells, B cells or NK cells, further demonstrating the cell type selectivity of exoSTING compared to FSAs, which demonstrated promiscuous uptake into immune cells. Therefore, we believe the selective targeting to APCs in the TME we have observed in preclinical studies with exoSTING suggests a substantial advantage. See the below figure.

 

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The potential killing of immune effector cells by FSAs may limit their clinical benefit—the higher the dose, the greater the off-target toxicity, thus resulting in a reduced therapeutic index. We believe that exoSTING and the engineered tropism into APCs in the TME provide an enhanced therapeutic index and potential best-in-class drug phenotype to engage the STING pathway and elicit potent innate and adaptive immune activation in the TME.

 

Selective Activation of Monocytes, Dendritic Cells and M2 Macrophages, without T-Cell Toxicity with exoSTING.

 

The figure above illustrates uptake and activation following in vitro treatment with exoSTING and FSAs in purified immune cells. CD86 expression was assessed as a cell activation marker for monocytes, whereas CD69 was used as an activation marker for T cells, NK cells and B cells. Activation of STING pathway was measured by IFNb production. exoSTING preferentially activates monocytes (panel a), in particular dendritic cells (panel c) and M2 polarized macrophages (panel d), but exoSTING does not activate M1 polarized macrophages (panel e) and also spares T-cells (panel f). In contrast, FSA non-selectively activates monocytes, T-cells and NK cells (panel b) and also is taken up by and activates the STING pathway in M1 macrophages (panel e) and T-cells (panel f). Data are presented as means ± s.e.m. RLU: Relative Luminescent Unit.

 

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Our good laboratory practice, or GLP, toxicology study in non-human primates supports the target product profile of exoSTING as illustrated by dose dependent injection-site retention with potent local pharmacology and limited systemic exposure. See panel A in the figure below. The tissue retained pharmacokinetic, or PK, profile of exoSTING was correlated with dose dependent and localized pharmacodynamic, or PD, activity as shown by multifold increments in the T-cell attracting chemokine CXCL10 (also known as IP10) with limited systemic IFNß. See panels B and C in the figure below. Local administration of exoSTING was well-tolerated and no local or systemic adverse events were observed. The highest tested dose of 5 µg (approximately 1.6 µg/kg) was the no-observed adverse event level, or NOAEL.

 

 

Pharmacokinetic and Pharmacodynamics of exoSTING in Skin and Blood in Non-Human Primates (NHP)

 

The figure above shows analyses of PK and PD in NHP following subcutaneous administration of exoSTING. Left panel: A 30-minute NHP skin biopsy (N=10) from the injection site was analyzed for exoSTING levels and compared to exoSTING levels in plasma (n=10). Graph represents Mean with SEM of plasma and skin concentrations of exoSTING demonstrating local retention of the drug. Middle panel: Pharmacodynamic (PD) analysis was performed in skin punch biopsy around the injection sites and corresponding plasma at 24 hours post-dose. Transcriptional profiling analysis of the skin samples demonstrated a dose dependent increase in the T-cell attracting chemokine CXCL10 (also known as IP10). Right panel: In contrast, modest increase in IFNb levels was observed in plasma. These data show that retention of exoSTING at the injection site led to local pharmacological activity with minimal leakage into blood circulation.

Moreover, our preclinical, ex vivo histo-culture studies with intra-tumoral injection of exoSTING showed effect in 9 out of 10 HNSCC human tumor samples. In addition, our approach to the clinical development of exoSTING has been informed by observations from clinical testing by others of FSAs. For example, clinical trials of FSAs with anti-PD-1 checkpoint inhibitors have shown clinical activity in HNSCC, TNBC and ATC and clinical trials using FSAs in HNSCC have advanced to Phase 2 clinical trials. However, data from clinical trials of FSAs administered as a monotherapy have only shown relatively minor activity to date. We believe that the properties of exoSTING as opposed to FSAs will have the potential to improve the likelihood of seeing single agent activity, particularly in these tumor types.

Our Phase 1/2 clinical trial

Our IND in the US for exoSTING went into effect in May 2020 and we received clearance of our CTA in the United Kingdom, or the UK, for exoSTING in June 2020. In September 2020, we initiated a Phase 1/2 clinical trial of exoSTING in the US and UK in patients with advanced/metastatic, recurrent, injectable solid tumors, with a focus on tumors likely to be enriched in the target APCs. Examples of such tumors include HNSCC, TNBC, ATC and cSCC.

 

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In our Phase 1/2 clinical trial of exoSTING, in Part A, we are investigating safety, tolerability, pharmacological activity and objective tumor response. Pharmacodynamic and anti-tumor activity are being assessed via serial assessment of objective response rate via CT scans and measurement of cancer biomarkers, cytokines, transcriptional profiling analysis in blood and tissue, systemic tumor specific T-cells as well as histological assessment of tumor tissue biopsies for histological response (e.g. T cell infiltration) and biomarkers. Our analyses will characterize safety, retention of our CDN molecule, dose response and objective tumor responses and, assuming positive data, should define a dose to advance into potential cohort expansion studies. We plan to enroll expansion cohorts of patients at the recommended Phase 2 dose in Part B of the trial.

 

 

Outline of Our exoSTING Phase 1/2 Clinical Trial

 

The figure above outlines flow of our exoSTING Phase 1/2 clinical trial. The study design is open label and multiple dose cohorts will be investigated using a common oncology “3+3” design. Subjects with injectable solid tumors can be enrolled with particular focus on patients with HNSCC, TNBC, cSCC and ATC. During screening study subjects will have a pre-dose biopsy of the injected tumor lesion(s) as well as CT scanning (imaging) for estimating tumor burden and establishing baseline for assessment of clinical activity. During Cycle 1, exoSTING will be dosed on Days 1, 8 and 15. During Cycle 2, exoSTING will be dosed on Days 1 and 15. From Cycle 3 and onwards, exoSTING will be dosed on Day 1 of each cycle. Safety data and samples will be collected throughout the study. Following start of treatment with exoSTING, serial tumor biopsies are taken on Cycle 1 Day 15 and Cycle 2 Day 15. CT scanning Imaging for assessment of anti-tumor activity via RECIST is done at 8-week intervals throughout the study. Following completion of Part A, the study can transition to Part B with potential early expansion into the initial target indications.

We initiated this trial in September 2020, with safety, biomarker and preliminary efficacy data, as assessed by serial CT scans every eight weeks, expected by mid-2021. We have made a number of trial design enhancements for our exoSTING Phase 1/2 program based upon observations from clinical testing of FSAs (ADUS100 and MK 1454) and other intra-tumoral administered drugs. We believe these enhancements will reduce variability with dosing and optimize the assessment timing for biomarkers to provide robust data to evaluate the single agent activity of exoSTING.

Pending data from our Phase 1/2 clinical trial and cohort expansion, we plan further development in our initial target indications, HNSCC, TNBC, cSCC and ATC, depending upon observed biomarker and preliminary efficacy data. Of note, ATC is a rare cancer—approximately 450 cases annually in the US—with a very high unmet medical need. Emerging data with a FSA in combination with CPI has shown activity in ATC. We believe that positive single agent activity of exoSTING in ATC, if observed in our Phase 1/2 clinical trial, could potentially lead to an accelerated development and regulatory approval pathway.

Furthermore, we believe exoSTING may also prove beneficial in certain neuro-oncology indications, such as GBM and LMD. Our investigation of exoSTING in GBM and LMD would represent a unique area of exploration of this pathway in areas of high unmet need, fits well with standard routes of delivery for drugs in these indications and may provide a potential opportunity for rapid single-agent development should our studies warrant progression into these malignancies. We believe there is also a significant opportunity beyond the initial indications in our Phase 1/2 clinical trial in the numerous myeloid rich solid tumors, which show poor responses to the CPIs. We are also generating preclinical data with CPI and exoIL-12 in combination with exoSTING to further

 

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expand options for clinical development with molecules that synergize with or enhance the responses to single agent exoSTING.

 

exoIL-12 for the treatment of cancer

Overview

exoIL-12 is an exosome engineered using our engEx Platform to display IL-12 in a fully active form on the surface of the engEx exosome, via PTGFRN, which enables engagement of the IL-12 receptor on immune effector cells. In previous preclinical and clinical studies conducted by others, IL-12 was observed to elicit a significant anti-tumor immune-response as a single agent through activation of T cells, NK cells and macrophages. We are developing exoIL-12 for the treatment of various forms of cancer that contain T cells and NK cells and which have previously shown clinical responses to IL-12 in prior studies with recombinant IL-12, or rIL-12. Development of rIL-12 and other strategies that have attempted to localize IL-12 to the TME have been limited by unwanted systemic exposure to IL-12, which has been associated with serious toxicity, including liver function abnormalities, hematologic toxicity and death. We believe exoIL-12 has the potential to overcome these limitations because of the pronounced localization of IL-12 in the TME with undetectable systemic exposure as seen in our preclinical mouse tumor models and non-human primate, or NHP, studies.

We are developing exoIL-12 for the treatment of solid tumors where engagement of the IL-12 pathway has been well-characterized, such as melanoma, MCC, Kaposi sarcoma, GBM and TNBC. We are initially focused on early stage CTCL. exoIL-12, which we believe has a best-in-class profile, has demonstrated encouraging preclinical and now clinical activity. In September 2020, we initiated a Phase 1 clinical trial of exoIL-12. In December 2020 and February 2021, we reported positive results from the single ascending dose portion of our Phase 1 clinical trial of exoIL-12 in healthy volunteers. In this randomized, placebo controlled, double-blind study, exoIL-12 demonstrated a favorable safety and tolerability profile, with no local or systemic treatment-related adverse events and no detectable systemic exposure of IL-12. Results confirmed the desired localization and retention of IL-12 at the injection site for at least 24 hours, as well as prolonged production of the T cell attractant chemokine IP-10 for 8-15 days depending upon dose. These results are consistent with our preclinical testing and confirm exoIL-12’s target product profile of local drug retention at the injection site, prolonged local pharmacodynamic activity, and lack of systemic IL-12 exposure. We plan to initiate the next portion (Part B) of the Phase 1 clinical trial, evaluating the safety and efficacy of exoIL-12, in CTCL patients at the optimal starting dose of 6 µg administered every other week, which we believe to be the optimal pharmacologically active dose based upon the healthy volunteer data from Part A of the trial and prior preclinical data with exoIL-12. We expect to see safety, biomarker and preliminary efficacy results from the repeat dose portion of our Phase 1 clinical trial of exoIL-12 by year-end 2021.

We estimate that the initial target patient populations for exoIL-12 represent approximately 19,000 current patients in the US and UK with an annual incidence rate of 3,600 new cases.

 

 

exoIL-12 Design

 

 

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The figure above illustrates the design of exoIL-12. The surface of exoIL-12 is enriched by the type I glycoprotein called PTGFRN (green) with in frame fusion of IL-12 (blue and yellow).

IL-12 and historical challenges

Clinical trials to date investigating rIL-12 in patients with CTCL, melanoma, MCC, Kaposi sarcoma, GBM and TNBC have reported encouraging single agent clinical activity data. However, systemic exposure to IL-12, even at low doses, is associated with substantial toxicities and in some cases, fatalities. Several more recent approaches have been tried to localize IL-12 to the TME via intra-tumoral administration, including adenovirus gene therapy, messenger RNA and electroporation of plasmid DNA encoding soluble rIL-12. These methods all delivered rIL-12, which is not localized to the TME exclusively, and showed wide variability in the quantity and duration of rIL-12 production, leading to variable degrees of systemic exposure and IL-12 induced toxicity. More recently, an adenovirus vector with a controllable promoter was shown to have promising results in GBM. While intra-patient levels of rIL-12 exposure in the systemic circulation could be managed, inter-patient IL-12 production levels varied widely. These observations suggest the level of localized TME dosing may be highly correlated to more robust tumor responses, the ability to control dose and a potentially better overall adverse event profile resulting from controlled systemic exposure. While rIL-12 has demonstrated an encouraging biological rationale as a viable cancer treatment across multiple tumor settings, its utility has been severely limited due to the historical inability to manage adverse events caused by systemic exposure to rIL-12 or consistently deliver precise local dosing in the TME.

Our approach

We designed exoIL-12 to overcome the therapeutic limitations of rIL-12. exoIL-12 was engineered to display IL-12 on the surface of the exosome using PTGFRN as a scaffold to facilitate potent local pharmacology at the injection site, with precisely quantified doses and to minimize the systemic exposure to IL-12. By displaying IL-12 on the surface of an exosome, and administering the drug intra-tumorally, we believe exoIL-12 may limit systemic exposure of IL-12 and associated toxicity and therefore potentially demonstrate an enhanced therapeutic index. We expect that exoIL-12 will allow local TME pharmacology without systemic exposure to the drug, with the potential to deliver more robust tumor response, dose control and an improved safety profile, and ultimately unlocking the potential of IL-12 across a group of human tumors already shown to be responsive to rIL-12 in prior studies.

 

exoIL-12 preclinical data

We have conducted extensive in vitro and in vivo testing of exoIL-12 in animal models. The results in syngeneic tumor models in mice demonstrated that exoIL-12 was approximately 100-fold more potent than rIL-12 despite equipotency in vitro. We also assessed the generation of systemic immunity in a MC38 syngeneic mouse tumor model, as measured post-study in the splenic lymphocyte pool, and observed that exoIL-12 elicited a systemic immunity of greater magnitude than rIL-12 at identical doses.

 

 

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exoIL-12: In vivo Anti-Tumor Effect and Induction of Systemic Anti-Tumor Immunological Memory

 

The figure above shows that exoIL-12 retains the activity of rIL-12 in vitro and induced a greater anti-tumor response (n=13). A) Representative dose-response curves of IFNY secretion from aCD3-stimulated human PBMCs after treatment with dose titrations of exoIL-12 or rIL-12. B) Comparison of anti-tumor activity of exoIL-12 and rIL-12 administered in M38 tumors. Mice were dosed three times intra-tumorally for MC38 (n=8). Tumor growth means ± SEM are displayed for tumor volumes from the various treatment groups over time. Tumors continued to grow in the rIL-12 treated group at the 100 ng dose and no complete responses (CRs) were observed. exoIL-12 showed dose-dependent effects on tumor growth rates at doses of 1, 10, or 100 ng. exoIL-12 at the 100 ng dose level resulted in complete responses in 5 mice (63%). C) The mice cured of tumors were re-challenged with fresh tumor cells; a group of naïve mice were also inoculated with MC38 tumors. No tumor growth was observed in any of the mice previously treated and cured with exoIL-12 demonstrating immunological memory.

 

Antigen-specific CD8+ T cells

The figure above illustrates the induction of antigen-specific anti-tumor responses in tumor-bearing mice after exoIL-12 treatment. Naïve mice (left), or mice treated with exoIL-12 after an initial subcutaneous implantation of the MC38 colon cancer cell line (right) were challenged by reimplantation of MC38 cells. T cells from the spleens of tumor-bearing mice in both groups were isolated and assayed for recognition of p15e, an MC38 tumor-associated antigen. Mice previously treated with exoIL-12 demonstrated significantly higher levels of tumor antigen-specific T cells than control animals as measured by flow cytometry. These results suggest that exoIL-12 treatment can induce an antigen-specific anti-tumor response in models of cancer.

 

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In order to understand the potential mechanism for this activity improvement, we developed assays to investigate the IL-12 protein in the tumor over time post-injection. As shown in the figure below (left), we observed that levels of IL-12 remained higher for 48 hours following administration of exoIL-12 as compared to rIL-12. This superior tumor retention translated to prolonged activity of exoIL-12 in the tumor, as measured by IFNY production, as shown in the figure below (right). Thus, by localizing the IL-12 to the TME, the anti-tumor immune activity that resulted with exoIL-12 allowed for reduced IL-12 doses to achieve tumor shrinkage, further enhancing the therapeutic index of exoIL-12.

 

exoIL-12 Shows Tumor Retention and Prolonged IFNY Production

The figure above shows intra-tumoral administration of exoIL-12 showed tumor retention (left) and prolonged T cell activation as measured by IFNY production (right). B16F10 tumor bearing mice were injected with either recombinant IL-12 or exoIL-12 (100 ng) and tumor tissue was collected at indicated time points and following administration. Levels of rIL-12 or IFNY were evaluated and plotted (n=3).

Our GLP toxicology study in non-human primates supports the target product profile of exoIL-12 as illustrated by dose dependent injection-site retention and no measurable systemic exposure of IL-12. See the left panel in the figure below. Four weekly doses of exoIL-12 demonstrated dose dependent and sustained localized pharmacodynamic activity as shown by increments in IFNY induced chemokines, such as IP-10, with negligible levels of IFNY and related chemokines in systemic plasma. See middle and right panels in the figure below. In NHPs, local administration of exoIL-12 was generally well-tolerated and no systemic or local adverse events were observed. The highest tested dose of 3 µg (approximately 1 µg/kg) was the NOAEL.

 

Pharmacokinetics and Pharmacodynamics of exoSTING in skin and blood in NHP

The figure above shows analyses of PK and PD in NHP following subcutaneous administration of exoIL-12. Left panel: A 30-minute NHP skin biopsy (N=10) from the injection site was analyzed for exoIL-12 levels and compared to exoIL-12 levels in plasma (n=10). Graph represents Mean with SEM of plasma and skin concentrations of exoIL-12 demonstrating local retention of the drug. Middle panel: Pharmacodynamic (PD) analysis was performed in skin punch biopsy around the injection sites and corresponding plasma following repeat dosing. ELISA analysis of the skin samples demonstrated a dose dependent increase in IFNY related chemokine IP-10. Right panel: In contrast, a modest increase in IP-10 levels was observed in plasma. These data show that retention of exoIL-12 at the injection site led to local pharmacological activity with minimal leakage into blood circulation.

 

 

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Our Phase 1 clinical trial

We received clearance for our CTA in the UK for exoIL-12 in August 2020 and initiated a Phase 1 clinical trial in September 2020. In addition, we have completed GMP manufacturing of exoIL-12 and vialed material has been released and qualified. Our Phase 1 clinical program for exoIL-12 consists of two parts (Part A & B) to explore safety, tolerability, PK and PD with a single subcutaneous dose in healthy volunteers (Part A) and a repeat dose study of intra-lesional administered exoIL-12 in stage IA-IIB CTCL patients (Part B).

 

Outline of Our exoIL-12 Phase 1 Clinical Trial

The figure above outlines the flow of our exoIL-12 Phase 1 clinical trial. Part A of the study was a randomized, placebo-controlled, single ascending dose design in healthy volunteers. exoIL-12 was administered subcutaneously and the study investigated safety and tolerability, as well as PK and PD in blood and within the area of the injected skin. Following completion of Part A in which we identified what we believe to be the optimal pharmacologically active starting dose, 6mg, the study will transition to Part B which will be an open label, “3+3” design, multiple ascending dose study of intra-lesional administration of exoIL-12 in patients with CTCL Stage IA-IIB. During Part B, safety, PK, and clinical activity data will be collected. We intend to assess anti-tumor response at 4-week intervals using CAILS and mSWAT scores. We plan to also assess pharmacodynamics in serial blood samples and paired tumor lesion biopsies. Pending the data generated in Parts A and B, we may expand our clinical development of exoIL-12 into multiple other indications, in some of which rIL-12 has proven to have single agent anti-tumor activity, such as TNBC, melanoma, GBM, MCC and Kaposi sarcoma.

Part A was a single ascending dose placebo-controlled investigation of subcutaneously administered exoIL-12. A total of five cohorts each with five subjects were enrolled, randomized 3:2 active drug to placebo, and dosed in Part A of the Phase 1 study. Each cohort received a subcutaneously administered single ascending dose of exoIL-12: 0.3 µg, 1.0 µg, 3.0 µg, 6.0 µg or 12.0 µg, respectively. We compared safety, tolerability and PK/PD data from serial blood and skin punch biopsies against previous single ascending dose studies of rIL-12 in healthy volunteers, which have shown systemic release of rIL-12 into the blood from the injection site and systemic IFNY production. We expected that subcutaneous administration of exoIL-12 would demonstrate a better adverse event profile as well as retention of IL-12 at the injection site and localized pharmacodynamic effects, in contrast to previous studies with subcutaneous administration of rIL-12. We observed this profile of exoIL-12 in our GLP toxicology study where exoIL-12 was administered in animal models by subcutaneous administration.

In December 2020, we reported positive tolerability data from Part A of our randomized, placebo-controlled, double-blind Phase 1 trial of exoIL-12 in healthy human volunteers. Consistent with our expectations and results of our preclinical observations, exoIL-12 demonstrated a favorable safety and tolerability profile, with no local or systemic treatment-related adverse events and no detectable systemic exposure of IL-12. In February 2021, we announced positive pharmacodynamic activity results from Part A of the trial. Results confirmed the desired localization and retention of IL-12 at the injection site for at least 24 hours, as well as prolonged production of the T cell attractant chemokine, IP-10, for 8-15 days depending upon dose. These results are consistent with our preclinical testing and confirm exoIL-12’s target product profile of local drug retention at the injection site, prolonged local pharmacodynamic activity, and lack of systemic IL-12 exposure. PD measurements including IL-12 receptor-mediated signaling assessed by induction of IP-10 was measured in skin punch biopsies at a 1.5 cm radius from the subcutaneous injection site. Samples were collected immediately prior to dosing (placebo or exoIL-12) and at 24 hours, Day 8 and Day 15 after administration. Results showed detectable IL-12 near the injection site as much as 24 hours post injection at the 6 µg dose. Samples collected at the 8-day and 15-day time points did not have detectable IL-12. In contrast, doses from 1.0 µg to 12 µg (not 0.3 µg) showed significant induction of IP-10 production in the skin detectable for 8-15 days confirming robust and durable local pharmacology. At the highest 12 µg dose, IP-10 was also detectable in the plasma, but not at any of the lower

 

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doses. As noted above, no detectable IL-12 was present in plasma and no drug-related adverse events were observed across the entire dose range. These results confirm the prolonged, local activation of the IL-12 signaling cascade. We now plan to initiate the Part B portion of the Phase 1 clinical trial, described below, evaluating the safety and efficacy of exoIL-12, in CTCL patients at the optimal starting dose of 6 µg administered every other week, which we believe to be the optimal pharmacologically active dose based upon this healthy volunteer data and prior preclinical data with exoIL-12.

 

 

 

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Part B will be a multiple ascending dose open label clinical trial of intra-lesional administered exoIL-12 and will be conducted in patients with Stage IA-IIB CTCL (Mycosis fungoides, or MF). Exacerbation or progression of CTCL has been associated with reduction in levels of IL-12 within the tumor lesions. As such, the therapeutic rationale of exoIL-12 is to restore the local deficit of IL-12 and prevent progression. Importantly, rIL-12 used by others as a single agent has been clinically validated in CTCL with previous studies conducted by others reporting an overall response rate of 56%, which included 2 out of 9 complete responses and 3 out of 9 partial responses. A follow-on study in 23 patients with Stage IA, IB or IIA CTCL showed measurable response in 17 out of 23 patients (74%) and duration of effect lasting from 3 to 45 weeks. The clinical activity of rIL-12 was observed after approximately four to six weeks dosing and we believe the cutaneous nature of the disease enables potential early detection of clinical activity using validated assessment measures specific for CTCL. It has also been observed in the trials of rIL-12 conducted by others that treatment effects can be observed in distal lesions and not just the injected lesion. This is consistent with the anticipated systemic immune-response against the malignant cells, supported by our preclinical mouse models showing development of systemic immunological responses to the tumor.

Part B of our trial will investigate safety and IL-12 exposure as well as local biomarker analysis of gene expression in serial punch biopsy specimens. Furthermore, we plan to assess clinical activity at four week intervals via serial assessment of objective response rate using Olsen criteria and Composite assessment of index lesion severity, or CAILS, and Modified Severity Weighted Assessment Tool, or mSWAT. In addition, we plan to obtain serial blood samples for measurements of cytokines and gene expression, assess local lesional responses by histology and analyze cellular biomarkers. We expect that patients will be able to continue to receive exoIL-12 for as long as they are experiencing clinical benefit. The study is being conducted in the United Kingdom. Given COVID-19-related restrictions involving new study initiation, we are working closely with study sites to open enrollment and commence dosing of patients when allowable and appropriate. Safety, biomarker and preliminary anti-tumor efficacy results are anticipated by the end of 2021.

Pending proof of concept data from Part B of our CTCL Stage IA-IIB study, we plan to further develop exoIL-12 in this patient population. We anticipate initially expanding development of exoIL-12 to include other indications where rIL-12 has demonstrated single agent clinical activity, using doses derived from the Phase 1 CTCL study. We believe exoIL-12 may have utility in several other tumor types that have been shown to respond to rIL-12 monotherapy over the last two decades, such as melanoma, MCC, Kaposi sarcoma, GBM and TNBC. As mentioned above in our discussion of exoSTING, we are exploring exoIL-12 as a combination therapy with exoSTING in animal models, which represents a possible proprietary combination strategy in cancer therapy.

 

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exoASO-STAT6 for treatment of cancer

Overview

exoASO-STAT6 is an exosome engineered using our engEx Platform to overexpress PTGFRN to selectively target uptake in M2 polarized tumor-associated macrophages. exoASO-STAT6 is engineered with a surface displayed antisense oligonucleotide, or ASO, selective for the transcription factor STAT6. STAT6 is a transcription factor that activates genes that encode immunosuppressive cytokines from these M2 macrophages. We are developing exoASO-STAT6 for treatment of cancers rich in so-called M2 polarized (tumor permissive/anti-inflammatory) macrophages. These M2 macrophages secrete cytokines that repel T cells and other immune effector cells from the TME and dampen their function. These M2 macrophages are “polarized” meaning they are biased by the expression of certain gene transcription factors, to make several immune suppressive factors. Targeting STAT6 acts as a potent switch of the polarization of tumor-associated macrophages from an M2 tumor permissive/anti-inflammatory phenotype to an M1 T cell attractive, anti-tumor/inflammatory phenotype. This is reflected in the production of prototypical M1 cytokines (TNF) commensurate with suppression of STAT6 mRNA in vitro and in preclinical models in vivo and a reduction in M2 cytokine production.

We plan to initially develop exoASO-STAT6 for primary and metastatic cancers of the liver, such as HCC, PDAC, CRC, lung adenocarcinoma, uveal melanoma, glioma, thyroid cancer and ovarian cancer. We estimate there to be approximately 240,000 new patients annually in the US with these cancers. We are also exploring the utility of exoASO-STAT6 in GBM and LMD and may further expand our development efforts into these M2 rich, intractable tumors of the central nervous system, or CNS.

 

exoASO-STAT6 Design

The figure above illustrates the design of exoASO-STAT6. The surface of exoASO-STAT6 is enriched with PTGFRN (blue and green) to facilitate selective uptake in tumor-resident M2 polarized macrophages. exoASO-STAT6 is further loaded with our proprietary ASO targeting STAT6.

STAT6 and historical challenges

A wide range of cancers with limited or no response to T cell directed immune therapy are highly enriched in M2 macrophages with increased STAT6 expression. The immune suppressive phenotype of these M2 macrophages in the tumor results in a cytokine milieu that is repulsive to T cell infiltration into the TME. M2 polarized macrophages can effectively suppress T cell proliferation and effector function and promote tumor growth. Furthermore, high levels of M2-like myeloid derived suppressor cells have been shown to negatively affect clinical response to T cell directed immune therapies. Examples of such cancers are primary and metastatic cancers of the liver, such as HCC, PDAC, CRC, lung adenocarcinoma, uveal melanoma, glioma, thyroid cancer, ovarian cancer, GBM and LMD.

Several drug modalities and pharmacological targets are being interrogated by other biopharmaceutical companies in an attempt to selectively target tumor-associated macrophages. However, results with macrophage depletion with CSF1R inhibitors have to date failed to show single agent anti-tumor effect both in preclinical models and early stage clinical trials. More recent approaches targeting Triggering Receptor Expressed in Myeloid cells 1, or TREM1, and Triggering Receptor Expressed in Myeloid cells 2, or TREM2, have also shown

 

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very limited single agent activity with no complete responses. Key challenges in successful targeting of tumor-associated macrophages are selective delivery and potent repolarizing. Transcription factors which regulate families of genes are ideal targets, but very challenging to drug with common drug modalities, such as small molecules and monoclonal antibodies, due to the lack of specific target cell delivery.

Our approach

exoASO-STAT6 is an exosome engineered using our engEx Platform to overexpress PTGFRN to selectively target uptake in M2 polarized tumor associated macrophages to potentially enhance the therapeutic index. exoASO-STAT6 is engineered with a surface displayed ASO, selective for the transcription factor STAT6. We have designed exoASO-STAT6 to allow for the necessary delivery specificity of the STAT6 ASO to the M2 macrophages to repolarize these cells, potentially resulting in strong single agent anti-tumor activity not possible with free ASO and not observed with other pathway inhibitors described above.

Our strategy with exoASO-STAT6 is to reduce the levels of specific transcription factors, such as STAT6, which are known to polarize macrophages in the M2 direction. By “repolarizing” the macrophages to the M1 immune stimulatory phenotype, exoASO-STAT6 is designed to promote an influx of T cells and immune effector cells to control tumor growth. exoASO-STAT6 uses the same exosome construct with high level PTGFRN display engineered onto the surface as exoSTING, thus reducing manufacturing risk. These exosomes are “loaded” with a proprietary ASO-linker system to the exosome surface using proprietary methods of loading. The PTGFRN display promotes selective uptake of the construct by M2 macrophages with selective delivery of the ASO to the target cell with limited uptake in non-target cells, thus potentially enhancing the therapeutic index of the candidate.

exoASO-STAT6 preclinical data

Our in vitro studies showed preferential uptake of engEx exosomes overexpressing PTGFRN into M2 polarized macrophages. Our in vivo biodistribution studies demonstrated that exoASO-STAT6 resulted in up to 12-fold increased selective delivery of ASOs to myeloid cells as compared to free ASO. See figure below. Furthermore, exoASO-STAT6 offered greater activity than free ASO, and in vitro, led to effective M2 to M1 macrophage reprogramming as shown by decrease in classical M2 factors and increase in anti-tumoral cytokines such as IL-12. In vivo studies with exoASO-STAT6 also showed more significant reduction in STAT6 mRNA in the myeloid subset of cells in the TME compared to comparable levels of free ASO, which led to a distinct decrease in expression of M2 genes and increase in expression of M1 genes.

 

 

exoASO-STAT6 Reduces mRNA Transcripts for STAT6 and Repolarizes Macrophages from M2 to M1 in vivo

The figure above shows direct injection of CT26 tumors was performed with 15 mg of free ASO or exoASO on days 8, 10 and 13. After treatment, tumor-associated myeloid cells were isolated using CD11b-positive selection magnetic beads (80% enrichment). Target gene reduction was analyzed by qPCR in total tumor and in tumor CD11b+ cells. Gene expression analysis in tumor myeloid cells was performed by transcriptional profiling using a mouse myeloid panel. The three panels show that exoASO led to selective knockdown of STAT6 in the myeloid cells and that the knockdown leads to down regulation of the M2 marker CSF1R and up regulation of the M1 marker NOS2. ***, P < 0.001 by two-way ANOVA, compared to a scrambled ASO (exoASO-scramble) or free STAT6 ASO. Overall these data demonstrate the ability of the engEx Platform to drug transcription factor biology for reprogramming tumor macrophages for enhanced tumor killing.

 

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These pharmacodynamic effects translated into exoASO-STAT6 displaying significant single agent anti-tumor activity in the myeloid rich colorectal CT26 and hepatocellular Hepa 1-6 preclinical cancer models with up to 50% complete response following intra-tumoral and intravenous administration, respectively. As illustrated below, no complete response activity was observed with free ASO at comparable ASO concentration, anti-CSF1R antibody or anti-PD1 antibody. These anti-tumor results correlate with selective targeting of TME M2 macrophages and the enhanced activity of the ASO when delivered to the target cell by exosome-mediated delivery.

 

 

exoASO-STAT6 Induced Single Agent Anti-Tumor Activity

The figure above shows anti-tumor activity of exoASO-STAT6 as a single agent was evaluated in CT26 model. CT26 tumor cells were implanted subcutaneously in the flanks of mice (n = 10 per group). ExoASO and free ASO were dosed intra-tumorally (day 8, 10, 13, 15, 17, 19) and antibody treatments were given intraperitoneally (bi-weekly). All treatments were terminated on day 20 and tumor growth was monitored. exoASO-STAT6 monotherapy resulted in complete tumor remissions (CR) in 50% (5 out of 10) mice, complete tumor remissions (CRs) were not observed in any other control groups.

 

 

 

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The figure above shows anti-tumor activity of intravenously administered exoASO-STAT6 and control exosome treatments as single agents and in combination with an anti PD-1 monoclonal antibody evaluated in the orthotopic Hepa1-6 murine hepatocellular carcinoma model. Hepa1-6 tumor cells were surgically implanted in the livers of mice (n = 7-8 per group) and the indicated therapeutics were dosed intravenously (starting day 3, every two days for 6 treatments), while antibody treatments were given intraperitoneally (anti PD-1: twice weekly for four treatments; anti CSF1R: every two days for 6 treatments). All treatments were terminated on day 16 and tumor burden was determined at the end of the study histologically by scoring of % of macroscopic tumor lesions. exoASO-STAT6 monotherapy and in combination with an anti PD-1 monoclonal antibody resulted in complete tumor remissions (CR) in ≥50% of mice in each group, significantly more than in any other treatment group. (*** P<0.0005; ** P<0.005 one-way ANOVA).

exoASO-STAT6 program status and clinical development plan

We have nominated exoASO-STAT6 to be our third wholly owned engEx product candidate to enter the clinic and IND enabling studies are ongoing, with a targeted IND submission in the second half of 2021. We have manufactured GMP exosomes using our proprietary manufacturing technology to support these activities.

We plan to initially develop IV administered exoASO-STAT6 for various cancers, including HCC, PDAC, CRC, lung adenocarcinoma, uveal melanoma, glioma, thyroid cancer and ovarian cancer. We estimate that the incidence rate of these cancers is approximately 240,000 patients per year in the US. We are also exploring the utility of exoASO-STAT6 in GBM and LMD and may further expand our development efforts into these M2-rich, intractable tumors of the central nervous system, or CNS.

Our preclinical experimentation in the myeloid cell rich GBM and LMD cancer metastasis animal models using intra-tumoral and intrathecal dosing, respectively, may represent opportunities in areas of very high unmet need with potentially expedited approval pathways, should the data warrant moving forward. All of the tumors we are targeting are particularly enriched in M2 macrophages and represent areas of substantial unmet need.

Our additional research and preclinical programs

exoVACC: a modular platform for constructing precision vaccines

We believe that our engEx Platform is well-suited to create potent vaccines with features that can be purposely designed to activate specific arms of the immune system (e.g. innate, T cell, B cell). We refer to this capability as our exoVACC Precision Engineered Vaccine Technology Platform, or our exoVACC Platform. Our exoVACC Platform is designed to allow us to engineer vaccines to provide simultaneous delivery of antigen(s) and adjuvant to the same APC, with flexibility to display multiple antigens either on the surface or inside the lumen of the exosome. In addition to our ability to use our exoVACC Platform to engineer cells to produce our antigen displaying vaccine candidates, we have developed methods for chemical conjugation of vaccine antigen candidates for rapid screening and potential therapeutic use. We can further modify the exosome surface to facilitate purposeful tropism to enhance delivery of the vaccine to APC subsets with differentiated functions, and to display co-stimulatory molecules to further “shape” the immune-response for the desired features. We believe we can also shape the immune-response by the choice of adjuvant molecules, which typically activate the innate immune-response, including our STING agonist used in exoSTING, toll-like receptor, or TLR, agonists or other adjuvants. We intend to utilize our exoVACC Platform to develop vaccine candidates that may be useful in infectious disease, cancer and neurodegenerative settings where the antigens are known.

 

exoVACC Precision Engineered Vaccine Technology Platform

 

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The figure above describes our exoVACC Platform. By combining our engEx Platform with exogenous loading methods, we have developed a modular platform that allows us to generate custom exosomes for particular vaccine purposes. We have successfully generated exosomes with surface or luminal antigens, expressing targeting ligands against particular antigen presenting cell populations (e.g. anti-Clec9a to target cDC1 cells), expressing co-stimulatory molecules, and have loaded various adjuvants.

We have explored the utility of our exoVACC Platform with ovalbumin, or Ova, as a well-known and often used, model antigen. We utilize the BASP1 exosomal scaffold protein to display Ova inside the lumen of the exosome and to drive uptake into APC by display of PTGFRN on the exosome surface as utilized for exoSTING and exoASO-STAT6. Our STING agonist is then loaded in the exosome lumen (using technology developed for exoSTING) to provide adjuvant stimulation to the APC to which the Ova vaccine candidates are being delivered. Our preclinical results to date have shown significant stimulation of innate, T cell and B cell immunity specific for the Ova antigen. We have demonstrated these superior antigen specific responses in animal models using intravenous, subcutaneous and inhaled exosome delivery with as little as a single immunization and antigen levels 100-fold lower than control.

 

 

exoVACC Promoted Broad Immunological Responses including CD4, CD8 and Antibody Response

 

The figure above shows mice vaccinated intranasally with an exoVACC vaccine targeting ovalbumin (OVA) at day 0, boosted at day 14. Animals were assessed at day 28 for OVA-specific CD4 and CD8 T cell responses and OVA specific B cell antibody responses. Vaccination with OVA antigen localized to the exosome lumen along with a STING agonist adjuvant (exoOVA-STING) resulted in a >5 fold and >2 fold greater induction of OVA-specific CD4 T cells and CD8 T cells respectively as compared to controls (free OVA protein or Free OVA with Alum or unadjuvanted exoOVA). In addition, the exoVACC combination also resulted in robust induction of OVA antigen-specific IgG1 antibodies.

In addition to the breadth of immune-response possible at low antigen dose, we have observed the selective stimulation of a unique population of CD8+ T cells in the lung mucosal surfaces called resident-memory T cells, or Trm. These cells appear to be crucial in virus defense in the lung and other mucosal surfaces and represent the first line of defense against virus exposure. These cells, once elicited, appear to expand and maintain residence at the mucosal surface of the lung to provide a rapid memory response to the antigen. Their proximity to the site of viral entry at the mucosal surfaces makes them crucial for protection from viruses where T cell immunity is a critical part of protection, such as HIV and various coronaviruses.

 

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exoVACC Promotes Expansion of Resident Memory CD8 T cells in the Lung

The figure above shows naïve mice (n=3-5 per group) dosed with equal quantities of OVA or OVA engineered into the exosome lumen (exo-OVA). Poly I:C, a widely used adjuvant for enhancing antibody responses, was added to OVA or to exo-OVA. These constructs were tested in comparison to an exo-OVA construct adjuvanted with a STING agonist. Mice were primed with the vaccines on day 1 and boosted on day 7. Lung tissue was harvested on day 14 and flow cytometry was utilized to enumerate the levels of OVA antigen specific tissue resident memory T cell populations. TRM defined as CD8+CD44+CD62L-CD103+CD69+ cells reactive to OVA (SIINFEKL) tetramer. As compared to control unadjuvanted or free OVA adjuvanted with poly I:C vaccines, exoVACC with luminally loaded antigen and adjuvanted a STING agonist (exoOVA:a STING agonist) resulted in >28 fold induction of antigen specific TRM cells in the lung (*** P<0.0005; ** P<0.005 one-way ANOVA).

 

 

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We have partnered with The Ragon Institute of MGH, MIT and Harvard to develop vaccines to protect against HIV and SARS-CoV-2 based upon the results described above, particularly the expansion of mucosal Trm. The Walker lab at Ragon has developed a proprietary algorithm to predict T cell epitopes for HIV that are postulated to generate protective immune-responses for the vast majority of patients. A similar approach is also underway to develop a vaccine for SARS-CoV-2 and the Walker lab has provided those antigen sequences to us under our agreement to construct potential exoVACC candidates. We plan to screen these early stage, preclinical candidates in vitro with patient blood samples and then test them in appropriate preclinical models prior to any human testing. We expect that both the HIV and SARS-CoV2 T cell epitopes will be engineered into PTGFRN over-expressing exosomes and utilize BASP1 for luminal loading of the antigens. Our STING agonist will be loaded as an adjuvant using methods developed for exoSTING. In the case of the potential SARS-CoV-2 vaccine, we plan to make further engineering modifications by expressing the so-called “spike protein” on the surface of the exosome using PTGFRN as a scaffold to achieve high level antigen display to facilitate antibody responses. We expect that our further activities in this area will focus on development of a pan-coronavirus vaccine. Our SARS-CoV-2 studies have been supported by a grant application jointly submitted by the Walker lab and Codiak and awarded by Evergrande Foundation. We anticipate screening multiple early stage exoVACC vaccine candidates over the coming months with potential selection of a candidate for further evaluation in clinical trials expected by early 2021. We believe our capacity to potentially stimulate an anti-viral response activating innate, T cell (especially Trm) and antibody responses is a highly differentiating feature of exoVACC. Recent data from vaccine studies with SARS-CoV-2 highlight the importance of the vaccine candidate for eliciting T cell responses in a high percentage of individuals.

 

SARS-CoV-2 exoVACC Example

The figure above describes an example of an exoVACC vaccine candidate for SARS-CoV-2. Our exoVACC Platform is used to engineer exosomes that contain both surface B cell epitopes (e.g. receptor binding domain) as well as luminal highly conserved T cell epitopes. The engineered multifunctional exosome is then exogenously loaded with an adjuvant, such as a CDN STING agonist. The combination of both surface B cell epitopes and luminal T cell epitopes is expected to generate both antibody and cytotoxic T cell responses.

We have also established a collaboration with Washington University in St. Louis for access to unique, proprietary tumor neoantigens to evaluate in potential exoVACC candidates. We plan to utilize the same general approach of antigen and adjuvant co-delivery to select APC subpopulations with adjuvants that promote strong Th1 anti-tumor T cell responses.

We plan to pursue additional collaborations to acquire rights to other unique and valuable antigens.

 

engEx-AAV and non-viral precision delivery

It has been known for some time that production of various serotypes of AAV is associated with stochastic incorporation of viral particles into exosomes. These AAV particles can be seen in electron micrographs of purified exosomes inside the lumen of the exosome and occur as either single or multiple loaded capsids per exosome. The relative efficiency of stochastic loading is low, with most exosomes lacking viral particles and the majority that contain them having only 1-2 capsids per exosome. We have used our engEx Platform and BASP1 to develop methods to enhance luminal loading into exosomes and further optimization work is proceeding. Our preliminary studies have shown an up to 50-fold enhancement of AAV luminal loading. These studies

 

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demonstrate the feasibility of using our engEx Platform and our engineering technologies to improve the efficiency of AAV luminal loading.

Recombinant adeno-associated virus, rAAV, has been developed as a successful vector for both basic research and human gene therapy. However, neutralizing antibodies, or NAbs, against AAV capsids can abolish AAV infectivity on target cells, reducing the transduction efficacy. We have addressed the question of whether the application of our engEx Platform to AAV, or engEx-AAV, is subject to inhibition by virus serotype specific neutralizing antibodies in an in vitro assay examining gene transfer. The results suggest that luminal AAV in engEx-AAV is not susceptible to antibody neutralization. These studies also confirm that engEx-AAV efficiently delivers the transgene and that the transgene is expressed in vitro. By correcting for plasmid copy number it appears that engEx-AAV is more efficient than wild-type AAV at transducing cells based upon the greater fluorescence of the cells transduced with a luciferase containing DNA sequence. We have also confirmed gene expression in vivo following rat intra-ocular administration of engEx-AAV. Histological analysis demonstrated robust uptake of exosomes in the retinal ganglion cells with concomitant functional gene transfer.

 

 

engEx-AAV Resistant to Antibody Neutralization, Functional in vitro and in vivo, Can Be Engineered by Our engEx Platform

The figure above describes our engEx-AAV platform. A) Isolation of highly pure exosomes from AAV expressing cells results in some AAV in the exosome fraction (white band), while the majority of free AAV is pelleted at the bottom. EM pictures illustrate the difference between engEx-AAV and free AAV. B) engEx-AAV or free AAV expressing secreted nanoLuciferase were incubated with various concentrations of human IVIG before transduction of HEK 293 cells. While free AAV was neutralized by increasing concentrations of IVIG, engEx-AAV was resistant to neutralization and had increased activity vs free AAV. C) engEx-AAV expressing secreted nanoLuciferase was intravitreally administered to rat eyes and 2 weeks later, eyes were collected and luciferase levels were measured following tissue homogenization. D) Diagram of how engEx can be used to re-direct exosome tropism as well as increase the amount of AAV loaded into exosomes. E) Using the engEx Platform, HEK 293 cells were engineered to express various configurations of a luminal anti-AAV affinity ligand (engEx-1, 2 or 3). AAV was generated from WT HEK 293 or three engEx variants by triple transfection and exosomes were purified. AAV genome copy numbers were measured by qPCR in the conditioned media and exosome fraction, and data shown here represents the fold improvement of total AAV that is found in exosome fraction from engEx engineered cells versus unmodified HEK293 cells.

 

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The observations described above suggest several differentiating properties for engEx-AAV. Our engEx-AAV constructs are functional vehicles for non-viral gene transfer that we believe can markedly enhance the level of gene expression as compared to AAV alone. Moreover, packaging the AAV in an exosome using engEx-AAV has shown evidence of “immune cloaking” of the luminal AAV due to the lack of AAV neutralization with immune sera specific for the serotype of the virus capsid. With the coupling of exosome tropism engineering with our engEx Platform, engEx-AAV could facilitate cell selective, non-viral gene delivery to specific cells and cellular compartments. These attributes may allow for:

 

A specific aim of our collaboration with Sarepta is to optimize AAV incorporation into exosomes using our engEx Platform. The encouraging preliminary results demonstrate the utility of our engEx Platform, and future efforts are designed to improve process efficiency and robustness so that the technology can be advanced into clinical testing. We believe that the combination of immune cloaking, specific delivery through tropism modification and our experience with industrializing the production of exosomes will demonstrate the value of our engEx Platform for the targets subject to our collaboration with Sarepta, and potentially for a substantial number of indications for gene therapy.

Neurology strategy

We believe the potential of our engEx Platform to enhance the therapeutic index of our engEx exosomes by compartmental exosome dosing may be particularly well-suited for CNS disorders. Intravenous dosing approaches typically yield low CNS drug delivery due to the blood brain barrier, or BBB. However, we believe several neuro-oncology, neuro-inflammatory and neurodegenerative diseases warrant local dosing of therapies directly into the nervous system or surrounding cerebrospinal fluid, or CSF. This dosing approach is increasingly pursued by ASO, gene and stem cell therapies.

Our preclinical data have demonstrated that intrathecally dosed engEx exosomes overexpressing PTGFRN are substantially retained within the skull and spinal compartments, while intrathecally dosed ASOs exit the CSF to accumulate in peripheral organs, which may precipitate off-target effects. Moreover, within the intrathecal compartment, PTGFRN overexpressing exosomes (like those used for exoSTING, exoASO-STAT6 and exoVACC) can be detected using our highly specific antibody 1G11, which recognizes human PTGFRN. Exosomes administered in this compartment are found to be selectively sequestered in macrophages of the cranial and spinal meninges, nerve roots and perivascular spaces. Most of the exosome accumulating cells are CD206 expressing M2 macrophages, which are emerging as key regulators of nervous system immune surveillance, adaptive immune-responses and autoimmunity.

 

 

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Intrathecal Delivery of PTGFRN Overexpressing Exosomes to CNS Tissue Resident Macrophages

 

The figure above illustrates Intrathecal delivery of PTGFRN exosomes to central nervous system tissue resident macrophages in rat. Two hours post intrathecal dosing ⁸⁹Zr-labelled exosomes are retained in the intrathecal compartment while ¹²⁵I-labelled antisense oligonucleotides (ASO) show significant egress to the periphery. However, Cy7-labelled ASOs loaded onto exosomes (Cy7-exo ASO) show retention and a high level of meningeal and nerve root localization within the intrathecal compartment as determined by fluorescence tomography. ASO-loaded PTGFRN exosomes selectively target meningeal lymphatics following intrathecal dosing.

The nervous system has long been known to be an immune-privileged organ. Several specializations besides the BBB contribute to this. The brain parenchyma does not have conventional lymphatic vessels for fluid management and immune surveillance. Instead material in the CNS extracellular fluid space moves along CNS blood vessel walls and this perivascular route provides a path connecting brain-derived extracellular material with the CSF. Understanding the nature of the flow of exosomes through the CSF and the cells they interact with in the meninges defines the biological processes and therefore disease situations that potentially can be readily targeted with exosome therapeutics.

In addition to resident meningeal macrophages, the meninges harbor true lymphatics that are continuous with lymphatics in cranial and spinal nerve root sheaths and ultimately connect with head, neck and paraspinal lymph nodes. Immune cells educated in these lymph nodes towards CNS antigens gain entry back into the nervous system under signaling assistance from these same M2 macrophages. Selective targeting of CNS immunoregulatory M2 macrophages with PTGFRN overexpressing exosomes has identified several near-term opportunities for our pipeline. The observation that many peripheral cancers metastasize to the CNS while CNS originating cancers rarely migrate out, may reflect an actively hindered anti-tumor immune-response in the CNS involving M2 macrophages, in the same way as these macrophages limit immune cell influx in peripheral solid tumors. Indeed, GBM is a tumor well-known for its high M2 immunosuppressive macrophage content (approximately 40% of tumor mass), low T cell content and checkpoint inhibitor resistance. Activation and M1 polarization of glioblastoma associated macrophages with intra-tumoral exoSTING or exoASO-STAT6 may thus turn on local immune-responses in these notoriously immunologically “cold” tumors. Intra-tumoral dosing is an accepted clinical option in GBM and our pilot work with exoSTING in a syngeneic mouse glioblastoma model suggests that this dosing approach leads to exosome spread within the tumor, uptake by GBM-associated M2 macrophages and stimulation of macrophage IFNß production, which is the critical trigger for promoting T cell influx and tumor destruction. We are conducting preclinical studies in GBM models with exoSTING and exoASO-

 

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STAT6. Previous work agonizing the STING pathway and macrophage repolarization are active areas of investigation for GBM and are supportive of these pathways in this difficult to treat malignancy.

LMD represents neoplastic disease that has metastasized to the meninges. Nerve root involvement and elevated CSF pressure due to meningeal lymphatic vessel blockade by the cancer cells leads to a rapid clinical demise with only a few months between diagnosis and death. The incidence of LMD is increasing and it is now being seen with 5% of all cancer cases (approximately 110,000 cases per year) with melanoma and breast cancers in adults and hematological cancer in children being the most frequent culprits. In preclinical testing, we have shown that the high M2 resident macrophage population of the meninges can be targeted with intrathecal exoSTING dosing to activate macrophage IFNb signaling. As a result, we believe LMD provides an opportunity to test our myeloid biology targeting exoSTING and exoASO-STAT6 product candidates. Moreover, the standard of care in LMD routinely involves intrathecal chemotherapy, which we believe may facilitate clinical evaluation of our engEx exosomes in this high unmet need and potentially provide an expedited pathway to approval should the data be positive. We are planning to evaluate exoSTING and exoASO-STAT6 for activity in a melanoma LMD animal model. The expected current survival time for patients with melanoma LMD is approximately 1.7 to 2.5 months, and we believe the biology and mechanism are supportive in this disease and represent an area of extraordinarily high unmet need that fits well with our current routes of dosing capabilities.

Neuroinflammation has emerged as a causative factor in multiple neurological diseases. A subcellular multi-protein complex that is abundantly expressed in immune and central nervous system cells is the nucleotide-binding oligomerization domain-, leucine-rich repeat- and pyrin domain-containing 3 inflammasome, which is known as NLRP3. The NLRP3 inflammasome can sense and be activated by a wide range of exogenous and endogenous stimuli such as microbes, aggregated and misfolded proteins, and cytokines. This results in activation of caspase-1 and leads to the processing of interleukin-1ß, or IL-1ß, and interleukin-18, or IL-18, pro-inflammatory cytokines, which mediate rapid cell death. Therefore, the NLRP3 inflammasome is considered a key contributor to the development of neuroinflammation.

exoASO-NLRP3 is an exosome therapeutic candidate engineered with our engEx Platform to overexpress PTGFRN to target NLRP3. exoASO-NLRP3 is engineered with a surface displayed ASO selective for NLRP3. By combining inflammatory cell targeting and compartmental dosing, exoASO NLRP3 has the potential to enhance the therapeutic index in diseases such as multiple sclerosis, neuropathy, and neurodegeneration. exoASO-NLPR3 is a discovery stage product candidate.

In addition, inappropriate activation of myeloid signaling in the CNS is associated with a number of inflammatory and autoimmune conditions, including multiple sclerosis, Guillain Barre syndrome, neuropathies and radiculopathies. Several neurodegenerative diseases such as Alzheimer’s disease, Parkinson’s disease, Amyotrophic Lateral Sclerosis, or ALS, and frontotemporal dementia also have significant neuroinflammation as a component of their pathophysiology. We are developing several engEx exosomes to target key inflammation cascades mediated by the meningeal macrophages, which are readily targeted with our exosomes. Several research programs are underway to target inflammatory pathways with engineered exosomes including the inflammasome.

 

We also intend to leverage our exoVACC Platform to build neurology pipeline assets. Several lessons have been learned from the biopharmaceutical industry’s passive and active immunotherapy efforts towards misfolded aggregation prone neurotoxic protein. Several principles have emerged for generating safe and adequate B cell active immune-responses while avoiding autoimmune T cell responses. We believe we can engineer the unique set of vaccine requirements to potentially achieve this B cell humoral vaccine response with our modular exoVACC Platform. By engineering B cell antigens, B cell tropism, costimulatory molecules, and the appropriate adjuvants into the same exosome particle, we believe we have the potential to generate novel engEx exosomes for treating and preventing multiple neurodegenerative diseases characterized by the accumulation of neurotoxic misfolded protein aggregates. The recent emergence of misfolded protein aggregates as the underlying defect in several trinucleotide repeat diseases further provides an opportunity to build a proprietary, differentiated treatment and prevention vaccine strategy for these genetic orphan disorders. Recent published data have shown that antibody mediated clearance of these misfolded proteins results in improved outcomes in preclinical models. To this end, together with Laura P.W. Ranum, Ph.D., who is a leader in the field of trinucleotide repeat disorders, we have submitted a grant application to study vaccine candidates to elicit specific antibody responses against misfolded proteins in trinucleotide repeat diseases.

 

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Collaborations

Jazz Pharmaceuticals

In January 2019, we entered into a Collaboration and License Agreement with Jazz focused on the research, development and commercialization of exosome therapeutics to treat cancer. Pursuant to the agreement, we granted Jazz an exclusive, worldwide, sublicensable royalty-bearing license to develop, manufacture and commercialize therapeutic candidates directed at up to five oncogene targets to be developed using our engEx Platform for exosome therapeutics. The targets selected to date, which include NRAS and STAT3, have been validated in hematological malignancies and solid tumors but generally have been undruggable with current modalities.

Under the terms of the agreement, we are responsible for the initial development of therapeutic candidates directed at all five targets, as well as the costs associated with such development activities. In addition, we are responsible for development costs up to and including IND acceptance, and certain development costs of the Phase 1, Phase 1/2 and Phase 2 clinical trials for each of the first two therapeutic candidates to commence clinical trials.

Following the conclusion of the applicable clinical trials for the first two candidates, and for the remaining three candidates, Jazz will be responsible for the further development and associated costs of the therapeutic candidates, including all Phase 3 and any Phase 4 clinical trials, potential regulatory submissions and commercialization for each product at its sole cost and expense. We have the option to participate in co-commercialization and cost/profit-sharing in the US and Canada on up to two products, subject to a one-time veto right by Jazz. Should we choose to exercise this option, we and Jazz will equally split most of the remaining development costs and the net profits or losses in the US and Canada, while we would receive milestones and royalties for sales in other parts of the world. In the event that we do not exercise our option, we will receive milestones and royalties based upon sales worldwide.

As part of the agreement, Jazz paid us an upfront payment of $56.0 million. We are eligible to receive up to $20.0 million in preclinical development milestone payments, the first of which is for $10.0 million and will be due from Jazz upon the second initiation of IND-enabling toxicology studies for a collaboration target. We are also eligible to receive milestone payments totaling up to $200.0 million per product based on IND acceptance, clinical and regulatory milestones, including approvals in the US, the EU and Japan, and sales milestones. We are also eligible to receive tiered royalties on net sales of each approved product, with percentages ranging from mid-single digits in the lowest tier to high teens in the highest tier. The milestone and royalty payments are each subject to reduction under certain specified conditions set forth in the agreement.

Either party can terminate the agreement with respect to a region and a target upon the other party’s material breach relating to such region and target, subject to specified notice and cure provisions. Jazz also has the right to terminate the agreement in its entirety or in part (with respect to a particular collaboration target, research program, licensed compound or product, region or, in some cases, country) for convenience at any time upon 180 days’ written notice or for safety reasons immediately upon notice, provided, however, that in the case of a termination for convenience with respect to a licensed compound that is a development candidate, Jazz will maintain its obligation to reimburse us for certain development costs.

Absent early termination, the term of the agreement will continue on a country-by-country basis and licensed product-by-licensed product basis, until the expiration of the royalty payment obligations for the country and the licensed product (or, in the case of a shared territory for an optioned product, will continue for so long as such optioned product is being sold by Jazz or its affiliates or sublicensees in the shared territory).

Sarepta Therapeutics

In June 2020, we entered into a two-year Research License and Option Agreement with Sarepta focused on the use of exosomes for non-viral delivery of AAV, gene-editing and RNA therapeutics to address five agreed targets associated with neuromuscular diseases. Pursuant to the agreement, we are receiving funding to conduct collaborative research and Sarepta has options to enter into exclusive, worldwide licenses for each of the agreed targets to develop, commercialize and manufacture therapeutic candidates developed using our engEx Platform for exosome therapeutics. For each target option exercised, we will be eligible to receive an option exercise fee,

 

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milestones, and royalties. Each target is well-understood to be therapeutically relevant to its associated neuromuscular disease.

Under the terms of the agreement, we granted to Sarepta a non-exclusive, royalty-free, worldwide license, with a limited right to sublicense, to use certain of our intellectual property in the conduct of activities for which Sarepta is responsible under the agreement. The agreement provides that the activities conducted by the parties will be performed in accordance with a research plan which sets forth the activities to be undertaken by both parties over the course of the agreement covering all targets included in the agreement. We are responsible for the conduct of all activities assigned to us under the research plan. The agreement initially covers five agreed research targets as selected by Sarepta at inception of the arrangement. However, Sarepta has the right to replace up to two of the research targets with certain other agreed pre-named targets. To the extent a target is replaced, the original target is discontinued as a research target under the agreement and the replacement target becomes a research target under the agreement. During the term of the agreement, we may not develop, manufacture, commercialize or otherwise exploit any exosome therapeutic product directed to any of the agreed research targets, except for those activities conducted pursuant to the agreement; provided that we may conduct non-clinical or pre-clinical research regarding such products so long as we provide Sarepta written notice of and regular reports regarding such activities.

Pursuant to the terms of the agreement, we granted to Sarepta an option to obtain an exclusive, worldwide, sublicensable license to use certain of our intellectual property for the development, manufacturing and commercialization of exosome therapeutic candidates directed to one or more of the research targets. Each of the licenses that would be issued upon exercise of such option cover the use of our intellectual property in the exploitation of therapeutics directed to a particular target. Options may be exercised on a research target by research target basis any time prior to completion of the research activities for the respective target, but not later than June 17, 2022, subject to extension to December 17, 2022. Following option exercise, the parties will execute a definitive license agreement that outlines the terms and conditions of the collaboration arrangement that would govern the further development and commercialization of exosome therapeutics directed to the subject target, contingent on remittance of the option exercise fee.

Under the terms of the license agreement which would be entered into upon the exercise of the option by Sarepta, we would be responsible for the conduct of the associated pre-clinical development through the generation of a development candidate directed to the applicable target in accordance with a plan which sets forth the activities to be conducted with respect to each pre-clinical development program. Additionally, we are obligated to provide manufacturing and supply through the completion of Phase 2 clinical trials. We are entitled to receive reimbursement of costs incurred with respect to the activities performed in the execution of the pre-clinical development programs and any manufacturing activities. Following the selection of a development candidate from a pre-clinical development program, Sarepta is responsible for any further development, regulatory matters and commercialization at its sole cost and expense.

Under the terms of the research agreement, we received up-front and non-refundable cash payments totaling $10.0 million, consisting of a $7.0 million up-front payment and a $3.0 million up-front research services prepayment. In addition, we are eligible for the reimbursement of costs incurred in the execution of the research plan. To the extent Sarepta exercises its option and the parties enter into a definitive license agreement with respect to any target included in the arrangement, Sarepta would be obligated to remit an option exercise payment of $12.5 million to us per target, up to a total of $62.5 million if all options are exercised. Conditional on the exercise of the options and execution of such license agreements, we may earn potential development and regulatory milestones and tiered royalties on net sales of licensed products. We are eligible to receive up to $192.5 million in development and regulatory milestones per target. One of the selected targets is eligible to generate additional milestone payments on the achievement of certain development and regulatory milestones. Also, to the extent any of the product candidates are commercialized, we would be entitled to receive tiered royalty payments ranging from the mid-single digits in the lowest tier to the low teens in the highest tier. Royalties are payable on a licensed product-by-licensed product and country-by-country basis from the first commercial sale until the later of (a) 10 years from first commercial sale, (b) expiration of valid claims of licensed patent rights and (c) expiration of regulatory exclusivity. The royalty payments are subject to reduction under certain conditions to be specified in the license agreement.

Either party can terminate the agreement upon the other party’s material breach, subject to specified notice and cure provisions. Sarepta also has the right to terminate the agreement in its entirety or in part (with respect to

 

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a particular target and its corresponding option right) for convenience at any time upon specified written notice, subject to an obligation to pay our related personnel costs for a specified period of time after the effective date of termination as well as to pay for any unavoidable costs as a result of the termination. Any expiration or termination of the agreement does not affect the rights and obligations of the parties that accrued prior to the expiration or termination date. Upon termination of the agreement, the license and options granted by us to Sarepta will immediately terminate.

Absent early termination, the term of the agreement will continue for two years, plus additional specified time, if needed, for the execution of the license agreement should Sarepta exercise its option. We believe our work with respect to these development candidates may be sufficiently advanced to enable Sarepta to exercise its related options in 2021.

 

Kayla Therapeutics

In November 2018, we entered into a License Agreement with Kayla, pursuant to which we obtained a co-exclusive worldwide, sublicensable license under certain patent rights and to related know-how and methods to research, develop, manufacture and commercialize exosome compounds and products covered by such patent rights in all diagnostic, prophylactic and therapeutic uses. The foregoing license is co-exclusive with Kayla, but Kayla’s retained rights are subject to certain restrictions.

During the first 6 years following the effective date of the agreement, Kayla and its affiliates may not research, develop, manufacture or commercialize anywhere in the world any product containing a small molecule STING agonist and an exosome. In addition, during the term of the agreement, Kayla and its affiliates may not grant a license to any third party under the licensed patent rights to, develop, manufacture or commercialize anywhere in the world a product containing certain STING compounds for therapeutic or veterinary purpose. The agreement also restricts us from developing any competing product containing a small molecule STING agonist and an exosome until the expiration of a non-compete period determined by the achievement of clinical milestones.

As of March 1, 2021, the patent portfolio licensed from Kayla consists of two US patents, one European patent and three worldwide pending applications. The patent rights licensed to us under the patent and patent application relate to certain modified cyclic dinucleotides compositions of matter.

We have certain diligence obligations under the license agreement, which include using commercially reasonable efforts to develop, commercialize and market the products developed under the licensed patent rights, including using commercially reasonable efforts to initiate a cohort extension of a Phase 1/2 trial after obtaining IND approval.

As partial consideration for the license, we paid Kayla an up-front payment of $6.5 million and issued to Kayla 118,212 shares of common stock. Based on the progress we make in the advancement of licensed products, we are required to make aggregate milestone payments of up to $100.0 million in cash payments and up to $13.0 million payable in shares of our common stock upon the achievement of specified clinical and regulatory milestones, including approvals in the US, the EU and Japan. The first eligible milestone, for which we are obligated to make a nonrefundable payment to Kayla of $15.0 million in cash and $5.3 million in common stock, with the price per share in common stock valued as set forth in the license agreement, occurred upon the first dosing of a licensed product (i.e. exoSTING) to the first subject in a Phase 1/2 clinical trial in September 2020. In addition, we are required to pay to Kayla a percentage of the payments that we receive from sublicensees of the rights licensed to us by Kayla, excluding any royalties. This percentage varies from single digits to low double digits.

We are obligated to pay to Kayla tiered royalties ranging from low single-digits to mid single-digits based on annual net sales by us, our affiliates and our sublicensees of licensed products. The royalty term is determined on a product-by-product and country-by-country basis and continues until the later of (i) the expiration of the last valid claim of the licensed patent rights that covers such product in such country, (ii) the loss or expiration of any period of marketing exclusivity for such product in such country, or (iii) ten years after the first commercial sale of such product in such country; provided that if the royalty is payable when no valid claim covers a given product in a given country, the royalty rate for sales of such product in such country is decreased.

 

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Following the first dosing of a licensed product in a pivotal trial and payment of the related milestone, we will have the right to control prosecution of the licensed patents, to the extent such licensed patents (i) are the only patents we own or control that claim the composition of matter of a licensed product and (ii) have not been licensed by Kayla to a third party for the development of products containing certain STING compounds. Additionally, following such milestone, we will have the right to control enforcement of the licensed patents, to the extent such patents are the only patents we own or control that claim the composition of matter of a licensed product, as well as those licensed patents that Kayla has not licensed to a third party for the development of products containing certain STING compounds.

Unless terminated earlier, the term of the license agreement will continue on a country-by-country basis and licensed product-by-licensed product basis, until the expiration of the royalty term for such licensed product. We may terminate the license agreement on a licensed compound-by-licensed compound basis and on a region-by region basis for any reason upon 30 days prior written notice to Kayla. Either party may terminate the agreement upon the other party’s material breach, subject to specified notice and cure provisions.

 

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Scientific Collaborations

In March 2020, we entered into a Collaboration and Option Agreement with Washington University in St. Louis. We are early in our development and hope to show that a cancer vaccine candidate based on an exoVACC composition can be used to mount an antigen-specific immune-response in various mouse models of sarcoma, and that the exoVACC composition is superior to existing vaccine strategies. Under the agreement, we have an option to obtain an exclusive or non-exclusive royalty-bearing license, subject to Washington University in St. Louis’s obligations regarding licensure that may exist in agreements with the US government or other entity as a result of funding aspects of the project, to Washington University in St. Louis’s intellectual property rights arising under the collaboration. The agreement terminates one year from the effective date unless earlier terminated or otherwise extended by mutual agreement of the parties. Either party may also terminate the agreement upon 30 days’ prior written notice.

In February and May of 2020, we entered into two Sponsored Collaboration Research Agreements with The Ragon Institute of MGH, MIT and Harvard and its investigators Dr. Bruce Walker and Dr. Gaurav Gaiha, who are experts in the mechanism of HIV infection control and who are now also working on research related to SARS-CoV-2. The May 2020 agreement aims to develop an exoVACC vaccine candidate for SARS-CoV-2, for which the Ragon team has identified conserved, structurally constrained T cell epitopes. We are early in our development and hope to show that our exoVACC candidates induce both neutralizing antibodies and antigen-specific T cell responses against SARS-CoV-2. Specifically, the ability to target immune-responses to the lung and other mucosal surfaces where infection occurs could represent an advance in the fight against SARS-CoV-2 and future SARS coronaviruses. The February 2020 agreement aims to develop an exoVACC vaccine candidate for HIV, for which Drs. Walker and Gaiha have identified HIV viral proteins that are recognized by CD8+ T cells in so-called elite controller patients, a rare subset of patients who do not progress to AIDS despite being HIV-positive. The investigators have shown that CD8 T cell recognition of these HIV epitopes may be a strategy to convert non-elite controller HIV patients to elite controller patients. We hope to integrate the HIV antigens identified by Drs. Walker and Gaiha into our exoVACC compositions and test in various mouse models of HIV whether we can generate an immune-response superior to existing HIV vaccine strategies. Under both agreements, we have the option to obtain an exclusive or non-exclusive, royalty-bearing license to Ragon’s intellectual property rights arising under the collaboration. Each of the agreements terminates one year from its respective effective date unless earlier terminated or otherwise extended, in each case by mutual written agreement of the parties. We may also terminate each agreement upon 60 days’ prior written notice. Each agreement is also subject to early termination upon an uncured material breach by the other party, or due to our bankruptcy, insolvency or dissolution.

 

Intellectual property

We believe that the diversity and breadth of our intellectual property is a key asset that provides us with important strategic and competitive advantages. We strive to protect the proprietary inventions, improvements and technology that we expect to be important for our planned commercial activities, including seeking and maintaining domestic and international patent rights whether from our own inventions or licensed from our collaborators or other partners. We also rely on our extensive know-how, trade secrets and other intellectual property that we believe will prove instrumental to our success. Our strategic approach is to seek domestic and international patent protection for new inventions and improvements or, where deemed appropriate, maintain certain inventions and improvements as trade secrets. Our intellectual property estate covers technologies related to our engEx Platform, manufacturing methods, analytical methods, engEx product candidates, pharmaceutical compositions, methods of treating patients, and other core technologies and improvements.

We plan to continue to expand our intellectual property estate by filing provisional and non-provisional patent applications related to our engEx product candidates, engEx Platform advances, manufacturing methods, and other inventions and technologies. Our success will depend, in part, on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, defend and enforce any patents that we may obtain or otherwise control, preserve the confidentiality of our trade secrets, and operate without infringing the valid and enforceable patents and proprietary rights of third parties.

In addition to filing and prosecuting patent applications in the US, we often file counterpart patent applications in additional countries where we believe such foreign filing is likely to be beneficial, including but not

 

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limited to Australia, Brazil, Canada, China, Europe, Hong Kong, India, Israel, Japan, Korea, Mexico, New Zealand and South Africa.

Individual patents extend for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued for applications filed in the US are effective for 20 years from the earliest effective filing date for a non-provisional patent application to which priority is claimed. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. The restoration period cannot be longer than five years and the total patent term, including the restoration period, must not exceed 14 years following FDA approval. The duration of patents outside of the US varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date for a non-provisional patent application to which priority is claimed. However, the actual protection afforded by a patent varies on a product-by-product basis, from country-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.

We believe that we have a strong global intellectual property position, including issued patents and pending patent applications in many key jurisdictions across the globe, as well as broad know-how and trade secrets all directed to our engEx product candidates, engEx Platform technologies, manufacturing and other important technologies. As of March 1, 2021, our patent portfolio consists of approximately 60 patent families, including 28 owned issued patents (nine in the US) and approximately 40 in-licensed issued patents (two in the US); approximately 82 owned or in-licensed pending applications in the US, and approximately 171 owned or in-licensed pending applications in jurisdictions outside of the US (including active PCT applications). Our objective is to continue to expand our portfolio of patents and patent applications in order to protect our engEx Platform, engEx product candidates and manufacturing processes. Examples of the product candidates and technology areas covered by our intellectual property portfolio are described below.

 

engEx Platform intellectual property

Our intellectual property portfolio includes numerous patents and pending patent applications that relate to innovations that we use to engineer exosomes. Our engEx Platform patent portfolio includes patent filings directed to:

We filed these patent applications in the PCT and/or major commercial markets and other countries of commercial relevance. We expect our patents in these families, if issued, to expire between 2038 and 2041, depending on patent family, excluding any patent term adjustments or extensions. These patents and pending applications are owned by us.

Each of our engEx product candidates leverages components of our engEx Platform technology and the related intellectual property estate.

engEx product candidate intellectual property

We also file patent applications directed to our engEx product candidates. Such patent filings relate to engineered therapeutic exosome compositions and methods of using such compositions to potentially treat or ameliorate various diseases and conditions. The engEx product candidate patent applications described below are owned by us. The patent applications for our lead programs include patent applications directed to:

 

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These applications are pending in major commercial markets and other countries of commercial relevance. We expect any patents in these families, if issued, to expire between 2038 and 2039, excluding any patent term adjustments or extensions.

We have additional provisional patent applications and unpublished applications that may relate to current and/or future product candidates depending on the scope of any claims that may ultimately issue. These additional candidates are generally directed to exosomes loaded with payloads designed to deliver therapeutic molecules to many cell types and tissues for the treatment of oncology, immune-based diseases, neurological disorders, neuromuscular disorders, vaccination, gene therapy and rare diseases. We expect the patents in these families, if issued, to expire between 2039 and 2041, excluding any patent term adjustments or extensions.

Manufacturing and analytical intellectual property

Another important aspect of our intellectual property estate relates to methods of making, purifying and characterizing exosomes. Our manufacturing and analytical intellectual property is central to potential commercialization of our exosome therapeutics, if approved, and consists of patent applications, know-how and trade secrets. All the manufacturing and analytical intellectual property listed below is owned by us and includes applications directed to:

Our manufacturing and analytical intellectual property, including know-how, patent applications and trade secrets, is important to the potential commercial success of our product candidates. As discussed above, engineering exosomes in a scalable and reproducible way poses significant challenges. Furthermore, the ability to accurately and precisely measure the characteristics and purity of exosomes has also proved to be extremely difficult. We believe that our early and continued investment in manufacturing and analytical capabilities provides us with an important and durable competitive advantage.

We have additional provisional patent applications and unpublished applications that relate to our current and/or future processes for manufacturing and analyzing our exosomes and engEx product candidates. We expect the patents in these families, if issued, to expire between 2037 and 2041, excluding any patent term adjustments or extensions.

Trade secrets

We may also rely, in some circumstances, on trade secrets to protect our technology and aspects of our engEx Platform. Trade secrets can be difficult to protect. We seek to protect our technology and engEx product candidates, in part, by entering into confidentiality agreements with those who have access to our confidential information, including our employees, contractors, consultants, collaborators and advisors. We also seek to preserve the integrity and confidentiality of our proprietary technology and processes by maintaining physical security of our premises and physical and electronic security of our information technology systems. Although we have confidence in these individuals, organizations and systems, agreements or security measures may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or may be independently discovered by our competitors. To the extent that our employees, contractors, consultants, collaborators and advisors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For this and more comprehensive risks related to our proprietary technology, inventions, improvements and products, see “Risk Factors”.

 

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Trademarks

Our trademarks are important to us and are generally covered by trademark applications with the USPTO and the patent or trademark offices of other countries. Trademark protection varies in accordance with local law, and continues in some countries as long as the trademark is used and in other countries as long as the trademark is registered.

 

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Competition

The biotechnology and pharmaceutical industries, including in the exosome therapeutics area, are characterized by rapid growth, a dynamic landscape of competitive product candidates and a strong reliance on intellectual property. While we believe that our engEx Platform, exosome engineering and manufacturing capabilities and product candidate pipeline, together with our resources, industry expertise and proprietary know-how, give us a competitive advantage in the field, we face competition from a variety of organizations. Our competitors include larger pharmaceutical companies, specialty biotechnology companies, academic research institutions, governmental agencies, as well as public and private institutions.

There are several companies that are currently developing exosome-based therapeutics for use in a variety of indications, from cancer to rare disease, to regenerative medicine. Broadly, the development of exosome therapeutics can be segregated into two groups: those that use (a) unmodified cell-derived exosomes and (b) engineered and ex vivo modified exosomes.

Unmodified cell-derived exosomes generally rely on the intrinsic therapeutic activity of cargo in exosomes collected from a specific producer cell type. Typically, these producer cells are stem cells or other precursor cells, and the exosomes are generally used in regenerative medicine, immuno-suppression, and central nervous system modulation. The mechanism of action for these exosomes is not well-understood, and may rely on one or more cargo types including miRNAs, mRNAs, and/or surface proteins. Although none of our engEx product candidates rely on unmodified exosomes isolated from producer cells, there is potential competition in the application and uses of our engEx product candidates with those based on unmodified exosomes. Competitors using unmodified cell-derived exosomes include: Aegle Therapeutics Corp., ArunA Biomedical, Inc., or ArunA, Capricor Therapeutics, Inc. and ReNeuron Group plc. In addition, several small-scale clinical studies using unmodified cell-derived exosomes have been initiated, often led by academic investigators, for a variety of indications including cancer, immune diseases, and stroke.

All of our existing and anticipated engEx product candidates use exosomes that are produced from modified cells and/or are loaded ex vivo with various biologically active molecules. We believe this gives our engEx exosomes desired properties such as predictable pharmacology, defined mechanism of action, reproducible activity and a defined analytical profile. We understand that our competitors using engineered and ex vivo modified exosomes plan to use their candidates in numerous therapeutic applications, some of which may directly compete with our engEx product candidates and early programs. Competing therapeutic applications include cancer, metabolic diseases, various rare diseases, central nervous system disorders, neuromuscular disorders, diseases of the immune system and infectious diseases. Competitors using engineered and ex vivo loaded exosomes include ArunA, AstraZeneca plc, or AstraZeneca, Evox Therapeutics Ltd. and PureTech Health plc. We believe that our engEx product candidates will be the first engineered exosomes to enter human clinical trials.

We also face competition outside of the exosome therapeutics field, including from some of the largest pharmaceutical companies and other specialty biotechnology companies. Our three lead engEx product candidates, exoSTING, exoIL-12 and exoASO-STAT6, face competition from numerous companies.

In the STING Agonist Space:

Chinook Therapeutics, Inc., or Chinook, and Novartis International AG, or Novartis; Bristol Myers Squibb Company, or BMS; Merck & Co., Inc., or Merck; Takeda Pharmaceutical Company Limited; Eisai Co., Ltd., or Eisai; Nimbus Therapeutics, Inc.; GlaxoSmithKline plc, or GSK; F-star Therapeutics, Limited, or F-star; Synlogic, Inc., or Synlogic; Mavupharma, Inc. (acquired by AbbVie Inc.) and others.

Merck, Chinook in collaboration with Novartis, BMS, Eisai, GSK, F-star and Synlogic have initiated clinical trials using STING agonists in cancer patients. Additionally, there are several STING agonist programs that have been described in the literature that are owned or being developed by academic institutions that may soon enter clinical trials.

 

 

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In the IL-12 Space:

Astellas Pharma Inc.; Celsion Corporation, or Celsion; Cytix, Inc., or Cytix; Dragonfly Therapeutics Inc.; Eli Lilly and Company; MedImmune, LLC (acquired by AstraZeneca), or MedImmune; Immvira Co Ltd.; Inovio Pharmaceuticals, Inc.; Merck; Moderna, Inc., or Moderna; Neumedicines, Inc., or Neumedicines; OncoSec Medical Incorporated, or OncoSec; Rubius Therapeutics, Inc.; Repertoire Immune Medicines, Inc.; Ziopharm Oncology, Inc., or Ziopharm; and others.

The IL-12 programs from Ziopharm, OncoSec, Neumedicines, Celsion, Cytix, Merck and MedImmune are currently being used in clinical trials.

We also face competition related to the therapeutic areas and biologically active molecules we plan to engineer onto or into our engEx exosomes. As described above, our engEx Platform is amenable to creating exosomes capable of delivering and/or displaying numerous classes of biologically active molecules. For each of these therapeutic areas and molecule classes we face competition from numerous large pharmaceutical companies and specialty biotechnology companies.

We also face competition outside of the exosome therapeutics field from large pharmaceutical companies and specialty biotechnology companies using synthetic drug delivery systems such as liposomes, lipid nanoparticles and other non-viral delivery approaches, including Alnylam, Arbutus Biopharma, Arcturus Therapeutics, Inc., Intellia, Ipsen Group, Johnson & Johnson, Luye Pharma Group, Moderna and others. These include marketed products and those that are currently in clinical development.

In addition, many of our current or potential competitors, either alone or with their collaboration partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials and marketing approved products than we do. Mergers and acquisitions in the biopharmaceutical industry 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. 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. Our competitors also may obtain FDA or other regulatory 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. The key competitive factors affecting the success of all of our programs are likely to be their efficacy, safety, convenience and availability of reimbursement.

 

If our current programs are approved for the indications for which we are currently planning clinical trials, they may compete with other products currently under development. Competition with other related products currently under development may include competition for clinical trial sites, patient recruitment and product sales.

 

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Government Regulation

Government authorities in the US 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 and biological products, such as our product candidates and any future product candidates. Generally, before a new drug or biologic 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.

US biological product development

In the US, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and its implementing regulations and biologics under the FDCA, the Public Health Service Act, or PHSA, and their implementing regulations. Both drugs and biologics 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 and local statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable US 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, restrictions on the marketing or manufacturing of the product, withdrawal of an approval or license revocation, a clinical hold, untitled or warning letters, product recalls or market withdrawals, product seizures, detentions or import refusals, 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.

Our product candidates and any future product candidates must be approved by the FDA through a Biologics License Application, or BLA, process before they may be legally marketed in the US. The process generally involves the following:

 

 

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The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates and any future product candidates will be granted on a timely basis, or at all.

Preclinical studies and IND

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. 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. Some long-term preclinical testing 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 patients 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 and its related documentation must be reviewed and approved by an 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 US 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 a BLA. The FDA will accept a well-designed and well-conducted foreign clinical study not conducted under an IND if the study 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.

 

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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 a BLA. Failure to exhibit due diligence with regard to conducting mandatory Phase 4 clinical trials could result in withdrawal of approval for products.

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 or animal or in vitro testing 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 also must be submitted to the FDA and the investigators. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines that the information qualifies for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information.

Information about certain clinical trials must be submitted within specific timeframes to the NIH for public dissemination on its ClinicalTrials.gov website. Similar requirements for posting clinical trial information in clinical trial registries exist in other countries outside the US.

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 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 biologic 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 biologic 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 the product candidate does not undergo unacceptable deterioration over its shelf life.

 

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FDA 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 a BLA, along with proposed labeling, chemistry and manufacturing information to ensure product quality and other relevant data. The BLA is a request for approval to market the biologic for one or more specified indications and must contain proof of safety, purity and potency. 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, purity and potency of the investigational product to the satisfaction of the FDA. FDA approval of a BLA must be obtained before a biologic may be marketed in the US.

Under the Prescription Drug User Fee Act, or PDUFA, as amended, each BLA must be accompanied by a user fee, which for federal fiscal year 2021 is $2,875,842 for an application requiring clinical data. The sponsor of an approved BLA is also subject to an annual program fee, which for fiscal year 2021 is $336,432. The FDA adjusts the PDUFA user fees on an annual basis. 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 BLAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.

The FDA reviews all submitted BLAs before it accepts them for filing and may request additional information rather than accepting the BLA for filing. The FDA must make a decision on accepting a BLA for filing within 60 days of receipt and such decision could include a refusal to file by the FDA. Once the submission is accepted for filing, the FDA begins an in-depth review of the BLA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has 10 months, from the filing date, in which to complete its initial review of an original BLA and respond to the applicant and six months from the filing date of an original BLA designated for priority review. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs and the review process is often extended by FDA requests for additional information or clarification.

Before approving a BLA, 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 products or 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 a BLA, it will issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the biologic with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application will not be approved in its present form. A Complete Response Letter usually describes all of the specific deficiencies in the BLA identified by the FDA. The Complete Response Letter may require additional clinical data and/or other significant and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may either resubmit the BLA, 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 BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data.

If the FDA approves a new product, it may limit the approved indications for use of the product. It may also require that contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require post-approval studies, including Phase 4 clinical trials, to further assess the product’s safety or efficacy after approval. The agency may also require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms to help ensure that the benefits of the product outweigh the potential risks. Following approval, many

 

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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 drug designation and exclusivity

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

Orphan drug designation for a biologic must be requested before submitting a BLA. 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 our product 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. Orphan drug status in the European Union, or the EU, has similar, but not identical, requirements and benefits.

Expedited development and review programs

The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs and biologics that meet certain criteria. Specifically, new drugs and biologics are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and preclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to both the product and the specific indication for which it is being studied. The sponsor of a biologic can request the FDA to designate the product for fast track status any time before receiving BLA approval, but ideally no later than the pre-BLA meeting. Any product submitted to the FDA for marketing, including under a fast track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. A product is eligible for priority review if it treats a serious or life-threatening condition and, if approved, would provide a significant improvement in safety and effectiveness compared to available therapies. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biologic designated for priority review in an effort to facilitate the review.

A product may also be eligible for accelerated approval if it treats a serious or life-threatening condition and generally provides a meaningful advantage over available therapies. In addition, it must demonstrate an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely to predict an effect on IMM or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug or biologic receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug or biologic shown to be effective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions as it deems necessary to assure safe use of the product. If the FDA determines that the conditions of approval are not being met, such as the required post-marketing confirmatory trial does not demonstrate a clinical benefit, the FDA can withdraw its accelerated approval for such drug or biologic. In addition, unless otherwise informed by the FDA, the FDA currently requires, as a condition for accelerated approval, that all advertising and promotional materials that are intended for dissemination or publication be submitted to the agency in advance for review.

 

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Additionally, a drug or biologic may be eligible for designation as a breakthrough therapy if the product is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The benefits of breakthrough therapy designation include the same benefits as fast track designation, plus intensive guidance from the FDA to ensure an efficient drug development program.

Fast track designation, priority review, accelerated approval and breakthrough therapy designation do not change the standards for approval, but may expedite the development or approval process.

Pediatric information

Under the Pediatric Research Equity Act, or PREA, a BLA or supplement to a BLA must contain data to assess the safety and efficacy of the biologic 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 grant deferrals for submission of pediatric data or full or partial waivers. A sponsor who is planning to submit a marketing application for a drug that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration must submit an initial Pediatric Study Plan, or PSP, within 60 days of an end-of-Phase 2 meeting or, if there is no such meeting, as early as practicable before the initiation of the Phase 3 or Phase 2/3 study. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDA and the sponsor must reach an agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from preclinical studies, early phase clinical trials and/or other clinical development programs.

Post-marketing requirements

Following approval of a new product, the sponsor and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and record-keeping activities, reporting of adverse experiences, complying with promotion and advertising requirements, which include restrictions on promoting products 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 products for off-label uses, manufacturers may not market or promote such uses. Prescription drug and biologic promotional materials must be submitted to the FDA in conjunction with their first use. Further, if there are any modifications to the biologic, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new BLA or BLA supplement, 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. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS. The FDA will not approve the BLA without an approved REMS, if required. 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.

FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMP regulations. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. These manufacturers must comply with cGMP regulations that require, among other things, quality control and quality assurance, the maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the manufacture and distribution of approved drugs or biologics are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP requirements and

 

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other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. The discovery of violative conditions, including failure to conform to cGMP regulations, could result in enforcement actions and the discovery of problems with a product after approval may result in restrictions on a product, manufacturer or holder of an approved BLA, including withdrawal of the product from the market. In addition, changes to the manufacturing process or facility generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

US patent term restoration and marketing exclusivity

Depending upon the timing, duration and specifics of FDA approval of our product candidates and any future product candidates, some of our US patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch Waxman Amendments. The Hatch Waxman Amendments permit restoration of the patent term of up to five years as compensation for patent term lost during product development and the 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 a BLA plus the time between the submission date of a BLA 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 biologic 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 BLA.

An abbreviated approval pathway for biological products shown to be similar to, or interchangeable with, an FDA licensed reference biological product was created by the Biologics Price Competition and Innovation Act of 2009, or BPCI Act. This amendment to the PHSA, in part, attempts to minimize duplicative testing. Biosimilarity, which requires that the biological product be highly similar to the reference product notwithstanding minor differences in clinically inactive components and that there be no clinically meaningful differences between the product and the reference product in terms of safety, purity and potency, can be shown through analytical studies, animal studies and a clinical trial or trials.

Interchangeability requires that a biological product be biosimilar to the reference product and that the product can be expected to produce the same clinical results as the reference product in any given patient and, for products administered multiple times to an individual, that the product and the reference product may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biological product without such alternation or switch.

A reference biological product is granted 12 years of data exclusivity from the time of first licensure of the product and the FDA will not accept an application for a biosimilar or interchangeable product based on the reference biological product until four years after the date of first licensure of the reference product. “First licensure” typically means the initial date the particular product at issue was licensed in the US. Date of first licensure does not include the date of licensure of (and a new period of exclusivity is not available for) a biological product if the licensure is for a supplement for the biological product or for a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or other related entity) for a change (not including a modification to the structure of the biological product) that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device or strength, or for a modification to the structure of the biological product that does not result in a change in safety, purity, or potency.

 

Pediatric exclusivity is another type of regulatory market exclusivity in the US. Pediatric exclusivity, if granted, adds six months to existing regulatory exclusivity periods. This six-month exclusivity may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA issued ‘‘Written Request’’ for such a trial.

 

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US coverage and reimbursement

Successful commercialization of pharmaceutical products depends on the availability of adequate coverage and reimbursement from third-party payors. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors, such as private health insurers and health maintenance organizations, are critical to new product acceptance.

Government authorities and other third-party payors decide which products and treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

In the US, no uniform policy of coverage and reimbursement for pharmaceutical products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time consuming and costly process that could require a manufacturer to provide to each payor supporting scientific, clinical and cost effectiveness data for the use of the product on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement from third-party payors will be obtained. There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the US, the principal decisions about reimbursement for new products are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the US Department of Health and Human Services, as CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree. Even if coverage for a given product is obtained, the resulting reimbursement payment rates might not be adequate to achieve or sustain profitability or may require co-payments that patients find unacceptably high.

Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use certain pharmaceutical products. Patients are unlikely to use a product unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of the product. Because novel pharmaceutical products may have a higher cost of goods than conventional therapies, and may require long-term follow-up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products.

Payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, the Middle Class Tax Relief and Job Creation Act of 2012 required that CMS reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which served as a base for 2014 and subsequent years. In addition, effective January 1, 2014, CMS also began bundling the Medicare payments for certain laboratory tests ordered while a patient received services in a hospital outpatient setting. Additional state and federal healthcare reform measures are expected to be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for certain pharmaceutical products or additional pricing pressures.

 

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Moreover, increasing efforts by governmental and third-party payors in the US and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved pharmaceutical products and, as a result, they may not cover or provide adequate payment for some products. There has been increasing legislative and enforcement interest in the US with respect to specialty pharmaceutical pricing practices. Manufacturers are experiencing pricing pressures in connection with the sale of pharmaceutical products due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, cost containment initiatives and additional legislative changes.

US healthcare reform

In the US, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the ACA, was passed, which substantially changes the way healthcare is financed by both governmental and private insurers and significantly impacts the US pharmaceutical industry.

Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as efforts by the current administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance, delaying the implementation of certain ACA-mandated fees and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. On December 14, 2018, a Texas US District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by the US Congress as part of the Tax Cuts and Jobs Act of 2017 Act. While the Texas US 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 ACA will impact the ACA.

In addition, other legislative changes have been proposed and adopted in the US since the Affordable Care Act was enacted. The Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year. These reductions will remain in effect through 2027 unless additional Congressional action is taken.

Further, there have been several recent US Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drugs. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains additional 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. The Trump administration also 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. 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 on January 31, 2019, the Department of Health and Human Services Office of Inspector General proposed modifications to the federal Anti-Kickback Statute discount safe harbors 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. On October 1, 2020, the FDA published a final rule that could allow for the importation of

 

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certain prescription drugs from Canada. Under the final rule, States and Indian Tribes, and in certain future circumstances pharmacists and wholesalers, may submit importation program proposals to the FDA for review and authorization. On September 25, 2020, CMS stated drugs imported by States under this rule will not be eligible for federal rebates under Section 1927 of the Social Security Act and manufacturers would not report these drugs for “best price” or Average Manufacturer Price purposes. Since these drugs are not considered covered outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost for these drugs. Separately, the FDA also issued a final guidance document outlining a pathway for manufacturers to obtain an additional National Drug Code, or NDC, for an FDA-approved drug that was originally intended to be marketed in a foreign country and that was authorized for sale in that foreign country. The regulatory and market implications of the final rule and guidance are unknown at this time.

While some of these and other proposed measures 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 are increasingly passing legislation and implementing 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, rules and regulations designed to encourage importation from other countries and bulk purchasing.

Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn and Matthew Bellina Right to Try Act of 2017, or the 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 1 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 prescription drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

US healthcare laws

Healthcare providers, physicians and third-party payors in the US and elsewhere play a primary role in the recommendation and prescription of pharmaceutical products. Arrangements with third-party payors and customers can expose pharmaceutical manufacturers to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or financial arrangements and relationships through which such companies conduct research, sell, market and distribute pharmaceutical products. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. The federal and state healthcare laws and regulations that may affect a manufacturer’s ability to operate include, but are not limited to:

 

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

 

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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. Efforts to ensure that business arrangements comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that a manufacturer’s business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against a manufacturer and the manufacturer is not successful in defending itself or asserting its rights, those actions could have a significant impact on the manufacturer’s 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, as well as additional reporting obligations and oversight if subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations.

European Union drug development

In the EU our future products may also be subject to extensive regulatory requirements. Following the UK’s departure from the EU on January 31, 2020, the UK will continue to follow the same regulations as the EU until the end of 2020, or the Transition Period, and so for such period of time, access to the UK market will remain unaffected.

Similar to the US, the various phases of preclinical and clinical research in the EU are subject to significant regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out common rules for the control and authorization of clinical trials in the EU, the EU member states have transposed and applied the provisions of the Directive differently in their national laws. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority, or NCA, which in the UK is the Medicines and Healthcare Products Regulatory Agency, or MHRA, and one or more Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA and ECs of the member state where they occurred.

In April 2014, the EU adopted a new Clinical Trials Regulation (EU) No. 536/2014, which is set to replace the current EU Clinical Trials Directive 2001/20/EC. It will overhaul the current system of approvals for clinical trials in the EU. Specifically, the new legislation, which will be directly applicable in all EU member states (meaning that no national implementing legislation in each EU member state is required), aims to harmonize and streamline clinical trial authorization, simplify adverse event reporting procedures, improve the supervision of clinical trials and increase their transparency. The new Clinical Trials Regulation provides for a streamlined application procedure via a single-entry point and strictly defined deadlines for the assessment of clinical trial applications. It is expected that the new Clinical Trials Regulation (EU) No. 536/2014 will come into effect following confirmation of full functionality of the Clinical Trials Information System, the centralized EU portal and database for clinical trials foreseen by the new Clinical Trials Regulation, through an independent audit.

European Union drug marketing

Much like the Anti-Kickback Statute prohibition in the US, the provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is also prohibited in the EU. The provision of benefits or advantages to physicians is governed by the national anti-bribery laws of EU member states, which in the UK is the Bribery Act 2010. Infringement of these laws could result in substantial fines and imprisonment.

Payments made to physicians in certain EU member states must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization and/or the regulatory authorities of the individual EU member states. These requirements are provided in the national laws, industry codes or professional codes of conduct, applicable in the EU member states. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.

 

 

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European Union drug review and approval

In the European Economic Area, or EEA, which comprises the 27 member states of the EU and Iceland, Liechtenstein and Norway, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two main routes to obtain a marketing authorization.

The first route is an MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, advanced therapy medicines such as gene therapy, somatic cell therapy or tissue engineered medicines and medicinal products containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune and other immune dysfunctions and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.

National MAs, which are issued by the competent authorities of the member states of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure.

Where a product has already been authorized for marketing in a member states of the EEA, this National MA can be recognized in other member states through the Mutual Recognition Procedure, one of the options for the second route to obtain an MA. If the product has not received a National MA in any member state at the time of application, it can be approved simultaneously in various member states through the Decentralized Procedure the other option for the second route to obtain an MA. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the member states in which the MA is sought, one of which is selected by the applicant as the Reference Member State, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of the product characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the other member states (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in all the member states (i.e., in the RMS and the Member States Concerned).

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the member states of the EEA make an assessment of the risk/benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

European Union orphan designation and exclusivity

In the EU, the EMA’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 life threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the EU (or where it is unlikely that the development of the medicine would generate sufficient return to justify the investment) and for which no satisfactory method of diagnosis, prevention or treatment has been authorized (or, if a method exists, the product would be a significant benefit to those affected).

In the EU, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following medicinal product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

European data collection

The collection and use of personal health data in the EU is governed by the provisions of the General Data Protection Regulation, or GDPR, and the related national data protection laws of the EU member states. This directive imposes several requirements relating to the consent of the individuals to whom the personal data

 

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relates, the information provided to the individuals, notification of data processing obligations to the competent national data protection authorities and the security and confidentiality of the personal data. The GDPR and the related national data protection laws of the EU member states also impose strict rules on the transfer of personal data out of the EU to the US. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU member states may result in fines and other administrative penalties. The GDPR introduces new data protection requirements in the EU and substantial fines for breaches of the data protection rules. The GDPR regulations may impose additional responsibility and liability in relation to personal data that we process and we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules. This may be onerous and adversely affect our business, financial condition, results of operations and prospects.

Rest of the world regulation

For other countries outside of the EU and the US, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. Additionally, the clinical trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

If we fail to comply with other regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Employees

As of December 31, 2020, we had 105 full-time employees, 39  of our employees have Ph.D. or M.D. degrees and 86 of our employees are engaged in research and development activities. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.

 

We operate in a highly competitive environment for human capital, particularly as we seek to attract and retain talent with experience in the biotechnology and pharmaceutical sectors. Our workforce is highly educated, and as of December 31, 2020, 68% of our employees hold Ph.D., M.D., J.D., or Master’s degrees. Among our employees, 50% identify as female and 50% as male.  In 2020, we expanded our emphasis on diversity, equity and inclusion by creating a DE&I educational series and conducting several internal seminars, panels, and discussions on inclusive behaviors.

To help promote alignment between our employees and our shareholders, all employees participate in our equity programs through the receipt of new hire and annual equity grants. We believe that in addition to incentivizing growth that leads to shareholder value, broad eligibility for our equity programs helps promote employee retention as these awards generally vest over a four-year period.

 

Facilities

We lease a facility containing 68,258 square feet of office and laboratory space which is located at 35 CambridgePark Drive, Cambridge, Massachusetts 02140. The lease expires in 2029, subject to one option to extend the lease for 10 years. In April 2020, we entered into a sublease with Apic Bio, Inc., or Apic, pursuant to which we subleased to Apic excess capacity in the CambridgePark property. The sublease expires in April 2022, subject to Apic’s one option to extend the sublease for 12 months.

In addition, we lease a facility containing 18,707 square feet of clinical manufacturing, laboratory and office space, which is located at 4 Hartwell Place, Lexington, Massachusetts 02421. The lease expires in 2029, subject to two options to extend the lease, each for an additional five years.

 

 

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Legal proceedings

We are not currently a party to any material legal proceedings.

 

 

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Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks related to our financial position and need for additional capital

We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.

We are a clinical-stage biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory approval and/or become commercially viable. We initiated our clinical trials for our initial engEx product candidates, exoSTING and exoIL-12, in September 2020. We have no products approved for commercial sale and we have not yet demonstrated an ability to successfully conduct or complete clinical trials, to manufacture a commercial-scale product or arrange for a third party to do so on our behalf or conduct sales and marketing activities necessary for successful product commercialization. Engineering exosomes to become potential therapeutics is a novel therapeutic approach and no products based on exosomes have been approved to date in the United States, or the US, or the European Union, or the EU. We have not generated any revenue from product sales to date and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2015. For the years ended December 31, 2020 and 2019 we reported net losses of $91.7 million and  $78.0 million, respectively. As of December 31, 2020, we had an accumulated deficit of $288.1 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future and we expect these losses to increase as we continue our research and development, advance certain product candidates into preclinical studies and clinical trials and, if clinical development is successful, seek regulatory approvals for our product candidates. We anticipate that our expenses will increase substantially if, and as, we:

 

 

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To become and remain profitable, we or any current or future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials, obtaining marketing approval for product candidates, manufacturing, marketing and selling products for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would 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 also could cause you to lose all or part of your investment.

Even if we succeed in commercializing one or more of our engEx product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete the development and commercialization of our product candidates.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to conduct further research and development, preclinical studies and clinical trials of engEx exosomes, enhance the capabilities of our engEx Platform, operate and maintain our own Phase 1/2 clinical manufacturing facility, seek regulatory approvals for our product candidates and launch and commercialize any products for which we receive regulatory approval. As of December 31, 2020, we had $88.9 million of cash and cash equivalents. Based on our current operating plan, we expect our cash and cash equivalents as of December 31, 2020, together with the net proceeds of $62.0 million that we received from our follow-on public offering in February 2021, will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months. However, our future capital requirements and the period for which our existing resources will support our operations may vary significantly from what we expect and we will in any event require additional capital in order to complete clinical development of any of our current engEx product candidates. Our monthly spending levels will vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with development of our engEx Platform, engEx product candidates and development programs is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

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We do not have any committed external source of funds or other support for our development and commercialization efforts and we cannot be certain that additional funding will be available on acceptable terms, or at all. Additional proceeds available to us under our Loan and Security Agreement, or the Hercules Loan Agreement, with Hercules Capital, Inc., or Hercules, are conditioned on satisfaction of liquidity and clinical milestones, which may never occur. Until we can generate sufficient product or royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. Any additional fundraising efforts may divert our management’s attention from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. Disruptions in the financial markets in general and more recently due to the COVID-19 pandemic have made equity and debt financing more difficult to obtain and may have a material adverse effect on our ability to meet our fundraising needs. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, your ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable, or on terms that are less favorable than may otherwise be available, or relinquish or license our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourselves.

As a result of our recurring losses from operations and recurring negative cash flows from operations, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively. If we are unable to obtain funding or raise additional capital in sufficient amounts, on terms acceptable to us or on a timely basis, we may have to significantly delay, scale back or discontinue one or more of our research or development programs or be unable to expand our operations or otherwise capitalize on business opportunities, as desired. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.

We have a limited operating history, which may make it difficult to evaluate our technology and product development capabilities and predict our future performance.

We are a clinical-stage company and initiated clinical trials of our initial engEx product candidates in September 2020. We were formed in 2015, have no products approved for commercial sale and have not generated any revenue from product sales. Our ability to generate product revenue or profits, which we do not expect will occur for many years, if ever, will depend on the successful development and eventual

 

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commercialization of our product candidates, which may never occur. We may never be able to develop or commercialize a marketable product.

All of our programs require additional preclinical research and development, clinical development, regulatory approval, obtaining manufacturing supply, capacity and expertise, building of a commercial organization, substantial investment and/or significant marketing efforts before we generate any revenue from product sales. Other programs of ours require additional discovery research and then preclinical development. In addition, our product candidates must be approved for marketing by the FDA or other health regulatory agencies before we may commercialize any product. We have not yet demonstrated an ability to successfully complete any clinical trials, obtain marketing approvals, manufacture a commercial-scale medicine, or arrange for a third party to do so on our behalf or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

Our limited operating history, particularly in light of the nascent exosome therapeutics field, may make it difficult to evaluate our technology and industry and predict our future performance. Though several groups have conducted or are conducting proof of principle studies of therapeutic candidates based on natural exosomes, in most cases, these studies used exosomes secreted from producer cells that were partially purified and administered without further modification. As a result, the relevance of those studies to the evaluation of product candidates developed using our engEx Platform, which generates engineered exosomes, may be difficult to ascertain. Our short history as an operating company and novel therapeutic approach make any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving fields. If we do not address these risks successfully, our business will suffer. Similarly, we expect that our financial condition and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.

In addition, as an early-stage company, we have encountered unforeseen expenses, difficulties, complications, delays and other known and unknown circumstances. As we advance our engEx product candidates, we will need to transition from a company with a research focus to a company capable of supporting clinical development and if successful, commercial activities. We may not be successful in such a transition.

 

Our existing and any future indebtedness could adversely affect our ability to operate our business.

As of December 31, 2020, we had $25.0 million of outstanding borrowings under the Hercules Loan Agreement. Advances bear interest at a rate equal to the greater of (i) 9.00% plus the prime rate less 5.25% and (ii) 9.00%. We are required to make interest only payments through April 1, 2022. The interest only period may be extended to November 1, 2022 upon satisfaction of certain milestones. Following the interest only period, we are required to repay the principal balance and interest of the advances in equal monthly installments through October 1, 2024. Subject to certain conditions set forth in the Hercules Loan Agreement, we may borrow up to an additional $50.0 million, or $75.0 million in aggregate principal amount. Subject to the restrictions in this existing credit facility, we could in the future incur additional indebtedness beyond our borrowings from Hercules.

Our outstanding indebtedness, including any additional indebtedness beyond our borrowings from Hercules, combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:

 

 

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We intend to satisfy our current and future debt service obligations with our then existing cash and cash equivalents. However, we may not have sufficient funds, and may be unable to arrange for additional financing, to pay the amounts due under the Hercules Loan Agreement or any other debt instruments. Failure to make payments or comply with other covenants under our existing credit facility or such other debt instruments could result in an event of default and acceleration of amounts due. For example, the affirmative covenants under our existing credit facility require us to, among other things, maintain unrestricted cash and cash equivalents in a control account equal to or greater than the lesser of 110% of all outstanding amounts under the credit facility (inclusive of any prepayment charge and end of term charge that would be due and payable if the outstanding loans were prepaid at the time of measurement) plus the amount of our company’s and our subsidiaries’ accounts payable that have not been paid within 90 days from the invoice date and 100% of the cash and cash equivalents of our company and our wholly-owned subsidiary, Codiak Security Corporation. Under the Hercules Loan Agreement, the occurrence of an event that would reasonably be expected to have a material adverse effect on our business, operations, assets or condition is an event of default. If an event of default occurs and Hercules accelerates the amounts due, we may not be able to make accelerated payments and the lenders could seek to enforce security interests in the collateral securing such indebtedness. In addition, the covenants under our existing credit facility, the pledge of our assets as collateral and the negative pledge with respect to our intellectual property could limit our ability to obtain additional debt financing.

Our ability to use net operating losses and research and development credits to offset future taxable income may be subject to certain limitations.

As of December 31, 2020, we had US federal and state net operating loss carryforwards of $137.6 million and $138.1 million, respectively, some of which begin to expire in 2035. As of December 31, 2020, we also had US federal and state research and development tax credit carryforwards of $8.3 million and $3.9 million, respectively, which begin to expire in 2035 and 2031, respectively. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future taxable income or tax liabilities, respectively. US federal and certain state net operating losses generated in taxable years beginning after December 31, 2017 are not subject to expiration. Federal net operating losses generally may not be carried back to prior taxable years except that, under the Coronavirus Aid, Relief and Economic Security Act, federal net operating losses generated in  2019 and 2020 may be carried back to each of the five taxable years preceding the taxable year in which the loss arises. Additionally, for taxable years beginning after December 31, 2020, the deductibility of federal net operating losses is limited to 80% of our taxable income in such taxable year.

In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards or tax credits, or NOLs or credits, to offset future taxable income. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least five percent of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Our existing federal and state NOLs and our existing research and development credits may be subject to limitations arising from previous ownership changes and, if we undergo an ownership change, our ability to utilize NOLs or credits could be further limited by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or credits may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs or credits. Furthermore, our ability to utilize our NOLs or credits is conditioned upon our attaining profitability and generating US federal and state taxable income. As described above, we have incurred significant net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future; and therefore, we do not know whether or when we will generate the US federal or state taxable income necessary to utilize our NOLs or credits that are subject to limitation by Sections 382 and 383 of the Code.

Risks related to our business, technology and industry

We are very early in our development efforts. While we initiated our first clinical trials of our initial engEx product candidates in September 2020, the remainder of our engEx Platform is still in preclinical

 

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development and it could be many years before we or our collaborators commercialize a product candidate, if ever. If we are unable to advance our product candidates through clinical development, obtain regulatory approval and ultimately commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

We are very early in our development efforts and have focused our research and development efforts to date on enhancing the capabilities of our engEx Platform, advancing our engEx product candidates through preclinical development towards clinical trials, initiating clinical trials for our lead product candidates, exoSTING and exoIL-12, working to industrialize engineered exosome manufacturing and identifying our initial targeted cell types, disease indications and preferred routes of administration. Our future success depends heavily on the successful development of our engEx Platform and engEx product candidates. Our ability to generate product revenue, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. For example, our research programs may fail to identify potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates, or our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products impractical to manufacture, unmarketable or unlikely to receive marketing approval. We currently generate no revenue from sales of any product and we may never be able to develop or commercialize a marketable product.

We advanced our first two engEx product candidates, exoSTING and exoIL-12, into clinical development in September 2020 and expect to advance additional product candidates into clinical development in the future. Commencing clinical trials is subject to clearance by the FDA or other regulatory authorities of our investigational new drug applications, or INDs, or other similar applications in foreign countries and finalizing the trial designs based on discussions with the FDA and other regulatory authorities. In the event that the FDA or other regulatory authorities require us to complete additional preclinical studies or we are required to satisfy other requests from the FDA or other regulatory authorities, the commencement of clinical trials may be delayed. Even after we receive and incorporate guidance from these regulatory authorities, the FDA or other regulatory authorities could disagree that we have satisfied their requirements to commence our clinical trials or change their position on the acceptability of our preclinical studies, trial design or the clinical endpoints selected, which may require us to complete additional preclinical studies or clinical trials or impose stricter approval conditions than we currently expect. Prior to commencing any clinical trials we will also have to obtain approval from the Institutional Review Board, or IRB, or ethics committee for each of the institutions at which we plan to conduct our clinical trials. Moreover, our clinical trial results may show our engEx product candidates to be less effective than expected (e.g., a clinical trial could fail to meet its primary endpoints) or have unacceptable side effects or toxicities.

Our product candidates will require additional preclinical and clinical development, regulatory and marketing approval in multiple jurisdictions, obtaining sufficient manufacturing capacity and expertise for both clinical development and commercial production and substantial investment and significant commercialization efforts before we generate any revenue from product sales. Our product candidates must be approved for marketing by the FDA or certain other regulatory agencies, including the MHRA, before we may commercialize our product candidates.

The success of our current and future engEx product candidates will depend on some or all of the following factors:

 

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If we do not succeed in one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.

Our business is highly dependent on the success of our initial engEx product candidates, exoSTING and exoIL-12, targeting cancer. All of our engEx product candidates and development programs will require significant additional development before we can seek regulatory approval for and launch a product commercially.

Our business and future success is highly dependent on our ability to initiate and complete clinical trials and to obtain regulatory approval of and then successfully launch and commercialize our initial engEx product candidates, exoSTING and exoIL-12, and others that may be selected from our development programs.

Our clinical trials may experience complications or delays surrounding trial execution, such as complexities surrounding regulatory acceptance of an IND or CTA, trial design and establishing trial protocols, patient recruitment and enrollment, quality and supply of clinical doses, delays due to the COVID-19 pandemic or safety issues. Any such complications or delays could impact the conduct of our clinical trials and our ability to complete them in a timely manner or at all, which in turn could delay and/or negatively impact the regulatory review and approval of our product candidates.

Our lead product candidates, exoSTING and exoIL-12, are being developed to address solid tumors and we initiated clinical trials for both product candidates in September 2020. We are highly dependent on the success of these and future clinical trials, the outcomes of which are uncertain. The FDA and other regulatory authorities, such as the MHRA, may disagree with our clinical trial design, may change the requirements for advancement or approval even after it has reviewed and commented on the design of our trials. As a result, the FDA or other regulatory authorities could require us to conduct additional preclinical studies or clinical trials, which could result in delays and significant additional costs, all of which could jeopardize our ability to successfully develop our product candidates.

All of our engEx exosomes are in varying stages of early development and will require additional preclinical and/or clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. The process for obtaining marketing approval for any product candidate is very long and risky and there will be significant challenges for us to address in order to obtain marketing approval as planned, if at all. In addition, because exoSTING and exoIL-12 are our most advanced engEx product candidates,

 

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if either exoSTING or exoIL-12 encounters safety, efficacy, supply or manufacturing problems, developmental delays, regulatory or commercialization issues or other problems, the value of our engEx Platform could be greatly diminished and our development plans and business would be significantly harmed.

Our engEx product candidates are based on a novel therapeutic approach, which makes it difficult to predict the time and cost of development and of subsequently obtaining regulatory approval, if at all.

Using exosome technology to develop product candidates is a relatively new therapeutic approach and no products based on exosomes have been approved to date in the US, the United Kingdom, or the UK, or the European Union, or the EU. As such it is difficult to accurately predict the developmental challenges we may face for our engEx product candidates as they proceed through development. In addition, because we are just commencing clinical trials with our first engEx product candidates, we have not yet been able to assess safety in humans and there may be short-term or long-term effects from treatment with any product candidates that we develop that we cannot predict at this time. Also, animal models may not exist for some of the diseases we choose to pursue in our programs. As a result of these factors, it is more difficult for us to predict the time and cost of product candidate development and we cannot predict whether the application of our engEx Platform, or any similar or competitive exosome technologies, will result in the identification, development and regulatory approval of any products. There can be no assurance that any development problems we experience in the future related to our engEx Platform, exosome therapeutics or any of our research programs will not cause significant delays or unanticipated costs or that such development problems can be solved. Any of these factors may prevent us from completing our preclinical studies or any clinical trials that we may initiate or commercializing any product candidates we may develop on a timely or profitable basis, if at all.

The clinical trial requirements of the FDA, the MHRA and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the product candidate. No products based on exosomes have been approved to date by regulators. As a result, the regulatory approval process for product candidates such as ours is uncertain, and may be more expensive and take longer than the approval process for product candidates based on other, better known or more extensively studied technologies. It is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in the US, the UK, the EU or other regions of the world or how long it will take to commercialize our product candidates. Delay or failure to obtain or unexpected costs in obtaining the regulatory approvals necessary to bring a potential product candidate to market could decrease our ability to generate sufficient product revenue and our business, financial condition, results of operations and prospects may be harmed.

Development of new therapeutics involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs, fail to replicate the positive results from our earlier preclinical or clinical studies or experience delays in completing or ultimately be unable to complete, the development and commercialization of any product candidates.

To obtain the requisite regulatory approvals to commercialize any product candidates, we must demonstrate through extensive preclinical studies and clinical trials that our products are safe and effective in humans. All of our engEx product candidates and exosomes are in early stages of development and thus their risk of failure is high. Before we can commence clinical trials for a product candidate, we must complete extensive preclinical studies that support our filed and planned INDs in the US, or similar applications in other jurisdictions. We cannot be certain of the timely completion or outcome of our preclinical studies and cannot predict if the FDA or other regulatory authorities will accept our proposed clinical programs or if the outcome of our preclinical studies will ultimately support the further development of our product candidates. As a result, we cannot be sure that we will be able to submit INDs or similar applications for our preclinical programs on the timelines we expect, if at all, and we cannot be sure that submission of INDs or similar applications will result in the FDA or other regulatory authorities allowing clinical trials to begin.

 

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Clinical trials are expensive, difficult to design and implement and can take many years to complete and their outcome is inherently uncertain. Failure can occur at any time during, or even after, the clinical trial process and our ongoing and future clinical results may not be successful. We may be unable to establish clinical endpoints that applicable regulatory authorities would consider clinically meaningful and a clinical trial can fail at any stage of testing. 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. Differences in trial design between early-stage clinical trials and later-stage clinical trials make it difficult to extrapolate the results of earlier clinical trials to later clinical trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

Successful completion of clinical trials is a prerequisite to submitting a Biologics License Application, or BLA, to the FDA and similar marketing applications to other regulatory authorities, for each product candidate and, consequently, the ultimate approval and commercial marketing of any product candidates. We do not know whether any of our clinical trials will be completed on schedule, if at all.

We may experience delays in initiating or completing clinical trials and preclinical studies. We also may experience numerous unforeseen events during, or as a result of, any ongoing and future clinical trials that we conduct that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

 

 

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We could also encounter delays if a clinical trial is suspended, placed on clinical hold or terminated by us, the IRBs of the institutions in which such trials are being conducted, or the FDA or other regulatory authorities or recommended for suspension or termination by the Data Safety Monitoring Board, or DSMB, for such trial. A suspension or termination may be imposed due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product or treatment, failure to establish or achieve clinically meaningful trial endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Further, the FDA or other regulatory authorities may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after they have reviewed and commented on the design for our clinical trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA approval.

Our product development costs will increase if we experience delays in clinical testing or marketing approvals. Our preclinical studies or clinical trials may not begin as planned, may need to be restructured or may not be completed on schedule, or at all. Significant preclinical studies or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates and may allow our competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates and harming our business and results of operations. Any delays in our preclinical or clinical development programs may harm our business, financial condition and prospects significantly.

Interim top-line and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publish interim top-line or preliminary data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Additionally, we make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. Preliminary or top-line data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects. Further, the FDA and other regulatory authorities may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our business in general.

Positive results from early preclinical and clinical studies of our product candidates are not necessarily predictive of the results of later preclinical studies and any clinical trials of our product candidates. If we cannot replicate the positive results from our earlier preclinical and clinical studies of our product

 

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candidates in our later preclinical studies and any clinical trials, we may be unable to successfully develop, obtain regulatory approval and commercialize our product candidates.

Any positive results from our preclinical and early clinical studies of our engEx product candidates may not necessarily be predictive of the results in later preclinical studies and clinical trials. Similarly, even if we are able to complete our planned preclinical studies or clinical trials of our product candidates according to our current development timeline, the positive results from such preclinical studies and clinical trials may not be replicated in our subsequent preclinical studies or later-stage clinical trials.

There is a high failure rate for drugs and biologics proceeding through clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical trials after achieving positive results in early-stage development and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, preclinical and other nonclinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreported adverse events. Moreover, preclinical, nonclinical and clinical data are often susceptible to varying interpretations and analyses, which may delay, limit or prevent regulatory approval. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA approval.

Our clinical trials or those of our future collaborators may reveal significant adverse events not seen in our preclinical studies and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of our product candidates.

There is typically an extremely high rate of attrition due to failure of product candidates proceeding through clinical trials. Following repeated dosing some patients may develop antibodies to our exosome therapeutics. These antibodies could reduce the efficacy of our exosome therapeutics or result in undesirable side effects. Product candidates in later stages of clinical trials also may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. Most product candidates that commence clinical trials are never approved as products and there can be no assurance that any of our clinical trials will ultimately be successful or support further clinical development of any of our product candidates.

We initiated clinical trials for our first two product candidates, exoSTING and exoIL-12, in September 2020, and there may be serious adverse events or undesirable side effects related to these or other of our product candidates. If significant adverse events or other side effects are observed in any of our clinical trials, we may have difficulty recruiting patients to our clinical trials, patients may drop out of our trials or we may be required to limit development to certain uses or subpopulations in which the serious adverse events, undesirable side effects or other characteristics are less prevalent, less severe, or more acceptable from a risk-benefit perspective, or to abandon the trials or our development efforts of one or more product candidates altogether. We, the FDA or other applicable regulatory authorities or an IRB may suspend clinical trials of a product candidate at any time for various reasons, including a belief that subjects in such trials are being exposed to unacceptable health risks or adverse side effects. The FDA or other regulatory authorities could also deny approval of our product candidates for any or all targeted indications. Some potential therapeutics developed in the biotechnology industry that initially showed therapeutic promise in early-stage trials have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude the drug from obtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its tolerability versus other therapies. Any of these developments could materially harm our business, financial condition and prospects.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

We may experience difficulties with patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of patients depends on many factors, including:

 

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In addition, our clinical trials compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates and this competition will reduce the number and types of patients available to us because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial site. Moreover, because our product candidates represent a departure from more commonly used methods for our targeted therapeutic areas, potential patients and their doctors may be inclined to use conventional therapies, rather than enroll patients in any ongoing or future clinical trials we may conduct.

 

Delays in patient enrollment may result in increased costs or may affect the timing or outcome of our clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our product candidates.

Negative developments in the field of exosomes could damage public perception of any product candidates that we develop, which could adversely affect our ability to conduct our business or obtain regulatory approvals for such product candidates.

Exosome therapeutics are novel and unproven therapies, with no exosome therapeutic approved to date. Exosome therapeutics may not gain the acceptance of the public or the medical community. To date, other efforts to leverage natural exosomes have generally demonstrated an inability to generate exosomes with predictable biologically active properties or to manufacture exosomes at suitable scale to treat more than a small number of patients. Some studies used natural exosomes without an intended or understood mechanism of action or pharmacology. Other studies included payloads but generated inconclusive results. Our success will depend on our ability to demonstrate that our engEx exosomes can overcome these challenges.

If one of our current or future product candidates is unable to successfully target a certain cell type or pathway and establish proof of concept in a certain disease, it may indicate that we will not be able to apply our engEx Platform to other diseases mediated by that cell type or pathway. This may also indicate a decrease in the probability of our success for other targets using the same modality in the same or different cell types, as well as

 

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for our engineered exosome approach more generally. Such failures could negatively affect the public or medical community’s perception of our engEx Platform and exosome therapeutics in general.

Additionally, our success will depend upon physicians who specialize in the treatment of diseases targeted by our product candidates, if approved, prescribing treatments that involve the use of our product candidates, if approved, in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical data may be available. Adverse events in clinical trials of our product candidates or in clinical trials of others developing similar products and the resulting publicity, as well as any other adverse events in the field of exosome therapeutics, could result in a decrease in demand for any product that we may develop. These events could also result in the suspension, discontinuation, or clinical hold of, or modification to, our clinical trials. Any future negative developments in the field of exosomes and their use as therapies could also result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or approvals of our product candidates. Any increased scrutiny could delay or increase the costs of obtaining marketing approval for any of our product candidates.

We may not be successful in our efforts to utilize our engEx Platform to identify and develop additional engEx product candidates. Due to our limited resources and access to capital, we must choose to prioritize development of certain product candidates, such as our initial focus on developing exoSTING and exoIL-12, which may prove to be wrong choices and may adversely affect our business.

A key element of our strategy is utilizing our engEx Platform to generate multiple engEx product candidates. Although we are developing numerous engEx product candidates targeting various cell types and indications and carrying a wide range of biologically active drug molecules, in addition to the engEx product candidates we are currently developing, we may fail to identify viable new engEx product candidates for clinical development for a number of reasons. For example, while we believe our engEx Platform engineered exosomes is capable of enhancing the value of several established drug modalities, such as nucleic acid therapeutics, including antisense oligonucleotides, or ASOs, siRNA, miRNA, mRNA, gene therapy and gene editing, we have not yet successfully advanced an engEx exosomes incorporating these drug modalities into clinical trials, and we may not be successful in developing engineered exosomes to deliver any of these types of molecules. If we fail to identify additional potential engEx product candidates, our business could be materially harmed.

Research programs to pursue the development of our engEx product candidates and using our engEx Platform to design and identify new engEx product candidates and disease targets require substantial technical, financial and human resources whether or not they are ultimately successful. Our engEx Platform and research programs may initially show promise in identifying potential indications and/or product candidates, yet fail to yield results for clinical development for a number of reasons, including:

If any of these events occur, we may be forced to abandon our research or development efforts for a program or programs, which would have a material adverse effect on our business, financial condition or results of operations. Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specific indications among many potential options. For example, we have focused our initial clinical development of exoSTING and exoIL-12 on a limited set of cancer indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that

 

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later prove to have greater commercial potential or a greater likelihood of success. 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 product candidates for specific indications may not yield any commercially viable medicines. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product 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 product candidate.

Accordingly, there can be no assurance that we will ever be able to identify additional therapeutic opportunities for our product candidates or to develop suitable potential product candidates through internal research programs, which could materially adversely affect our future growth and prospects. We may focus our efforts and resources on potential product candidates or other potential programs that ultimately prove to be unsuccessful, which would be costly and time-consuming.

 

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries, including in the exosome therapeutics area, are characterized by rapid growth, a dynamic landscape of competitive product candidates and a strong reliance on intellectual property. We face competition from a variety of organizations, including larger pharmaceutical companies, specialty biotechnology companies, academic research institutions, governmental agencies, as well as public and private institutions.

There are several companies that are currently developing exosome-based therapeutics for use in a variety of indications, from cancer to rare disease, to regenerative medicine. Broadly, the development of exosome therapeutics can be segregated into two groups: those that use (a) unmodified cell-derived exosomes and (b) engineered and ex vivo modified exosomes.

Unmodified cell-derived exosomes generally rely on the intrinsic therapeutic activity of cargo in exosomes collected from a specific producer cell type. Typically, these producer cells are stem cells or other precursor cells and the exosomes are generally used in regenerative medicine, immuno-suppression and central nervous system modulation. The mechanism of action for these exosomes is not well-understood and may rely on one or more cargo types including miRNAs, mRNAs, and/or surface proteins. Although none of our engEx product candidates relies on unmodified exosomes isolated from producer cells, there is potential competition in the application and uses of our engEx product candidates with those based on unmodified exosomes. Competitors using unmodified cell-derived exosomes include Aegle Therapeutics Corp., ArunA Biomedical, Inc., or ArunA, Capricor Therapeutics, Inc. and ReNeuron Group plc. In addition, several small-scale clinical studies using unmodified cell-derived exosomes have been initiated, often led by academic investigators, for a variety of indications including cancer, immune diseases and stroke.

All of our existing and anticipated engEx product candidates use exosomes that are produced from modified cells and/or are loaded ex vivo with various biologically active molecules. We understand that our competitors using engineered and ex vivo modified exosomes plan to use their candidates in numerous therapeutic applications, some of which may directly compete with our engEx product candidates and early programs. Competing therapeutic applications include cancer, metabolic diseases, various rare diseases, central nervous system disorders, neuromuscular disorders, diseases of the immune system and infectious diseases. Competitors using engineered and ex vivo loaded exosomes include ArunA, AstraZeneca plc, or AstraZeneca, Evox Therapeutics Ltd. and PureTech Health plc.

We also face competition outside of the exosome therapeutics field, including from some of the largest pharmaceutical companies and other specialty biotechnology companies. Our lead engEx product candidates, exoSTING and exoIL-12, face competition from numerous companies.

In the STING agonist space: Chinook Therapeutics, Inc., or Chinook, and Novartis International AG, or Novartis; Bristol-Myers Squibb Company, or BMS; Merck & Co., Inc., or Merck; Takeda Pharmaceutical Company Limited; Eisai Co., Ltd., or Eisai; Nimbus Therapeutics, Inc.; GlaxoSmithKline plc, or GSK; F-star Therapeutics, Limited, or F-star; Synlogic, Inc., or Synlogic; Mavupharma, Inc. (acquired by AbbVie Inc.) and others. Merck, Chinook in collaboration with Novartis, BMS, Eisai, GSK, F-star and Synlogic have initiated clinical trials using

 

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STING agonists in cancer patients. Additionally, there are several STING agonist programs that have been described in the literature that are owned or being developed by academic institutions that may soon enter clinical trials.

In the IL-12 space: Astellas Pharma Inc.; Celsion Corporation, or Celsion; Cytix, Inc., or Cytix; Dragonfly Therapeutics Inc.; Eli Lilly and Company; MedImmune, LLC (acquired by AstraZeneca), or MedImmune; Immvira Co Ltd.; Inovio Pharmaceuticals, Inc.; Merck; Moderna, Inc., or Moderna; Neumedicines, Inc., or Neumedicines; OncoSec Medical Incorporated, or OncoSec; Rubius Therapeutics, Inc.; Repertoire Immune Medicines, Inc.; Ziopharm Oncology, Inc., or Ziopharm; and others. The IL-12 programs from Ziopharm, OncoSec, Neumedicines, Celsion, Cytix, Merck and MedImmune are currently being used in clinical trials.

We also face competition related to the therapeutic areas and biologically active molecules we plan to engineer onto or into our engEx exosomes. As described above, our engEx Platform is amenable to creating exosomes capable of delivering and/or displaying numerous classes of biologically active molecules. For each of these therapeutic areas and molecule classes we face competition from numerous large pharmaceutical companies and specialty biotechnology companies.

We also face competition outside of the exosome therapeutics field from large pharmaceutical companies and specialty biotechnology companies using synthetic drug delivery systems such as liposomes, lipid nanoparticles and other non-viral delivery approaches, including Alnylam, Arbutus Biopharma, Arcturus Therapeutics, Inc., Intellia, Ipsen Group, Johnson & Johnson, Luye Pharma Group, Moderna and others. These include marketed products and those that are currently in clinical development.

In addition, many of our current or potential competitors, either alone or with their collaboration partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials and marketing approved products than we do. Mergers and acquisitions in the biopharmaceutical industry 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. 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. Our competitors also may obtain FDA or other regulatory 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. The key competitive factors affecting the success of all of our programs are likely to be their efficacy, safety, convenience and availability of reimbursement.

If our current programs are approved for the indications for which we are currently planning clinical trials, they may compete with other products currently under development. Competition with other related products currently under development may include competition for clinical trial sites, patient recruitment and product sales.

 

We also may face competition in the United States for our product candidates, if approved, from therapies sourced from foreign countries that have placed price controls on pharmaceutical products. In the United States, the FDA issued a final guidance document outlining a pathway for manufacturers to obtain an additional National

 

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Drug Code, or NDC, for an FDA-approved drug that was originally intended to be marketed in a foreign country and that was authorized for sale in that foreign country. The market implications of the final guidance are unknown at this time. Proponents of drug reimportation may attempt to pass legislation that would directly allow reimportation under certain circumstances. Legislation or regulations allowing the reimportation of drugs, if enacted, could decrease the price we receive for any products that we may develop and adversely affect our future revenues and prospects for profitability.

In addition, as a result of the expiration or successful challenge of our patent rights, we could face more litigation with respect to the validity and/or scope of patents relating to our competitors’ products and our patents may not be sufficient to prevent our competitors from commercializing competing products.

We may develop exoSTING, exoIL-12 and potential future product candidates in combination with other therapies and safety or supply issues with combination-use products may delay or prevent development and approval of our product candidates.

We may develop exoSTING, exoIL-12 and potential future product candidates, in combination with one or more cancer or other therapies, both approved and unapproved. Even if any product candidate we develop were to receive marketing approval or be commercialized for use in combination with other existing therapies, we would continue to be subject to the risk that the FDA or similar regulatory authorities outside of the US could revoke approval of the therapy used in combination with our product candidate, or that safety, efficacy, manufacturing or supply issues could arise with these existing therapies. Combination therapies are commonly used for the treatment of cancer and we would be subject to similar risks if we develop any of our product candidates for use in combination with other drugs or for indications other than cancer. We may choose to combine multiple cancer therapies on one exosome, which could enhance the risk of safety-related issues. Similarly, if the therapies we use in combination with our product candidates are replaced as the standard of care for the indications we choose for any of our product candidates, the FDA or similar regulatory authorities outside of the US may require us to conduct additional clinical trials. The occurrence of any of these risks could result in our own products, if approved, being removed from the market or being less successful commercially.

We will not be able to market and sell exoSTING, exoIL-12 or any product candidate we develop in combination with any such unapproved cancer therapies that do not ultimately obtain marketing approval. The regulations prohibiting the promotion of products for unapproved uses are complex and subject to substantial interpretation by the FDA and other government agencies. In addition, there are additional risks similar to the ones described for our products currently in development and clinical trials that result from the fact that such cancer therapies are unapproved, such as the potential for serious adverse effects, delay in their clinical trials and lack of FDA approval.

Furthermore, we cannot be certain that we will be able to obtain a steady supply of such cancer therapies for use in developing combinations with our product candidates on commercially reasonable terms or at all. Any failure to obtain such therapies for use in clinical development and the expense of purchasing therapies in the market may delay our development timelines, increase our costs and jeopardize our ability to develop our product candidates as commercially viable therapies.

If the FDA or similar regulatory authorities outside of the US do not approve these other drugs or revoke their approval of, or if safety, efficacy, manufacturing or supply issues arise with, the drugs we choose to evaluate in combination with exoSTING, exoIL-12 or any product candidate we develop, we may be unable to obtain approval of or market exoSTING, exoIL-12 or any product candidate we develop.

Even if a product candidate we develop receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

If any engEx product candidate we develop receives marketing approval, whether as a single agent therapeutic or in combination with other therapies, its commercial success will depend upon its degree of market acceptance by physicians, patients, third-party payors and others in the medical community. For example, other cancer treatments like chemotherapy, radiation therapy and immunotherapy are well-established in the medical community and doctors may continue to rely on these therapies instead of therapies derived from our engEx Platform, if approved. If the engEx product candidates we develop do not achieve an adequate level of

 

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acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of any product candidate, if approved for commercial sale, will depend on a number of factors, including:

Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after it is launched. If our product candidates do not achieve an adequate level of acceptance following regulatory approval, if ever, we may not generate significant product revenue and may not become profitable.

Acquisitions, collaborations or other strategic partnerships may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

We are engaged in various collaborations and strategic partnerships and may evaluate additional partnerships or potential acquisitions, including licensing or acquiring biologically active molecules to load into or onto our engineered exosomes, complementary products, intellectual property rights, technologies or businesses. For example, our partnership with Jazz Pharmaceuticals Ireland Limited, or Jazz, focuses on the research, development and commercialization of exosome therapeutics to treat cancer. Our collaboration with Sarepta Therapeutics, Inc., or Sarepta, focuses on the use of exosomes for non-viral delivery of AAV, gene-editing and RNA therapeutics to address targets associated with neuromuscular diseases. Our existing collaborations and partnerships and any future potential acquisition, collaboration or strategic partnership may entail numerous risks, including:

 

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In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business. Any of the foregoing may materially harm our business, financial condition, results of operations, stock price and prospects.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

We face an inherent risk of product liability as a result of testing our engEx product candidates in clinical trials and will face an even greater risk if we commercialize any products. For example, we may be sued if our product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical trials, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

Although we maintain clinical trial and product liability insurance coverage, it may not be adequate to cover all liabilities that we may incur. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop, alone or with collaborators. If and when coverage is secured, our insurance policies may also have various exclusions and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

 

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The market opportunities for our product candidates may be limited to those patients who are ineligible for or have failed prior treatments and may be small and our estimates of the prevalence of our target patient populations may be inaccurate.

Cancer and other disease therapies are sometimes characterized as first-line, second-line or third-line and the FDA often approves new therapies initially only for third-line use. Initial approvals for new cancer and other disease therapies are often restricted to later lines of therapy for patients with advanced or metastatic disease, limiting the number of patients who may be eligible for such new therapies, which may include our product candidates.

Our lead engEx product candidates, exoSTING and exoIL-12, are being developed to address certain types of solid tumors. Our projections of both the number of people who have the diseases we are targeting, as well as the subset of people with these diseases in a position to receive our therapies, if approved, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, input from key opinion leaders, patient foundations or secondary market research databases and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for our engEx product candidates may be limited or may not be amenable to treatment with our product candidates. Even if we obtain significant market share for our product candidates, because certain of the potential target populations may be small, we may never achieve profitability without obtaining regulatory approval for additional indications. For example, our initial clinical trial for exoSTING is focused on metastatic head and neck squamous cell cancer, triple-negative breast cancer, cutaneous squamous cell carcinoma and anaplastic thyroid carcinoma. We believe there are approximately 90,000 patients annually in the US with these cancers. If the market opportunities for any product candidates we may develop are smaller than we believe they are, our potential revenues may be adversely affected and our business may suffer.

We currently have limited marketing and sales capabilities and have limited experience in marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.

We currently have limited sales, marketing or distribution capabilities and have limited experience in the sale, marketing or distribution of products. If we are able to achieve regulatory approval for any of our engEx product candidates, we may consider commercializing the product ourselves by developing an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. Recruiting and training a sales force or reimbursement specialists is expensive and time consuming and we will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and other commercialization 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 commercialization personnel.

Other factors that may inhibit our efforts to commercialize our product candidates we may develop on our own include:

 

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In addition to establishing internal commercialization capabilities, we may pursue collaborative arrangements for the sale and marketing of our products, if any; however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements. If we enter into arrangements with third parties to perform sales, marketing, commercial support and distribution services, any revenue we receive will depend upon the efforts of such third parties and our product revenues or the profitability of these product revenues to us may be lower than if we were to commercialize our product candidates ourselves. In addition, we may not be successful in entering into arrangements with third parties to commercialize our product candidates we may develop or may be unable to do so on terms that are favorable to us. We may have little control over the marketing and sales efforts of such third parties and any of them may fail to devote the necessary resources and attention to sell and market our medicines effectively. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates. There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third party collaborators to commercialize any product in the US or internationally.

Risks related to employee matters, managing growth and other risks related to our business

If we lose key management personnel or if we fail to recruit additional highly skilled personnel, our ability to identify and develop new or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel. The loss of the services of any of our executive officers, other key employees and other scientific and medical advisors and our inability to find suitable replacements could result in delays in product development and harm our business.

We conduct our operations at our facilities in Cambridge, Massachusetts. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. For example, employment of our key employees is at-will, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees.

In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. For example, the members of our scientific advisory board are employed by employers other than us.

Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.

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

As of December 31, 2020, we had 105 full-time employees. As our research, development, manufacturing and commercialization plans and strategies develop and as we operate as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

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

Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of our product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.

In addition, we currently rely, and for the foreseeable future will continue to rely, in substantial part on certain organizations, advisors, contractors and consultants to provide certain services, including many aspects of regulatory affairs, clinical management and manufacturing. There can be no assurance that the services of these organizations, advisors and consultants will continue to be available to us on a timely basis when needed or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners, vendors and principal investigators. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to comply with the rules or regulations of the FDA and other regulatory bodies, provide true, complete and accurate information to the FDA and other regulatory bodies, comply with manufacturing regulations and standards, comply with healthcare privacy, fraud and abuse laws in the US and similar foreign laws or report financial information or data accurately or to disclose unauthorized activities to us.

Sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA or other regulatory authorities, which could result in significant civil, criminal and administrative penalties and cause serious harm to our reputation.

If we obtain FDA approval of any of our product candidates and begin commercializing those products in the US, our potential exposure under such laws will increase significantly and our costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our current

 

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activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs.

We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct and 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 government 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 impact on our business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.

If we or any contract manufacturers and suppliers we engage 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 any contract manufacturers and suppliers we engage are subject to numerous federal, state and local environmental, health and safety laws, regulations and permitting requirements, including those governing laboratory procedures; the generation, handling, use, storage, treatment and disposal of hazardous and regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air and water; and employee health and safety. Our research and development activities involve the use of biological and hazardous materials and 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, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance.

 

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, development or production efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources and our clinical trials or regulatory approvals could be suspended, which could have a material adverse effect on our business, financial condition, results of operations and prospects. Failure to comply with these laws, regulations and permitting requirements also may result in substantial fines, penalties or other sanctions or business disruption, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Any third-party contract manufacturers and suppliers we engage will also be subject to these and other environmental, health and safety laws and regulations. Liabilities they incur pursuant to these laws and regulations could result in significant costs or an interruption in operations, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect our business and could cause a disruption to the development of our product candidates.

Public health crises such as pandemics or similar outbreaks could adversely impact our business. Recently, a novel strain of a virus named severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2 or coronavirus, which causes COVID-19, has spread to most countries across the world, including all 50 states within the US, including Cambridge, Massachusetts, where our primary office and laboratory space is located. The COVID-19 pandemic is evolving and to date has led to the implementation of various responses, including

 

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government-imposed quarantines, travel restrictions and other public health safety measures. The extent to which the COVID-19 pandemic impacts our operations or those of our third party partners, including our ongoing or planned clinical trials or preclinical studies, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that will emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. The continued spread of COVID-19 globally could adversely impact our clinical trials and preclinical studies, including our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography or regulatory agencies whose attention may be diverted by the pandemic. Similar to other biopharmaceutical companies, we may experience delays in initiating IND-enabling studies, protocol deviations or delays in enrolling our clinical trials or dosing of patients in our clinical trials as well as in activating new trial sites. For example, Part B of our Phase 1 clinical trial of exoIL-12 is being conducted in the United Kingdom, much of which is currently subject to COVID-19-related restrictions involving new study initiation, which we expect will delay our initiation of Part B and potentially the overall timing of, and announcement of data from, the trial. COVID-19 may also affect employees of third-party CROs located in affected geographies that we rely upon to carry out our clinical trials. Any negative impact COVID-19 has on patient enrollment or treatment or the execution of our product candidates could cause costly delays to clinical trial activities, which could adversely affect our ability to obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses and have a material adverse effect on our financial results.

Additionally, timely enrollment in clinical trials is dependent upon clinical trial sites, which could be adversely affected by global health matters, such as pandemics. We are conducting clinical trials for our product candidates in geographies which are currently affected by the COVID-19 pandemic. Some factors related to the COVID-19 pandemic that may delay or otherwise adversely affect enrollment in the clinical trials of our product candidates, as well as our business generally, include:

 

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We have taken precautionary measures intended to help minimize the risk of the virus to our employees, including allowing all employees to work remotely, suspending all non-essential travel worldwide for our employees and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect our business. We cannot presently predict the scope and severity of the planned and potential shutdowns or disruptions of businesses and government agencies, such as the Securities and Exchange Commission, or the SEC, or the FDA.

These and other factors arising from the COVID-19 pandemic could worsen in countries that are already impacted by the coronavirus or in any additional countries to which the coronavirus spreads. Any of these factors and other factors related to any such disruptions that are unforeseen, could have a material adverse effect on our business and our results of operation and financial condition. Further, uncertainty around these and related issues could lead to adverse effects on the economy of the US and other economies, which could impact our ability to raise the necessary capital needed to develop and commercialize our product candidates.

Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber security.

Our internal computer systems and those of our current and any future third-party vendors, collaborators and other contractors or consultants on which we rely may fail and are vulnerable to damage or interruption from computer viruses, computer hackers, malicious code, employee theft or misuse, denial-of-service attacks, sophisticated nation-state and nation-state-supported actors, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Our and their information technology and other internal infrastructure systems, including corporate firewalls, servers, leased lines and connection to the Internet, face the risk of systemic failure that could disrupt our operations. While we have not, to our knowledge, experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other disruptions. For example, the loss of clinical trial data from ongoing or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. In addition, in response to the ongoing COVID-19 pandemic, a majority of our workforce is currently working remotely. This could increase our cyber security risk, create data accessibility concerns and make us more susceptible to communication disruptions. If we were to experience a significant cybersecurity breach of our information systems or data, the costs associated with the investigation, remediation and potential notification of the breach to counter-parties and data subjects could be material. In addition, our remediation efforts may not be successful. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology and cybersecurity infrastructure, we could suffer significant business disruption, including transaction errors, supply chain or manufacturing interruptions, processing inefficiencies, data loss or the loss of or damage to intellectual property or other proprietary information.

To the extent that any disruption or security breach were to result in a loss of or damage to our or our third-party vendors’, collaborators’ or other contractors’ or consultants’ data or applications or inappropriate disclosure of confidential or proprietary information, we could incur liability including litigation exposure, penalties and fines, we could become the subject of regulatory action or investigation, our competitive position could be harmed and the further development and commercialization of our product candidates could be delayed. Any of the above could have a material adverse effect on our business, financial condition, results of operations or prospects.

Likewise, we rely on third parties for the manufacture of our product candidates or any future product candidates and expect to rely on third parties to conduct our ongoing and any future clinical trials and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and commercialization of our product candidate or any future product candidates could be hindered or delayed.

 

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Business disruptions could seriously harm our future business and financial condition and increase our costs and expenses.

Our operations and those of our current and future CROs, CMOs, collaborators, partners, suppliers and other third parties with whom we do business could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, such as the current COVID-19 pandemic, and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. For example, we have instituted a temporary work from home policy for non-essential office personnel and it is possible that this could have a negative impact on the execution of our business plans and operations. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce and process our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.

 

Risks related to manufacturing and supply

Although we have commenced operations at our in-house Phase 1/2 clinical manufacturing facility, we have been and expect to remain dependent on suppliers for some of our components and materials used to manufacture our engEx exosomes and for later stage clinical trials and commercial supply.

We currently depend on suppliers for some of the components necessary to produce our engEx product candidates and engEx exosomes and expect to continue to depend on them for the future manufacture of engEx product candidates as we advance to later stage clinical development and commercialization, if approved. We cannot be sure that these suppliers will remain in business, that they will be able to meet our supply needs or that they will not be purchased by one of our competitors or another company that is not interested in continuing to produce these materials for our intended purpose. These vendors may be unable or unwilling to meet our future demands for our clinical trials or commercial sale. For example, while we believe our suppliers have produced sufficient product to enable us to complete our initial clinical trials of exoSTING and exoIL-12, the shelf life or stability of the existing supply may be shorter or less than we anticipate and we may have to produce or source additional supply sooner than we anticipate, which may not be readily available. Establishing additional or replacement suppliers for these components could take a substantial amount of time and it may be difficult to establish replacement suppliers who meet regulatory requirements. Any disruption in supply from a supplier or manufacturing location could lead to supply delays or interruptions, which would damage our business, financial condition, results of operations and prospects.

If we are able to find a replacement supplier, the replacement supplier would need to be qualified and we may need to obtain additional regulatory authority approval, which could result in further delay. While we seek to maintain adequate inventory of the components and other materials used to manufacture our products, any interruption or delay in the supply of components or other materials or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner could impair our ability to meet the demand of our customers and cause them to cancel orders.

In addition, as part of the FDA’s approval of our product candidates, the FDA will review the individual components of our process, which may include the manufacturing processes and facilities of our suppliers.

Our reliance on these suppliers subjects us to a number of risks that could harm our business and financial condition, including, among other things:

 

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If any of these risks materialize, our manufacturing costs could significantly increase and our ability to meet clinical and commercial demand for our products could be impacted.

We are establishing our own manufacturing facility and infrastructure in addition to or in lieu of relying on CMOs for the manufacture of our engEx product candidates for early and mid-stage clinical trials, which is costly, time-consuming and which may not be successful.

We have completed construction of, and commenced operations at, our in-house manufacturing facility. However, we do not yet have the capability to produce our engEx product candidates for early and mid-stage clinical trials and engEx exosomes for preclinical testing. We have limited experience as a company in establishing, operating and maintaining an exosome manufacturing facility and may face significant challenges with the establishment of our own exosome manufacturing facility or capabilities. As a result, we will also need to hire additional personnel to build and set up a manufacturing facility, manage our operations and facilities and develop the necessary infrastructure to continue the research and development and eventual commercialization, if approved, of our engEx product candidates. If we later determine that we have failed to select the correct location or build out the facility and its customizations to our needs in an efficient manner or if we fail to recruit the required personnel and generally manage our growth effectively, the development and production of our product candidates could be curtailed or delayed and we may be unable to rely on previously existing relationships with CMOs.

We may establish multiple manufacturing facilities as we expand our commercial footprint to multiple geographies, which may lead to regulatory delays or prove costly. Even if we are successful, our manufacturing capabilities could be affected by cost-overruns, unexpected delays, equipment failures, labor shortages, natural disasters, power failures and numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy and have a material adverse effect on our business.

In addition, the FDA, the MHRA and other regulatory authorities may require us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, the FDA, the MHRA or other regulatory authorities may require that we not distribute a lot until the relevant agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects. Problems in our manufacturing process could restrict our ability to meet market demand for our products.

We also may encounter problems hiring and retaining the experienced scientific, quality control and manufacturing personnel needed to operate our manufacturing processes, which could result in delays in production or difficulties in maintaining compliance with applicable regulatory requirements.

Changes in product candidate manufacturing or formulation may result in additional costs or delay, which could adversely affect our business, results of operations and financial condition.

As product candidates are developed through preclinical studies to later-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods or formulation, are altered along the way in an effort to optimize processes and results. Any of these changes could cause our engEx product candidates to perform differently and affect the results of ongoing or planned clinical trials or other future clinical trials conducted with the altered materials. In addition, such changes and any other similar changes in the future may also require additional testing or notification to or approval by the FDA or other regulatory authorities. This could delay completion of clinical trials, require the

 

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conduct of bridging clinical trials or studies, require the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates and/or jeopardize our ability to commence product sales and generate revenue.

Our engEx product candidates are complicated to manufacture. If we or any of our third-party manufacturers encounter difficulties in manufacturing our engEx product candidates, our ability to provide supply of our engEx product candidates for clinical trials or our products for patients, if approved, could be delayed or stopped or we may be unable to maintain a commercially viable cost structure.

The manufacturing process used to produce our engEx exosomes is complex and novel and it has not yet been validated for commercial production. As a result of these complexities, the cost to manufacture our engEx product candidates is generally higher than traditional biopharmaceutical compounds and the manufacturing process may prove to be less reliable and may be more difficult to reproduce. Furthermore, our manufacturing process development and scale-up is at an early stage. The actual cost to manufacture and process our engEx product candidates could be greater than we expect and could materially and adversely affect the commercial viability of our product candidates.

Our manufacturing process may be susceptible to logistical issues associated with shipment of the final product to clinical centers, manufacturing issues associated with interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, inconsistency in cell growth and productivity and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, lot failures, product defects, product recalls, product liability claims, insufficient inventory and other supply disruptions. Even if we successfully develop and commercialize product candidates, we may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, MHRA or other comparable applicable foreign standards or specifications with consistent and acceptable production yields and costs. If microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made, production at such manufacturing facilities may be interrupted for an extended period of time to investigate and remedy the contamination.

Although we continue to optimize our manufacturing process for our engEx product candidates, consistently achieving the targeted results is not guaranteed and there are risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of reagents and/or raw materials. We ultimately may not be successful in transferring our production process to other manufacturing facilities or our contract manufacturer may not have the necessary capabilities to complete the implementation of the manufacturing process. If we are unable to adequately validate or scale-up the manufacturing process for our product candidates with our current manufacturer, we will need to transfer to another manufacturer and complete the manufacturing validation process, which can be lengthy. If we are able to adequately validate and scale-up the manufacturing process for our product candidates with a contract manufacturer, we will still need to negotiate with such contract manufacturer an agreement for commercial supply and it is not certain we will be able to come to agreement on terms acceptable to us. As a result, we may ultimately be unable to reduce the cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product candidates are commercialized.

 

The manufacturing process for any products that we may develop is subject to the FDA and other regulatory authority approval processes and we and our CMOs will need to meet all applicable FDA and other regulatory authority requirements on an ongoing basis. If we or our CMOs are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CMOs will be able to consistently manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods and have an adverse effect on our business, financial condition, results of operations and growth prospects. Our future success depends on our ability to manufacture

 

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our products on a timely basis with acceptable manufacturing costs, while at the same time maintaining good quality control and complying with applicable regulatory requirements and an inability to do so could have a material adverse effect on our business, financial condition and results of operations. In addition, we could incur higher manufacturing costs if manufacturing processes or standards change and we could need to replace, modify, design or build and install equipment, all of which would require additional capital expenditures. Specifically, because our product candidates may have a higher cost of goods than conventional therapies, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater.

Risks related to government regulation

We cannot predict when, or if, we will obtain regulatory approval to commercialize a product candidate we may develop in the US or any other jurisdiction and any such approval may be for a narrower indication than we seek.

We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate. Even if any product candidates we may develop meet their safety and efficacy endpoints in clinical trials, regulatory authorities may not complete their review processes in a timely manner or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action or changes in regulatory authority policy during the period of product development, clinical trials and the review process.

Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or a Risk Evaluation and Mitigation Strategy, or REMS. These regulatory authorities may require labeling that includes precautions, boxed warnings or contra-indications with respect to conditions of use, or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of any product candidates we may develop. Any of the foregoing scenarios could materially harm the commercial prospects for any product candidates we may develop and materially adversely affect our business, financial condition, results of operations and prospects.

 

If we are not able to obtain or if there are delays in obtaining required regulatory approvals for our product candidates, we will not be able to commercialize or will be delayed in commercializing our product candidates and our ability to generate revenue will be materially impaired.

Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale, distribution, import and export are subject to comprehensive regulation by the FDA and other regulatory agencies in the US and by comparable authorities in other countries. Before we can commercialize any of our product candidates, we must obtain marketing approval. We have not received approval to market any of our product candidates from regulatory authorities in any jurisdiction and it is possible that none of our product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. In certain instances, we may need to rely on third-party CROs and/or regulatory consultants to assist us in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the biologic product candidate’s safety, purity, efficacy and potency.

Securing regulatory approval also requires the submission of information about the prospective manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.

The process of obtaining regulatory approvals, both in the US and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in

 

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marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations or changes in regulatory review for each submitted IND, BLA or equivalent application types, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. Our product candidates could be delayed in receiving or fail to receive regulatory approval for many reasons, including the following:

 

Of the large number of drugs in development, only a small percentage successfully complete the FDA or foreign regulatory approval processes and are commercialized. The lengthy approval process as well as the unpredictability of clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.

We expect the novel nature of our product candidates to create further challenges in obtaining regulatory approval. As a result, our ability to develop product candidates and obtain regulatory approval may be significantly impacted.

For example, the general approach for FDA approval of a new biologic or drug is for sponsors to seek licensure or approval based on dispositive data from well-controlled, Phase 3 clinical trials of the relevant product candidate in the relevant patient population. Phase 3 clinical trials typically involve hundreds of patients, have significant costs and take years to complete. We believe that we may be able to utilize the FDA’s accelerated approval program for our product candidates given the limited alternatives for treatments for cancer and other serious diseases, but the FDA may not agree with our plans.

The FDA may also require a panel of experts, referred to as an Advisory Committee, to deliberate on the adequacy of the safety and efficacy data to support approval. The opinion of the Advisory Committee, although not binding, may have a significant impact on our ability to obtain approval of any product candidates that we develop based on the completed clinical trials.

Moreover, approval of genetic or biomarker diagnostic tests may be necessary in order to advance some of our product candidates to clinical trials or potential commercialization. In the future regulatory agencies may require the development and approval of such tests. Accordingly, the regulatory approval pathway for such product candidates may be uncertain, complex, expensive and lengthy and approval may not be obtained.

In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the

 

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successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the US, including additional preclinical studies or clinical trials, as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the US, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

We may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the US have requirements for approval of product candidates with which we must comply prior to marketing in those jurisdictions and such regulatory requirements can vary widely from country to country. Obtaining other regulatory approvals and compliance with other regulatory requirements could result in significant delays, difficulties and costs for us and could require additional preclinical studies or clinical trials, which could be costly and time-consuming and could delay or prevent the introduction of our products in certain countries. The foreign regulatory approval process involves all of the risks associated with FDA approval. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with the regulatory requirements in international markets and/or obtain and maintain applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

If any of our engEx product candidates cause serious adverse effects, undesirable side effects or unexpected characteristics, such events, side effects or characteristics could delay or prevent regulatory approval of the product candidates, limit the commercial profile of an approved label or result in significant negative consequences following any marketing approval.

Serious adverse effects, undesirable side effects or unexpected characteristics caused by our product candidates could cause us to interrupt, delay or halt preclinical studies or could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. As is the case with many cancer and disease therapeutics, it is likely that there may be side effects associated with the use of our product candidates. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. If we are unable to demonstrate that any adverse events were caused by factors other than our product candidates, the FDA or other regulatory authorities could order us to suspend or terminate our clinical trials, cease further development of or deny approval of our product candidates for any or all targeted indications. Even if we are able to demonstrate that all future serious adverse events are not product-related, such occurrences could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Moreover, if we elect or are required to delay, suspend, place on clinical hold or terminate any clinical trial of any product candidate we may develop, the commercial prospects of such product candidates may be harmed and our ability to generate product revenues from any of these product candidates may be delayed or eliminated. Any of these occurrences may harm our ability to identify and develop product candidates, and may harm our business, financial condition, result of operations and prospects significantly.

Further, clinical trials by their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure, rare and severe side effects of our product candidates may

 

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only be uncovered with a significantly larger number of patients exposed to the product candidate. Additionally, if we successfully develop a product candidate and it receives marketing approval, the FDA could require us to adopt a REMS to ensure that the benefits of treatment with such product candidate outweigh the risks for each potential patient, which may include, among other things, a medication guide outlining the risks of the product for distribution to patients, a communication plan to health care practitioners, extensive patient monitoring or distribution systems and processes that are highly controlled, restrictive and more costly than what is typical for the industry. If our product candidates receive marketing approval and we or others identify undesirable side effects caused by such product candidates (or any other similar drugs) after such approval, a number of potentially significant negative consequences could result, including:

We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidates and could substantially increase the costs of commercializing our product candidates, if approved, and significantly impact our ability to successfully commercialize our product candidates and generate revenues.

 

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We may seek priority review designation for one or more of our other product candidates, but we might not receive such designation, and even if we do, such designation may not lead to a faster regulatory review or approval process.

If the FDA determines that a product candidate offers a treatment for a serious condition and, if approved, the product would provide a significant improvement in safety or effectiveness of the treatment, the FDA may designate the product candidate for priority review. A priority review designation means that the goal for the FDA to review an application is six months, rather than the standard review period of ten months. We may request priority review for our product candidates. The FDA has broad discretion with respect to whether or not to grant priority review status to a product candidate, so even if we believe a particular product candidate is eligible for such designation or status, the FDA may decide not to grant it. Moreover, a priority review designation does not necessarily result in expedited regulatory review or approval process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Receiving priority review from the FDA does not guarantee approval within the six-month review cycle, or at all.

We may fail to obtain and, if obtained, maintain, orphan drug designations from the FDA for our current and future product candidates, as applicable.

We may file for orphan drug designation where available for our product candidates. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition, which is defined as one occurring in a patient population of fewer than 200,000 in the US, or a patient population greater than 200,000 in the US where there is no reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the US. In the US, orphan drug designation entitles a party to financial incentives, such as opportunities for grant funding toward and into clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full new drug application, or NDA, or BLA, to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the original manufacturer is unable to assure sufficient product quantity.

In addition, exclusive marketing rights in the US may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the orphan designated disease or condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties may receive and be approved for the same condition and only the first applicant to receive approval will receive the benefits of marketing exclusivity. Even after an orphan-designated product is approved, the FDA can subsequently approve a later drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior if it is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug, nor gives the drug any advantage in the regulatory review or approval process. In addition, while we may seek orphan drug designation for our product candidates, we may never receive such designations.

While we have not yet sought any regulatory approval for any product candidate, the FDA, the MHRA and other regulatory authorities may implement additional regulations or restrictions on the development and commercialization of our product candidates, which may be difficult to predict.

The FDA, the MHRA and regulatory authorities in other geographies have each expressed interest in further regulating biotechnology products. Agencies at both the federal and state level in the US, as well as the US Congressional committees and other governments or governing agencies, have also expressed interest in further regulating the biotechnology industry. At present, we have not sought approval from any such regulatory authority, but such further regulation may delay or prevent commercialization of one or more of our product candidates. Adverse developments in clinical trials of any therapeutic candidates leveraging exosomes conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of our product candidates. These regulatory review agencies and the new requirements or guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and

 

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commercialization of our product candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory agencies and comply with applicable requirements and guidelines. If we fail to do so, we may be required to delay or discontinue development of such product candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of our product candidates can be costly and could negatively impact our ability to complete clinical trials and commercialize our current and future product candidates in a timely manner, if at all.

 

Even if we receive regulatory approval of any product candidates or therapies, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.

If any of our present or future product candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, export, import, conduct of post-marketing studies and submission of safety, efficacy and other post-market information, including both federal and state requirements in the US and requirements of other regulatory authorities. In addition, we will be subject to continued compliance with current good manufacturing practices, or cGMP, and good clinical practices, or GCP, requirements for any clinical trials that we conduct post-approval.

Manufacturers and manufacturers’ facilities are required to comply with extensive FDA and other regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any BLA, other marketing application and previous responses to inspection observations. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

Any regulatory approvals that we receive for our present or future product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require REMS as a condition of approval of our product candidates, which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or another regulatory authority approves our product candidates, we will have to comply with requirements including submissions of safety and other post-marketing information and reports and registration.

The FDA may seek to enter into consent decrees or 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 our product candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS. Other potential consequences include, among other things:

 

 

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The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Products 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. The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained which would adversely affect our business, prospects and ability to achieve or sustain profitability.

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the US or abroad. For example, certain policies of the current administration may impact our business and industry. Namely, the current administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities, such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications. It is difficult to predict how these executive actions, including any executive orders, will be implemented and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

We and our contract manufacturers are subject to significant regulation with respect to the manufacturing of our current and future product candidates. The manufacturing facilities on which we rely may not continue to meet regulatory requirements and have limited capacity.

We currently have relationships with a limited number of suppliers for the manufacturing of our product candidates. Each supplier may require licenses to manufacture such components if such processes are not owned by the supplier or in the public domain and we may be unable to transfer or sublicense the intellectual property rights we may have with respect to such activities.

All entities involved in the preparation of therapeutics for clinical studies or commercial sale, including our existing contract manufacturers for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance with cGMP. 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 adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our existing and future contract manufacturers must supply all necessary documentation in support of a BLA on a timely basis and must adhere to the FDA’s good laboratory practices, or GLP, and cGMP regulations enforced by the FDA through its facilities inspection program. Some of our contract manufacturers have not produced a commercially-approved product and therefore have not obtained the requisite FDA approvals to do so. Our facilities and quality systems and the facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our product candidates or any of our other potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA approval of the products will not be granted.

 

In response to the COVID-19 pandemic, in March 2020, the FDA announced its intention to postpone most inspections of domestic and foreign manufacturing facilities while local, national and international conditions warrant. As of June 23, 2020, the FDA noted it was conducting mission critical domestic and foreign inspections to ensure compliance of manufacturing facilities with FDA quality standards. On July 10, 2020, the FDA announced its goal of restarting domestic on-site inspections during the week of July 20, 2020, but such activities will depend on data about the virus’ trajectory in a given state and locality and the rules and guidelines that are put in place by state and local governments. The FDA has developed a rating system to assist in determining

 

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when and where it is safest to conduct prioritized domestic inspections. Should FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the review cycle due to restrictions on travel, FDA has stated that it generally intends to issue a complete response letter. Further, if there is inadequate information to make a determination on the acceptability of a facility, FDA may defer action on the application until an inspection can be completed. Regulatory authorities outside the U.S. may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities.

The regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities or those of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business.

If we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or biologic product, or revocation of a pre-existing approval. As a result, our business, financial condition and results of operations may be materially harmed.

Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. An alternative manufacturer would need to be qualified through a BLA supplement which could result in further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and could result in a delay in our desired clinical and commercial timelines.

These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical studies may be delayed.

Healthcare insurance coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, if approved, which could make it difficult for us to sell any product candidates or therapies profitably.

The success of our product candidates, if approved, depends on the availability of adequate coverage and reimbursement from third-party payors. Because our product candidates represent new approaches to the treatment of the cancers and diseases they target, we cannot be sure that coverage and reimbursement will be available for, or accurately estimate the potential revenue from, our product candidates or for any product that we may develop. If we are unable to obtain adequate levels of reimbursement, our ability to successfully market and sell any such product candidates will be adversely affected. The manner and level at which reimbursement is provided for services related to any product candidates we may develop (e.g., for administration of our product candidate to patients) is also important. Inadequate reimbursement for such services may lead to physician and payor resistance and adversely affect our ability to market or sell our product candidates we may develop. In addition, we may need to develop new reimbursement models in order to realize adequate value. Payors may not be able or willing to adopt such new models and patients may be unable to afford that portion of the cost that such models may require them to bear. If we determine such new models are necessary but we are unsuccessful in developing them, or if such models are not adopted by payors, our business, financial condition, results of operations and prospects could be adversely affected.

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors, such as private health insurers and health maintenance organizations, are critical to new product acceptance. Government authorities and other third-party payors decide which drugs and treatments they will cover and the amount of

 

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reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

In the US, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost effectiveness data for the use of our products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement from third-party payors will be obtained. There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the US, the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the US Department of Health and Human Services, as CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high.

Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of product candidates. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Because our product candidates may have a higher cost of goods than conventional therapies and may require long-term follow-up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.

Payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, CMS may develop new payment and delivery models, such as bundled payment models. In addition, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several US Congressional inquiries and proposed and enacted federal legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare and review the relationship between pricing and manufacturer patient programs. The Trump administration’s budget proposal for fiscal year 2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses and place limits on pharmaceutical price increases. On May 11, 2018, President Trump laid out his administration’s “Blueprint” to lower drug prices and reduce out-of-pocket costs of prescription drugs that contained 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 Department of Health and Human Services, or HHS, has solicited feedback on some of these measures and has implemented others under its existing authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January 1, 2019. Although some of these and other measures may require additional authorization through 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. Additional state and federal healthcare reform measures are expected to be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for certain pharmaceutical products or additional pricing pressures.

 

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Moreover, increasing efforts by governmental and other third-party payors in the US and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our product candidates. There has been increasing legislative and enforcement interest in the US with respect to specialty drug pricing practices. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, cost containment initiatives and additional legislative changes.

Ongoing healthcare legislative and regulatory reform measures may have a material adverse effect on our business and results of operations.

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 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.

In the US, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, or the ACA, was passed, which substantially changes the way healthcare is financed by both governmental and private insurers and significantly impacts the US pharmaceutical industry. The ACA, among other things, subjects biological products to potential competition by lower-cost biosimilars, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual fees and taxes on manufacturers of certain branded prescription drugs and created a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% (increased from 50%, effective January 1, 2019, pursuant to the Bipartisan Budget Act of 2018) 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.

Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as efforts by the current administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law. The TCJA includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA 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.” Additionally, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the ACA-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical device tax and, effective January 1, 2021, also eliminates the health insurer tax. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amended the ACA, 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 ACA qualified health plans and health insurance issuers under its 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 US District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” tax penalty was repealed by the US Congress as part of the TCJA. On December 18, 2019, the US Court of Appeals for the 5th Circuit ruled 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. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case and has allotted one hour for oral arguments. It is unclear when such oral arguments are to be held and when a decision is expected to be made. It is also unclear how such litigation and other efforts to repeal and replace the ACA will impact the ACA and our business.

In addition, other legislative changes have been proposed and adopted in the US since the ACA was enacted. The Budget Control Act of 2011, among other things, created measures for spending reductions by

 

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Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These reductions will remain in effect through 2030 unless additional action is taken by Congress. However, pursuant to the CARES Act, these Medicare sequester reductions will be suspended from May 1, 2020 through December 31, 2020 due to the COVID-19 pandemic.

These laws and future state and federal healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

Specifically, there have been several recent US Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drugs. In 2018, the Trump administration also 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. For example, in May 2019, 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 January 1, 2019. On July 24, 2020, President Trump signed four Executive Orders aimed at lowering drug prices. The Executive Orders direct the Secretary of the US Department of Health and Human Services, or HHS, to: (1) eliminate protection under an Anti-Kickback Statute safe harbor for certain retrospective price reductions provided by drug manufacturers to sponsors of Medicare Part D plans or pharmacy benefit managers that are not applied at the point-of-sale; (2) allow the importation of certain drugs from other countries through individual waivers, permit the re-importation of insulin products, and prioritize finalization of the FDA’s December 2019 proposed rule to permit the importation of drugs from Canada; (3) ensure that payment by the Medicare program for certain Medicare Part B drugs is not higher than the payment by other comparable countries (depending on whether pharmaceutical manufacturers agree to other measures); and (4) allow certain low-income individuals receiving insulin and epinephrine purchased by a Federally Qualified Health Center, or the FQHC, as part of the 340B drug program to purchase those drugs at the discounted price paid by the FQHC. It is unclear if, when, and to what extent the Executive Orders may be implemented. The regulatory and market implications of the Executive Orders are unknown at this time, but legislation, regulations or policies allowing the reimportation of drugs, if enacted and implemented, could decrease the price we receive for any products that we may develop and commercialize and could adversely affect our future revenues and prospects for profitability.

While some of these and other proposed measures 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 are increasingly passing legislation and implementing 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.

EU drug marketing and reimbursement regulations may materially affect our ability to market and receive coverage for our products in the European member states.

We intend to seek approval to market our product candidates in both the US and in selected foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions for our product candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the EU, the pricing of pharmaceutical products is subject to governmental control and other market regulations, which could put pressure on the pricing and usage of our product candidates. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval of a product candidate. In addition, market acceptance and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our product candidates and may be affected by existing and future healthcare reform measures.

 

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Much like the Anti-Kickback Statute prohibition in the US, the provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products are also prohibited in the EU. The provision of benefits or advantages to physicians is governed by the national anti-bribery laws of EU member states, such as the UK Bribery Act 2010. Infringement of these laws could result in substantial fines and imprisonment.

Payments made to physicians in certain EU member states must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization and/or the regulatory authorities of the individual EU member states. These requirements are provided in the national laws, industry codes or professional codes of conduct, applicable in the EU member states. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.

In addition, in most foreign countries, including the European Economic Area, 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 EU 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. Reference pricing used by various EU member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. 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. In some countries, we may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of any of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. 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 EU do not follow price structures of the US and generally, prices tend to be significantly lower. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If pricing is set at unsatisfactory levels or if reimbursement of our products is unavailable or limited in scope or amount, our revenues from sales by us or our strategic partners and the potential profitability of any of our product candidates in those countries would be negatively affected.

We face risks related to our collection and use of data, which could result in investigations, inquiries, litigation, fines, legislative and regulatory action and negative press about our privacy and data protection practices.

Our business processes personal data, including data related to health. When conducting clinical trials, we face risks associated with collecting trial participants’ data, especially health data, in a manner consistent with applicable laws and regulations, such as the common rules for the control and authorization for clinical trials in the EU, GCP requirements or FDA human subject protection regulations. We also face risks inherent in handling large volumes of data and in protecting the security of such data. We could be subject to attacks on our systems by outside parties or fraudulent or inappropriate behavior by our service providers or employees. Third parties may also gain access to users’ accounts using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks or other means and may use such access to obtain users’ personal data or prevent use of their accounts. For example, in 2019, we experienced a phishing incident where one employee’s email account was accessed by an unauthorized third party. We initiated an investigation to determine whether further action is required under either US or state law. The incident did not have a material impact on our business or financial condition. While we believe we responded appropriately, including implementing remedial measures with the goal of preventing similar such events in the future, there can be no assurance that we will be successful in these remedial and preventative measures or be successful in mitigating the effects of future incidents or cyber-attacks. Data breaches could result in a violation of applicable US and international privacy, data protection and other laws and subject us to individual or consumer class action litigation and governmental investigations and proceedings by federal, state and local regulatory entities in the US and by international regulatory entities, resulting in exposure to material civil and/or criminal liability. Further, our general liability insurance and corporate risk program may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed.

 

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This risk is enhanced in certain jurisdictions and, as we expand our operations domestically and internationally, we may be subject to additional laws in other jurisdictions. Any failure, or perceived failure, by us to comply with privacy and data protection laws, rules and regulations could result in proceedings or actions against us by governmental entities or others. These proceedings or actions may subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and severely disrupt our business. For example, in the US, California recently adopted the California Consumer Privacy Act of 2018, which will come into effect beginning in January 2020. The GDPR, discussed below, became effective in May 2018. If any of these events were to occur, our business and financial results could be adversely affected. Other jurisdictions besides the US and the EU are similarly introducing or enhancing laws and regulations relating to privacy and data security, which enhances risks relating to compliance with such laws.

European data collection is governed by restrictive regulations governing the use, processing and cross-border transfer of personal information.

The collection and use of personal health data in the EU was governed by the provisions of the Data Protection Directive, which, as of May 25, 2018, has been superseded by the GDPR. While the Data Protection Directive did not apply to organizations based outside the EU, the GDPR has expanded its reach to include any business, regardless of its location, that provides goods or services to residents in the EU. This expansion would incorporate any potential clinical trial activities in EU member states. The GDPR imposes strict requirements on controllers and processors of personal data, including special protections for “sensitive information” which includes health and genetic information of data subjects residing in the EU. GDPR grants individuals the opportunity to object to the processing of their personal information, allows them to request deletion of personal information in certain circumstances and provides the individual with an express right to seek legal remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict rules on the transfer of personal data out of the EU to the US or other regions that have not been deemed to offer “adequate” privacy protections. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU member states, which may deviate slightly from the GDPR, may result in fines of up to 4% of global revenues, or € 20,000,000, whichever is greater. As a result of the implementation of the GDPR, we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules.

Risks related to our intellectual property

If we are unable to obtain and maintain patent protection for any product candidates we develop or for our engEx Platform, our competitors could develop and commercialize products or technology similar or identical to ours and our ability to successfully commercialize any product candidates we may develop and our technology may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the US and other countries with respect to the engEx Platform, our product candidates and other technologies we may develop. We seek to protect our proprietary position by in-licensing intellectual property and filing patent applications in the US and abroad relating to our product candidates and engEx Platform, as well as other technologies that are important to our business. Given that the development of our technology and product candidates is at an early stage, our intellectual property portfolio with respect to certain aspects of our technology and product candidates is also at an early stage. We have three issued US composition of matter patents with claims directed to certain aspects of our engEx Platform technology utilized in one or more of our current engEx product candidates. We have filed or intend to file patent applications on aspects of our technology and our product candidates; however, there can be no assurance that any such patent applications will issue as granted patents. Furthermore, in some cases, we have only filed provisional patent applications on certain aspects of our technology and product candidates and each of these provisional patent applications is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Any failure to file a non-provisional patent application within this timeline could cause us to lose the ability to obtain patent protection for the inventions disclosed in the associated provisional patent applications. Even for our patent applications that have moved beyond the provisional application stage, in some cases, we have only filed an application under the Patent Cooperation Treaty, or PCT, application. A PCT application does not itself become a patent. Rather, it preserves the right for us to pursue protection in any jurisdiction that is a member of the PCT, so long as we do so by the applicable deadlines.

 

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Composition of matter patents for biological and pharmaceutical products are generally considered to be the strongest form of intellectual property protection for those types of products, as such patents provide protection without regard to any method of use. We cannot be certain, however, that the claims in our pending patent applications covering the composition of matter of our product candidates will be considered patentable by the US Patent and Trademark Office, or the USPTO, or by patent offices in foreign countries, or that the claims in any of our issued patents will be considered valid and enforceable by courts in the US or foreign countries. Furthermore, in some cases, we may not be able to obtain issued claims covering compositions of matter relating to the engEx Platform and our product candidates as well as other technologies that are important to our business and instead may need to rely on filing patent applications with claims covering a method of use and/or method of manufacture. Method of use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their products for our targeted indications, physicians may prescribe these products “off-label” for those uses that are covered by our method of use patents. Although off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement can be difficult to prevent or prosecute.

Regardless of the types of claims pursued in our patent applications, whether composition of matter, method of use or otherwise, there can be no assurance that any such patent applications will issue as granted patents and, even if they do issue or have issued, that such patent claims will be sufficient to prevent third parties, such as our competitors, from utilizing our technology. Any failure to obtain or maintain patent protection with respect to the engEx Platform and our product candidates could have a material adverse effect on our business, financial condition, results of operations and prospects.

If any of our owned or in-licensed patent applications do not issue as patents in any jurisdiction, we may not be able to compete effectively.

Changes in either the patent laws or their interpretation in the US and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our owned and licensed patents. With respect to our patent portfolio, as of March 1, 2021, we own two issued US patents directed to exosomes comprising an exogenously expressed prostaglandin F2 receptor negative regulator, or PTGFRN, and an issued US patent directed to exosomes expressing fusion proteins comprising a PTGFRN or a fragment thereof fused to an immunomodulating component, such as a cytokine. In addition, as of March 1, 2021, we have approximately 25 other owned issued patents (six in the US) and approximately 40 in-licensed issued patents (two in the US); approximately 82 owned or in-licensed pending applications in the US, and approximately 171 owned or in-licensed pending applications in jurisdictions outside of the US (including active PCT applications). Many of these additional owned issued patents relate to technology that we are not using in our current product candidates. In addition, we may rely on third-party collaborators to file patent applications relating to proprietary technology that we develop jointly during certain collaborations. With respect to both in-licensed, owned and jointly owned intellectual property, we cannot predict whether the patent applications we, our licensors and present or future collaborators are currently pursuing or may pursue will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors