UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2019

OR

For the transition period from                  to                 

Commission File Number 001-33095

 

ACHILLION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(215) 709-3040

(Registrant’s telephone number, including area code)

 

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

 

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of November 1, 2019, the registrant had 140,046,647 shares of Common Stock, $0.001 par value per sharesull, outstanding.

 

 

 

 

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INDEX

 

 

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PART I. FINANCIAL INFORMATION

Achillion Pharmaceuticals, Inc.

Balance Sheets

(in thousands, except per share amounts)

(unaudited)

 

 

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

 

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Achillion Pharmaceuticals, Inc.

Statements of Comprehensive Loss

(in thousands, except per share amounts)

(unaudited)

 

 

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

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Achillion Pharmaceuticals, Inc.

Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018

(in thousands)

 

 

 

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Achillion Pharmaceuticals, Inc.

Statements of Cash Flows

(in thousands)

(unaudited)

 

 

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

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Achillion Pharmaceuticals, Inc.

Notes to Financial Statements

(in thousands, except per share amounts)

(unaudited)

1. Nature of the Business

Achillion Pharmaceuticals, Inc. (the “Company”) was incorporated on August 17, 1998 in Delaware. The Company is a clinical-stage biopharmaceutical company focused on advancing its oral factor D inhibitors into late-stage development and commercialization. Each of the product candidates in the Company’s factor D portfolio was discovered in the Company’s laboratories and is wholly owned by the Company. The Company is focusing its product development activities on complement-mediated diseases where there are no approved therapies or significant unmet medical needs persist despite existing therapies.

The Company is currently advancing novel orally administered small molecules from its platform that target complement factor D, an essential protein of the alternative pathway. The Company believes that the alternative pathway plays a critical role in a number of disease conditions including the therapeutic areas of hematology, nephrology, ophthalmology and neurology. Initially the Company is targeting paroxysmal nocturnal hemoglobinuria (“PNH”), a blood disorder, and C3 glomerulopathy (“C3G”) and immune complex membranoproliferative glomerulonephritis (“IC-MPGN”), two related rare diseases affecting the kidney. The Company plans to expand its drug development efforts into additional indications where it believes an overactive alternative pathway plays an important role in disease pathogenesis.

The Company incurred net losses of $19,583 and $15,884 for the three months ended September 30, 2019 and 2018, respectively, and $57,968 and $53,671 for the nine months ended September 30, 2019 and 2018, respectively. The Company had an accumulated deficit of $730,894 at September 30, 2019. The Company has funded its operations primarily through the sale of equity securities.

On October 15, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alexion Pharmaceuticals, Inc., a Delaware corporation (“Alexion”) and Beagle Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Alexion (“Merger Sub”), pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a direct wholly owned subsidiary of Alexion. The Company expects to complete the Merger in the first half of 2020. However, the exact timing of completion of the Merger is subject to closing conditions specified in the Merger Agreement, many of which are outside of the Company’s control.

Based on the Company’s current development plan, whether the proposed Merger is consummated or not, the Company believes that its existing cash, cash equivalents and marketable securities will be sufficient to meet its current projected operating requirements for at least the next 12 months from the issuance of these financial statements. However, the Company’s future capital requirements may change and will depend upon numerous factors, including but not limited to:

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2. Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases—Topic 842” (“ASU No. 2016-02”). ASU No. 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under United States generally accepted accounting principles (“U.S. GAAP”). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU No. 2018-10”), and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU No. 2018-11”), both of which clarify and enhance the certain amendments made in ASU No. 2016-02 and were adopted in conjunction with ASU No. 2016-02. The Company adopted Topic 842 as of January 1, 2019 under the modified retrospective transition and elected the package of practical expedients. The Company determined that its operating lease commitments were subject to the new standard and recognized a $1,900 right-of-use asset and a $1,900 operating lease liability upon its adoption of ASU No. 2016-02.

In August 2018, FASB issued ASU No. 2018-13, “Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU No. 2018-13”) which modifies the disclosure requirements on fair value measurements. The amendments related to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not believe ASU No. 2018-13 will have a material effect on its financial position and results of operations.

3. Basis of Presentation

The accompanying unaudited financial statements of the Company should be read in conjunction with the audited financial statements and notes as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2019. The accompanying financial statements have been prepared in accordance with U.S. GAAP for interim financial information, in accordance with the instructions to Form 10-Q and the guidance in Article 10 of Regulation S-X. Accordingly, since they are interim financial statements, the accompanying financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.

In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2019, and its results of operations for the three and nine months ended September 30, 2019 and 2018, stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018. The balance sheet as of December 31, 2018 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and notes thereto.

4. Restructuring Plan

In January 2019 and February 2018, the Company implemented restructuring plans that reduced employee headcount. The restructuring plans were implemented following an initial strategic assessment of the Company’s portfolio and continued evaluation of the Company’s operations to optimize its structure. Further, the Company opened an office in and recently changed its principal address to Blue Bell, Pennsylvania which provides the Company with access to the talent in that geographic area, and it is evaluating and optimizing the location of its functional areas.

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In connection with these restructurings, the Company offered individuals whose employment was terminated a severance package that included severance pay, continuation of benefits and outplacement services. Restructuring costs during the three months ended September 30, 2019 and 2018 were $0 and $75, respectively. Restructuring costs during the nine months ended September 30, 2019 and 2018 were $655 and $1,900, respectively. Of these amounts, $181 related to non-cash stock-based compensation and the remainder were cash payments. All amounts relating to the restructurings have been paid.

5. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is calculated in accordance with Accounting Standards Codification (“ASC”) 260, “Earnings Per Share,” by dividing net income or loss attributable to common stockholders by the weighted average common stock outstanding. Diluted EPS is calculated by adjusting weighted average common shares outstanding for the dilutive effect of common stock options and warrants. In periods in which a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be antidilutive. Securities that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive. The calculations of basic and diluted net loss per share are as follows:

 

 

Potentially dilutive securities outstanding consists solely of outstanding stock options. The Company had stock options outstanding to purchase 14,979 and 15,569 shares of common stock, respectively, as of September 30, 2019 and 2018, respectively.

6. Marketable Securities

The Company applies the provisions of ASC 820, “Fair Value Measurements and Disclosures,” for financial assets and liabilities measured on a recurring basis which requires disclosure that establishes a framework for measuring fair value and expands disclosures in the financial statements. The guidance requires that fair value measurements be classified and disclosed in one of the three categories:

Level 1: Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date;

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; or

Level 3: Unobservable inputs.

The fair value of the Company’s marketable securities of $185,395 and $221,148 as of September 30, 2019 and December 31, 2018, respectively, is valued based on Level 2 inputs. The Company’s investments consist mainly of U.S. government and agency securities, government-sponsored bond obligations and certain other corporate debt securities. Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs. The Company has assessed these as Level 2 within the fair value hierarchy of ASC 820. There were no transfers between levels within the hierarchy during the nine months ended September 30, 2019 and 2018. The Company classifies its entire investment portfolio as available for sale as defined in ASC 320, “Debt Securities.” Securities are carried at fair value with the unrealized gains (losses) reported in accumulated other comprehensive income.

The unrealized gain (loss) from marketable securities was $223 and $(199) at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, none of the Company’s investments were determined to be other than temporarily impaired.

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The following table summarizes the Company’s investments:

 

 

 

7. Accrued Expenses

Accrued expenses consisted of the following:

 

 

Accrued research and development expenses are comprised of amounts owed to third-party contract research organizations, clinical investigators, laboratories and data managers for research and development work performed on behalf of the Company.

8. Stock-Based Compensation

The Company’s Amended and Restated 2015 Stock Incentive Plan (the “2015 Plan”), is administered by the Company’s board of directors and provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. The Company’s officers, employees, consultants, advisors and directors are eligible to receive awards under the 2015 Plan; however, incentive stock options may only be granted to employees. Stock option awards are exercisable for a period determined by the Company, but in no event longer than ten years from the date of the grant. Stock option awards generally vest as to 25% of the shares underlying the option on the first anniversary of the date of grant and as to 6.25% of the shares underlying the option quarterly thereafter for the following three years, subject to continued service. In May 2018, the Company’s stockholders approved an amendment and restatement of the 2015 Plan which included an 8,200 increase to the number of shares of common stock that may be issued pursuant to the 2015 Plan. There were 8,535 shares available to be granted under the 2015 Plan as of September 30, 2019.

A summary of the status of the Company’s stock option activity for the nine months ended September 30, 2019 is presented in the table and narrative below:

 

 

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The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of the stock-based awards. The assumptions used to value options granted are as follows:

 

 

Total compensation expense recorded in the accompanying statements of operations associated with stock option grants made to employees was $1,688 and $1,506 for the three months ended September 30, 2019 and 2018, respectively, and $4,655 and $7,281 for the nine months ended September 30, 2019 and 2018, respectively. Total compensation expense recorded in the accompanying statements of operations associated with stock option grants made to consultants was $0 and $89 for the three months ended September 30, 2019 and 2018, respectively, and $154 and $161 for the nine months ended September 30, 2019 and 2018, respectively. The Company recorded no tax benefit related to these stock options since the Company currently maintains a full valuation allowance on its deferred tax assets.

As of September 30, 2019, the intrinsic value of the stock options outstanding was $10,501, of which $1,764 related to vested stock options and $8,737 related to unvested stock options. The intrinsic value of stock options is calculated based on the difference between the exercise prices of the underlying common stock and the quoted stock price of the Company’s common stock as of the reporting date.

As of September 30, 2019, the total compensation cost related to unvested stock options not yet recognized in the financial statements was approximately $12,719, net of estimated forfeitures, and the weighted average period over which this amount is expected to be recognized is 2.8 years.

9. Comprehensive Loss

The Company reports and presents comprehensive income (loss) in accordance with ASC 220, “Comprehensive Income,” which establishes standards for reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. The Company’s other comprehensive income (loss) arises from net unrealized gains (losses) on marketable securities. The unrealized gain (loss) from marketable securities was $223 and $(199) at September 30, 2019 and December 31, 2018, respectively.

10. Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the related ASUs that followed (collectively referred to as “Topic 842”). Topic 842 requires the recognition of right of use (“ROU”) lease assets and liabilities by lessees for all leases greater than one year in duration and classified as operating leases under U.S. GAAP.

The Company elected the package of practical expedients which allows the Company to apply the transition provision for Topic 842 at its adoption date instead of at the earliest comparative period presented in our financial statements. Therefore, existing leases at January 1, 2019 were recognized and measured but without retrospective application. The Company also elected the short-term lease practical expedient but did not elect the hindsight practical expedient.

The impact of Topic 842 on the Company’s balance sheet beginning January 1, 2019 was the recognition of ROU assets and lease liabilities for operating leases. There was no income to the Company’s statement of comprehensive loss or beginning retained earnings related to the adoption of Topic 842.

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The Company’s operating lease commitments consist of obligations under operating leases for its facilities and office equipment. The Company has leases for its operating facilities in New Haven, Connecticut and Blue Bell, Pennsylvania. The lease agreements require monthly lease payments through September 2022 and November 2022, respectively. In September 2019, the Company modified its existing building lease for its New Haven, CT facilities to exit the majority of its current space early and entered into a lease agreement for new space in the same building in New Haven, CT. The Company does not have any leases that are classified as finance leases.

The Company determines if an arrangement is a lease at inception. For purposes of calculating operating lease liabilities, lease terms may include options to extend or terminate the lease when it becomes probable that the Company will exercise the option. As the rate implicit in the lease is generally not readily determinable for the Company’s operating leases, the discount rates used to determine the present value of its lease liability are based on the Company’s incremental borrowing rate at the lease commencement date.

The following table summarizes the Company’s lease obligations as of September 30, 2019:

 

 

The following table summarizes the Company’s lease obligations as of December 31, 2018:

 

 

Expense related to the Company’s operating leases is included in operating expenses and was $262 and $235 for the three months ended September 30, 2019 and 2018, respectively, and $858 and $671 for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, the carrying value of the ROU assets was $2,265 and is separately stated on the Company’s balance sheet. The related short-term and long-term liabilities as of September 30, 2019 were $754 and $1,518, respectively.

During the nine months ended September 30, 2019 cash paid for operating leases was $783. As of September 30, 2019, the weighted average remaining lease term was 2.9 years and the weighted average incremental borrowing rate was 7.1%.

11. Commitments and Contingencies

From time to time, in the ordinary course of business, the Company may be subject to litigation and regulatory examinations as well as information gathering requests, inquiries and/or investigations. The Company is not currently subject to any matters where it believes there is a reasonable possibility that a material loss may be incurred.

12. Income Taxes

During the three months ended June 30, 2019, the Company updated its review of “ownership changes” through December 31, 2018 as defined under Section 382 of the Internal Revenue Code of 1986, as amended. Based on this review, the Company’s federal net operating loss carryforwards increased by $115,366. This increase was recorded with an offsetting valuation allowance during the three months ended September 30, 2019. The Company’s total federal net operating loss carryforwards were determined to be $541,254.

 

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13. Subsequent Event

 

On October 15, 2019, the Company entered into the Merger Agreement with Alexion and Merger Sub, pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company, with the Company surviving the Merger as a direct wholly owned subsidiary of Alexion.

 

Under the terms of the Merger Agreement, at the time the Merger becomes effective (the “Effective Time”) each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than certain excluded shares as described in the Merger Agreement) will be automatically converted into (i) the right to receive $6.30 in cash, without interest, and (ii) one (1) contractual contingent value right (a “CVR”) pursuant to the CVR agreement that Alexion and a rights agent mutually agreeable to Alexion and the Company will enter into at or prior to the Effective Time.

 

In addition, at the Effective Time, each (i) compensatory option to purchase shares of Company common stock (a “Company Stock Option”) that is then outstanding, unexercised and vested (or which, pursuant to its terms or the terms of a contract in effect on October 15, 2019, shall become vested upon the consummation of the Merger), (ii) unvested Company Stock Option held by a Specified Holder (as defined in the Merger Agreement) (each Company Stock Option held by a Specified Holder, a “Specified Holder Option”) who has, at or prior to the Effective Time, delivered to the Company and not revoked a Non-Competition Agreement (as that term is defined in the Merger Agreement), (iii) unvested Company Stock Option, that is not a Specified Holder Option that is held by an officer or employee of the Company other than a Specified Holder who has, at or prior to the Effective Time, delivered to the Company and not revoked a General Release (as that term is defined in the Merger Agreement), and (iv) Company Stock Option that is then outstanding and unexercised, whether or not vested, that is held by an individual who is not an officer or employee of the Company, which, in each case, has a per share exercise price that is less than the Cash Merger Consideration (each, an “In the Money Option”), will be cancelled and converted into the right to receive both (i) a cash payment equal to (A) the excess, of (x) the Cash Merger Consideration over (y) the exercise price payable per share of Company common stock under such Company Stock Option, multiplied by (B) the total number of shares of Company common stock subject to such In the Money Option immediately prior to the Effective Time (without regard to vesting) and (ii) one CVR for each share of Company common stock subject to such In the Money Option immediately prior to the Effective Time (without regard to vesting).

 

At the Effective Time, each (i) Company Stock Option other than an In the Money Option that is then outstanding, unexercised and vested (or which, pursuant to its terms or the terms of a contract in effect on October 15, 2019, shall become vested upon the consummation of the Merger), (ii) unvested Company Stock Option that is not an In the Money Option that is held by a Specified Holder who has, at or prior to the Effective Time, delivered to the Company and not revoked a Non-Competition Agreement, (iii) unvested Company Stock Option that is not an In the Money Option held by an officer or employee of the Company other than a Specified Holder who has, at or prior to the Effective Time, delivered to the Company and not revoked a General Release, (iv) Company Stock Option other than an In the Money Option that is then outstanding and unexercised, whether or not vested, that is held by an individual who is not an officer or employee of the Company (each, an “Out of the Money Option”), will be cancelled and, except as described below, converted into the right to receive a cash payment, if any, from Alexion with respect to each share of Company common stock subject to the Out of the Money Option upon each Milestone Payment Date (as defined in the CVR Agreement) (each, a “Valuation Point”) which occurs after the Effective Time, equal to (i) the amount by which, as of the Valuation Point, the sum of (x) the Cash Merger Consideration, (y) the amount per share of Company common stock in cash previously paid in respect of any earlier Valuation Points (if any) and (z) the amount per share of Company common stock in cash to be paid at such Valuation Point under the CVR Agreement (collectively, the “Per Share Value Paid”) exceeds the exercise price payable per share of Company common stock under such Out of the Money Option, less (ii) the amount of all payments previously received with respect to such Out of the Money Option. Any Out of the Money Options with an exercise price payable per share of Company common stock equal to or greater than $8.30 and any other Company Stock Options that are not vested as of the effective time and which do not vest pursuant to their respective terms or the terms of a contract in effect on October 15, 2019 that are held by (1) a Specified Holder who has not, at or prior to the Effective Time, delivered to the Company and not revoked a Non-Competition Agreement or (2) an officer or employee of the Company who is not a Specified Holder who has not, at or prior to the Effective Time, delivered to the Company and not revoked a General Release will be cancelled at the Effective Time without any consideration payable therefor.

 

The Merger Agreement includes customary representations, warranties and covenants in the Merger Agreement. The Merger Agreement includes restrictions on the conduct of the Company’s business prior to the completion of the Merger, generally requiring the Company to conduct its business in the ordinary course and subjecting the Company to a variety of specified limitations absent Alexion’s consent. The closing of the Merger is subject to the adoption of the Merger Agreement by the Company’s shareholders and other customary closing conditions.

 

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Either the Company or Alexion may terminate the Merger Agreement in certain circumstances, including if (1) the Merger is not completed by April 15, 2020, subject to extension by Alexion in certain circumstances in the event that antitrust approval is not obtained (the “End Date”), (2) a governmental authority of competent jurisdiction has issued a final non-appealable order prohibiting the Merger or any applicable law makes consummation of the Merger illegal, (3) the Company’s stockholders fail to adopt the Merger Agreement, (4) the other party breaches its representations, warranties or covenants in the Merger Agreement in a way that would entitle the party seeking to terminate the Merger Agreement not to consummate the Merger, subject to the right of the breaching party to cure the breach, (5) subject to compliance with specified process and notice requirements, the Company terminates the Merger Agreement in order to enter into an agreement providing for a “Superior Proposal” (as such term is defined in the Merger Agreement), or (6) the Company’s board of directors has changed its recommendation in favor of the Merger. In the event of a termination of the Merger Agreement under certain specified circumstances, including termination by Achillion to enter into an agreement providing for a Superior Proposal, or a termination by Alexion following a change in recommendation by the Company’s board of directors, the Company may be required to pay Alexion a termination fee equal to $20,000,000. In the event of a termination of the Merger Agreement under certain specified circumstances, including failure to complete the merger by April 15, 2020 (or such later date as extended by Alexion) if, at the time of such termination, any necessary antitrust approval has not been obtained, or a final non-appealable order prohibiting the Merger by a governmental authority of competent jurisdiction, Alexion may be required to pay the Company a termination fee equal to (i) $30,000,000 if the Merger Agreement is terminated prior to April 15, 2020, (ii) $40,000,000 if Alexion has extended the End Date and the Merger Agreement is terminated after April 15, 2020 but on or prior to July 15, 2020, (iii) $50,000,000 if Alexion has extended the End Date twice and the Merger Agreement is terminated after July 15, 2020 but on or prior to October 15, 2020 or (iv) $60,000,000 if Alexion has extended the End Date three times and the Merger Agreement is terminated after October 15, 2020.

 

Additional information about the Merger is set forth in the Company’s Current report on Form 8-K filed with the SEC on October 16, 2019, which includes the full text of the Merger Agreement as Exhibit 2.1 thereto.  

 

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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act and Section 21E of the Securities Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. All statements other than statements relating to historical matters including statements to the effect that we “believe,” “expect,” “anticipate,” “plan,” “target,” “intend” and similar expressions should be considered forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of important factors, including factors discussed in this section and elsewhere in this Quarterly Report on Form 10-Q, including those discussed in Item 1A of this report under the heading “Risk Factors,” and the risks discussed in our other filings with the Securities and Exchange Commission, or SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as the date hereof. We assume no obligation to update these forward-looking statements to reflect events or circumstances that arise after the date hereof except as required by law.

The following discussion should be read in conjunction with our financial statements and accompanying notes to financial statements in this quarterly report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Overview

We are a clinical-stage biopharmaceutical company focused on advancing our oral factor D inhibitors into late-stage development and commercialization. Each of the product candidates in our oral factor D portfolio was discovered in our laboratories and is wholly owned by us. We are focusing our product development activities on complement-mediated diseases where there are no approved therapies or significant unmet medical needs persist despite existing therapies. In our efforts to advance our investigational product candidates into registrational clinical trials and commercialization, we plan to work closely with key stakeholders including patients, regulators, healthcare providers and payors.

The complement system is a part of the human innate immune system and is believed to be comprised of three pathways: the alternative pathway, the lectin pathway and the classical pathway. We are currently advancing novel orally administered small molecules from our platform that target complement factor D, an essential protein of the alternative pathway. We believe that an overactive alternative pathway may play a critical role in a number of disease conditions including the therapeutic areas of hematology, nephrology, ophthalmology and neurology. Initially we are targeting paroxysmal nocturnal hemoglobinuria, or PNH, a rare blood disorder, and C3 glomerulopathy, or C3G, and immune complex membranoproliferative glomerulonephritis, or IC-MPGN, two related rare diseases affecting the kidney. We plan to expand our drug development efforts into additional indications where we believe an overactive alternative pathway plays an important role in disease pathogenesis.

Our first-generation factor D inhibitor, ACH-4471, or danicopan, has demonstrated preliminary clinical proof-of-concept in patients with PNH and C3G and is being evaluated for safety and efficacy in phase II clinical trials in both diseases. In September 2019, the U.S. Food and Drug Administration, or FDA, granted us Breakthrough Therapy designation for danicopan for treatment in combination with a C5 monoclonal antibody for patients with PNH who are sub-optimal responders to a C5 inhibitor alone.  In addition to danicopan, we have ACH-5228, a potent and specific orally-administered second-generation factor D inhibitor.  In July 2019, we completed a phase I multiple ascending dose, or MAD, clinical study outside the U.S. with ACH-5228 in healthy volunteers. We intend to advance ACH-5228 into phase II clinical trials for PNH and potentially other complement-mediated diseases. In addition to developing danicopan and ACH-5228, we are continuing our pre-clinical development efforts for our third-generation oral factor D inhibitors. We intend to nominate a lead third-generation compound with unique pharmacokinetic attributes for advancement into the clinic in the second half of 2020.

On October 15, 2019, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Alexion Pharmaceuticals, Inc., a Delaware corporation, or Alexion, and Beagle Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Alexion, or Merger Sub. Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof, Merger Sub will merge with and into the Company, which we refer to herein as the Merger, with the Company surviving the Merger as a wholly owned subsidiary of Alexion. The initial consideration of approximately $930 million, or $6.30 per share of our common stock, will be funded by Alexion from cash on hand. The transaction includes the potential for additional consideration in the form of non-tradeable contingent value rights, or CVRs, which will be paid to our shareholders if certain clinical and regulatory milestones are achieved within specified periods. Each CVR represent the right to receive $1.00 per share for FDA approval of danicopan within fifty-four months of the closing date of the transaction and $1.00 per share for ACH-5228 Phase 3 initiation within four years of the closing date of the transaction. Alexion’s acquisition of the Company is subject to the approval of Company shareholders and satisfaction of customary closing conditions and approval from relevant regulatory agencies, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Subject to the satisfaction of these conditions, the parties expect the transaction to close in the first half of 2020.  Additional information related to the Merger Agreement is set forth in our Current Report on Form 8-K filed with the SEC on October 16, 2019, which includes the full text of the Merger Agreement as Exhibit 2.1.

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We were incorporated on August 17, 1998 in Delaware. Since our inception, we have spent substantial research and development funds to develop our product candidate pipeline and expect to continue to do so for the foreseeable future. We have incurred losses of $19.6 million and $15.9 million for the three months ended September 30, 2019 and 2018, respectively, and $58.0 million and $53.7 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $730.9 million. As of September 30, 2019, we had $229.0 million in cash, cash equivalents and marketable securities and $152,000 of restricted cash.

We have funded our operations primarily through proceeds from the sale of equity securities. Through September 30, 2019, we have received approximately $932.4 million in aggregate gross proceeds from stock issuances, including convertible preferred stock, our initial public offering, private placements of our common stock, registered offerings of our common stock and an equity investment by a former collaboration partner.

We expect to incur substantial losses for at least the next several years and will require substantial additional cash to fund expenses as we seek to continue clinical development and potentially initiate commercialization of certain complement inhibitor product candidates. See “—Liquidity and Capital Resources.”

Our Complement Factor D Program

The following is a summary of our product development programs:

 

 

Our objective is to discover, develop and commercialize small molecule therapies that specifically target the complement system to treat complement-mediated disease. Specifically, our near-term strategy includes the following efforts:

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Financial Operations Overview

Revenue

During the three and nine months ended September 30, 2019 and 2018 we did not recognize any revenue.

Research and Development

Our research and development expenses reflect costs incurred for our proprietary research and development projects which consist primarily of salaries and benefits for our research and development personnel, costs of services by clinical research organizations, other outsourced research, materials used during research and development activities, facility-related costs such as rent and utilities associated with our laboratory and clinical development space and operating supplies.

All costs associated with internal research and development, and research and development services for which we have externally contracted, are expensed as incurred. Our research and development expenses for the nine months ended September 30, 2019 and 2018 were as follows:

 

 

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The expenses allocated to our product candidates relate to costs associated with our preclinical studies and clinical trials. Indirect costs and overhead are comprised of costs related to our facilities, professional fees, travel and other expenses.

We expect research and development expenses associated with our complement inhibitor program to be substantial and to increase over time. There are numerous existing factors associated with the development and commercialization, if any, of our complement inhibitor program, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will evolve and therefore are expected to impact the development of our complement inhibitor program and plans over time.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of our product candidates. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required to complete clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we would be required to expend significant additional financial resources and time on the completion of clinical development.

In addition, even if we are able to successfully develop and obtain approval and market access for any product candidate, the amount of revenues we are able to generate will depend on many factors, including but not limited to the breadth of the indication approved by regulatory authorities, the size of the appropriate patient population, the acceptability of the product profile and the competition from competing approved products, as well as products in development. Any failure to complete any stage of the development of any product candidate in a timely manner or successfully launch, market and sell any approved product, could have a material adverse effect on our operations, financial position and liquidity. A discussion of some of the risks and uncertainties associated with our product development efforts, and the potential consequences of failing to do so, are set forth in Part II, Item 1A below under the heading “Risk Factors.”

The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The program provides for such exchange of the research and development credit at a rate of 65% of the annual research and development credit. The benefit for such exchange is recorded as a reduction of research and development expenditures.

General and Administrative

Our general and administrative expenses consist primarily of salaries and benefits for management and administrative personnel, professional fees for corporate and intellectual property related legal advice, accounting and other services, travel costs and facility-related costs such as rent, utilities and other general office expenses.

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Critical Accounting Policies and Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our critical accounting estimates is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2018. We continually review these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in the estimates and assumptions we use could have a significant impact on our financial results. During the first nine months of 2019, there were no significant changes in our estimates or our critical accounting policies.

Results of Operations

Results of operations may vary from period to period depending on numerous factors, including the progress of our research and development projects, technological advances and determinations as to the commercial potential of proposed products as well as the timing of payments received under collaborations, strategic alliances, joint ventures or financings, if any.

Comparison of three and nine months ended September 30, 2019 and 2018

Revenues. During the three and nine months ended September 30, 2019 and 2018 we did not recognize any revenue.

Research and Development Expenses. Research and development expenses, exclusive of restructuring charges, were $15.0 million and $12.8 million for the three months ended September 30, 2019 and 2018, respectively, and $45.7 million and $37.9 million for the nine months ended September 30, 2019 and 2018, respectively. The increase for the three months ended September 30, 2019 was primarily due to increased manufacturing and formulation costs related to ACH-5228, partially offset by decreased clinical trial costs for danicopan. The increase for the nine months ended September 30, 2019 was primarily due to increased clinical trial costs related to danicopan and ACH-5228, combined with increased manufacturing and formulation costs related to danicopan and ACH-5228. We expect research and development expenses in the fourth quarter to increase largely due to increased danicopan and ACH-5228 clinical trial costs combined with increased ACH-5228 manufacturing costs. Research and development expenses for the three and nine months ended September 30, 2019 and 2018 were comprised as follows:

 

 

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General and Administrative Expenses. General and administrative expenses, exclusive of restructuring charges, were $6.1 million and $4.4 million for the three months ended September 30, 2019 and 2018, respectively, and $16.3 million and $17.9 million for the nine months ended September 30, 2019 and 2018, respectively. The increase for the three months ended September 30, 2019 was primarily due to increased legal fees combined with market research related professional fees. The decrease for the nine months ended September 30, 2019 was primarily due to decreased personnel costs and non-cash stock-based compensation charges related to the transition of our former chief executive officer. We expect general and administrative expenses to increase somewhat in fourth quarter as compared with prior quarters primarily due to increased legal and other professional fees related to the Merger Agreement. General and administrative expenses for the three and nine months ended September 30, 2019 and 2018 were comprised as follows:

 

 

Restructuring Charges. We incurred restructuring charges of $0 and $75,000 during the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $1.9 million during the nine months ended September 30, 2019 and 2018, respectively. These charges consist primarily of employee severance payments, continuation of benefits and outplacement services resulting from the implementation of our restructuring plans in January 2019 and February 2018 which reduced employee headcount.

Other Income (Expense). Interest income was $1.5 million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively.   Interest expense was $2,000 and $4,000 for the three months ended September 30, 2019 and 2018, respectively.

Interest income was $4.8 million and $4.1 million for the nine months ended September 30, 2019 and 2018, respectively. The $0.7 million, or 17%, increase was primarily due to a greater return on investments during the nine months ended September 30, 2019. Interest expense was $18,000 and $25,000 for the nine months ended September 30, 2019 and 2018, respectively.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from the sale of equity securities. Through September 30, 2019, we have received approximately $932.4 million in aggregate gross proceeds from stock issuances, including convertible preferred stock, our initial public offering, private placements of our common stock, registered offerings of our common stock and an equity investment by a former collaboration partner. We had $229.0 million and $271.0 million in cash, cash equivalents and marketable securities as of September 30, 2019 and December 31, 2018, respectively, and $152,000 of restricted cash as of September 30, 2019 and December 31, 2018. We regularly review our investments and monitor the financial markets. As of September 30, 2019, our cash, cash equivalents and marketable securities included short-term financial instruments, primarily money market funds, government sponsored bond obligations and other investment grade corporate debt securities.

In February 2017, we filed a universal shelf registration on Form S-3 with the SEC, which was declared effective by the SEC on April 28, 2017, to register for sale from time to time up to $250.0 million of common stock, preferred stock, warrants and/or units in one or more registered offerings. Further, in February 2017, we entered into a sales agreement with Cantor Fitzgerald & Co., or Cantor, as sales agent, pursuant to which, from time to time, we may offer and sell shares of our common stock in “at-the-market” offerings having an aggregate offering price of up to $75.0 million through Cantor pursuant to such universal shelf registration statement.

Operating Activities

Cash used in operating activities was $48.3 million for the nine months ended September 30, 2019 and was primarily attributable to our $58.0 million net loss, partially offset by $4.9 million in non-cash stock-based compensation and a $4.3 million increase in accrued expenses. Cash used in operating activities was $50.3 million for the nine months ended September 30, 2018 and was primarily attributable to our $53.7 million net loss, combined with a $3.6 million decrease in accounts payable. This amount was partially offset by $7.5 million in non-cash stock-based compensation.

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Investing Activities

Cash provided by investing activities was $38.3 million for the nine months ended September 30, 2019 and was primarily attributable to $227.2 million in maturities of marketable securities, partially offset by $188.7 million in purchases of marketable securities. Cash provided by investing activities was $41.3 million for the nine months ended September 30, 2018 and was primarily attributable to $214.7 million in maturities of marketable securities, partially offset by $173.0 million in purchases of marketable securities.

Financing Activities

Cash provided by financing activities was $3.8 million for the nine months ended September 30, 2019 and was primarily attributable to proceeds from the exercise of stock options. Cash provided by financing activities was $1.9 million for the nine months ended September 30, 2018 and was primarily attributable to proceeds from the exercise of stock options.

Our product development programs and the potential commercialization of our product candidates, if any, will require substantial additional cash to fund expenses. As a result, we will need to raise additional funds prior to, among other things, being able to complete the development of any of our product candidates, obtain regulatory approvals, market any of our product candidates, fund operating losses, and if deemed appropriate, establish manufacturing and sales and marketing capabilities. For some of our product candidates, we may collaborate with third-party pharmaceutical and biotechnology companies for the development and potential commercialization of our product candidates, or we will seek to raise funds through public or private equity or debt financings or other sources of financing. There can be no assurance that we will be able to enter into third-party collaborations, or that funds will be available on terms favorable to us, if at all. Based on our development plan, if the Merger is not consummated, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our current projected operating requirements for at least the next 12 months from the issuance date of the financial statements included in this Quarterly Report on Form 10-Q. However, our future capital requirements may change and will depend upon numerous factors, including but not limited to:

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We may augment our cash balance through financing transactions, including through a combination of public and private equity offerings, debt financings and collaboration, strategic alliance and licensing arrangements. For example, in February 2017, we entered into an agreement with Cantor pursuant to which, from time to time, we may offer and sell up to $75.0 million of shares of our common stock “at the market” through Cantor pursuant to a universal shelf registration statement that we filed with the SEC in February 2017. In connection with capital raising activities, we may be required to dilute the ownership interests of our existing stockholders substantially. There can be no assurance that we will be able to obtain adequate levels of additional funding on favorable terms, if at all. If the proposed Merger is not consummated and we are unable to obtain adequate levels of additional funding, we may be required to:

If our operating plan changes, or the Merger is not timely consummated, we may need additional funds sooner than planned. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay preclinical studies, clinical trials or other development activities for one or more of our product candidates. We may seek additional financing through a combination of private and public equity offerings, debt financings and collaboration, strategic alliance and licensing arrangements, subject to the restrictions pursuant to the terms of the Merger Agreement. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include adverse liquidation or other preferences that adversely affect stockholders’ rights.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2019.

Recently Issued Accounting Standards

For a discussion of the recent accounting pronouncements relevant to our business operations, see Note 2, “Recent Accounting Pronouncements” under “Part I, Item 1. Financial Statements.”

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Interest Rate Risk. Our exposure to market risk is confined to our cash, cash equivalents and marketable securities. We regularly review our investments and monitor the financial markets. We invest primarily in short-term investment grade financial instruments, money market funds, U.S. government and agency securities, government-sponsored bond obligations and certain other corporate debt securities, with the effective duration of the portfolio less than 12 months and no security with an effective duration in excess of 24 months. We currently do not hedge interest rate exposure. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, we believe we are subject to minimal interest rate risk and do not believe that an increase in market rates would have a material negative impact on the value of our portfolio. We do not believe that we have any material exposure to interest rate risk or changes in credit ratings arising from our investments.

Capital Market Risk. We currently have no product revenues and depend on funds raised through other sources. One source of funding is through future debt or equity offerings. Our ability to raise funds in this manner depends upon, among other things, capital market forces affecting our stock price, and on the state of the capital markets generally.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations. These risk factors restate and supersede in their entirety the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Risks Relating to the Merger

On October 15, 2019, we entered into the Agreement and Plan of Merger, or the Merger Agreement, with Alexion Pharmaceuticals, Inc., a Delaware corporation, or Alexion, and Beagle Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Alexion, or Merger Sub, pursuant to which, subject to the terms and conditions of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving the Merger as a direct wholly owned subsidiary of Alexion. Subject to the terms of the Merger Agreement, at the time the Merger becomes effective, or Effective Time, each share of our common stock, par value $0.001 per share, issued and outstanding immediately prior to the Effective Time will be canceled and automatically converted into the right to receive (i) $6.30 in cash, without interest and subject to any applicable withholding taxes, and (ii) one (1) contractual contingent value right, or CVR, which will represent the right to receive contingent cash payments from Alexion upon the achievement of certain milestones (in each case subject to the terms and conditions of the CVR agreement to be entered into in accordance with the Merger Agreement). There is no guaranty that any payments will be received from the CVR agreement.

 

We and Alexion may be unable to satisfy the conditions required to complete the Merger, and any delay in completing the Merger could diminish the anticipated benefits of the Merger. Failure to complete the Merger could adversely impact the market price of our shares as well as our business and operating results.

 

The consummation of the Merger is subject to a number of conditions, including approval by our stockholders and other customary closing conditions. We cannot make any assurances that the Merger will be consummated on the terms or timeline currently contemplated or at all.

 

Completion of the Merger is also conditioned upon the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. While we and Alexion intend to pursue vigorously all required governmental clearances, the requirement to receive these clearances before the consummation of the Merger could delay the Merger or result in an inability to complete the Merger. Any delay in the completion of the Merger could diminish anticipated benefits of the Merger, including realization of expected synergies and operating efficiencies, or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the Merger.

 

To the extent that the market price of the shares of our common stock reflects positive market assumptions that the Merger will be consummated, the price of such shares may decline if the Merger is not consummated for any reason or in a timely manner.

 

We may also be subject to additional risks if the Merger is not consummated, including:

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The announcement and pendency of the Merger could adversely affect our business and operations.

 

Whether the Merger is ultimately consummated or not, its announcement and pendency could have a number of negative effects on our current business, including potentially disrupting our regular operations, diverting the attention of our workforce and management team, or increasing workforce turnover. The completion of the Merger, including, for example, efforts to obtain regulatory clearances, will require significant time and attention from our management and may divert attention from the day-to-day operations of our business. Any uncertainty over the ability of us and Alexion to complete the Merger could make it more difficult for us to retain certain key employees or attract new talent or to pursue business strategies.

 

Parties with which we have business relationships, either contractual or operational, may experience uncertainty as to the future or desirability of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.

 

The Merger Agreement subjects us to restrictions on our business activities and obligates us to generally operate our business in the ordinary course of business in all material respects prior to completion of the Merger. These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger and are outside the ordinary course of business, or otherwise have an adverse effect on our results of operations, cash flows and financial position.

 

The Merger Agreement limits our ability to pursue alternatives to the Merger.

 

The Merger Agreement contains provisions that make it more difficult for us to enter into alternative transactions. The Merger Agreement contains certain provisions that restrict our ability to, among other things, solicit, initiate or knowingly encourage or knowingly facilitate alternative acquisition proposals from third parties, to provide non-public information to third parties in connection with alternative acquisition proposals and to engage in discussions with third parties regarding alternative acquisition proposals, subject to customary exceptions. The Merger Agreement also provides that our board of directors will not change its recommendation that our stockholders adopt the Merger Agreement and will not approve any agreement with respect to an acquisition proposal, subject to limited exceptions.

 

In addition, we may be required to pay a termination fee of $20 million to Alexion if the Merger is not consummated under specified circumstances, including , among others, if the Merger Agreement is terminated by us to enter into a definitive agreement with respect to a superior proposal (subject to compliance with certain procedures) or if the Merger Agreement is terminated by Alexion as a result of a change of recommendation by our board of directors . Notwithstanding the foregoing, in no event will the termination fee be paid to Alexion more than once. In addition, upon adoption of the Merger Agreement by our stockholders, our right to terminate the Merger Agreement in response to a superior proposal will be eliminated. While we believe these provisions are reasonable, customary and not preclusive of other offers, the provisions might discourage a third party that has an interest in acquiring all or a significant part of us from considering or proposing such acquisition, even if such party was prepared to pay consideration with a higher per-share value than the currently proposed merger consideration. Furthermore, the requirement to pay a termination fee under certain circumstances may result in a third party proposing to pay a lower per-share price to acquire us than it might otherwise have proposed to pay because of the added expense of the $20 million termination fee that may become payable by us in certain circumstances.

Litigation against us and the members of our board of directors arising out of our pending acquisition by Alexion may delay or prevent the completion of the Merger.

 

Lawsuits could be filed that could delay or prevent our acquisition by Alexion, divert the attention of our management and employees from our day-to-day business and otherwise adversely affect us financially.

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Risks Related to the Discovery and Development of Our Product Candidates

Our approach to the discovery and development of product candidates that target complement alternative pathway factor D inhibition is unproven, and we do not know whether we will be able to develop any products of commercial value.

We are focused on the research and development of our complement inhibitor platform, pursuant to which we are initially targeting complement factor D, an essential protein of the complement alternative pathway that is a part of the human innate immune system. Our complement inhibitor platform is focused on advancing small molecule compounds that inhibit the alternative pathway and have the potential to be used in the treatment of immune-related diseases where the complement pathway plays a critical role. We anticipate that our complement inhibitor platform may play a role in addressing needs of patients with paroxysmal nocturnal hemoglobinuria, or PNH, including patients who have suboptimal response to, or who fail to respond to, currently approved treatments for PNH, and C3 glomerulopathy, or C3G, and immune complex membranoproliferative glomerulonephritis, or IC-MPGN, both kidney diseases, as well as the needs of patients with other complement-mediated diseases where the alternative pathway may play a significant role.

Our approach to the discovery and development of product candidates that target the alternative pathway is unproven. We are currently only in the phase II clinical testing stage for our most advanced product candidate. We may not successfully develop any medicines that target alternative pathway inhibition, and even if we are successful in early development, any medicines that we develop may not effectively inhibit the alternative pathway or provide a clinical benefit. Even if we are able to develop a product candidate that effectively inhibits complement factor D in preclinical studies, we may not succeed in demonstrating safety and efficacy of the product candidate in human clinical trials. For example, although lampalizumab, a product candidate that was in clinical development with another company that targeted complement factor D inhibition in geographic atrophy, or GA, was reported to have demonstrated safety, tolerability and evidence of activity in a phase II trial, the trial’s sponsor announced that in two phase III trials of the product candidate in GA did not meet its primary endpoint of reducing GA lesions when compared to a sham treatment, and the program was discontinued. Our focus on using our proprietary technology to identify product candidates targeting the alternative pathway may not result in the discovery and development of commercially viable medicines to treat human disease.

If we are unable to develop, obtain marketing approval for or successfully commercialize product candidates, either alone or through a collaboration, or if we experience significant delays in doing so, our business could be materially harmed.

We currently have no products approved for sale and are investing substantially all of our efforts and financial resources on the development of our complement inhibitor platform. Our prospects are substantially dependent on our ability, or that of any future collaborator we may have to develop, obtain marketing approval for, and successfully commercialize at least one product candidate in one or more disease indications based upon our programs.

The success of our complement inhibitor platform, will depend on several factors, including the following:

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The success of our complement inhibitor platform also depends on our ability to compete with other marketed therapies for complement-mediated diseases such as those from Alexion Pharmaceuticals, Inc., and other potential therapies in development by Akari Therapeutics PLC, Amgen Inc., Amyndas Pharmaceuticals S.A., Apellis Pharmaceuticals, Inc., BioCryst Pharmaceuticals, Inc., ChemoCentryx, Inc., Ionis Pharmaceuticals, Inc., Novartis AG, Omeros Corporation, Ra Pharmaceuticals, Inc., Regeneron Pharmaceuticals, Inc., and F. Hoffmann-La Roche Ltd.

Many of the factors on which our success is dependent are beyond our control, including clinical development, the regulatory submission and review process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborators. If we or our collaborators are unable to develop, receive marketing approval for and successfully commercialize products based on our technologies, or experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.

Results of preclinical studies and early clinical trials may not be positive and may not be predictive of results of future clinical trials.

The outcome of preclinical studies and early clinical trials may not be positive and may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks. For example, we intend to submit an IND application for ACH-5228 to the FDA in the fourth quarter of 2019. However, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin for ACH-5228 or any other product candidate for which we submit an IND to the FDA, or that, once begun, issues will not arise that suspend or terminate clinical trials for such product candidates. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. In addition, changes to formulations of product candidates may result in delays and requirements for additional clinical testing. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we, or any future collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, variability of the disease being studied, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. If we fail to receive positive results in clinical trials of our product candidates, the development timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly, our business and financial prospects would be negatively impacted.

We may expend our resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is 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 product candidates. For example, we are currently focusing our efforts on developing ACH-4471 (“danicopan”) in phase II clinical trials for PNH, C3G, and IC-MPGN, and ACH-5228 is currently in phase I clinical development. 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 the product candidate.

We implemented plans to reduce our staff levels and eliminate certain personnel and other costs, which could significantly adversely affect our ability to continue to discover and develop new compounds.

In January 2019 and February 2018, we implemented restructuring plans that reduced employee headcount. The restructuring plans were implemented following an initial strategic assessment of our portfolio and continued evaluation of our operations to attempt to optimize our structure. We have reduced our staff across several functional areas and we have continued to evaluate our operations to optimize our structure. For example, we recently opened an office in Blue Bell, Pennsylvania which provides us with access to the talent in that geographic area. We are evaluating and optimizing the location of our functional areas.

Our restructuring and continuing optimization efforts may disrupt our staff and our business, and we may experience delays and disruptions in advancing our existing clinical candidates or in discovering or developing new compounds as a result of these efforts.

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Clinical product development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of any clinical trials. Conversely, as a result of the same factors, any clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in any clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case.

Additional factors that may negatively impact our clinical development efforts include:

Our failure to successfully initiate and complete clinical trials of our product candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our product candidates would significantly harm our business.

If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or any future collaborators, may incur additional costs or experience delays in completing, or may ultimately be unable to complete, the development and commercialization of these product candidates.

We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Foreign regulatory authorities, such as the European Medicines Agency, or the EMA, impose similar requirements. We, and any future collaborators, may never receive such approvals. We, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we, or they, will be able to obtain these approvals.

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. In addition, our interest in developing potential therapies for rare diseases for which there is no currently available treatment, such as C3G, makes the difficulty in study design and outcome more challenging, as the appropriate endpoints for obtaining approval from regulatory authorities have not been previously defined. Additionally, the clinical course of C3G is highly variable and it may be difficult to identify appropriate patients for clinical trials. PNH and C3G are chronic conditions and regulatory authorities may require clinical trials for longer periods than anticipated by us. Any inability to successfully complete preclinical and clinical development could result in additional costs to us, or any future collaborators, and impair our ability to generate revenues from

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product sales, regulatory and commercialization milestones and royalties. Moreover, if (1) we, or any future collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we, or they contemplate, (2) we, or any future collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (3) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (4) there are unacceptable safety concerns associated with our product candidates, we, or any future collaborators, in addition to incurring additional costs, may:

Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during development that could delay or prevent their marketing approval or limit their use.

Adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, any future collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or FDA requirement for a risk evaluation and mitigation strategy, or REMS, or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. For example, treatment with complement inhibitors, like each of our factor D inhibitors, may decrease the body’s ability to fend off infection by certain types of pathogens. Treatment with the marketed complement C5 inhibitor, eculizumab (Soliris^®), is associated with increased risk for certain types of infection, including meningococcal infection. For this reason, patients treated with complement inhibitors, including patients treated in our future clinical trials, may be vaccinated for pathogens known to have increased risk of infection with complement deficiency or inhibition and may also be treated with prophylactic antibiotics in an effort to reduce the risk of an adverse event resulting from an infection. However, there is a risk that vaccination and/or prophylactic antibiotics will not prevent or reduce the risk of infections, including meningococcal infection.

Other adverse events may occur. In our phase I multiple ascending dose study of danicopan in healthy volunteers, two cases of self-limited, alanine aminotransferase, or ALT, elevations (Grade 3 and 4) were observed post-treatment in the two highest dose groups, with neither subject exhibiting signs or symptoms of liver decompensation. Both subjects’ ALT levels normalized without intervention during follow up. Further, no treatment-associated fever or infections were observed. ALT is a liver enzyme measure to see whether a liver is damaged or diseased. We have also seen a serious adverse event of elevated liver enzymes in a patient in our PNH monotherapy program which resolved without intervention when the patient was discontinued from danicopan treatment. There is a risk that increases in ALT will be seen more frequently as more patients are enrolled in our clinical trials and dosed with danicopan. To date, danicopan has been dosed in few patients and for limited durations, the longest being approximately 29 months, and there is a risk that in longer dosing durations planned for our clinical trials, patients may experience increases in ALT or other adverse events. There is also a risk that doses of danicopan which we believe can be safely administered to patients may not be effective in treating complement-mediated diseases such as PNH or C3G.

If any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.

If we, or any future collaborators, experience any of a number of possible unfavorable events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.

We, or any future collaborators, may experience numerous unfavorable events during, or as a result of, clinical trials that could delay or prevent marketing approval or commercialization of our product candidates, including:

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Product development costs for us, or any future collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we, or any future collaborators, may have the exclusive right to commercialize our product candidates or allow our competitors, or the competitors of any future collaborators, to bring products to market before we, or any future collaborators, do and impair our ability, or the ability of any future collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

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If we, or any future collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our or their receipt of necessary regulatory approvals could be delayed or prevented.

We, or any future collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials. We are investigating our product candidates in PNH, C3G and IC-MPGN, all of which are rare diseases. Arranging for investigative sites and recruiting patients for our clinical trials in these diseases may be very difficult, particularly in diseases that only recently have been characterized in the medical literature such as C3G. In addition, other companies are currently investigating their investigational products in PNH and C3G which may make it more difficult to enroll eligible patients into our clinical trials. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

Our inability, or the inability of any future collaborators, to enroll a sufficient number of patients for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. Enrollment delays in our, or their, clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or any future collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline and limit our ability to obtain additional financing, if needed.

If any of our product candidates receives marketing approval and we, or others, later discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability, or that of any future collaborators, to market the product could be compromised.

Clinical trials of our product candidates are expected to be conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials, or those of any future collaborator, may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

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Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.

Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors, health authorities and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.

We have never commercialized a product. Even if one of our product candidates is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient, or even any, market acceptance by physicians, patients, third-party payors, health authorities and others in the medical community. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.  

Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.

We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to use a combination of focused in-house sales and marketing capabilities and third-party collaboration, licensing and distribution arrangements to sell any of our products that receive marketing approval.

We generally plan to seek to retain full commercialization rights in the United States for products that we can commercialize with a small specialized sales force in certain rare diseases. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire or retain a

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sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and commercialize the product independently.

We generally plan to collaborate with third parties for commercialization in the United States of any products that we cannot commercialize with a small sales force and that require a large sales, marketing and product distribution infrastructure. We also plan to commercialize our product candidates outside the United States through collaboration, licensing and distribution arrangements with third parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively.

If we do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates that receive marketing approval.

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

The development and commercialization of new drug products is highly competitive. We expect that we and our future collaborators, if any, will face significant competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to any of our product candidates that we, or they, may seek to develop or commercialize in the future. There are a number of pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of the key complement-mediated disease indications. For example, Alexion Pharmaceuticals, Inc.’s eculizumab (Soliris^®) is a marketed therapy for the treatment of PNH, myasthenia gravis and atypical hemolytic uremic syndrome and its recently approved ravulizumab (Ultomiris^™) is for the treatment of adult patients with PNH. In addition, Akari Therapeutics PLC, Alexion Pharmaceuticals, Inc., Amgen Inc. Amyndas Pharmaceuticals S.A., Apellis Pharmaceuticals, Inc., BioCryst Pharmaceuticals, Inc., ChemoCentryx, Inc., Ionis Pharmaceuticals, Inc., Novartis AG, Omeros Corporation, Ra Pharmaceuticals, Inc., Regeneron Pharmaceuticals, Inc., and F. Hoffmann-La Roche Ltd. have complement inhibitor therapies in development for other hematologic or nephritic diseases. Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

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, or any future collaborators, may develop. Our competitors also may obtain FDA or other marketing approval for their products before we, or any future collaborators, are able to obtain approval for ours, which could result in our competitors establishing a strong market position before we, or any future collaborators, are able to enter the market. Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, nonclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller 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.

If the FDA or comparable foreign regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely affected.

Once a new drug application, or NDA, is approved, the product covered thereby becomes a “reference-listed drug” in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference-listed drugs through submission of Abbreviated New Drug Applications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference-listed drug and that the generic version is bioequivalent to the reference-listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference-listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference-listed drug may be typically lost to the generic product.

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The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference-listed drug has expired. The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity, or NCE. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification that a patent covering the reference-listed drug is either invalid or will not be infringed by the generic product, in which case the applicant may submit its application four years following approval of the reference-listed drug. If any product we develop does not receive five years of NCE exclusivity, the FDA may approve generic versions of such product three years after its date of approval. Manufacturers may seek to launch these generic products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.

Competition that our products may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.

Even if we, or any future collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives that could harm our business.

The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by third-party payors, including government health administration authorities and private health coverage insurers. If coverage and reimbursement is not available, or reimbursement is available only to limited levels, we, or any future collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or any future collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments. In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors and coverage and reimbursement for products can differ significantly from payor to payor.

There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved products. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or any future collaborators, might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability or the ability of any future collaborators to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval.

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. Therefore, our ability, and the ability of any future collaborators, to commercialize any of our product candidates will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from third-party payors. Third party payors decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of any future collaborators to sell our product candidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of any future collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or any future collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any, decrease or if governmental and other third-party payors do not provide coverage or adequate reimbursement, our prospects for revenue and profitability will suffer.

There may also be delays in obtaining coverage and reimbursement for newly approved products, and coverage may be more limited than the indications for which the product is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the product and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost products or may be incorporated into existing payments for other services.

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In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. We cannot be sure that coverage will be available for any product candidate that we, or any future collaborator, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for products may be subject to additional reductions if there are changes to laws that presently restrict imports of products from countries where they may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any of our product candidates for which we, or any future collaborator, obtain marketing approval could significantly harm our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Spurred by examples of large price increases for certain drug products, political candidates and others have raised media attention to the issue of pharmaceutical price regulation. For example, recently announced plans have included elements such as patient spending caps, requirements for drug makers to spend a defined portion of their profits on research and development, allowing Americans to import lower-priced drugs from other countries and addressing specialty pharmaceuticals which tend to have higher prices than other drugs. If greater regulation of pharmaceutical pricing is approved, we may not be able to receive adequate reimbursement for our drug therapies or may be forced to accept pricing at levels lower than that which would make us profitable. We cannot predict the political or regulatory climate that may result in enhanced drug pricing regulations.

Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from any clinical trial participants. We will face an even greater risk if we or any future collaborators commercially sell any product that we may, or they may, develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, 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. Regardless of the merits or eventual outcome, liability claims may result in:

Although we maintain general liability insurance and clinical trial/products liability insurance, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.

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Our internal computer systems, or those of any collaborators or contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

Despite the implementation of security measures, our internal computer systems and those of third parties with which we contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Any system failure, accident or security breach that causes interruptions in our operations could result in a material disruption of our product development programs and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. For example, the loss of clinical trial data from completed clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we may incur liabilities and the further development of our product candidates may be delayed. In addition, we may not have adequate insurance coverage to provide compensation for any losses associated with such events.

We could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in the information systems and networks of our company, including personal information of our employees. In addition, outside parties may attempt to penetrate our systems or those of our vendors or fraudulently induce our employees or employees of our vendors to disclose sensitive information in order to gain access to our data. Like other companies, we may experience threats to our data and systems, including malicious codes and viruses, and other cyber-attacks. The number and complexity of these threats continue to increase over time. If a material breach of our security or that of our vendors occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose business and our reputation and credibility could be damaged. We could be required to expend significant amounts of money and other resources to repair or replace information systems or networks. Although we develop and maintain systems and controls designed to prevent these events from occurring, and we have a process to identify and mitigate threats, the development and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of these events occurring cannot be eliminated entirely.

Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our ability to collect and process data globally, and the failure to comply with such requirements could have a material adverse effect on our business, financial condition or results of operations.

The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Globally, virtually every jurisdiction in which we operate has established its own data security and privacy frameworks with which we must comply. For example, the European Union’s General Data Protection Regulation 2016/679, or GDPR, imposes strict obligations on the processing of personal data, including personal health data, and the free movement of such data. The GDPR applies to any company established in the European Union as well as any company outside the European Union that processes personal data in connection with the offering of goods or services to individuals in the European Union or the monitoring of their behavior. The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, obligations relating to: processing health and other sensitive data; obtaining consent of individuals; providing notice to individuals regarding data processing activities; responding to data subject requests; taking certain measures when engaging third-party processors; notifying data subjects and regulators of data breaches; implementing safeguards to protect the security and confidentiality of personal data; and transferring personal data to countries outside the European Union, including the United States. The GDPR imposes additional obligations and risks upon our business and substantially increases the penalties to which we could be subject in the event of any non-compliance, including fines of up to €20 million or 4% of total worldwide annual turnover, whichever is higher. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages. Given the breadth and depth of changes in data protection obligations, preparing for and complying with the GDPR’s requirements has required and will continue to require significant time, resources and a review of our technologies, systems and practices, as well as those of any third-party collaborators, service providers, contractors or consultants that process or transfer personal data collected in the European Union. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from our clinical trials, could require us to change our business practices or lead to government enforcement actions, private litigation or significant fines and penalties against us, reputational harm and could have a material adverse effect on our business, financial condition or results of operations.

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Risks Related to our Financial Position and Need for Additional Capital

We have incurred significant losses since inception, expect to incur significant and accumulating losses for at least the next several years, and we may never achieve or maintain profitability.

We have incurred significant annual net operating losses since our inception. We expect to continue to incur significant and accumulating net operating losses for at least the next several years. Our net losses were $58.0 million and $53.7 million for the nine months ended September 30, 2019 and 2018, respectively. We had an accumulated deficit of $730.9 million at September 30, 2019. We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We are currently only in the phase II clinical testing stage for our most advanced product candidate under our complement inhibitor platform and expect that it will be many years, if ever, before we have a product candidate ready for commercialization.

We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical development programs. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ (deficit) equity and working capital.

We anticipate that our expenses will increase substantially if and as we:

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, products based on our programs. This will require success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or any future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of increased expenses, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even 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 adversely impact our stock price and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations.

We will need additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate clinical trials of, initiate new research and preclinical development efforts for and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. Accordingly, we will need to obtain additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

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We will be required to expend significant funds in order to advance the development of our complement factor D inhibitor product candidates. In addition, while we may seek one or more collaborators for future development of our product candidates, we may not be able to enter into a collaboration for any of our product candidates on suitable terms or at all. In any event, our existing cash, cash equivalents and marketable securities will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. We do not have any committed external source of funds. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. Furthermore, as a result of the termination of our exclusive license and collaboration agreement with Janssen Pharmaceuticals, Inc., or Janssen, which we refer to as the Janssen Agreement, we will not receive any future milestone-based or royalty payments under that arrangement.

We believe that our existing cash, cash equivalents and marketable securities as of September 30, 2019, will enable us to fund our current projected operating requirements for at least the next 12 months from the issuance date of the financial statements included in this Quarterly Report on Form 10-Q. Our estimate as to how long we expect our existing cash, cash equivalents and marketable securities to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

We expect that we will need additional capital in the future to continue our planned operations. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our stockholders may be materially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of a common stockholder. In February 2017, we entered into a sales agreement with Cantor Fitzgerald & Co., or Cantor, as sales agent, pursuant to which, from time to time, we may offer and sell shares of our common stock having an aggregate offering price of up to $75,000,000 through Cantor pursuant to a universal shelf registration statement that we filed with the Securities and Exchange Commission, or SEC, in February 2017. Sales of our common stock, if any, under the agreement with Cantor may be made in sales deemed to be an “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, or the Securities Act. Sales of substantial amounts of shares of our common stock or other securities could cause dilution to our stockholders and lower the market price of our common stock.

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In addition, debt financing, if available, could result in fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Comprehensive changes to the U.S. tax code made by 2017’s tax reform law could adversely affect our business and financial condition.

On December 22, 2017, President Trump signed into law legislation, commonly referred to as the Tax Cuts and Jobs Act, or TCJA, that significantly revised the Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income, limitation on the amount of research and development expenses deductible per year, and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA remains uncertain and our business and financial condition could be adversely affected. In addition, how various states will respond to the TCJA continues to be uncertain. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. During 2018, interpretive guidance on the TCJA was issued in the form of proposed regulations which remain subject to change until finalized by the Internal Revenue Service. Pursuant to SEC SAB No. 118, we were allowed a measurement period of up to one year after the enactment date of the TCJA to finalize the recording of the related tax accounting effects. As of December 31, 2018, we completed our accounting for the effects of the TCJA and no measurement period adjustments were been recorded. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.  

Our effective tax rate may fluctuate, and we may incur additional tax obligations.

We are subject to taxation in a number of U.S. states. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including as a result of applying the provisions of the TCJA (as such provisions may be elaborated on or further developed in guidance, regulations and technical corrections pertaining to the TCJA), changes in the mix of our profitability, if any, from state to state, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in additional tax obligations.

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

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a company undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change taxable income or taxes may be limited. Changes in our stock ownership, some of which are outside of our control, may have resulted or could in the future result in an ownership change. For example, we completed a review of our changes in ownership through December 31, 2018 and determined that we had three ownership changes since inception. The changes of ownership resulted in net operating loss and research and development credit carryforwards expiring unutilized. If additional limitations were to apply, utilization of a portion of our net operating loss and tax credit carryforwards could be further limited in future periods and a portion of the carryforwards could expire before being available to reduce future income tax liabilities.

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If the estimates we make and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary significantly.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Such estimates and judgments include revenue recognition, stock-based compensation expense, the valuation of investments, accrued expenses and deferred tax assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. However, these estimates and judgments, or the assumptions underlying them, may change over time. Accordingly, our actual financial results may vary significantly from the estimates contained in our financial statements.

Risks Related to Our Dependence on Third Parties

We may enter into collaborations with third parties for the development and commercialization of our product candidates. If those collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.

We may in the future seek third-party collaborators for the development and commercialization of product candidates based on our complement inhibitor platform. Our likely collaborators for any collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. If we enter into such collaborations, we will have limited control over the amount and timing of resources that our collaborators will dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from any future collaboration or license agreement will depend on the collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, any collaborators may have the right to abandon research or development projects and terminate applicable agreements, including any funding obligations, prior to or upon the expiration of the agreed upon terms. For example, on September 9, 2017, we received notice from Janssen that the Janssen Agreement, pursuant to which we granted Janssen exclusive worldwide rights to develop and commercialize our portfolio of HCV product candidates, would be terminated effective November 8, 2017. As a result of the termination, we will not receive any future milestone-based or royalty payments under the Janssen Agreement, our HCV product candidates will not be developed or commercialized by Janssen and our HCV product candidates may never be developed or commercialized.

Collaborations involving our product candidates pose a number of risks, including the following:

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Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If any future collaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to it by us.

We may seek to establish collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.

Our product development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates. We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from competing product candidates, design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any such approval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product to patients and the potential of competing products. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such a collaboration could be more attractive than the one with us for our product candidate.

Collaborations are complex and time-consuming to negotiate and document. Further, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. In addition, any collaboration agreements that we enter into in the future may contain, restrictions on our ability to enter into potential collaborations or to otherwise develop specified compounds.

We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.

We have and intend to continue to rely on third parties to conduct any clinical trials. If they do not perform satisfactorily, our business could be materially harmed.

We have and intend to continue to rely on third parties, such as contract research organizations, clinical data management organizations, contract laboratories, medical institutions and clinical investigators, to conduct clinical trials and expect to rely on these third parties to conduct clinical trials of any product candidate that we develop. Any of these third parties may terminate their engagements with us under certain circumstances and we may terminate our engagements with them. We may not be able to enter into alternative arrangements or do so on commercially reasonable terms. In addition, there is a natural transition period when a new contract research organization begins work. As a result, delays would likely occur, which could materially impact our ability to meet our expected clinical development timelines and harm our business, financial condition and prospects.

Further, our reliance on these third parties for clinical development activities limits our control over these activities, but we remain responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as current Good Clinical Practices, or cGCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third-party contractors fail to comply with applicable cGCPs, the clinical data generated in any clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

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Furthermore, the third parties that we intend to engage to conduct clinical trials on our behalf are not our employees, and except for remedies available to us under agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our development programs. These contractors may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other product development activities, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct any clinical trials in accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be delayed, impaired or foreclosed.

We also intend to rely on other third parties to store and distribute product supplies for any clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additional losses and depriving us of potential product revenue.

We have and intend to continue to contract with third parties for the manufacture and distribution of any product candidates for clinical trials in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We have and intend to continue to rely on contract manufacturers to produce both drug substance and drug product required for any clinical trials. We also intend to rely upon contract manufacturers, and potentially collaboration partners, to manufacture commercial quantities of our products, if approved. Reliance on such third-party contractors entails risks, including:

We rely on contract manufacturers to produce drug substances and drug products required for our clinical trials under cGMP, with oversight by our internal managers and third parties. We plan to continue to rely upon contract manufacturers and collaboration partners to manufacture commercial quantities of our drug product if and when approved for marketing by the FDA. We do not have long-term agreements with any of these third parties. If any of our existing manufacturers should become unavailable to us for any reason, we may incur some delay in identifying or qualifying replacements. We currently manage our supply by having additional inventories on hand that are intended to be available should it become necessary for us to engage alternate sources of supply for clinical trial materials.

Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations, delay any clinical trials and, if our products are approved for sale, result in lost sales. Additionally, we intend to rely on third parties to supply the raw materials needed to manufacture any product candidates. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to future contract manufacture caused by problems at suppliers could delay shipment of our product candidates, increase our cost of goods sold and result in lost sales.

If any of our future product candidates are approved by any regulatory agency, we plan to enter into agreements with third party contract manufacturers for the commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a timely manner. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under current good manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization efforts.

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Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by our third-party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers cannot successfully manufacture material that conforms to our specifications or the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.

In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and have a material adverse impact on our business, financial condition and results of operations.

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

Risks Related to Our Intellectual Property

If our patent position does not adequately protect our product candidates, others could compete against us more directly, which would harm our business.

We own a number of U.S. issued patents, pending U.S. provisional and non-provisional patent applications, as well as pending Patent Cooperating Treaty applications and associated foreign patents and patent applications. Our success depends in large part on our ability to obtain and maintain patent protection both in the United States and in other countries for our product candidates. Our ability to protect our product candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to maintain, obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for our product candidates or provide sufficient protection to afford us a commercial advantage against competitive products or processes. We cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us.

Patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time prior to issuance as a U.S. patent. Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Consequently, we cannot be certain that we or our licensors or co-owners were the first to invent, or the first to file patent applications on, our product candidates or their intended uses. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our products or by covering similar technologies that affect our product market or patentability, or all prior art that could be considered relevant to our patent claims.

The claims of any patents which have already issued or may issue in the future and are owned or controlled by us, may not confer on us significant commercial protection against competing products. Additionally, our patents may be challenged by third parties, resulting in the patent being deemed invalid, cancelled, unenforceable or narrowed in scope, or the third party may circumvent any such issued patents. Our patents may be challenged, for example, in a U.S. federal court or alternatively challenged in an adversarial proceeding at the Patent Trial and Appeals Board, or PTAB, at the U.S. Patent Office. The cost of these procedures are often substantial, and it is possible that our efforts would be unsuccessful resulting in a loss of our U.S. patent position. Further, even if a U.S. federal court or PTAB rules that a patent owned by us is valid and enforceable, if the other venue takes a contrary position, the patent is considered invalid and not enforceable. Therefore, a party seeking to invalidate a patent owned by us in the United States has the procedural advantage of two alternative venues.

Also, our pending patent applications may not issue, and we may not receive any additional patents. Our patents might not contain claims that are sufficiently broad to prevent others from utilizing our technologies. For instance, the issued patents relating to our product candidates may be limited to a particular molecule or a related group of molecules. Consequently, our competitors may independently develop competing products that do not infringe our patents or other intellectual property. To the extent a competitor can develop similar products using a different molecule, our patents may not prevent others from directly competing with us.

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The Leahy-Smith America Invents Act, or the America Invents Act, was signed into law in September 2011, and many of the substantive changes became effective in March 2013. The America Invents Act revised United States patent law in part by changing the standard for patent approval from a “first to invent” standard to a “first to file” standard and developing a post-grant review system. This legislation changes United States patent law in a way that may weaken our ability to obtain patent protection in the United States for those applications filed after March 2013. For example, if we are the first to invent a new product or its use, but another party is the first to file a patent application on this invention, under the new law the other party may be entitled to the patent rights on the invention.

The America Invents Act created for the first-time new procedures to challenge issued patents in the United States, including post-grant review and inter partes review proceedings, which some third parties have been using to cause the cancellation of selected or all claims of issued patents of competitors. For a patent with a priority date of March 16, 2013 or later, a petition for post-grant review can be filed by a third party in a nine-month window from issuance of the patent. A petition for inter partes review can be filed immediately following the issuance of a patent if the patent was filed prior to March 16, 2013. A petition for inter partes review can be filed after the nine-month period for filing a post-grant review petition has expired for a patent with a priority date of March 16, 2013 or later. Post-grant review proceedings can be brought on any ground of challenge, whereas inter partes review proceedings can only be brought to raise a challenge based on published prior art. These adversarial actions at the U.S. Patent Office review patent claims without the presumption of validity afforded to U.S. patents in lawsuits in U.S. federal courts and use a lower burden of proof than used in litigation in U.S. federal courts. The U.S. Patent Office issued a Final Rule on November 11, 2018, announcing that it will now use the same claim construction currently used in the U.S. federal courts to interpret patent claims, which is the plain and ordinary meaning of words used. If any of our patents are challenged by a third party in such a U.S. patent office proceeding, there is no guarantee that we or our licensors will be successful in defending the patent, which would result in a loss of the challenged patent right to us.

The U.S. Supreme Court has issued opinions in patent cases in the last few years that many consider may weaken patent protection in the United States, either by narrowing the scope of patent protection available in certain circumstances, holding that certain kinds of innovations are not patentable or generally otherwise making it easier to invalidate patents in court. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the U.S. PTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed. For example, we could become a party to foreign opposition proceedings, such as at the European Patent Office, or patent litigation and other proceedings in a foreign court. If so, uncertainties resulting from the initiation and continuation of such proceedings could have a material adverse effect on our ability to compete in the market place. The cost of foreign adversarial proceedings can also be substantial, and in many foreign jurisdictions, the losing party must pay the attorney fees of the winning party.

Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization of our product candidates, thereby reducing any advantages of the patent. To the extent our product candidates based on that technology are not commercialized significantly ahead of the date of any applicable patent, or to the extent we have no other patent protection on such product candidates, those product candidates would not be protected by patents, and we would then rely solely on other forms of exclusivity, such as regulatory exclusivity provided by the FDCA or trade secret protection.

If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be harmed.

Our research, development or commercialization activities, including any product candidates or products resulting from these activities, may infringe or be claimed to infringe patents or other proprietary rights owned by third parties and to which we do not hold licenses or other rights. We may not be aware of third-party patents that a third party might assert against us. For example, there may be third party applications that have been filed but not published that, if issued, could be asserted against us. If a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. Further, if we are found to have infringed a third-party patent, we could be obligated to pay royalties and/or other payments to the third party for the sale of our product, which may be substantial, or we could be enjoined from selling our product. We could also incur substantial litigation costs.

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Litigation regarding patents, intellectual property, and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing product candidates to market and harm our ability to operate.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement against us related to our product candidates, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future and allege that the use of our technologies infringes these patent claims or that we are employing their proprietary technology without authorization. Likewise, third parties may challenge or infringe upon our existing or future patents. Proceedings involving our patents or patent applications or those of others could result in adverse decisions regarding:

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may:

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

Because our complement inhibitor candidates are small molecules, after commercialization they will be subject in the United States to the patent litigation process of the Hatch Waxman Act, which allows a generic company to submit an Abbreviated New Drug Application, or ANDA, to the FDA to obtain approval to sell our drug using bioequivalence data only. Under the Hatch Waxman Act, we will have the opportunity to list all of our patents that cover our drug product or its method of use in the FDA’s compendium of “Approved Drug Products with Therapeutic Equivalence Evaluation,” sometimes referred to as the FDA’s Orange Book. A generic company can only submit an ANDA to the FDA four years after our drug approval because our drug products will be deemed new chemical entities. The submission of the ANDA by a generic company is considered a technical act of patent infringement. The generic company can certify that it will wait until the natural expiration date of our listed patents to sell a generic version of our product or can certify that one or more of our listed patents are invalid, unenforceable, or not infringed. If the latter, we will have 45 days to bring a patent infringement lawsuit against the generic company. This will initiate a challenge to one or more of our Orange Book listed patents based on arguments from the generic company that either our patent is invalid, unenforceable or not infringed. Under the Hatch Waxman Act, if a lawsuit is brought, the FDA is prevented from issuing a final approval on the generic drug until the earlier of seven-and-a-half years from our drug approval or a final decision of a court holding that our asserted patent claims are invalid, unenforceable or not infringed. If we do not properly list our relevant patents in the Orange Book, or timely file a lawsuit in response to a certification from a generic company under an ANDA, or if we do not prevail in the resulting patent litigation, we can lose our proprietary market, which can rapidly become generic. Further, even if we do correctly list our relevant patents in the Orange Book, bring a lawsuit in a timely manner and prevail in that lawsuit, it may be at a very significant cost to us of attorneys’ fees and employee time and distraction over a long period. Further, it is common for more than one generic company to try to sell an innovator drug at the same time, and so we may be faced with the cost and distraction of multiple lawsuits. We may also determine it is necessary to settle the lawsuit in a manner that allows the generic company to enter our market prior to the expiration of our patent or otherwise in a manner that adversely affects the strength, validity or enforceability of our patent.

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

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly in developing countries. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by changes in foreign intellectual property laws. Additionally, laws of some countries outside of the United States and Europe do not afford intellectual property protection to the same extent as the laws of the United States and Europe. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, including India, China and other developing countries, may not favor the enforcement of our patents and other intellectual property rights. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. A number of foreign countries have stated that they are willing to issue compulsory licenses to patents held by innovator companies on approved product to allow the government or one or more third-party companies to sell the approved product without the permission of the innovator patentee where the foreign government concludes it is in the public interest. India, for example, has used such a procedure to allow domestic companies to make and sell patented products without innovator approval. There is no guarantee that patents covering any of our product will not be subject to a compulsory license in a foreign country, or that we will have any influence over if or how such a compulsory license is granted. In addition, several other countries have created laws that make it more difficult to enforce product patents than patents on other kinds of technologies. Further, under the treaty on the Trade-Related Aspects of Intellectual Property Rights, or TRIPS, as interpreted by the Doha Declaration, countries in which product are manufactured are required to allow exportation of the product to a developing country that lacks adequate manufacturing capability. Therefore, our drug markets in the U.S. or foreign countries may be affected by the influence of current public policy on patent issuance, enforcement or involuntary licensing in the healthcare area.

In addition, in November 2015, members of the World Trade Organization, or the WTO, which administers TRIPS, voted to extend the exemption against enforcing pharmaceutical drug patents in least developed countries until 2033. We currently have no patent applications filed in least developed countries, and our current intent is not to file in these countries in the future, at least in part due to this WTO pharmaceutical patent exemption.  

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

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the U.S. PTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-U.S. patent agencies. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

We rely on our ability to stop others from competing by enforcing our patents, however some jurisdictions may require us to grant licenses to third parties. Such compulsory licenses could be extended to include some of our product candidates, which may limit our potential revenue opportunities.

Many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties, in certain circumstances. For example, compulsory licensing, or the threat of compulsory licensing, of life-saving products and expensive products is becoming increasingly popular in developing countries, either through direct legislation or international initiatives. Compulsory licenses could be extended to include some of our product candidates, if they receive marketing approval, which may limit our potential revenue opportunities. Consequently, we may not be able to prevent third parties from practicing our inventions in certain countries outside the United States and Europe. Competitors may also use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, if our ability to enforce our patents to stop infringing activities is inadequate. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and resources from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in major markets for our products where such patent rights exist, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

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In addition, some countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement if a government is the infringer, which could materially diminish the value of the patent.

The rights we rely upon to protect our unpatented trade secrets may be inadequate.

We rely on unpatented trade secrets, know-how and technology, which are difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public during the regulatory approval process. We seek to protect trade secrets, in part, by entering into confidentiality agreements with employees, consultants and others. These parties may breach or terminate these agreements or may refuse to enter into such agreements with us, and we may not have adequate remedies for such breaches. Furthermore, these agreements may not provide meaningful protection for our trade secrets or other proprietary information or result in the effective assignment to us of intellectual property and may not provide an adequate remedy in the event of unauthorized use or disclosure of confidential information or other breaches of the agreements. Despite our efforts to protect our trade secrets, we or our collaboration partners, board members, employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors.

If we fail to maintain trade secret protection, our competitive position may be adversely affected. Competitors may also independently discover our trade secrets. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information and may not adequately protect our intellectual property.

We rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. To protect our proprietary technology and processes, we also rely in part on confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to us of intellectual property and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover our trade secrets and proprietary information, and in such case, we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Related to Employee Matters and Managing Growth

If we are not able to attract and retain key management, scientific personnel and advisors, we may not successfully develop our product candidates or achieve our other business objectives.

We depend upon our senior management and scientific staff for our business success. All of our employment agreements with our senior management employees are terminable by the employee. The loss of the service of any of the key members of our senior management may significantly delay or prevent the achievement of drug development and other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors, including senior leadership with the requisite qualifications and experience to lead our research and development programs and lead our company, is critical to our success. We face intense competition for qualified individuals, particularly those experienced in discovering and developing complement inhibitor product candidates, from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. In addition, following our restructurings in January 2019 and February 2018, we have engaged in aligning our functional capabilities with our corporate objectives of becoming a later stage drug development and commercial company. We may face additional challenges in recruiting and retaining key personnel. We may be unable to attract and retain these individuals, and our failure to do so would adversely affect our business.

If we acquire or license technologies, resources or product candidates, we will incur a variety of costs and may never realize benefits from the transaction.

If appropriate opportunities become available, we may license or acquire technologies, resources, products or product candidates. We may never realize the anticipated benefits of such a transaction. In particular, due to the risks inherent in drug development, we may not successfully develop or obtain marketing approval for the product candidates we acquire. Future licenses or acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, the creation of contingent liabilities, material impairment expenses related to goodwill, and impairment or amortization expenses related to other intangible assets, which could harm our financial condition.

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In the future, we may grow our organization, and as a result, we may encounter difficulties in managing any such growth, which could disrupt our operations.

In the future, we may experience growth in the number of our employees and the scope of our operations, particularly in the areas of drug manufacturing, regulatory affairs and sales, marketing and distribution. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Our management may need to devote a disproportionate amount of its attention to managing these growth activities. We may not be able to effectively manage the expansion of our operations or identify, recruit and train additional qualified personnel. Our inability to manage the expansion of our operations effectively 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. Any growth in the future could also require significant capital expenditures and may divert financial resources from other projects. If we are unable to effectively manage our growth in the future, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be able to implement our business strategy, including the successful commercialization of our product candidates.

Risks Related to Regulatory Approval and Marketing of Our Product Candidates and Other Legal Compliance Matters

Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of our product candidates. If we or any future collaborators are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we or they will not be able to commercialize 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 and distribution, export and import, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by the EMA, and governing regulatory authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We have not received approval to market any of our product candidates from regulatory authorities in any jurisdiction. We have limited resources and experience in filing and supporting the applications necessary to gain marketing approvals across geographic regions and expect to rely on third-party contract research organizations, consultants, and/or local regulatory or other experts to assist us throughout this process. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Obtaining marketing approval for a new drug requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Regulatory marketing approval also requires the submission of information about the product 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 marketing approvals, both in the United States 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 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 product application, 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 is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we, or any future collaborators, ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

Accordingly, if we or any future collaborators experience delays in obtaining approval or if we or they 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.

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Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed in such jurisdictions.

In order to market and sell our medicines in the European Union and many other jurisdictions, we or any future collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing, reviews, and discussions with regulatory authorities. The time required to obtain marketing approval may differ substantially from that required to obtain approval from the FDA. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, a product must be approved for reimbursement before the product can be approved for sale in that country. We or any future collaborators may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market.

Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The United Kingdom has a period of a maximum of two years from the date of its formal notification to negotiate the terms of its withdrawal from, and future relationship with, the European Union. If no formal withdrawal agreement is reached between the United Kingdom and the European Union, then it is expected the United Kingdom’s membership of the European Union will automatically terminate on the deadline, which was initially March 29, 2019. That deadline has been extended to January 31, 2020 to allow the parties to negotiate a withdrawal agreement, which has proven to be extremely difficult to date. Discussions between the United Kingdom and the European Union will continue to focus on withdrawal issues and transition agreements. However, limited progress to date in these negotiations and ongoing uncertainty within the UK Government and Parliament sustains the possibility of the United Kingdom leaving the European Union without a withdrawal agreement and associated transition period in place, which is likely to cause significant market and economic disruption.

Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the referendum could materially impact the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could significantly and materially harm our business.  

We, or any future collaborators, may not be able to obtain orphan drug designation or orphan drug exclusivity for our product candidates in United States, European Union or other markets and, even if we do, that exclusivity may not prevent the FDA, EMA or other regulatory authorities from approving other competing products.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States. We, or any future collaborators, may seek orphan drug designations for other product candidates and may be unable to obtain such designations.

Even if we, or any future collaborators, obtain orphan drug designation for a product candidate, we, or they, may not be able to obtain orphan drug exclusivity for that product candidate. Generally, a product with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first marketing approval for the indication for which it has such designation, in which case the FDA or the EMA will be precluded from approving another marketing application for the same drug for that indication for the applicable exclusivity period. The applicable exclusivity period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Additionally, in the European Union, the orphan designation for a drug is reevaluated at the time of request for marketing authorization to verify whether it can maintain its status as an orphan drug and there is a risk that any orphan designation may not be maintained. Orphan drug exclusivity may be lost if the FDA or the EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

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Even if we, or any future collaborators, obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

On August 3, 2017, the Congress passed the FDA Reauthorization Act of 2017, or FDARA. FDARA, among other things, codified the FDA’s pre-existing regulatory interpretation, to require that a drug sponsor demonstrate the clinical superiority of an orphan drug that is otherwise the same as a previously approved drug for the same rare disease in order to receive orphan drug exclusivity. The new legislation reverses prior precedent holding that the Orphan Drug Act unambiguously requires that the FDA recognize the orphan exclusivity period regardless of a showing of clinical superiority. The FDA may further reevaluate the Orphan Drug Act and its regulations and policies. We do not know if, when, or how the FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our business. Depending on what changes the FDA, EMA, or any other regulatory authority may make to its orphan drug regulations and policies, our business could be adversely impacted.

Fast track designation by the FDA or other regulatory acceleration options may not actually lead to a faster development or regulatory review or approval process and does not assure approval.

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical need for this condition, the drug sponsor may apply for FDA fast track designation. However, fast track designation does not ensure that the drug sponsor will receive marketing approval or that approval will be granted within any particular timeframe. We may seek fast track designation for one or more of our product candidates. If we do seek fast track designation, we may not receive it, and even if we receive fast track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. In addition, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program. Fast track designation alone does not guarantee qualification for the FDA’s priority review procedures.

Priority review designation by the FDA or similar classifications by other regulatory authorities may not lead to a faster regulatory review or approval process and, in any event, does not assure approval.

If the FDA determines that a product candidate offers major advances in treatment or provides a treatment where no adequate therapy exists, the FDA may designate the product candidate for priority review. For all new molecular entity (NME) new drug applications, a priority review designation means that the goal for the FDA to act on the NDA is 8 months from the date of submission, rather than the standard 12 months. For subsequent applications (e.g., sNDAs), 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 mean a faster regulatory review 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 eight-month or six-month clock or thereafter.  

A breakthrough therapy designation by the FDA for a product candidate may not lead to a faster development or regulatory review or approval process, and it would not increase the likelihood that the product candidate will receive marketing approval.

We may seek a breakthrough therapy designation for one or more product candidates. A breakthrough therapy is defined as a product candidate that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Product candidates designated as breakthrough therapies by the FDA are also eligible for priority review if supported by clinical data at the time of the submission of the NDA.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe that one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to product candidates considered for approval under conventional FDA procedures and it would not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the product candidate no longer meets the conditions for qualification or it may decide that the time period for FDA review or approval will not be shortened.

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Even if we, or any future collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.

Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We, and any future collaborators, must therefore comply with requirements concerning advertising and promotion for any of our product candidates for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we, and any future collaborators will not be able to promote any products we develop for indications or uses for which they are not approved.

In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA and International Conference on Harmonization, or ICH, requirements, including ensuring that quality control, quality assurance and manufacturing procedures conform to cGMPs, which include requirements relating to quality control, quality assurance and the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, any future collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA, EMA, and/or any other regulatory authority to monitor and ensure compliance with cGMPs.

Accordingly, assuming we, or any future collaborators, receive marketing approval for one or more of our product candidates, we, and any future collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality assurance and control.

If we, and any future collaborators, are not able to comply with post-approval regulatory requirements and/or commitments, we, and any future collaborators, could have the marketing approvals for our products withdrawn by regulatory authorities and our, or any future collaborators’, ability to market any products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.

In order to market our medicines in the European Union and many other jurisdictions, we or any future collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. These regulatory requirements will vary among countries and approval by the FDA of our labeling and promotional activities does not ensure approval by regulatory authorities in other countries or jurisdictions. Accordingly, the terms of approvals and ongoing regulation of our products may limit how we market our products in particular jurisdictions and that could materially impair our ability to generate revenue.  

Any product candidate for which we or any future collaborators obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to substantial penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.

Any product candidate for which we or any future collaborators obtain marketing approval, along with the manufacturing processes, post-approval clinical safety and/or efficacy data, quality, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA, EMA, and other regulatory authorities. These requirements include submissions of safety, efficacy, and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control and manufacturing, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the medicine, including the requirement to implement a risk evaluation and mitigation strategy.

The FDA and other agencies in the U.S., including the Department of Justice, or the DOJ, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA and DOJ impose stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations and enforcement actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws. Similar laws and requirements are present and applicable in the European Union, as well as other geographies and countries.

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In addition, later discovery of previously unknown or rare adverse safety events or other problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

Non-compliance with U.S. and European Union requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.

Under the CURES Act and the Trump Administration’s regulatory reform initiatives, the FDA’s policies, regulations and guidance may be revised or revoked and that could prevent, limit or delay regulatory approval of our product candidates, which would impact our ability to generate revenue.

In December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and spur innovation, but its ultimate implementation is unclear. 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 and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

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 United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump 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. An under-staffed FDA could result in delays in the FDA’s responsiveness or in its ability to review submissions or applications within the established Prescription Drug User Fee Act (PDUFA) time frames, issue regulations or guidance, or implement or enforce regulatory requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, which requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump

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issued an Executive Order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one provisions and other previously issued Executive Orders relating to the review of federal regulations, however it is difficult to predict how these requirements 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.

Our relationships with healthcare providers, physicians and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which, in the event of a violation, could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with healthcare providers, physicians and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to other healthcare providers and healthcare entities, or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment, integrity obligations, and the curtailment or restructuring of our operations. Any penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from funded healthcare programs, or curtailment or restructuring of our operations could adversely affect our financial results. We are developing and implementing a corporate compliance program designed to ensure that we will market and sell any future products that we successfully develop from our product candidates in compliance with all applicable laws and regulations, but we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such 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, including the imposition of significant fines or other sanctions.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusion from government funded healthcare programs.

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Current and future legislation may increase the difficulty and cost for us and any future collaborators to obtain marketing approval of our other product candidates and affect the prices we, or they, may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability of any collaborators, to profitably sell any products for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any future collaborators, may receive for any approved products.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA. Among the provisions of the ACA of potential importance to our business and our product candidates are the following:

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent legislative amendments to the statute, will stay in effect through 2025 unless additional congressional action is taken, and the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws 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. Further, there have been several recent U.S. congressional inquiries and proposed state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products.

We will continue to evaluate the effect that the Health Care Reform Law and its possible repeal and replacement could have on our business. It is possible that repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. While the timing and scope of any potential future legislation to repeal and replace Health Care Reform Law provisions is uncertain in many respects, it is also possible that some of the Health Care Reform Law provisions that generally are not favorable for the research-based pharmaceutical industry could also be repealed along with Health Care Reform Law coverage expansion provisions. Accordingly, such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop commercialize product candidates.

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Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the TCJA, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise. Further, each chamber of the Congress has put forth multiple bills designed to repeal or repeal and replace portions of the ACA. Although none of these measures has been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the ACA. The Congress will likely consider other legislation to replace elements of the ACA, during the next Congressional session. It is possible that repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. While the timing and scope of any potential future legislation to repeal and replace ACA provisions is highly uncertain in many respects, it is also possible that some of the ACA provisions that generally are not favorable for the research-based pharmaceutical industry could also be repealed along with ACA coverage expansion provision. We will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on our business.

The Trump Administration has also taken executive actions to undermine or delay implementation 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. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Further, on June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.  

In addition, CMS has proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. On November 30, 2018, CMS announced a proposed rule that would amend the Medicare Advantage and Medicare Part D prescription drug benefit regulations to reduce out of pocket costs for plan enrollees and allow Medicare plans to negotiate lower rates for certain drugs. Among other things, the proposed rule changes would allow Medicare Advantage plans to use pre-authorization (PA) and step therapy (ST) for six protected classes of drugs, with certain exceptions, permit plans to implement PA and ST in Medicare Part B drugs; and change the definition of “negotiated prices” while a definition of “price concession” in the regulations. It is unclear whether these proposed changes will be accepted, and if so, what effect such changes will have on our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.

Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the TCJA, the remaining provisions of the ACA are invalid as well. The Trump administration and CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued an order staying the judgment pending appeal. The Trump administration thereafter represented to the Court of Appeals considering this judgment that it does not oppose the lower court’s ruling. On July 10, 2019, the Court of Appeals for the Fifth Circuit heard oral argument in this case. In those arguments, the Trump administration argued in support of upholding the lower court decision. It is unclear how this decision and any subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.

The costs of prescription pharmaceuticals in the United States has also been the subject of considerable discussion in the United States, and members of Congress and the Administration have stated that they will address such costs through new legislative and administrative measures. The pricing of prescription pharmaceuticals is also subject to governmental control outside the United States. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidates to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our ability to generate revenues and become profitable could be impaired. In the European Union, similar political, economic and regulatory developments may affect our ability to profitably commercialize our products. In addition to continuing pressure on prices and cost containment measures, legislative developments at the European Union or member state level may result in significant additional requirements or obstacles that may increase our operating costs.

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Specifically, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enacted state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. For example, on May 11, 2018, the Administration issued a plan to lower drug prices. Under this blueprint for action, the Administration indicated that the Department of Health and Human Services (HHS) will: take steps to end the gaming of regulatory and patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics to boost price competition; evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to and lower the cost of new drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessive pricing by relying more on value-based pricing by expanding outcome-based payments in Medicare and Medicaid; work to give Part D plan sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be negotiated for a lower price by Part D plans, and improving the design of the Part B Competitive Acquisition Program; update Medicare’s drug-pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that prevent pharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D plan members be provided with an annual statement of plan payments, out-of-pocket spending, and drug price increases. More recently, on January 31, 2019, the HHS Office of Inspector General proposed modifications to the federal Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers working with these organizations.

At the state level, individual states are increasingly aggressive in 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. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.

Moreover, legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical drugs. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and any future collaborators to more stringent drug labeling and post-marketing testing and other requirements.

Laws and regulations governing any international operations we may have in the future may preclude us from developing, manufacturing and selling certain products outside of the United States and require us to develop and implement costly compliance programs.

If we expand our operations outside of the United States, we must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

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Various laws, regulations and Executive Orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.

The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

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

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

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

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.

In some countries, such as the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control and access. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we, or any future collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.

Our employees and consultants may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of fraud or other misconduct by our employees and consultants, including intentional failures to comply with FDA regulations or similar regulations of comparable non-U.S. regulatory authorities, provide accurate information to the FDA or comparable non-U.S. regulatory authorities, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable non-U.S. regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Employee and consultant misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee and consultant 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 governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, standards 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 and results of operations, including the imposition of significant fines or other sanctions.

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Risks Related to Our Common Stock

Our executive officers, directors and principal stockholders have the ability to significantly influence all matters submitted to our stockholders for approval, which could have the effect of delaying, deferring or preventing a change in control of us and entrenching our management or board of directors.

As of November 1, 2019, our directors, executive officers and stockholders who own more than 5% of our outstanding common stock, together with their affiliates and related persons, beneficially owned, in the aggregate, greater than approximately 40% of our outstanding common stock. As a result, if these stockholders were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation, sale of all or substantially all of our assets or similar transaction, as well as our management and affairs. The interests of this group of stockholders may not always coincide with our corporate interests or the interest of other stockholders, and they may act in a manner with which you may not agree or that may not be in the best interests of other stockholders. This concentration of voting power may have the effect of delaying, deferring or preventing a change in control of our company on terms that other stockholders may desire and entrenching our management or board or directors.

Our stock price has been and may in the future be volatile, and the market price of our common stock may decline in value in the future.

The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. During the period from January 1, 2009 to September 30, 2019, our stock price has ranged from a low of $0.70 to a high of $16.87. Market prices for securities of development-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

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In addition, if we fail to reach an important research, development or commercialization milestone or result by a publicly expected deadline, even if by only a small margin, there could be significant impact on the market price of our common stock. Additionally, as we approach the announcement of important clinical data or other significant information and as we announce such results and information, we expect the price of our common stock to be particularly volatile, and negative results would have a substantial negative impact on the price of our common stock.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our business operations and reputation. For example, we, and certain of our current and former officers, were named as defendants in a consolidated class action lawsuit following our announcements regarding the FDA’s clinical hold related to sovaprevir, our clinical-stage product candidate for the treatment of chronic HCV infection. On May 5, 2014, without any settlement payment by us, any individual defendant or any third party on their behalf, the lead plaintiffs in the consolidated class action lawsuit voluntarily dismissed all of their claims without prejudice.

Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to drop significantly.

Certain stockholders hold a substantial number of shares of our common stock. If such stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our stock incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 under the Securities Act of 1933 and, in any event, we have filed registration statements permitting shares of common stock issued on exercise of options to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Future sales by other stockholders may also have a material adverse effect on the trading price of our common stock. 

Unstable market and economic conditions may have serious adverse consequences on our business.

Our general business strategy may be adversely affected by economic downturns and volatile business environments and continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive difficult economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.

We are a “smaller reporting company”, and the reduced disclosure requirements applicable to smaller reporting companies may make our common stock less attractive to investors.

As a smaller reporting company, we are permitted to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not smaller reporting companies. These exemptions include:

We cannot predict whether investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

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Inadequate funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, in our operations as a public company, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.

Our management is required to devote substantial time and incur additional expense to comply with public company regulations. Our failure to comply with such regulations could subject us to public investigations, fines, enforcement actions and other sanctions by regulatory agencies and authorities and, as a result, our stock price could decline in value.

As a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the Nasdaq Global Select Market, have required us to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations places significant additional demands on our limited number of finance and accounting staff and on our financial, accounting and information systems.

In particular, as a public company, our management is required to conduct an annual evaluation of our internal control over financial reporting and include a report of management on our internal control over financial reporting in our Annual Reports on Form 10-K. If we are unable to continue to conclude that we have effective internal control over financial reporting or, if our independent registered public accounting firm is unable to provide us with an attestation and an unqualified report as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be stockholders’ sole source of gain.

We have never declared or paid cash dividends on our capital stock. We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which a stockholder might otherwise receive a premium for his or her shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

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Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.

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Attached as Exhibit 101 to this Form 10-Q are the following formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets at September 30, 2019 (unaudited) and December 31, 2018, (ii) Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (unaudited), (iii) Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018, (iv) Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited), and (v) Notes to Financial Statements (unaudited).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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Exhibit 10.1

 

 

 

 

 

 

 

 

 

 

 

SUBLEASE

 

by and between

 

YALE UNIVERSITY

(Sublandlord)

 

and

 

ACHILLION PHARMACEUTICALS, INC.

(Subtenant)

 

 

 

Dated:  September 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SUBLEASE

 

Dated:  September 13, 2019

 

Reference Data

 

 

The foregoing data is to be used for reference purposes only and not as a summary or interpretation of any of the terms and conditions of the Sublease.

 

 

 

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TABLE OF CONTENTS

 

 

 

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EXHIBITS:

Exhibit A – Plan showing the Premises

Exhibit B – Subtenant’s Work

Exhibit C – Rules and Regulations

 

 

 

 

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SUBLEASE

 

THIS SUBLEASE made this 13th day of September, 2019 (the “Effective Date”), between Yale University, a specially chartered Connecticut corporation with an office c/o Office of University Properties, 433 Temple Street, New Haven, Connecticut 06511 (hereinafter called "Sublandlord"), and Achillion Pharmaceuticals, Inc., a Delaware corporation with offices at 300 George Street, New Haven, CT 06510 (hereinafter called "Subtenant").

 

W I T N E S S E T H :

 

1.PREMISES.  Sublandlord hereby Subleases to Subtenant and Subtenant hereby hires from Sublandlord, 22,497 rentable square feet of space located on the third (3^rd) floor of the building known as 300 George Street, New Haven, Connecticut (hereinafter referred to as the "Building"), as indicated on the plan attached hereto as Exhibit A (hereinafter referred to as the "Premises").

 

2.TERM.  The term of this Sublease shall commence on October 1, 2019 (the "Commencement Date").  Sublandlord represents to Subtenant that Sublandlord has not created, brought or introduced any Hazardous Materials (as defined below) in the Premises, but Sublandlord has no knowledge of the existence or non-existence of Hazardous Materials in the Premises otherwise. The term ending date shall be September 30, 2021.  The Commencement Date of this Sublease and the obligation of Subtenant to pay rent, additional rent and all other charges hereunder shall not be delayed or postponed by reason of any delay by Subtenant in performing changes or alterations in the Premises to be performed by Subtenant.  In the event the term shall commence on a day other than the first day of a month, then the rent shall be immediately paid for such partial month prorated on the basis of a thirty (30) day month.  From and following the Effective Date, Subtenant shall have access to the Premises to perform Subtenant’s Work (as defined below), pursuant to the Access Agreement (as defined below). Notwithstanding anything to the contrary contained herein, such Subtenant’s early access shall not be deemed to be Subtenant’s acceptance or occupancy of the Premises, provided that all of the terms and conditions of this Sublease, other than the obligation to pay annual rent and additional rent, shall apply to Subtenant during such period of early access.

 

3.RENT.  Annual rent shall be as follows:

 

(i)Lease Year 1: $528,679.50 per year ($23.50 per rentable square foot), payable in monthly installments of $44,056.63.

 

(ii)Lease Year 2: $539,928.00 per year ($24.00 per rentable square foot), payable in monthly installments of $44,994.00.

 

Subtenant covenants and agrees to pay to Sublandlord the rent at YSM Facilities, Yale University, P.O. Box 209038, New Haven, CT 06520-8038, or at such other place as Sublandlord may designate in writing.  Except as otherwise set forth herein, rent shall be payable without notice or demand, without abatement, deduction or setoff.  Rent for any portion of a month shall be pro-rated.  Annual rent shall be payable in monthly installments on the first day of each month in advance.  All amounts (other than annual rent) payable to Sublandlord by Subtenant under this Sublease shall be deemed additional rent and Sublandlord shall have the same rights and remedies by reason of non-payment of such additional rent as if Subtenant had

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failed to pay an installment of annual rent. Sublandlord shall be and shall remain responsible under the Prime Lease (as defined below) for any and all payments owed to Landlord (as defined below), and Subtenant shall have no responsibility whatsoever for making any payment directly to Landlord under the Prime Lease or otherwise related to Subtenant’s sublease of the Premises, Subtenant’s sole and exclusive financial responsibility related to Subtenant’s sublease of the Premises being to Sublandlord as expressly set forth in this Sublease.  

 

In addition to the annual rental payable under this Sublease as set forth above, Subtenant shall pay to Sublandlord, the following:

 

(a)A pro rata percentage of all Operating Expenses (as hereinafter defined) during the term of this Sublease. The pro rata percentage applicable to this Sublease is four and thirty-four one hundredths percent (4.34%) of the Building.

 

(b)A pro rata percentage of all Real Estate Taxes levied upon the Building, applicable to and due and payable during the term of this Sublease.  The pro rata percentage applicable to this Sublease is four and thirty-four one hundredths percent (4.34%) of the Building.

 

"Operating Expenses" shall mean those Expenses that Sublandlord is required to pay to Landlord under the Prime Lease. Sublandlord represents and warrants that the definition of Expenses contained in the Prime Lease is as follows:

 

“all costs and expenses actually incurred in each calendar year in connection with operating, maintaining, repairing, and managing the Building and the Property including, but not limited to:

 

(i)Properly allocated labor costs, including wages, salaries, social security and employment taxes, medical and other types of insurance, uniforms, training, and retirement and pension plans.

 

(ii)Management fees (not to exceed five percent (5%) of gross Rent collections), the cost of equipping and maintaining a management office, accounting and bookkeeping services, legal fees not attributable to leasing or collection activity, and other administrative costs. Landlord, by itself or through an affiliate, shall have the right to directly perform or provide any services under this Lease (including management services), provided that the cost of any such services shall not exceed the cost that would have been incurred had Landlord entered into an arms-length contract for such services with an unaffiliated entity of comparable skill and experience.

 

(iii)The cost of services, including amounts paid to service providers and independent contractors and the rental and purchase cost of parts, suppliers, tools and equipment.

 

(iv)Premiums and deductibles paid by Landlord for insurance, including workers compensation, fire and extended coverage, earthquake, general liability, rental loss, environmental, elevator, boiler and other insurance customarily carried from time to time by owners of comparable buildings.

 

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(v)Electrical Costs (defined below) and charges for water, gas, steam and sewer, but excluding those charges for utilities delivered to leased or leasable areas of the Building. "Electrical Costs" means: (a) charges paid by Landlord for electricity; and (b) costs incurred in connection with an energy management program for the Property. Electrical Costs shall be adjusted as follows: (i) amounts received by Landlord as reimbursement for above standard electrical consumption shall be deducted from Electrical Costs; (ii) the cost of electricity incurred to provide overtime HVAC to specific tenants (as reasonably estimated by Landlord) shall be deducted from Electrical Costs; and (iii) if Tenant is billed directly for the cost of building standard electricity to the Premises as a separate charge in addition to Base Rent, the cost of electricity to individual tenant spaces in the Building shall be deducted from Electrical Costs.

 

(vi)The cost of all window and other cleaning and janitorial, snow and ice removal and security services.

 

(vii)The cost of exterior and interior plantings and landscapings.

 

(viii)The amortized cost of capital improvements (as distinguished from replacement parts or components installed in the ordinary course of business) and alterations and improvements made to the Property which are: (a) performed primarily to reduce operating expenses costs or otherwise improve the operating efficiency of the Property; or (b) required to comply with any Laws that, whether newly enacted or by amendment, first become effective after the Commencement Date. The cost of capital improvements shall be amortized by Landlord over the useful life as reasonably determined by the Internal Revenue Service, provided that in the case of the cost of capital improvements under (a) above, the annual amount that is includable in Expenses shall not exceed the amount of the savings achieved by such improvements, as reasonably determined by Landlord, for the Property as a whole. The amortized cost of capital improvements shall include actual or imputed interest at the rate that Landlord would reasonably be required to pay to finance the cost of the capital improvement.

 

If Landlord incurs Expenses for the Property together with one or more other buildings or properties, whether pursuant to a reciprocal easement agreement, common area agreement or otherwise, the shared costs and expenses shall be equitable prorated and apportioned between the Property and the other buildings or properties.

 

Expenses shall not include: the cost of capital improvements (except as set forth above); depreciation; interest (except as provided above for the amortization of capital improvements); principal payments of mortgage and other non-operating debts of Landlord; the cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation proceeds; costs in connection with leasing space in the Building, including brokerage commissions; lease concessions, including rental abatements and construction allowances granted to specific tenants; costs incurred in connection with the sale, financing or refinancing of the Building; fines, interest and penalties incurred due to the late payment of Taxes or Expenses; expenses associated with the creation and operation of the entity which constitutes Landlord; any penalties or damages that Landlord pays to Tenant under this Lease or to other tenants in the Building under their respective leases; any payments to Landlord or affiliates of Landlord for services in the Building to the extent same exceeds the costs of such services if rendered by unaffiliated companies on a competitive basis; expenses incurred by Landlord to resolve disputes, enforce or negotiate lease terms with prospective or existing tenants or in connection with any financing, sale or

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syndication of the Property; expenses incurred for the repair, maintenance or operation of any pay parking garage, including but not limited to salaries and benefits of any attendants, electricity, insurance and taxes; expenses for the replacement of any item covered under warranty; cost to correct any penalty or fine incurred by Landlord due to Landlord's violation of any federal, state or local law or regulation and any interest or penalties due for late payment by Landlord of any of the Expenses; cost of repairs necessitated by Landlord's negligence or willful misconduct; cost of correcting any latent defects or original design defects in the Building construction, materials or equipment; expenses for any item or service, for the leased or leasable portions of the Building, which Tenant pays directly to a third party or separately reimburses Landlord with respect to the Premises; expenses for any item or service not provided to Tenant, but provided exclusively to certain other tenants in the Building; Landlord's general corporate overhead and administrative expenses; reserves; costs of sculptures, paintings and other objects of art; costs associated with the removal of substances considered to be detrimental to the environment or the health of occupants of the Building; and to the extent that the cost of steam or any other utility supplied to the Premises is billed directly to Tenant (by Landlord or by the utility provider), whether pursuant to Section 10(h) or otherwise, then the cost of such utility to individual tenant spaces in the Building shall be deducted from Expenses.

 

If the Building is not at least 95% occupied during any calendar year or if Landlord is not supplying services to at least 95% of the total Rentable Square Footage of the Building at any time during a calendar year, Expenses shall be determined as if the Building has been 95% occupied and Landlord had been supplying service to 95% of the Rentable Square Footage of the Building during that calendar year. The only costs that shall be adjusted in this manner shall be variable Expenses where the amount of such expense is directly related to the level of occupancy or the square footage area receiving a particular service. Fixed costs shall at all times be allocated as though the Property were 100% rented and occupied. (As an example of a gross-up: Assume (1) the Property consists only of 4 equal tenant spaces, all occupied, each of which then has a pro rata share of expenses of 25%; and (ii) the Landlord has life safety inspections performed in each space at a cost of $100.00 per space — for a total of $400.00 for all (it is a variable cost, not a fixed cost for the Building). Assume then that 2 tenants vacate and Landlord then conducts life safety only in the 2 remaining occupied spaces — still at $100.00 per space. Landlord's cost is now $200.00. If one tenant paid its pro rata share of 25%, it would pay only $50.00 and Landlord would be unable to recoup all of its cost. Landlord shall then "gross up" the cost to be $400.00 and the tenant will pay its 25% of such grossed up cost. Landlord shall not utilize the foregoing "gross-up" provision to recover fixed costs related to unleased space.” To the extent that Sublandlord, as tenant under the Prime Lease, audits Expenses under the Prime Lease, Subtenant will receive the benefit of any reduction in Expenses, and Sublandlord will share a copy of any such audit results, subject to Subtenant entering into a commercially reasonable confidentiality agreement with respect thereto.

 

Commencing with the Commencement Date for purposes of payments under subparagraphs (a) and (b) above Sublandlord shall provide Subtenant with estimates of the amounts which are payable thereunder, as received from Landlord under the Prime Lease.  The amounts of said estimates shall be divided into equal monthly payments which shall be paid by Subtenant in advance, commencing on the Commencement Date, along with Subtenant's regular monthly rental payment.  Sublandlord shall have the right to adjust such estimated amounts from time to time.

 

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Within thirty (30) days from the date Sublandlord presents each annual bill to Subtenant for payments under subparagraphs (a) and (b), Subtenant will pay to Sublandlord in a lump sum that amount by which Subtenant's actual pro rata share exceeds the amount of Subtenant's estimated payments theretofore.  Should the amount of Subtenant's estimated payments exceed Subtenant's pro rata share, then Sublandlord shall, at Sublandlord’s option, either refund such overpayment to Subtenant within said thirty (30) day period or credit such overpayment against subsequent payments of Operating Expenses and Real Estate Taxes that are due from Subtenant hereunder.  A bill for Operating Expenses based on the bill for Expenses received by Sublandlord from Landlord and a real estate tax bill (or copy thereof) submitted by Sublandlord to Subtenant shall be sufficient evidence of the amount of Operating Expenses and Real Estate Taxes with respect to the property and improvements thereon.  Subtenant's pro rata share of such payments hereunder shall be adjusted in the first and last years of the Sublease to take into consideration the fact that Subtenant may only be in possession for a partial year.

 

"Real Estate Taxes" shall mean and include the following (which Sublandlord represents and warrants is the definition of Taxes in the Prime Lease: “ "Taxes" shall mean: (1) all real estate taxes and other assessments on the Building and/or Property, including, but not limited to, assessments for special improvement districts and building improvement districts, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments; (2) all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Property; and (3) all reasonable costs and fees incurred in connection with seeking reductions in any tax liabilities described in (1) and (2), including, without limitation, any costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without limitation, Taxes shall not include any (i) income, capital levy, franchise, capital stock, gift, estate or inheritance tax; or (ii) taxes arising solely from tenant improvement work which is other than Landlord's Base Building Work, done on another tenant's premises and which exceeds a building standard build-out. If an assessment is payable in installments, Taxes for the year shall include the amount of the installment and any interest due and payable during the year, except for any interest due to Landlord's late payment of Taxes. For all other real estate taxes, Taxes for that year shall, at Landlord's election, include either the amount accrued, assessed or otherwise improved for the year or the amount due and payable for that year, provided that Landlord's election shall be applied consistently throughout the Term. If a change in Taxes is obtained for any year of the Term during which Tenant paid Tenant's Pro Rata Share of any Taxes, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a refund, if any, based on the adjustment. Tenant shall pay Landlord the amount of Tenant's Pro Rata Share of any such increase in the Taxes within thirty (30) days after Tenant's receipt of a statement from Landlord.”

 

Subtenant shall pay for all ad valorem taxes on its personal property, if any, and on the value of leasehold improvements installed by Subtenant to the extent that same exceed building standard leasehold improvements (as determined by Sublandlord in its reasonable discretion), but only to the extent that the City of New Haven Tax Assessor attributes an increase in Real Estate Taxes to such above building standard leasehold improvements.

 

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If Sublandlord shall receive a refund of Real Estate Taxes for any period during the term of this Sublease and applicable to the term of this Sublease, then Sublandlord shall credit to Subtenant the pro rata percentage of Real Estate Taxes paid by Subtenant as set forth above, to the extent Subtenant shall have borne any portion of such taxes so refunded, after deducting from any such taxes so refunded the fees and expenses incurred by Sublandlord in obtaining such refund.

 

Rent payable under this Paragraph shall be apportioned for any fraction of a year at the end of the term of this Sublease.

 

4.INTENTIONALLY OMITTED.  

 

5.USE.

 

(a)The Premises shall be used for Subtenant's office purposes, as a research laboratory and all ancillary uses related thereto (collectively, the “Use”) and for no other purpose whatsoever.

 

(b)Subtenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Premises, or do or knowingly permit anything to be done in the Premises, in any manner (i) which violates the Certificate of Occupancy for the Premises or for the Building; (ii) which causes or is liable to cause injury to the Building or any equipment, facilities or systems therein; (iii) which constitutes a violation of the laws and requirements of any public authorities or the requirements of insurance bodies; (iv) which impairs or tends to impair the character, reputation or appearance of the Building as a first-class office Building; (v) which impairs or tends to impair the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (vi) which annoys or inconveniences or tends to annoy or inconvenience other tenants or occupants of the Building.  Sublandlord acknowledges and agrees that the Use does not, per se, violate the provisions of this Section.

 

6.SERVICES.  Sublandlord shall furnish the services to Subtenant which are furnished by Landlord to Sublandlord pursuant to the Prime Lease. Sublandlord represents and warrants that the Prime Lease requires Landlord to provide the following services, which are hereby incorporated into this Sublease to the extent applicable to the Premises and/or Subtenant’s use and enjoyment thereof:

 

“(1) water service for use in lavatories on each floor on which the Premises are located; (2) domestic cold water through the base Building system described in the Base Building MEP (as defined in Section 31 hereof); (3) condenser-water, pre-conditioned and delivered through the condenser loop as described in the Base Building MEP to supply the Tenant specific heating, ventilating and air-conditioning systems serving areas other than the Laboratory Space within the Premises and the refrigeration systems within the Laboratory Space. Tenant, upon such advance notice as is reasonably required by Landlord, shall have the right to receive such service in the areas other than Laboratory Space during hours other than Normal Business Hours. The condenser water shall be provided to the Laboratory Space 24 hours a day, 7 days a week, without Tenant requesting the delivery of the same for after hours. Tenant shall pay Landlord for all such services in accordance with the provisions of Section 10 of this Lease; (4) tempered fresh air delivered through the base Building system described in the Base Building MEP. Tenant, upon such advance notice as is reasonably required by Landlord, shall have the right to received tempered fresh air

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service in the areas other than Laboratory Space during hours other than Normal Business Hours. The tempered fresh air service shall be provided to the Laboratory Space 24 hours a day, 7 days a week, without Tenant requesting the delivery of the same for after hours. Tenant shall pay Landlord for all such services in accordance with the provisions of this Section and Section 10 of this Lease; (5) drainage system for domestic water and sanitary waste at locations indicated in the Base Building MEP; (6) a back-up generator providing for emergency lighting of Common Areas; (7) Maintenance and repair of the Premises and Property, to the extent and as described in Section 9(b); (8) Elevator service (at least 1 elevator shall be operational at all times); (9) Electricity to the Premises, in accordance with and subject to the terms and conditions in Section 10 of this Lease; (10) access to the Premises 24 hours a day, 7 days a week (11) Security for the Building (which shall include security guards and/or electronic monitoring); and (12) such other services as Landlord reasonably determines are necessary or appropriate for the Property.”

 

7.UTILITIES.  Sublandlord shall furnish to Subtenant the utilities which are furnished by Landlord to Sublandlord pursuant to the Prime Lease. Sublandlord represents and warrants that the Prime Lease contains the following provisions relating to the payment for utilities, which are hereby incorporated into this Sublease to the extent applicable to the Premises and/or Subtenant’s use and enjoyment thereof:

 

“(a)From and after the Commencement Date, Tenant shall pay to Landlord the cost of all electricity, gas, water and all other utilities used or consumed at the Premises, as Additional Rent.

 

(b)The Tenant shall pay for electric consumption for the Premises in equal monthly installments, in advance, together with Tenant's monthly payment of Base Rent. All of the Spaces leased under the Prior Leases have been provided with check meters to measure the consumption of electricity at the Premises. The cost of electricity shall be determined on the basis of the rate charged for such load and usage in the service classification in effect from time to time pursuant to which Landlord then purchases electric current for the entire Building (without any mark up), net of all discounts and rebates received by Landlord and applicable to the Building, and the usage as measured by the check meters. The Premises Electrical Charge shall be reconciled with the actual costs approximately every 6 months during the first 12 month period following the Commencement Date and not less than annually thereafter. The Premises Electrical Charge shall be adjusted, if necessary, from time to time, to appropriately reflect the cost of electricity delivered to and consumed at the Premises.

 

(c)Except, where applicable, for Grandfathered wsf Levels, the use of electrical service shall not exceed, either in voltage, rated capacity, or overall load the Base Building MEP, as the same may be increased by any Significant Capital Expense. If Tenant requests permission to consume excess electrical service, Landlord may refuse to consent or may condition consent upon conditions that Landlord reasonably elects (including, without limitation, the installation of utility service upgrades, meters, submeters, air handlers or cooling units), and the additional usage (to the extent permitted by Law), installation and maintenance costs shall be paid by Tenant.

 

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(d)Electrical service to the Building may be furnished by one or more unaffiliated companies providing electrical generation, transmission and distribution services, and the cost of electricity may consist of several different components or separate charges for such services, such as generation, distribution and stranded cost charges. Landlord shall have the exclusive right to select any company providing electrical service to the Building, to aggregate the electrical service for the Building and Premises with other buildings, to purchase electricity through a broker and/or buyers group and to change the providers and manner of purchasing electricity. In the event Landlord or any affiliate of Landlord generates or co-generates electricity and supplies such electricity to the Building, then the rate charged by Landlord for such electricity shall not exceed the rates charged for comparable electric service by unaffiliated providers.

 

(e)If either the quantity or character of utility service is changed by the public utility corporation supplying such service to the Building or the Premises is no longer available or suitable for Tenant's requirements, no such change, unavailability or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or Landlord's agents, except as may be otherwise specifically set forth herein. Notwithstanding the foregoing, Landlord covenants to use commercially reasonable efforts to obtain an alternate or substitute supplier of services.

 

(f)The water charge shall be payable in equal monthly installments, in advance, together with Tenant's monthly payment of Base Rent. Landlord shall, at Landlord's cost, install a flow meter and thereby measure the consumption of water for all purposes at the Premises. Tenant, at Tenant's sole cost and expense, shall keep any such meter and any such installation equipment in good working order and repair. The cost for water shall be determined on the basis of the cost to Landlord for water in effect from time to time from unaffiliated provider(s) (without any mark up), pursuant to which Landlord shall then have purchased water for the entire Building, net of all discounts and rebates received by Landlord and applicable to the Building. The water charge shall be reconciled with the actual cost approximately every six months during the first twelve-month period following the Commencement Date and not less than annually thereafter. The water charge shall be adjusted, if necessary, from time to time to appropriately reflect the cost of water delivered to and consumed at the Premises.

 

(g)The consumption and the delivery to the Premises, of heating, ventilation and air-conditioning will be separately monitored and the actual out-of-pocket costs incurred by Landlord, net of all discounts and rebates received by Landlord, in connection therewith shall, in accordance with provisions of this Lease, be billed to Tenant through the Building management system and payable by Tenant monthly, together with Tenant's payment of Base Rent.”

 

Subtenant shall be responsible, at its cost, for cleaning the Premises. Subtenant shall pay for the cost of gas, heat, air conditioning, water and sewer usage to Sublandlord, on a monthly basis, in a pro-rated amount based on the number of rentable square feet in the Premises compared to the total number of rentable square feet in the larger premises for which Sublandlord is paying for each such utility. Such payments shall be due within thirty (30) days after receipt of invoices from Sublandlord.

 

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Subtenant shall pay Sublandlord for the cost of electricity consumed in the Premises in a pro-rated amount based on the number of rentable square feet in the Premises compared to the total number of rentable square feet in the larger premises for which Sublandlord is paying for such utility. Such payments shall be in monthly estimated amounts due on the first day of each month and shall be subject to annual reconciliation, consistent with the reconciliation procedures under the Prime Lease. In no event shall Subtenant be allowed to place a load on the electrical system that exceeds the safe capacity thereof.

 

Notwithstanding anything to the contrary herein, in no event shall there be any duplication as between amounts owed by Subtenant under this Section 7 and amounts owed by Subtenant under other Sections of this Sublease, including without limitation Section 3 hereof.

 

8.INTERRUPTION OF SERVICES AND UTILITIES.  With respect to interruption of services and utilities to be provided pursuant to this Sublease, Subtenant shall have the remedies available to Sublandlord, as tenant, under the Prime Lease.  In connection therewith, Sublandlord represents and warrants that the following provision is in the Prime Lease relating to interruption of services and utilities, which is hereby incorporated into this Sublease to the extent applicable to the Premises and/or Subtenant’s use and enjoyment thereof:

 

“Except as otherwise explicitly set forth herein, Landlord's failure to furnish, or any interruption or termination of, services or utilities due to the application of Laws, the failure of any equipment, the performance of repairs, improvements or alterations, or the occurrence of any event or cause beyond the reasonable control of Landlord (a "Service Failure") shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. In no event shall Landlord be liable to Tenant for any loss or damage, including the theft of Tenant's Property (defined in Article 15), arising out of or in connection with the failure of any security services, personnel or equipment. Notwithstanding anything to the contrary contained in this Section 7 or elsewhere in this Lease, in the event there is an interruption, curtailment or suspension of a Building System ("Service Interruption") and (i) if such Service Interruption shall continue for more than five (5) consecutive days; (ii) such Service Interruption shall materially affect the operation of Tenant's business in the Premises and Tenant's back-up generator (if any), has not functioned in such a manner as to permit Tenant to conduct business in a customary manner within all or the affected material part of the Premises and; (iii) such Service Interruption has not been caused by an act of Tenant or Tenant's servants, employees or contractors, then, Tenant shall be entitled to an equitable abatement of Base Rent and Additional Rent (based on the square footage of the Premises subject to the Service Interruption and the extent of the affect on Tenant's business) beginning on the sixth (6^th) consecutive day of such Service Interruption and ending on the date such Service Interruption ceases. Similarly, if during the course of any particular Lease Year, there have occurred days of Service Interruptions which have been of a duration, in each instance, of less than five (5) consecutive days (and, therefore, the provisions of the preceding sentence have been inapplicable), but which, in the aggregate, have totaled thirty (30) days, then, Tenant shall be entitled to an abatement of Base Rent and Additional Rent (based on the square footage of the Premises subject to the Service Interruption) for each day thereafter on which a Service Interruption occurs and ending upon the date each such Service Interruption ceases. Landlord shall promptly take all action necessary to remedy the same and agrees to perform the work and repairs required to do so in a manner which will minimize, to the extent reasonably possible, interference with the conduct by Tenant of its business in Premises.”

 

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Sublandlord shall not be liable for the interruption, curtailment, stoppage or suspension of services and utilities to be furnished to the Premises, provided that to the extent that Sublandlord is entitled to an abatement of rent under the Prime Lease with respect to the Premises under the provision cited above, Subtenant shall be entitled to the same abatement of rent.

 

9.EXTRA SERVICES AND UTILITIES.  Subtenant shall reimburse Sublandlord for any requested additional services at the same rates charged to Sublandlord, as tenant, pursuant to the Prime Lease. In connection therewith, Sublandlord represents that the Prime Lease contains the following provisions relating to extra services and utilities, which is hereby incorporated into this Sublease to the extent applicable to the Premises and/or Subtenant’s use and enjoyment thereof:

 

“Notwithstanding the foregoing, if Tenant requests any additional or special services from Landlord, then Tenant shall pay to Landlord the standard reasonable charge for such service(s) (which standard charge shall reflect Landlord's costs incurred in providing such service(s)) with such after-hours charge being equitably prorated among all tenants (including Tenant) utilizing such services.”

 

Notwithstanding anything to the contrary herein, in no event shall there be any duplication as between amounts owed by Subtenant under this Section 9 and amounts owed by Subtenant under other Sections of this Sublease, including without limitation Section 3 hereof.

 

10.REPAIRS.

 

(a)Sublandlord shall use commercially reasonable efforts to obtain and/or have performed for Subtenant any and all services, repairs, alterations and other similar obligations which are the obligation of Landlord under the Prime Lease.  In connection therewith, Sublandlord represents and warrants that the following sets forth Landlord’s repair obligations under the Prime Lease, which provision is hereby incorporated into this Sublease:

 

“Landlord shall maintain the Building as a Class A office and laboratory building (with reference to other Class A office buildings in the Market (as defined in Section 4(g)) and thereafter maintain the Building as such. The costs and expenses of doing so shall be deemed to be "Expenses", subject to the provisions of Section 4 of this Lease. During the entire Term of the Lease, Landlord shall keep and maintain in good repair and working order and make repairs to and perform maintenance upon: (1) structural elements of the Building; (2) the base Building Systems including the mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Building in general but excluding those for which the Tenant is responsible, such as the tie-ins or point of connection with those systems which are located within or exclusively serving the Premises; (3) Common Areas; (4) the roof of the Building, including the roof membrane; (5) exterior windows of and all other exterior portions of the Building and common area doors; and (6) elevators serving the Building. Landlord shall promptly make repairs (considering the nature and urgency of the repair) for which Landlord is responsible.”

 

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Subtenant shall maintain and repair the interior of the Premises and keep the same in a neat and orderly condition and Subtenant shall pay to Sublandlord all reasonable out-of-pocket costs incurred by Sublandlord in making any repairs necessitated by Subtenant's, its servants', agents', and employees' negligence as additional rent, payable within thirty (30) days from the date of rendition of a bill therefor.  Subtenant covenants that it shall not make any repairs or in any way tamper with the heating, air-conditioning, ventilating, electrical, plumbing or mechanical systems of the Building outside of the Premises.

 

(b)Subtenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law.

 

(c)Business machines and mechanical equipment belonging to Subtenant which cause noise or vibration that may be transmitted to the structure of the Building or to the Premises to such a degree as to be objectionable to Sublandlord shall be placed and maintained by the party owning the machines or equipment at such party's expense, in setting of cork, rubber or spring type vibration eliminators sufficient to eliminate noise or vibration.  In the event of any violation, Subtenant shall be obligated to make such repairs to the Premises and Building, resulting therefrom and to take all steps reasonably necessary to eliminate such noise or vibration.

 

(d)Except as otherwise expressly provided in this Sublease (including, without limitation, the incorporated portions of the Prime Lease), Sublandlord shall have no liability to Subtenant nor shall Subtenant's covenants and obligations under this Sublease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Sublandlord's making any repairs or changes which Sublandlord is required or permitted by this Sublease, or required by law, to make in or to any portion of the Building or the Premises, or in or to the fixtures, equipment or appurtenances of the Building of the Premises.

 

11.YIELD UP AND FIXTURES.  Subtenant shall at the termination of this Sublease peaceably yield up the Premises and Subtenant's improvements and permitted Alterations (as defined below) in good order, repair and condition, fire, casualty and condemnation, and reasonable use and wear excepted, provided that if required by Sublandlord (pursuant to, and in accordance with, the terms and conditions of this Sublease), any Alterations made by Subtenant, including without limitation, any telephone or data wiring installed by Subtenant, shall be removed by Subtenant prior to the termination of this Sublease, in which event the Premises shall be restored to substantially their condition prior to the Alteration.  If, when Subtenant requests Sublandlord’s consent to any Alterations, Subtenant requests, in all capital bold letters, that Sublandlord notify Subtenant, when it approves the Alterations, as to whether any of such Alterations will need to be removed, then Sublandlord will so advise Subtenant when it approves the Alterations, and if Sublandlord does not so advise Subtenant, then removal shall be required. Subtenant shall before the termination of this Sublease remove all furniture, fixtures, and personal property of Subtenant from the Premises and Subtenant shall repair any damage to the Premises or the common areas proximately caused by such removal including the filling in of all holes, and the patching or replacement of all floor areas or ceilings damaged by such removal.

 

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12.CHANGES AND ALTERATIONS.

 

(a)Subtenant shall not make any changes or alterations ("Alterations") in or to the Premises without Sublandlord's prior written consent (not to be unreasonably withheld, conditioned or delayed with regard to Alterations that do not affect the structure of the Building or Building systems outside of the Premises).  Any approved Alterations shall be made on the following conditions:  (i) before proceeding with any Alteration, Subtenant shall submit to Sublandlord for Sublandlord's approval plans and specifications for the work to be done, and Subtenant shall not proceed with such work until it obtains Sublandlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed with regard to Alterations that do not affect the structure of the Building or Building systems outside of the Premises; (ii) Subtenant shall pay to Sublandlord, within fifteen (15) days following Sublandlord’s written notice, the reasonable out-of-pocket cost and expense actually incurred by Sublandlord in (A) reviewing said plans and specifications and (B) inspecting the Alterations to determine whether the same are being performed in accordance with the approved plans and specifications and all laws and requirements of public authorities, including, without limitation, the fees of any architect or engineer employed by Sublandlord for such purpose; (iii) Subtenant shall fully and promptly comply with and observe the applicable rules and regulations of Sublandlord then in force with respect to the making of Alterations; (iv) except for costs relating to Sublandlord’s negligence or willful misconduct, the entire cost of the Alterations shall be borne by Subtenant; and (v) Subtenant agrees that any review or approval by Sublandlord of any plans or specifications with respect to any Alterations is solely for Sublandlord's benefit, and without any representation or warranty whatsoever to Subtenant with respect to the adequacy, correctness or efficiency thereof or otherwise.

 

Notwithstanding anything to the contrary contained herein, Sublandlord agrees that its consent shall not be required to the extent that Landlord’s consent is not required under the Prime Lease. In connection therewith, Landlord represents that the following provision is in the Prime Lease and is hereby incorporated into this Sublease:

 

“Landlord's consent shall not be required for any Alteration that satisfies all of the following criteria (a "Cosmetic Alteration"): (1) is of a cosmetic nature such as painting, wallpapering, hanging pictures and/or installing carpeting; (2) is not readily visible from the streets around the Premises or Building; (3) will not affect the systems or structure of the Building; and (4) does not require work to be performed inside the walls or at, above or to the ceiling of the Premises.”

 

(b)Subtenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of Alterations and for final approval thereof upon completion, and shall cause Alterations to be performed in compliance therewith and with all applicable law and requirements of public authorities and with all applicable requirements of insurance bodies.  Alterations shall be diligently performed in a good and workmanlike manner, using new materials and equipment at least equal in quality and class to the better of (i) the original installations of the Building, or (ii) the then standards for the Building established by Landlord.  Alterations shall be performed by contractors first approved by Sublandlord (not to be unreasonably withheld, conditioned or delayed); provided, however, that any Alterations in or to the mechanical, electrical, sanitary, heating, ventilating, air-conditioning or other systems of the Building shall be performed only by contractors designated by Sublandlord.  Alterations shall be performed in such manner as not to unreasonably interfere

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with or delay and as not to impose an additional expense upon Sublandlord in the construction, maintenance, repair or operation of the larger premises leased by Sublandlord; and if any such additional expense shall be incurred by Sublandlord as a proximate result of Subtenant's performance of any Alterations, Subtenant shall pay such additional expense within fifteen (15) days following Sublandlord’s written notice.  Throughout the performance of Alterations, Subtenant, at its expense, shall carry, or cause to be carried, worker's compensation insurance in statutory limits, employer's liability in a minimum amount of One Hundred Thousand and 00/100 Dollars ($100,000.00), comprehensive general liability insurance, including completed operation endorsement, and broad form general liability endorsement and comprehensive auto liability, including owned, non-owned and hired vehicles, for any occurrence in or about the Building, under which Sublandlord shall be named as an additional insured, in such limits as Sublandlord may reasonably require, with insurers reasonably satisfactory to Sublandlord.  Subtenant shall furnish Sublandlord with reasonably satisfactory evidence that such insurance is in effect at or before the commencement of Alterations and, on request, at reasonable intervals thereafter during the continuance of Alterations.  All insurance required by this subparagraph 12(b) must name Sublandlord and Landlord as additional insureds.  If any Alterations shall involve the removal of any fixtures, equipment or other property in the Premises which are not Subtenant's Property, such fixtures, equipment or other property shall be promptly replaced at Subtenant's expense with new fixtures, equipment or other property of like utility and at least equal value unless Sublandlord shall otherwise expressly consent.

 

(c)Subtenant, at its expense, and with diligence and dispatch, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with Alterations, or any other work, labor, services or materials done for or supplied to Subtenant, or any person claiming through or under Subtenant, which shall be issued by the City of New Haven, or any other public authority having or asserting jurisdiction.  Subtenant shall defend, indemnify and save harmless Sublandlord from and against any and all mechanics' and other liens and encumbrances filed against the Building in connection with Alterations, or any other work, labor, services or materials done for or supplied to Subtenant, or any person claiming through or under Subtenant, including, without limitation, security interests in any materials, fixtures or articles so installed in and constituting part of the Premises and against all costs, expenses and liability incurred in connection with any such lien or encumbrance or any action or proceeding brought thereon.  Subtenant, at its expense, shall procure the satisfaction or discharge or record of all such liens and encumbrances (by bonding or otherwise) within ten (10) days after written notice from Sublandlord of the filing thereof.

 

(d)Subject to the other provisions of this Paragraph 12, including without limitation the obligation to obtain Sublandlord’s approval of the plans and/or specifications for the same, Subtenant shall have the right to perform, and Sublandlord and Landlord hereby consent to, the work to the Premises as set forth on Exhibit B attached hereto and made a part hereof (collectively, “Subtenant’s Work”).  Subtenant’s Work shall be performed promptly after the date of this Sublease.  Sublandlord shall reimburse to Subtenant for up to $35,000.00 toward the cost of Subtenant’s Demising Work (as defined in Exhibit B) (the “Allowance”). Such reimbursement shall occur upon substantial completion of Subtenant’s Demising Work, in the amount of the cost of Subtenant’s Demising Work, as evidenced by contractor invoices, up to the amount of the Allowance, in one lump sum payment.  Sublandlord shall reasonably cooperate with Subtenant in the pursuit of any governmental or agency approvals required in connection with Subtenant’s Work. Subtenant shall not be entitled to any cash payment, nor any credit against annual rent or additional rent, in the event that the cost of Subtenant’s Demising Work is

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less than the Allowance.  Sublandlord hereby agrees that Subtenant shall not be required to remove any portion of Subtenant’s Work at the end of the term of this Sublease; provided, however, Subtenant shall have the right to remove the Air Compressor (as defined in Exhibit B).   To the extent that the Subtenant’s Demising Work is not completed prior to the Commencement Date, Subtenant will not occupy or use the space from which the Premises will be demised (i.e., the remaining portions of the larger premises from which the Premises forms a part) for any reason; provided, however, Subtenant shall have the right to occupy the Premises on the Commencement Date regardless of whether such Subtenant’s Demising Work has been completed.  The fact that Subtenant’s Demising Work is not done prior to the Commencement Date will not affect any of Subtenant’s obligations under this Sublease on and after the Commencement Date, including without limitation, the obligation to pay annual rent.

 

13.INDEMNITY AND INSURANCE.  Except to the extent caused by Sublandlord’s negligence or willful misconduct (but subject to Section 25 hereof), Subtenant shall indemnify, defend and hold harmless Sublandlord, its agents and employees from and against any and all liability (statutory or otherwise), claims, suits, demands, judgments, costs, interest and expense (including, but not limited to, reasonable attorneys' fees and disbursements) arising from any injury to, or death of, any person or persons or damage to property (including loss of use thereof) related to (a) Subtenant's use of the Premises or conduct of business therein, (b) any work or thing whatsoever done, or any condition created (other than by Sublandlord, its employees, agents or contractors) by or on behalf of Subtenant in or about the Premises, including during the period of time, if any, prior to the term commencement date, that Subtenant may have been given access to the Premises for the purpose of doing any work or making any installations, (c) any condition of the Premises due to or resulting from any default by Subtenant in the performance of Subtenant's obligations under this Sublease, or (d) any act, omission or negligence of Subtenant or its agents, contractors, employees, subtenants, licensees or invitees in or about the Building.  In case any action or proceeding is brought against Sublandlord by reason of any one or more thereof, Subtenant shall pay all reasonable costs, attorneys' fees, expenses and liabilities resulting therefrom and shall resist such action or proceeding if Sublandlord shall so request, at Subtenant's expense, by counsel reasonably satisfactory to Sublandlord.

 

Sublandlord shall indemnify, defend and hold harmless Subtenant, its agents and employees from and against any and all liability (statutory or otherwise), claims, suits, demands, judgments, costs, interest and expense (including, but not limited to, reasonable attorneys' fees and disbursements) arising from any injury to, or death of, any person or persons or damage to property (including loss of use thereof) related to (a) any condition of the Building due to or resulting from any default by Sublandlord in the performance of Sublandlord's obligations under this Sublease and/or the Prime Lease, (b) any act, omission or negligence of Sublandlord or its agents, contractors or employees in or about the Building or (c) any material breach, misrepresentation, inaccuracy or incomplete disclosure regarding any Section of the Prime Lease (or portions thereof) which is expressly incorporated into, or excluded from, this Sublease.  In case any action or proceeding is brought against Subtenant by reason of any one or more thereof, Sublandlord shall pay all reasonable costs, attorneys' fees, expenses and liabilities resulting therefrom and shall resist such action or proceeding if Subtenant shall so request, at Sublandlord's expense, by counsel reasonably satisfactory to Subtenant.

 

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Subtenant shall at Subtenant's expense, obtain and keep in force at all times during the term of this Sublease, Commercial General Liability Insurance including broad form general liability endorsement and contractual liability on an occurrence basis and comprehensive auto liability, including owned, non-owned and hired vehicles with limits of not less than Two Million and 00/100 Dollars ($2,000,000.00) combined single limit insuring Sublandlord and Subtenant against any liability arising out of the use, occupancy or maintenance of the Premises, the Building and all areas appurtenant thereto.  The limit of said insurance shall not, however, limit the liability of Subtenant hereunder.  Subtenant may carry said insurance under a blanket policy provided an endorsement naming Sublandlord as an additional insured is attached thereto. Subtenant shall also obtain and keep in force at all time during the term of this Sublease, at its expense, all risk property/business interruption insurance, including flood and earthquake (to the extent available at commercially-reasonable rates), written at replacement cost value and with a replacement cost endorsement covering all of Subtenant’s trade fixtures, equipment, furniture and other personal property within the Premises.  Subtenant shall maintain insurance against such other perils and in such amounts as Sublandlord may from time to time reasonably require in writing.

 

Sublandlord represents and warrants that, pursuant to the Prime Lease, Landlord maintains an all risk property insurance policy on the Building insuring the full replacement value thereof (excluding the value of Sublandlord's personal property and equipment) which policy includes coverage for, but not be limited to, fire and extended perils including flood and earthquake, (to the extent available) and including rental loss coverage.

 

Insurance required hereunder shall be in companies licensed in the State of Connecticut and have a "Bests' Insurance Guide" rating of A/12 or better.  Mutual insurance companies may be used only if they are nonassessable.  To the extent commercially practicable, Subtenant shall seek an endorsement to the insurance policies required hereunder stating that such policy shall not be cancellable or subject to reduction of coverage except after thirty (30) days' written notice to Sublandlord.  All policies of insurance maintained by Subtenant shall be in form reasonably acceptable to Sublandlord with satisfactory evidence that all premiums have been paid.  Subtenant agrees not to knowingly violate or permit to be violated any of the conditions or provisions of the insurance policies required to be furnished hereunder, and agrees to promptly notify Sublandlord of any fire or other casualty.

 

14.SUBLEASING AND ASSIGNMENT.

 

(a)Subtenant covenants and agrees that neither this Sublease nor the term and estate hereby granted, nor any interest herein or therein, will be assigned, mortgaged, pledged, encumbered or otherwise transferred, and that neither the Premises, nor any part thereof, will be sublet or encumbered in any manner by reason of any act or omission on the part of Subtenant, or used or occupied, or permitted to be used or occupied, or utilized for desk space or for mailing privileges, by anyone other than Subtenant, or for any use or purpose other than as stated in Paragraph 5, without the prior written consent of Sublandlord, which Sublandlord may withhold in its sole discretion. Sublandlord’s consent shall not be required with respect to an assignment of this Sublease to or a sublease of the Premises or any portion thereof with an Affiliate or Permitted Entity. An “Affiliate” shall mean any entity that Controls Subtenant, any entity that Subtenant Controls, and any entity that is under common Control with Subtenant. “Control” shall mean more than 50% ownership, with respect to any non-publicly traded company, and more than 10% ownership, plus management control, with respect to any publicly traded company. A “Permitted Entity” shall mean any entity that acquires all or substantially all of Subtenant’s stock or assets or with which Subtenant merges or consolidates.

 

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(b)If Subtenant should desire to assign this Sublease or sublease the Premises or any portion thereof, Subtenant shall give Sublandlord written notice of such desire to make such assignment or effect such sublease.  At the time of giving such notice, Subtenant shall provide Sublandlord with a copy of the proposed assignment or sublease document and, except for any assignment or sublease to an Affiliate or Permitted Entity, such information as Sublandlord may reasonably request concerning the proposed sublessee or assignee to assist Sublandlord in making an informed judgment regarding the financial condition, reputation, operation, and general desirability of the proposed sublessee or assignee.  Sublandlord shall then have (other than with respect to assignments or subleases to an Affiliate or Permitted Entity) a period of thirty (30) days following receipt of such notice within which to notify Subtenant in writing of Sublandlord's election to:

 

(i)in the case of an assignment of this Sublease or a sublease of the entire Premises, terminate this Sublease as of the date specified by Subtenant, in which event Subtenant shall be relieved of all further obligations hereunder as to the Premises or said portion thereof, after paying all Rent due as of the termination date; or

 

(ii)permit Subtenant to assign or sublet the Premises or said portion thereof; or

 

(iii)refuse to consent to Subtenant's assignment or subleasing of the Premises or said portion thereof and to continue this Sublease in full force and effect as to the entire Premises.

 

If Sublandlord should fail to notify Subtenant of its election within said thirty (30) day period, Sublandlord shall have elected option 14(b)(iii) above.

 

(c)It is hereby expressly understood and agreed, however, if Subtenant is a corporation or a limited liability company, that the assignment or transfer of this Sublease, and the term and estate hereby granted, to any corporation or limited liability company into which Subtenant is merged or with which Subtenant is consolidated, which corporation or limited liability company shall have a net worth at least equal to that of Subtenant immediately prior to such merger or consolidation (such corporation or limited liability company being hereinafter called "Assignee") without the prior written consent of Sublandlord shall not be deemed to be prohibited hereby if, and upon the express condition that, Assignee and Subtenant shall promptly execute, acknowledge and deliver to Sublandlord an agreement in form and substance satisfactory to Sublandlord whereby Assignee shall agree to be bound by and upon all the covenants, agreements, terms, provisions and conditions set forth in this Sublease on the part of Subtenant to be performed, and whereby Assignee shall expressly agree that the provisions of this Paragraph 14 shall, notwithstanding such assignment of transfer, continue to be binding upon it with respect to all future assignments and transfers.

 

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(d) If, at any time during the Term of this Sublease, Subtenant is:

 

(i)a corporation or a trust (whether or not having shares of beneficial interest) and there shall occur any change in the identity of 50% or more of the persons then having power to participate in the election or appointment of the directors, trustees or other persons exercising like functions and managing the affairs of Subtenant; or

 

(ii)a partnership, association, limited liability company or otherwise not a natural person (and is not a corporation or a trust) and there shall occur any change in the identity of 50% or more of the persons who then are members of such partnership, association, limited liability company or who comprise Subtenant;

 

The same shall constitute an assignment of this Sublease for purposes of this Paragraph 14.  This Paragraph 14(d) shall not apply if the initial Subtenant named herein is a corporation and the outstanding voting stock thereof is listed on a recognized securities exchange.

(e)The listing of any name other than that of Subtenant, whether on the doors of the Premises or on the building directory, or otherwise, shall not operate to vest any right or interest in this Sublease or in the Premises or be deemed to be the written consent of Sublandlord mentioned in this Paragraph 14, it being expressly understood that any such listing is a privilege extended by Sublandlord revocable at will by written notice to Subtenant.  If this Sublease be assigned, or if the Premises or any part thereof be sublet or occupied by anybody other than Subtenant, Sublandlord may, at any time and from time to time, collect rent and other charges from the assignee, subtenant or occupant, and apply the net amount collected to the rent and other charges herein reserved.  No assignment, subletting, occupancy or collection shall be deemed a release of Subtenant or any guarantor of this Sublease from the further performance by Subtenant or such guarantor of covenants on the part of Subtenant contained in this Sublease.  No assignment, subletting or use of the Premises by an Affiliate of Subtenant shall affect the purpose for which the Premises may be used as stated in Paragraph 5.

 

(f)No assignment or subletting shall be effective unless consented to in writing by Sublandlord (if and to the extent required hereunder) and until an instrument in form reasonably satisfactory to Sublandlord's counsel has been delivered to Sublandlord under the terms of which the assignee or sublessee, as the case may be, has effectively assumed and agreed to pay the rent and additional rent hereunder and to perform all the terms and conditions contained in this Sublease.  The consent by Sublandlord to an assignment or subletting shall not in any way be construed to relieve Subtenant from obtaining the express consent in writing of Sublandlord to any further assignment or subletting.

 

(g)For the purposes of this Paragraph 14, the subletting for the remainder of the term of this Sublease shall be deemed to be a subletting and not an assignment.  No subletting shall be allowed to more than one sublessee and no subletting shall be for less than the whole area of the Premises.

 

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(h)If (i) the rent and other sums received by Subtenant on account of a sublease of all or any portion of the Premises (excluding sums received as part of any related transaction which sums are not consideration for this Sublease) exceeds the rent and additional rent allocable to the space subject to the sublease (in the proportion of the area of such space to the entire Premises) plus actual out-of-pocket expenses incurred by Subtenant in connection with Subtenant's subleasing of such space, including, without limitation, brokerage commissions to a licensed broker, legal costs and expenses, marketing expenses, and the cost of preparing such space for occupancy by the subtenant, Subtenant shall pay to Sublandlord, as an additional charge, fifty percent (50%) of such excess, monthly if and as received by Subtenant or (ii) any payment received by Subtenant on account of any assignment of this Sublease (excluding sums received as part of any related transaction) exceeds the actual out-of-pocket expenses including, without limitation, brokerage commissions to a licensed broker, legal costs and expenses, marketing expenses, and the cost of preparing space for the assignee, Subtenant shall pay to Sublandlord, as an additional charge, fifty percent (50%) of such excess if and when received by Subtenant.

 

(i)Subtenant shall, within thirty (30) days following Sublandlord’s written notice, reimburse Sublandlord for any reasonable out-of-pocket costs that Sublandlord actually incurs in connection with any assignment or sublease, including the reasonable costs of investigation, the acceptability of the proposed assignee or subtenant, and reasonable legal costs incurred in connection with the granting of any requested consent. Such costs shall not exceed $1,500.00 per request as long as there are no unusual legal issues involved and the documents presented do not have the effect of amending this Sublease.

 

15.SUBLANDLORD’S RIGHTS IN A SUBTENANT BANKRUPTCY.  In the event any or all of Subtenant's interest in the Premises and/or this Sublease is transferred by operation of law to any trustee, receiver or other representative or agent of Subtenant, or to Subtenant as a debtor in possession, and subsequently any or all of Subtenant's interest in the Premises and/or this Sublease is offered or to be offered by Subtenant or any trustee, receiver, or other representative or agent of Subtenant as to its estate or property, (such person, firm or entity being hereinafter referred to as the "Grantor"), for assignment, conveyance, lease, or other disposition to a person, firm or entity other than Sublandlord, (each such transaction being hereinafter referred to as a "Disposition"), it is agreed that Sublandlord has and shall have a right of first refusal to purchase, take, or otherwise acquire the same upon the same terms and conditions as the Grantor thereof shall accept upon such Disposition to such other person, firm, or entity; and as to each such Disposition the Grantor shall give written notice to Sublandlord in reasonable detail of all of the terms and conditions of such Disposition within twenty (20) days next following its determination to accept the same but prior to accepting the same, and it shall not make the Disposition until and unless Sublandlord has failed or refused to accept such right of first refusal as to the Disposition, as set forth herein.

 

Sublandlord shall have sixty (60) days next following its receipt of the written notice as to such Disposition in which to exercise the option to acquire Subtenant's interest by such Disposition, and the exercise of the option by Sublandlord shall be effected by written notice to that effect sent to the Grantor by certified or registered mail; but nothing herein shall require Sublandlord to accept a particular Disposition or any Disposition, nor does the rejection of any one such offer of first refusal constitute a waiver or release of the obligation of the Grantor to submit other offers hereunder to Sublandlord.  In the event Sublandlord accepts such offer of first refusal, the transaction shall be consummated pursuant to the terms and conditions of the

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Disposition described in the notice to Sublandlord.  In the event Sublandlord rejects such offer of first refusal, the Grantor may consummate the Disposition with such other person, firm, or entity; but any decrease in price of more than two percent (2%) of the price sought from Sublandlord or any change in the terms of payment for such Disposition shall constitute a new transaction requiring a further option of first refusal to be given to Sublandlord hereunder.

 

16.COMPLIANCE WITH LAWS.  Subtenant shall, at its own cost and expense:  (a) comply with all governmental laws, ordinances, orders and regulations relating to its particular manner of use (as distinguished from the Use generally) of the Premises, as opposed to compliance that applies to the Building as a whole now in force or which hereafter may be in force; (b) comply with and execute all rules, requirements and regulations of the Board of Fire Underwriters, Sublandlord's insurance companies and other organizations establishing insurance rates; (c) not suffer, permit, or commit any waste or nuisance; and (d) install fire extinguishers in the Premises in accordance with insurance requirements.

 

17.APPURTENANCES.  The Premises include the right of ingress and egress thereto and therefrom; however, Sublandlord reserves the right to make changes and alterations to the Building, fixtures and equipment thereof, in the street entrances, doors, halls, corridors, lobbies, passages, elevators, escalators, stairways, toilets and other parts thereof which Sublandlord may deem necessary or desirable, as long as no changes or alterations made by Sublandlord affect Subtenant’s use and enjoyment of the Premises and/or Subtenant’s business operations. Landlord represents and warrants that the Prime Lease provides the following, which Subtenant shall be subject to: “Landlord also has the right to make such other changes to the Property and Building as Landlord deems appropriate, provided the changes do not materially affect Tenant's ability to use the Premises for the Permitted Use subject to the remaining terms of this Lease.” Except as otherwise set forth herein, neither this Sublease nor any use by Subtenant of the Building or any passage, door, tunnel, concourse, plaza or any other area connecting the garages or other buildings with the building in which the Premises are located, shall give Subtenant any right or easement of such use and the use thereof may, without notice to Subtenant, be regulated or discontinued at any time and from time to time by Sublandlord without liability of any kind to Subtenant and without affecting the obligations of Subtenant under this Sublease.

 

18.FIRE OR OTHER CASUALTY.  If (i) by reason of a casualty the Premises is damaged, and the Prime Lease is terminated as a result thereof, then this Sublease shall automatically terminate.  If this Sublease is not terminated as a result of a casualty, then any damage to the Premises shall be restored by Landlord under the Prime Lease.  In connection therewith, Sublandlord represents and warrants that the following is incorporated into this Sublease from the Prime Lease:

“Casualty Damage.

 

(a)If all or any part of the Premises are damaged by fire or other casualty, Tenant shall immediately notify Landlord in writing. During any period of time that all or any portion of the Premises is rendered untenantable as a result of a fire or other casualty (including if there is no reasonable access to the Premises as a result of any such fire or other casualty), the Rent shall abate for the portion of the Premises that is untenantable and not used by Tenant. Landlord and Tenant shall each have the right to terminate this Lease if (1) the Building shall be damaged such that more than 50% of the Building that, in Landlord's reasonable judgment, substantial alteration or reconstruction of the Building shall be required (whether or not the Premises has been

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damaged) and provided Landlord is using reasonable efforts to terminate all other leases in effect at the Building, provided that in no event shall Landlord have the right to terminate this Lease, under this Section 17(a)(1), if it intends to rebuild the Building and/or repair the damage so long as, on the date of the casualty, fifteen (15) years remain in the Term of this Lease, or, if fifteen (15) years do not remain in the Term of this Lease, if Tenant is willing to enter into an amendment extending the Term of this Lease so that fifteen (15) years remain in the Term of this Lease, and if properly presented with such an amendment executed by Landlord, executes and delivers such amendment; or (2) if more than 50% of the Premises have been materially damaged and there is less than fifteen (15) years of the Term remaining on the date of the casualty unless Tenant is willing to enter into an amendment extending the Term of this Lease so that fifteen (15) years remain in the Term of this Lease, and if properly presented with such an amendment executed by Landlord, executes and delivers such amendment. Landlord agrees it shall not discriminate against Tenant by electing to terminate this Lease alone, except in the event of a termination by Landlord under Subsection (2) above. Landlord may exercise its right to terminate this Lease by notifying Tenant in writing within ninety (90) days after the date of the casualty. If Landlord does not terminate this Lease, Landlord shall endeavor to commence to repair and restore the damage on the earlier to occur of the date of receipt of insurance proceeds or the date which is ninety (90) days after the date of the casualty. Landlord shall thereafter proceed with reasonable diligence to complete repair and restoration of the Building and the Leasehold Improvements (excluding any Alterations that were performed by Tenant in violation of this Lease). However, in no event shall Landlord be required to spend more than the insurance proceeds paid by the insurer in connection with the casualty plus the deductible under Landlord's insurance policy. In the event Landlord fails to complete repair or restoration to such an extent as to permit Tenant to use and occupy the Premises within (i) the earlier to occur of twelve (12) months from the date of casualty or six (6) months from the date of the commencement of repair or restoration, with respect to any damage to any Space or Spaces that together constitute less than 10,000 rentable square feet, or (ii) the earlier to occur of twenty four (24) months from the date of casualty or eight (8) months from the date of the commencement of repair or restoration, with respect to any damage to any Space or Spaces that together constitute 10,000 rentable square feet or more, then Tenant may, by giving notice to Landlord prior to the date such repair or restoration is so completed, as its sole remedy, terminate this Lease. In addition, Tenant shall have the right to terminate this Lease with respect to any one or more Spaces that are not restored within said time frames, and have this Lease continue in full force and effect for the balance of the Premises. Landlord shall not be liable for any loss or damage to Tenant's Property or to the business of Tenant resulting in any way from the fire or other casualty or from the repair and restoration of the damage. Landlord and Tenant hereby waive the provisions of any Law relating to the matters addressed in this Article, and agree that their respective rights for damage to or destruction of the Premises shall be those specifically provided in this Lease.

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(b)If all or any portion of the Premises shall be made untenantable by fire or other casualty, Landlord shall, with reasonable promptness, cause an architect or general contractor selected by Landlord to provide Landlord and Tenant with a written estimate of the amount of time required to substantially complete the repair and restoration of the Premises and make the Premises tenantable again, using standard working methods ("Completion Estimate"). If the Completion Estimate indicates that the Premises cannot be made tenantable within 270 days from the date the repair and restoration is started, then regardless of anything in Section 17(a) above to the contrary, Tenant shall have the right to terminate this Lease by giving written notice to Landlord of such election within 10 days after receipt of the Completion Estimate. In addition, Tenant shall have the right to terminate this Lease with respect to any one or more Spaces that are not restored within said time frames by giving written notice to Landlord of such election within 10 days after receipt of the Completion Estimate, and have this Lease continue in full force and effect for the balance of the Premises.”

 

In that event, the rent shall be apportioned according to the part of the Premises which is useable by Subtenant, but restoration shall not be required to be performed except during business hours of business days. In the event that any damage to the Premises is not substantially restored within a period of time equal to half of the remaining term of this Sublease, then Subtenant shall have the right to terminate this Sublease by written notice to Sublandlord at any time before the damage is substantially restored.

 

19.CONDEMNATION.

 

(a)Landlord represents and warrants that the following provision is from the Prime Lease:

“Condemnation.

 

Either party may terminate this Lease if the whole or more than 50% of the Premises shall be taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a "Taking"). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Property which would leave the remainder of the Building unsuitable for use as an office/laboratory building in a manner comparable to the Building's use prior to the Taking and Landlord will, after the Taking, use the Building for other uses. In order to exercise its rights to terminate the Lease, Landlord or Tenant, as the case may be, must provide written notice of termination to the other within forty-five (45) days after the terminating party first receives notice of the Taking. Any such termination shall be effective as of the date the physical taking of the Premises or the portion of the Building or Property occurs. If this Lease is not terminated, the Rentable Square Footage of the Building, the Rentable Square Footage of the Premises and Tenant's Pro Rata Share shall, if applicable, be appropriately adjusted. In addition, Rent for any portion of the Premises taken or condemned shall be abated during the unexpired Term of this Lease effective when the physical taking of the portion of the Premises occurs. In addition, Tenant shall have the right to terminate this Lease with respect to any one or more Spaces that are so taken or condemned. All compensation awarded for a Taking, or sale proceeds, shall be the property of Landlord, any rights to receive compensation or proceeds being expressly waived by Tenant, except that Tenant shall be entitled to the value of its leasehold interest and to the unamortized cost of any leasehold improvements made by Tenant at Tenant's expense and not from the Initial Allowance of $4,000,000, the

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Option Space Allowance or the Refurbishment Allowance. In addition, Tenant may file a separate claim at its sole cost and expense for Tenant's Property and Tenant's reasonable relocation expenses, provided the filing of the claim does not diminish the award which would otherwise be receivable by Landlord.”

 

(b)In the event that the Prime Lease is terminated as a result of a condemnation or in any other manner for any public or quasi-public use or purpose, this Sublease and the term and estate hereby granted shall forthwith terminate as of the date of vesting of title in such condemning authority (which date is hereinafter also referred to as the date of taking), and the rents shall be prorated and adjusted as of such date.  

 

(c)In the event that more than 50% of the Premises is taken by condemnation or in any other manner for any public or quasi-public use or purpose, Subtenant shall have the right to terminate this Sublease by giving Sublandlord notice to that effect within ninety (90) days after the date of the taking, and thereupon the term and estate hereby granted shall forthwith terminate as of the date of vesting of title in such condemning authority (which date is hereinafter also referred to as the date of taking), and the rents shall be prorated and adjusted as of such date.  Upon such partial taking and this Sublease continuing in force as to any part of the Premises, the rent and additional rent shall be adjusted according to the rentable area remaining.

 

(d)In the event of any taking, partial or whole, provided for in this Paragraph, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be and remain the sole and exclusive property of Sublandlord, and Subtenant shall not be entitled to any portion of such award, judgment or settlement received by Sublandlord from such condemning authority.  Subtenant, however, may pursue its own claim against the condemning authority for any damage or award permitted under the laws of the State of Connecticut to be paid to Subtenant without diminishing or reducing the award, judgment or settlement receivable by Sublandlord.

 

20.INTENTIONALLY OMITTED.  

 

21.ACCESS.  Sublandlord shall have the right to show the Premises to prospective tenants during the last year of the term of this Sublease. In addition, Sublandlord's agents, employees, contractors and prospective purchaser shall have the right to enter the Premises at reasonable hours upon not less than 24 hours’ notice (except in an emergency) to Subtenant for the purpose of inspecting the same and, Sublandlord, its employees, agents and contractors shall have the right to enter the Premises at any time for the purpose of making repairs thereto and to the Building and its mechanical systems and for the purpose of performing the services to be performed by Sublandlord pursuant to the terms hereof and for the purpose of curing any violations of rules and regulations or defaults under this Sublease created by or suffered by Subtenant.

 

22.LIABILITY.  Neither Sublandlord, nor any agent or employee of Sublandlord, shall be liable for (a) loss of or damage to any property of Subtenant, or of any other person, entrusted to any of Sublandlord's agents or employees, (b) loss of or damage to any property of Subtenant or of any other person by theft or otherwise, except to the extent caused by Sublandlord’s negligence or willful misconduct, subject to Section 25 hereof, (c) any injury or damage to any person or property resulting from fire, explosion, falling plaster, steam, gas, electricity, dust, water or snow, or leaks from any part of the Building or from the pipes,

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appliances or plumbing system, or from the roof, street or subsurface or any other place or by dampness, or from any other cause whatsoever, except to the extent caused by Sublandlord’s negligence or willful misconduct, subject to Section 25 hereof, (d) any such damage caused by other occupants or persons in the Building or by construction of any private, public or quasi-public work, or (e) any latent defect in the Premises or the Building.

 

23.DEFAULT.  In the event of any failure of Subtenant to pay the rent or additional rent due hereunder, for more than five (5) days after written notice from Sublandlord that the same is due (provided that if Sublandlord has provided Subtenant with 2 notices in any 12 month period of such default, then Sublandlord shall not be required to provide any further written notices if Subtenant’s subsequently fails to pay rent or additional rent when due), or if Subtenant abandons or vacates all of any portion of the Premises for any reason other than the occurrence of an alteration or a casualty or condemnation, unless Subtenant can and does pay all reasonable costs that Sublandlord may suffer or incur by reason of the abandonment or vacancy of the Premises, or any failure to commence and diligently pursue the performance of any of the other terms, covenants, and conditions of this Sublease to be observed and performed by Subtenant for more than thirty (30) days after written notice of such default (provided that if cure reasonably takes more than thirty (30) days, Subtenant shall have such additional time as is reasonably needed, as long as Subtenant commences the cure promptly after written notice of the default from Sublandlord and thereafter diligently pursues the cure to completion), or if the Subtenant's interest herein shall be sold under execution, then Sublandlord, at its option, may terminate this Sublease without further notice to Subtenant and upon such termination Subtenant shall quit and surrender the Premises to Sublandlord, but such termination shall not affect the Sublandlord's right, subject to the terms and conditions of this Sublease, to recover damages or exercise any other right hereinafter provided; however, in lieu of terminating this Sublease, Sublandlord may elect to recover possession of the Premises without terminating this Sublease and Sublandlord shall have the right to re-enter the Premises and to remove all persons or property therefrom and store any property in a public warehouse or elsewhere at the cost and for the account of Subtenant, all without service of notice, except as notice is in this Paragraph 23 required, or resort to legal process, and Sublandlord shall not be liable for any loss or damage resulting from such re-entry nor shall Sublandlord be deemed guilty of trespass therefor.  In the event of termination of this Sublease or a re-entry of the Premises pursuant to this Paragraph 23, Sublandlord may re-let the whole or any part of the Premises on behalf of Subtenant for a period equal to, greater or less than the remainder of the then term of this Sublease, at such rental and upon such terms and conditions as Sublandlord shall deem reasonable.  Sublandlord shall not be liable in any respect for the failure to relet the Premises or in the event of such reletting, for failure to collect the rent thereunder and any sums received by Sublandlord on a reletting shall belong to Sublandlord.  In the event of a termination of this Sublease, Sublandlord shall forthwith be entitled to recover from Subtenant, as liquidated damages, the amount by which the sum of (a) rent and additional rent payable for the remainder of the term of this Sublease; and (b) all reasonable out-of-pocket expenses of Sublandlord actually incurred in recovering possession of the Premises and reletting the same including costs of repair and renovating the Premises, management agents' commissions and fees, Court costs and reasonable attorneys' fees, exceed the fair rental value of the Premises.  Subtenant hereby expressly waives its right to any notice to quit under the statutes relating to summary process or any statutes which may be enacted for recovery of possession of Premises. If Subtenant vacates or abandons the Premises prior to the expiration of the term of this Sublease, the same shall not be a default by Subtenant as long as Subtenant complies with all of the terms of this Sublease, but in that event, Sublandlord may re-take possession of the Premises from Subtenant without affecting Subtenant’s obligations under this Sublease, in which event Subtenant shall have no further right to possess the Premises.

 

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In no event shall Subtenant be liable to Sublandlord for any special, indirect, punitive or consequential damages under this Sublease except (i) to the extent covered by Subtenant’s liability insurance, or (ii) to the extent of damages incurred by Sublandlord as a result of any holdover by Subtenant. In no event shall Sublandlord be liable to Subtenant for any special, indirect, punitive or consequential damages under this Sublease, except to the extent covered by Sublandlord’s liability insurance.

 

Sublandlord shall also be entitled to a reasonable attorney's fee in the event that it shall retain an attorney for recovery of rent or additional rent or to otherwise enforce the provisions of this Sublease or if suit shall be brought for recovery of possession of the Premises or because of the breach of any other covenant herein contained on the part of Subtenant to be performed. In the event that Subtenant is in default of any provision of this Sublease requiring the payment of monies, then Subtenant shall pay to Sublandlord as additional rent the greater of (a) interest at the rate of eighteen percent (18%) per annum or the highest rate permitted by law, whichever is less, on the amount due Sublandlord hereunder, or (b) a late charge of five percent (5%) of the amount due.

 

In the event of a breach or threatened breach by Subtenant of any of its obligations under this Sublease, Sublandlord shall also have the right of injunction.  The special remedies to which Sublandlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies to which Sublandlord may lawfully be entitled at any time and Sublandlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. In addition to any remedies which Sublandlord may have under this Sublease, and without reducing or adversely affecting any of Sublandlord's rights and remedies under this Paragraph 23, if there shall be a default hereunder by Subtenant which shall not have been remedied within the applicable grace period, Sublandlord shall not be obligated during the continuance of such default to furnish to Subtenant or the Premises any heat, ventilation or air-conditioning services outside of Business Hours on Business Days, or any extra or additional cleaning services; and the discontinuance of any one or more such services shall be without liability by Sublandlord to Subtenant and shall not reduce, diminish or otherwise affect any of Subtenant's covenants and obligations under this Sublease.

 

24.BANKRUPTCY.  To the full extent permissible under the Bankruptcy Reform Act of 1978, specifically Section 365 thereof (11 U.S.C. 365) or any successor thereto, if Subtenant shall file a voluntary petition in bankruptcy or take the benefit of any insolvency act or be dissolved or adjudicated a bankrupt, or if a receiver shall be appointed for its business or its assets and the appointment of such receiver is not vacated within sixty (60) days after such appointment, or if it shall make an assignment for the benefit of its creditors, then and forthwith thereafter the Sublandlord shall have all the rights provided in Paragraph 23 above in the event of nonpayment of rent.

 

25.WAIVER OF SUBROGATION.  All fire and extended coverage insurance maintained by Sublandlord and Subtenant on the Premises, the property therein, and the Building and its appurtenances shall include a waiver by the insurer of all right of recovery against Sublandlord or Subtenant in connection with any loss or damage by fire or peril included within fire and extended coverage insurance and neither party shall be liable to the other for loss or damage resulting from such included peril and further, Sublandlord and Subtenant each release the other from any and all claims with respect to any such loss to the extent of the insurance proceeds paid with respect thereto.  

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26.SUBORDINATION.  This Sublease shall, at Sublandlord's option, be subordinate to the lien of any first mortgage which may now or hereafter affect the real property of which the Premises form a part, and to all renewals, modifications, consolidations, replacements and extensions thereof.  In confirmation of such subordination, Subtenant shall execute promptly any commercially reasonable subordination, non-disturbance and attornment agreement (each an “SNDA”) that Sublandlord may request.   Subtenant shall attorn to any foreclosing first mortgagee, purchaser at a foreclosure sale or purchaser by deed in lieu of foreclosure, subject to the terms and conditions of the SNDA, but no such mortgagee or purchaser shall be (a) liable for any act or omission of Sublandlord, unless the same is of a continuing nature, (b) bound by any payment of rent, additional rent or other charge made more than thirty (30) days in advance of the due date thereof, or (c) bound by any material assignment, surrender, termination, cancellation, amendment or modification of this Sublease made without the express written consent of such mortgagee or purchaser.

 

27.DEFINITION OF SUBLANDLORD.  The term, Sublandlord, as used in this Sublease means only the tenant under the Prime Lease, and in the event of any assignment of the Prime Lease, and the legally binding assumption of Sublandlord’s obligations thereunder by such assignee, then Sublandlord shall be and hereby is entirely freed and relieved of all its covenants, obligations and liability hereunder except liabilities which accrued prior to such assignment.  

 

28.BROKERAGE.  Subtenant represents it has not dealt with any real estate agent or broker in connection with this Sublease other than Cushman & Wakefield of Connecticut, Inc. (whose commission shall be paid by Sublandlord) and it shall indemnify Sublandlord and hold it harmless against the claims of any other broker(s) arising out of its actions. Sublandlord represents it has not dealt with any real estate agent or broker in connection with this Sublease other than Cushman & Wakefield of Connecticut, Inc. and it shall indemnify Subtenant and hold it harmless against the claims of any other broker(s) arising out of its actions.

 

29.RULES AND REGULATIONS.  Subtenant covenants that Subtenant, Subtenant's employees, agents and licensees shall faithfully observe and strictly comply with such rules and regulations as Landlord may adopt.  Nothing contained in this Sublease shall be construed to impose upon Sublandlord any duty or obligation to enforce the rules and regulations, or the provisions of any other lease, as against any other lessee, and Sublandlord shall not be liable to Subtenant for violation thereof by any other lessee or its employees, agents or licensees, or anyone else.  Sublandlord represents that the current rules and regulations as promulgated by Landlord are attached hereto as Exhibit C.

 

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30.INTENTIONALLY OMITTED.

 

 

31.FORCE MAJEURE.  Sublandlord shall be excused for the period of any delay in the performance of any obligations hereunder, when prevented from so doing by cause or causes beyond Sublandlord's control which shall include, without limitation, all labor disputes, civil commotion, war, war-like operations, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations or controls, fire or other casualty, inability to obtain any material, services or financing or through acts of God.  Subtenant shall similarly be excused for delay in the performance of obligations hereunder provided:

 

(a)nothing contained in this Paragraph or elsewhere in this Sublease shall be deemed to excuse or permit, by Sublandlord or Subtenant, any delay in the payment of any sums of money required hereunder, or any delay in the cure of any default which may be cured by the payment of money;

 

(b)no reliance by Subtenant upon this Paragraph shall limit or restrict in any way Sublandlord's right of self-help as provided in this Sublease; and

 

(c)Neither Sublandlord nor Subtenant shall be entitled to rely upon this Paragraph unless it shall advise the other party in writing, of the existence of any force majeure preventing the performance of an obligation within ten (10) days after the commencement of the force majeure.

 

32.NOTICES.  Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery or by mail, and if given by mail shall be deemed sufficiently given if sent by registered or certified mail, or by recognized overnight courier service, addressed as follows:

 

 

 

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Either party may by written notice to the other specify a different address for notice purposes.

 

33.SELF HELP.  In the event of any breach of this Sublease by Subtenant, beyond applicable notice, grace and cure periods, Sublandlord may, at Sublandlord's sole option, at any time, without notice, cure such breach for the account and at the expense of Subtenant.  If Sublandlord at any time so elects, or is compelled, to cure any such breach and/or is compelled to incur any other expense because of any such breach of Subtenant (including, without limitation, reasonable attorneys' fees and disbursements in reasonable amounts in instituting, prosecuting or defending any suits, actions or proceedings to enforce Sublandlord's rights under this Sublease or otherwise), the reasonable out-of-pocket sum or sums so paid by Sublandlord, with all interest at the rate of eighteen percent (18%) per annum, costs and damages shall be paid by Subtenant to Sublandlord, as additional rent, within thirty (30) days following Sublandlord’s written demand.

 

34.ESTOPPEL CERTIFICATES.  Subtenant shall, within ten (10) days after request by Sublandlord, execute and deliver to Sublandlord a written declaration in recordable form:  (a) ratifying this Sublease; (b) expressing the commencement and termination dates thereof; (c) certifying that this Sublease is in full force and effect and has not been assigned, modified, supplemented or amended (except by such writings as shall be stated); (d) that, to the best of its knowledge, all conditions under this Sublease to be performed by Sublandlord have been satisfied; (e) that, to the best of its knowledge, there are no defenses or offsets against the enforcement of this Sublease by Sublandlord, or stating those claimed by Subtenant; (f) the amount of advance rental, if any, (or none if such is the case) paid by Subtenant; (g) the date to which rental has been paid; and (h) the amount of security deposited with Sublandlord.  Such declaration shall be executed and delivered by Subtenant from time to time as may be requested by Sublandlord.  Sublandlord's mortgage lenders and/or purchasers shall be entitled to rely upon same.

 

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35.MECHANICS LIENS.  Subtenant shall not permit any mechanic's or other lien or charge to be filed against the Premises or the Building by reason of any act of Subtenant or anyone holding the Premises through or under Subtenant.  If any such mechanic's or other lien or charge shall at any time be filed against the Premises or the Building, Subtenant shall promptly cause the same to be discharged of record (by bonding or otherwise), in default of which Sublandlord may, on ten (10) days' notice to Subtenant, bond or insure over or discharge the same, and all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees, actually incurred by Sublandlord in procuring such discharge shall be payable by Subtenant to Sublandlord as additional rent within thirty (30) days following Sublandlord’s written demand.

 

36.CONDITION OF THE PREMISES.

 

(a)Except as otherwise set forth herein, Subtenant acknowledges that Sublandlord shall not be required to perform any work in or to the Premises, provided that Sublandlord shall remove from the Premises the furniture, fixtures and equipment in accordance with, and subject to, Section 49 of this Sublease.

 

(b)Subtenant represents that Subtenant has inspected the Premises and the Building and is thoroughly acquainted with their condition and, except as otherwise set forth herein, takes the Premises "as is," and the taking of possession of the Premises by Subtenant shall be conclusive evidence that the Premises and the Building were in good and satisfactory condition at the time possession was taken by Subtenant.  Neither Sublandlord nor Sublandlord's agents have made any representations or promises with respect to the condition of the Building, the Premises, the land upon which the Building is constructed, or any other matter or thing affecting or related to the Building or the Premises, except as herein expressly set forth, and no rights, easements or licenses are acquired by Subtenant by implication or otherwise except as expressly set forth in this Sublease.

 

37.PREJUDGMENT REMEDY, REDEMPTION, COUNTERCLAIM AND JURY TRIAL.  Subtenant, for itself and for all persons claiming through or under it, hereby acknowledges that this Sublease constitutes a commercial transaction as such term is used and defined in Public Act No. 431 of the Connecticut General Statutes, Revision of 1973, and hereby expressly waives any and all rights which are or may be conferred upon Subtenant by said Act to any notice or hearing prior to a prejudgment remedy, and by any present or future law to redeem the said Premises, or to any new trial in any action or ejection under any provisions of law, after reentry thereupon, or upon any part thereof, by Sublandlord, or after any warrant to dispossess or judgment in ejection.  If Sublandlord shall acquire possession of the said Premises by summary proceedings, or in any other lawful manner without judicial proceedings, it shall be deemed a reentry within the meaning of that word as used in this Sublease.  In the event that Sublandlord commences any summary proceedings or action for nonpayment of rent or other charges provided for in this Sublease, Subtenant shall not interpose any counterclaim of any nature or description in any such proceeding or action.  Subtenant and Sublandlord both waive a trial by jury of any or all issues arising in any action or proceeding between the parties hereto or their successors, under or connected with this Sublease, or any of its provisions.

 

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38.RECORDING.  Subtenant shall not record this Sublease but will, at the request of Sublandlord, execute a memorandum or notice thereof in recordable form satisfactory to both the Sublandlord and Subtenant specifying the date of commencement and expiration of the term of this Sublease and other information required by statute.  Either Sublandlord or Subtenant may then record said memorandum or notice of lease.

 

39.PARTIAL INVALIDITY.  If any provision of this Sublease or application thereof to any person or circumstance shall to any event be invalid, the remainder of this Sublease or the application of such provision to persons or circumstances other than those as to which it is held invalid shall not be affected thereby and each provision of this Sublease shall be valid and enforced to the fullest extent permitted by law.

 

40.ENTIRE AGREEMENT.

 

(a)This Sublease and the Exhibits, Riders and/or Addenda if any attached, set forth the entire agreement between the parties.  Any prior conversations or writings, including, without limitation, that certain Access Agreement dated August 8, 2019 by and between the Sublandlord and Subtenant (the “Access Agreement”), are merged herein and extinguished.  No subsequent amendment to this Sublease shall be binding upon Sublandlord or Subtenant unless reduced to writing and signed.  Submission of this Sublease for examination does not constitute an option for the Premises and becomes effective as a sublease only upon execution and delivery thereof by Sublandlord to Subtenant.  If any provision contained in a rider or addenda is inconsistent with any other provision of this Sublease, the provision contained in said rider or addenda shall supersede said other provision, unless otherwise provided in said rider or addenda.  The failure of Sublandlord of Subtenant to insist in any one or more instances upon the strict performance of any one or more of the other party’s obligations under this Sublease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Sublease or of the right to exercise such elections.

 

(b)No payment by Subtenant, or acceptance by Sublandlord, of a lesser amount than shall be due from Subtenant to Sublandlord shall be treated otherwise than as a payment on account.  The acceptance by Sublandlord of a check for a lesser amount with an endorsement or statement thereon, or upon any letter accompanying such check, that such lesser amount is payment in full, shall be given no effect, and Sublandlord may accept such check without prejudice to any other rights or remedies which Sublandlord may have against Subtenant.

 

41.HEIRS, ASSIGNS, NUMBER AND GENDER.  This Sublease shall be binding upon the parties hereto and their heirs, administrators, executors, successors and assigns.  The use of the neuter singular pronoun to refer to Subtenant or Sublandlord shall be deemed a proper reference even though Subtenant or Sublandlord may be an individual, partnership, a corporation or a group of two (2) or more individuals or corporations.  The necessary grammatical changes required to make the provisions of this Sublease apply in the plural number where there is more than one Subtenant or Sublandlord and to either corporations, associations, partnerships or individuals, males or females, shall in all instances be assumed as though in each case fully expressed.

 

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42.MORTGAGEE PROTECTION.  Subtenant agrees to give any Mortgagees and/or Trust Deed Holders, by Registered Mail, a copy of any Notice of Default served upon the Sublandlord, provided that prior to such notice Subtenant has been notified, in writing (by way of Notice of Assignment of Rents and Leases, or otherwise), of the address of such Mortgagees and/or Trust Deed Holders.

 

43.INTENTIONALLY OMITTED.

 

44.HOLDING OVER.  Any holding over by Subtenant after the expiration of the term of this Sublease shall be treated as a daily tenancy at sufferance at a rate equal to one and one-half (1 ½) times the rent plus additional rent and other charges herein provided (prorated on a daily basis) and shall otherwise be on the terms and conditions set forth in this Sublease as far as applicable.  In addition, Subtenant shall pay Sublandlord for all damages sustained by Sublandlord as a result of Subtenant's holding over. If Subtenant fails to remove any of its personal property from the Premises (if and as required by this Sublease) within 2 days after the termination of this Sublease or Subtenant’s right to possession, Sublandlord, at Subtenant’s sole cost and expense, shall be entitled (but not obligated) to remove and store Subtenant’s property. Sublandlord shall not be responsible for the value, preservation or safekeeping of Subtenant’s property. Subtenant shall pay to Sublandlord, within thirty (30) days following Sublandlord’s written demand, the reasonable expenses and storage charges for Subtenant’s property. In addition, if Subtenant fails to remove Subtenant’s property within 30 days after written notice, Sublandlord may deem all or any part of Subtenant’s property to be abandoned, and title to Subtenant’s property shall be deemed automatically vested in Sublandlord.

 

45.INTENTIONALLY OMITTED.  

 

46.SHORING.  If any excavation or construction is made adjacent to, upon or within the Building, or any part thereof, Subtenant shall afford to any and all persons causing or authorized to cause such excavation or construction license to enter upon the Premises for the purpose of doing such work as such persons shall deem necessary to preserve the Building or any portion thereof from injury or damage and to support the same by proper foundations, braces and supports, without any claim for damages or indemnity or abatement of rent, or of a constructive or actual eviction of Subtenant.

 

47.ENVIRONMENTAL CONDITION OF THE PROPERTY.  

 

(a)Subtenant Covenants.  Subtenant agrees (i) that Subtenant will not violate any present or future federal, state or local environmental or public health laws, rules, regulations and ordinances (hereinafter collectively referred to as the “Environmental Laws”); (ii) that Subtenant will not use, store, dispose, or generate any “hazardous materials”, “waste materials”, “solid waste”, “hazardous waste”, hazardous substances”, “medical waste”, “biomedical waste”, and including but not limited to oil and polychlorinated biphenyls, as those terms are defined in the Environmental Laws (hereinafter collectively referred to as the “Hazardous Materials”) at the Building, other than those Hazardous Materials used, stored, or generated by Subtenant in connection with its Use of the Premises; (iii) that Subtenant will not cause or permit any condition which would create Hazardous Materials contamination at the Building, excluding Hazardous Materials, if any, present in the Building prior to the commencement of the Term; (iv) that Subtenant will give notice to the Sublandlord promptly upon the Subtenant’s acquiring knowledge of the presence of any Hazardous Materials at the Building or of any Hazardous

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Materials contamination, in each instance, in violation of applicable Environmental Laws, with a description of Subtenant’s knowledge thereof; (v) that Subtenant will give notice to the Sublandlord promptly of any notice of violation issued to Subtenant of applicable Environmental Laws regulating Hazardous Materials or any requests for information issued to Subtenant from any federal, state, county, regional or local governmental authority concerning Hazardous Materials and Hazardous Materials contamination at the Building; (vi) that Subtenant will promptly comply with applicable Environmental Laws requiring the removal or disposal of such Hazardous Materials or Hazardous Materials contamination caused by Subtenant and provide the Sublandlord with satisfactory evidence of compliance required under applicable Environmental Laws.

 

(b)Indemnification.  Subtenant covenants and agrees at all times to indemnify, hold harmless and defend Sublandlord, its successors and assigns, as owner of the Building from and against any and all liability, loss, damage, cost, expense (including, without limitation, reasonable attorneys’ fees and expenses), cause of action, suit, claim, demand or judgment against the Subtenant and/or the Building of any nature pertaining to Hazardous Materials located or emanating from or relating to the Building, if and to the extent caused by Subtenant, including, but not limited to, liens or claims of any federal, state or municipal government or quasi-governmental agency or any third person, whether arising under any federal, state or municipal law or regulation or tort, contract or common law.

 

(c)Sublandlord’s Right to Remove Hazardous Materials.  Sublandlord shall have the right, but not the obligation, and without in any way limiting the Sublandlord’s rights and remedies, to enter into the Premises or to take such other actions as it reasonably deems necessary to clean up, remove, resolve or minimize the impact of, or otherwise deal with, any Hazardous Materials contamination at the Building to comply with applicable Environmental Laws, following receipt of any notice from any person or entity asserting the existence of any Hazardous Materials or Hazardous Materials contamination, in each instance, in violation of applicable Environmental Laws, pertaining to the Building or any part thereof which, if true, could result in an order, suit, imposition of a lien on the Building.  All reasonable costs and expenses paid or incurred by the Sublandlord in the exercise of any such rights relating to a violation of applicable Environmental Laws caused by Subtenant shall be payable by the Subtenant within 30 days following Sublandlord’s written notice; provided, however, that Subtenant shall not be responsible for any Landlord’s costs and expenses paid or incurred in connection with Hazardous Materials at the Building, the presence of which is not caused by Tenant. Sublandlord’s exercise of said right with respect to any violation of applicable Environmental Laws caused by Subtenant will not excuse or change Subtenant’s obligations as set forth in Section 47(a)(vi).  

 

(d)Closure Obligations.  Subtenant agrees that, if Subtenant is obligated pursuant to applicable Environmental Laws to close any hazardous waste storage area associated with Subtenant’s Use, if such required closure has not been fully completed as of the expiration date of this Sublease, despite Subtenant’s good faith efforts to do so, Subtenant shall, in connection therewith, and as security for Subtenant’s obligation, on Sublandlord’s request deposit with Sublandlord a reasonable sum, not to exceed $30,000, which Sublandlord shall be entitled to continue to hold as security until completion of the required closure of Subtenant’s hazardous waste storage area in accordance with applicable Environmental Laws (the “Closure Obligation”).  In lieu of cash, Subtenant may provide Sublandlord with an unconditional, irrevocable, assignable letter of credit, (the “Letter of Credit”) for all or a portion of such

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amount.  In the event Subtenant furnishes the Letter of Credit, the Letter of Credit shall be on the following terms and conditions:  (i) issued by a commercial bank acceptable to Sublandlord, which bank must have an office in Hartford, Connecticut, (ii) having a term which shall have an expiration date not sooner than the date which is five (5) years from the expiration date of this Sublease or sooner termination date, however, if the Letter of Credit has an earlier expiration date, it shall contain a so-called “evergreen clause”; (iii) available for negotiation by draft(s) at sight accompanied by a statement signed by Sublandlord stating that the amount of the draw represents funds due to Sublandlord (or its successors and assigns) due to the failure of Subtenant to perform its Closure Obligation or (iv) be otherwise on terms and conditions reasonably satisfactory to Sublandlord.  It is agreed that in the event Subtenant fails to perform its Closure Obligation, Sublandlord may draw upon the Letter of Credit or upon the funds held on account as Security Deposit to the extent required to perform the same.  In the event that Subtenant shall fully and faithfully perform its Closure Obligation (as evidenced by a sign off or other definitive communication from the applicable governmental authorities, to the extent that, pursuant to applicable Environmental Laws, closure is not self-executing), and shall have surrendered the Premises pursuant to the terms and conditions of this Sublease, the Letter of Credit and/or funds on deposit with Sublandlord shall be returned to Subtenant.  Subtenant further covenants that it will not assign or encumber or attempt to assign or encumber the Letter of Credit or any funds on deposit and that neither Sublandlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.

 

48.INTENTIONALLY OMITTED.

 

49.FF&E. Subtenant shall be permitted to use the furniture, fixtures and equipment in the Premises on the Commencement Date (the “FF&E”) (which FF&E consists of a portion of the furniture, fixtures and equipment acquired by Sublandlord from the former occupant of the Premises). Sublandlord represents and warrants that all furniture, fixtures and equipment that it acquired from the former occupant of the Premises which Subtenant required to be removed from the Premises, has been, or will be, removed by Sublandlord from the Premises prior to the Effective Date.  Subtenant shall maintain and repair the FF&E, but shall not be required to replace any FF&E if it wears out, and the FF&E shall remain Sublandlord’s property and shall remain in the Premises upon the expiration or sooner termination of this Sublease.

 

50.RENEWAL OPTION. Provided that this Sublease is in full force and effect and Subtenant is not in default hereunder, beyond applicable notice, grace and cure periods, Subtenant shall have the right to renew the term of this Sublease for one (1) period of one (1) year. In order to exercise such option, Subtenant must so notify Sublandlord, in writing, not less than six (6) months before the end of the initial term of this Sublease, time being of the essence. If Subtenant properly exercises such renewal option, then all of the terms and conditions of this Sublease shall apply to the renewal term, except that Subtenant shall have no remaining renewal options and annual rent shall be $551,176.50 per year ($24.50 per rentable square foot), payable in monthly installments of $45,931.38.

 

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51.PRIME LEASE.  This Sublease is subordinate to that certain Lease Agreement between WE 300 George Street, L.L.C. (“Landlord”) and Tenant dated as of May 1, 2006, as amended (the “Prime Lease”), provided that Sublandlord will obtain a non-disturbance agreement from Landlord upon the execution of this Sublease.  Notwithstanding anything to the contrary contained herein, the parties agree that this Sublease shall only be subject to the provisions of the Prime Lease to the extent the same are expressly incorporated into this Sublease.  In the event of a conflict between the terms and conditions of the Prime Lease and this Sublease, this Sublease shall control.  The following provisions shall apply relating to the Prime Lease:

 

(a)In any case where the Sublandlord reserves the right to enter the Premises, said right shall inure to the benefit of the Landlord as well as to Sublandlord.

 

(b)With respect to work, services, repairs, replacements and restoration or the performance of other obligations required of the Sublandlord under this Sublease, which work, services, repairs, replacements or restoration is the obligation of Landlord under the Prime Lease (as incorporated in Section 10 of this Sublease), Sublandlord's sole obligation, with respect thereto, shall be to request the same, on request in writing by Subtenant, and to use reasonable efforts to obtain the same from Landlord. In the event that Sublandlord does not request any such services, repairs, replacements or restoration itself, Subtenant shall have the right to request the same directly from Landlord, and, to the extent that Sublandlord does not bring any proceedings to enforce the same itself, to conduct such proceedings (in court or elsewhere), as may be required, to obtain from Landlord any such work, services, repairs, replacements, and restoration or the performance of such obligations; such proceedings may be, at Sublandlord's option, in its own name or in Sublandlord's name, and Sublandlord agrees to cooperate with Subtenant in connection therewith and to execute such documents as may be required in connection therewith; Subtenant agrees to reimburse Sublandlord for any reasonable legal or other expenses incurred by Sublandlord in any such court or other proceeding.

 

(c)Except for those Sections of the Prime Lease that are expressly incorporated into this Sublease, the remaining Sections of the Prime Lease are excluded from and do not apply with respect this Sublease.

 

In addition, Sublandlord hereby represents, covenants, and agrees to the following to Subtenant regarding the Prime Lease:

 

(i)The expiration date of the Prime Lease is April 30, 2032.

 

(ii)To the best of Sublandlord’s knowledge, Landlord is not in default under the Prime Lease.

 

(iii)As of the Commencement Date, Sublandlord shall not be in default under the Prime Lease and the Prime Lease shall be in full force and effect.

 

(iv)Sublandlord shall not breach the Prime Lease.

 

(v)Other than the consent of Landlord, no other consents to the execution, effectiveness and delivery of this Sublease are required.

 

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(vi)There are no terms or conditions in the Prime Lease which (A) have not been incorporated into this Sublease and (B) could (1) have a material adverse effect on Subtenant, Subtenant’s use or enjoyment of the Premises and/or Subtenant’s rights and remedies under this Sublease, (2) cause Tenant to incur out-of-pocket costs or expenses, and/or (3) expand Subtenant’s obligations beyond those expressly set forth in this Sublease.  

 

(vii)The roof of the Building is in good condition, leak-free and the Building structure, and doors and windows of the Building and the Premises, are in good working order.

 

52.MISCELLENEOUS.

(a)This Sublease may be executed in one or more counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute a single instrument and may be delivered by e-mail or facsimile transmission, and any such e-mail or facsimile transmitted Sublease shall have the same force and effect as hardcopy originals.

(b)This Sublease shall be governed by and construed in accordance with the internal laws of the State of Connecticut.

[Remainder of page intentionally left blank; signature pages follow.]

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IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.

 

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CONSENT TO SUBLEASE

WE 300 George Street, L.L.C. (the “Landlord”) hereby consents to the attached Sublease (the “Sublease”) dated as of September 13, 2019 between Yale University, as Sublandlord, and Achillion Pharmaceuticals, Inc., as Subtenant, for certain premises located at 300 George Street, New Haven, Connecticut, all as more particularly described in the Sublease.

Date of Consent: September 13, 2019

LANDLORD:

WE 300 George Street, L.L.C.

 

 

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EXHIBIT A

 

Floor Plan of Premises

 

 

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Shared mechanical room available space 3,377 RFS L2 diagnostics suite 309 yale neurology suit 353 available space 22,496 rsf yale mother’s room suites 3f-3g (eligible) architects (logo) partners floor three (eligible)

 

 

 

 

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EXHIBIT B

 

Subtenant’s Work

 

 

 

 

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EXHIBIT C

 

Rules and Regulations

 

Attached

 

 

 

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BUILDING RULES AND REGULATIONS

 

The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking garage (if any), the Property and the appurtenances. Capitalized terms have the same meaning as defined in the Lease.

 

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Winstanley Construction Management

Winstanley Property Management

Building Rules and Regulations

WE George Street, L.L.C.

300 George Street New Haven, CT 06511

 

 

Normal Construction Hours: 7:00 AM to 5:00 PM, Monday – Friday.

Alternative requirements/arrangements should be coordinated through Property Manager. A 48 hour notice is required, except in the event of an emergency.

Rules

All general contractors, subcontractors, suppliers, vendors, etc., shall be immediately advised of the following rules and regulations concerning their proper conduct within the building. If you are a general contractor, it is your responsibility to ensure that your subcontractors read and understand these rules and regulations.

Access to jobsite

Contractor must inform the Winstanley Construction Project Manager’s office in writing of construction start and completion dates. They must also provide the Winstanley Construction Project Manager’s office with a construction schedule and list of subcontractors, contract names and phone numbers. In addition, contractor must supply the Winstanley Construction Project Manager’s office with current certificates of insurance, per the contract specifications, for all contractors and subcontractors PRIOR TO THE COMMENCEMENT OF ANY ONSITE ACTIVITY. Winstanley Construction Management will further coordinate applicable details such as providing Winstanley Property Management at least 24 hour notice for access to buildings.

 

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Loading Dock

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Cooperation

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Technical Procedures

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Safety

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Damage Prevention

Other

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Exhibit 3.1

AMENDED AND RESTATED BY-LAWS

OF

ACHILLION PHARMACEUTICALS, INC.

 

Dated October 15, 2019

 

TABLE OF CONTENTS

 

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ARTICLE I

STOCKHOLDERS

1.1 Place of Meetings. All meetings of stockholders shall be held at such place as may be designated from time to time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President or, if not so designated, at the principal office of the corporation.

1.2 Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date and at a time designated by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President (which date shall not be a legal holiday in the place where the meeting is to be held). If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting.

1.3 Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, but such special meetings may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.

1.4 Notice of Meetings. Except as otherwise provided by law, notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. Without limiting the manner by which notice otherwise may be given to stockholders, any notice shall be effective if given by a form of electronic transmission consented to (in a manner consistent with the General Corporation Law of the State of Delaware) by the stockholder to whom the notice is given. The notices of all meetings shall state the place, date and time of the meeting and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If notice is given by mail, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. If notice is given by electronic transmission, such notice shall be deemed given at the time specified in Section 232 of the General Corporation Law of the State of Delaware.

1.5 Voting List. The Secretary shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least 10 days prior to the meeting: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the corporation. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

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1.6 Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, the holders of a majority in voting power of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person, present by means of remote communication in a manner, if any, authorized by the Board of Directors in its sole discretion, or represented by proxy, shall constitute a quorum for the transaction of business. A quorum, once established at a meeting, shall not be broken by the withdrawal of enough votes to leave less than a quorum.

1.7 Adjournments. Any meeting of stockholders may be adjourned from time to time to any other time and to any other place at which a meeting of stockholders may be held under these By-laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting, are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting.

1.8 Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by law or the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders may vote in person (including by means of remote communications, if any, by which stockholders may be deemed to be present in person and vote at such meeting) or may authorize another person or persons to vote for such stockholder by a proxy executed or transmitted in a manner permitted by the General Corporation Law of the State of Delaware by the stockholder or such stockholder’s authorized agent and delivered (including by electronic transmission) to the Secretary of the corporation. No such proxy shall be voted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period.

1.9 Action at Meeting. When a quorum is present at any meeting, any matter other than the election of directors to be voted upon by the stockholders at such meeting shall be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on such matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority in voting power of the shares of stock of that class present or represented and voting on such matter), except when a different vote is required by law, the Certificate of Incorporation or these By-laws. When a quorum is present at any meeting, any election by stockholders of directors shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election.

 

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1.10 Nomination of Directors.

(a) Except for (1) any directors entitled to be elected by the holders of preferred stock, (2) any directors elected in accordance with Section 2.7 hereof by the Board of Directors to fill a vacancy or newly-created directorships or (3) as otherwise required by applicable law or stock market regulation, only persons who are nominated in accordance with the procedures in this Section 1.10 shall be eligible for election as directors. Nomination for election to the Board of Directors at a meeting of stockholders may be made (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who (x) complies with the notice procedures set forth in Section 1.10(b) and (y) is a stockholder of record on the date of the giving of such notice and on the record date for the determination of stockholders entitled to vote at such meeting.

(b) To be timely, a stockholder’s notice must be received in writing by the Secretary at the principal executive offices of the corporation as follows: (i) in the case of an election of directors at an annual meeting of stockholders, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) in the case of the annual meeting of stockholders of the corporation to be held in 2007 or (y) in the event that the date of the annual meeting in any other year is advanced by more than 20 days, or delayed by more than 60 days, from the first anniversary of the preceding year’s annual meeting, a stockholder’s notice must be so received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (A) the 90th day prior to such annual meeting and (B) the tenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs; or (ii) in the case of an election of directors at a special meeting of stockholders, provided that the Board of Directors has determined that directors shall be elected at such meeting, not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of (x) the 90th day prior to such special meeting and (y) the tenth day following the day on which notice of the date of such special meeting was mailed or public disclosure of the date of such special meeting was made, whichever first occurs. In no event shall the adjournment or postponement of an annual meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

The stockholder’s notice to the Secretary shall set forth: (A) as to each proposed nominee (1) such person’s name, age, business address and, if known, residence address, (2) such person’s principal occupation or employment, (3) the class and number of shares of stock of the corporation which are beneficially owned by such person, and (4) any other information concerning such person that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (B) as to the stockholder giving the notice (1) such stockholder’s name and address, as they appear on the corporation’s books, (2) the class and number of shares of stock of the corporation which are owned, beneficially and of record, by such stockholder, (3) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (4) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the person(s) named in its notice and (5) a representation whether the stockholder intends or is part of a group which intends (x) to deliver a proxy

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statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to elect the nominee and/or (y) otherwise to solicit proxies from stockholders in support of such nomination; and (C) as to the beneficial owner, if any, on whose behalf the nomination is being made (1) such beneficial owner’s name and address, (2) the class and number of shares of stock of the corporation which are beneficially owned by such beneficial owner, (3) a description of all arrangements or understandings between such beneficial owner and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made and (4) a representation whether the beneficial owner intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock requirement to elect the nominee and/or (y) otherwise to solicit proxies from stockholders in support of such nomination. In addition, to be effective, the stockholder’s notice must be accompanied by the written consent of the proposed nominee to serve as a director if elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required to determine the eligibility of such proposed nominee to serve as a director of the corporation. A stockholder shall not have complied with this Section 1.10(b) if the stockholder (or beneficial owner, if any, on whose behalf the nomination is made) solicits or does not solicit, as the case may be, proxies in support of such stockholder’s nominee in contravention of the representations with respect thereto required by this Section 1.10.

(c) The chairman of any meeting shall have the power and duty to determine whether a nomination was made in accordance with the provisions of this Section 1.10 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s nominee in compliance with the representations with respect thereto required by this Section 1.10), and if the chairman should determine that a nomination was not made in accordance with the provisions of this Section 1.10, the chairman shall so declare to the meeting and such nomination shall be disregarded.

(d) Except as otherwise required by law, nothing in this Section 1.10 shall obligate the corporation or the Board of Directors to include in any proxy statement or other stockholder communication distributed on behalf of the corporation or the Board of Directors information with respect to any nominee for director submitted by a stockholder.

(e) Notwithstanding the foregoing provisions of this Section 1.10, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the corporation to present a nomination, such nomination shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the corporation. For purposes of this Section 1.10, to be considered a qualified representative of the stockholder, a person must be authorized by a written instrument executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such written instrument or electronic transmission, or a reliable reproduction of the written instrument or electronic transmission, at the meeting of stockholders.

 

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(f) For purposes of this Section 1.10, “public disclosure” shall include disclosure in a press release reported by the Dow Jones New Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

 

1.11 Notice of Business at Annual Meetings.

(a) At any annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (3) properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, (i) if such business relates to the nomination of a person for election as a director of the corporation, the procedures in Section 1.10 must be complied with and (ii) if such business relates to any other matter, the business must constitute a proper matter under Delaware law for stockholder action and the stockholder must (x) have given timely notice thereof in writing to the Secretary in accordance with the procedures set forth in Section 1.11(b) and (y) be a stockholder of record on the date of the giving of such notice and on the record date for the determination of stockholders entitled to vote at such annual meeting.

(b) To be timely, a stockholder’s notice must be received in writing by the Secretary at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) in the case of the annual meeting of stockholders of the corporation to be held in 2007 or (y) in the event that the date of the annual meeting in any other year is advanced by more than 20 days, or delayed by more than 60 days, from the first anniversary of the preceding year’s annual meeting, a stockholder’s notice must be so received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (A) the 90th day prior to such annual meeting and (B) the tenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs. In no event shall the adjournment or postponement of an annual meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

The stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (1) a brief description of the business desired to be brought before the annual meeting, the text relating to the business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the By-laws, the language of the proposed amendment), and the reasons for conducting such business at the annual meeting, (2) the name and address, as they appear on the corporation’s books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (3) the class and number of shares of stock of the corporation which are owned, of record and beneficially, by the stockholder and beneficial owner, if any, (4) a description of all arrangements or understandings between such stockholder or such beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of the stockholder or such beneficial owner, if any, in such business, (5) a

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representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting and (6) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to approve or adopt the proposal and/or (y) otherwise to solicit proxies from stockholders in support of such proposal. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any annual meeting of stockholders except in accordance with the procedures set forth in this Section 1.11; provided that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the corporation’s proxy statement for an annual meeting of stockholders shall be deemed to comply with the requirements of this Section 1.11. A stockholder shall not have complied with this Section 1.11(b) if the stockholder (or beneficial owner, if any, on whose behalf the nomination is made) solicits or does not solicit, as the case may be, proxies in support of such stockholder’s proposal in contravention of the representations with respect thereto required by this Section 1.11.

(c) The chairman of any meeting shall have the power and duty to determine whether business was properly brought before the meeting in accordance with the provisions of this Section 1.11 (including whether the stockholder or beneficial owner, if any, on whose behalf the proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s proposal in compliance with the representation with respect thereto required by this Section 1.11), and if the chairman should determine that business was not properly brought before the meeting in accordance with the provisions of this Section 1.11, the chairman shall so declare to the meeting and such business shall not be brought before the meeting.

(d) Notwithstanding the foregoing provisions of this Section 1.11, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual meeting of stockholders of the corporation to present business, such business shall not be considered, notwithstanding that proxies in respect of such vote may have been received by the corporation. For purposes of this Section 1.11, to be considered a qualified representative of the stockholder, a person must be authorized by a written instrument executed by the such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as a proxy at the meeting of stockholders and such person must produce such written instrument or electronic transmission, or a reliable reproduction of the written instrument or electronic transmission, at the meeting of stockholders.

(e) For purposes of this Section 1.11, “public disclosure” shall include disclosure in a press release reported by the Dow Jones New Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

 

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1.12 Conduct of Meetings.

(a) Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the Chairman’s absence by the Vice Chairman of the Board, if any, or in the Vice Chairman’s absence by the Chief Executive Officer, or in the Chief Executive Officer’s absence, by the President, or in the President’s absence by a Vice President, or in the absence of all of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen by vote of the stockholders at the meeting. The Secretary shall act as secretary of the meeting, but in the Secretary’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

(b) The Board of Directors may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the corporation as it shall deem appropriate including, without limitation, such guidelines and procedures as it may deem appropriate regarding the participation by means of remote communication of stockholders and proxyholders not physically present at a meeting. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as shall be determined; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

(c) The chairman of the meeting shall announce at the meeting when the polls for each matter to be voted upon at the meeting will be opened and closed. If no announcement is made, the polls shall be deemed to have opened when the meeting is convened and closed upon the final adjournment of the meeting. After the polls close, no ballots, proxies or votes or any revocations or changes thereto may be accepted.

(d) In advance of any meeting of stockholders, the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President shall appoint one or more inspectors of election to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is present, ready and willing to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by law, inspectors may be officers, employees or agents of the corporation. Each inspector, before entering upon the discharge of such inspector’s duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector shall have the duties prescribed by law and shall take charge of the polls and, when the vote in completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law.

 

1.13 No Action by Consent in Lieu of a Meeting. Stockholders of the corporation may not take any action by written consent in lieu of a meeting.

 

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ARTICLE II

DIRECTORS

2.1 General Powers. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation.

2.2 Number, Election and Qualification. Subject to the rights of holders of any series of Preferred Stock to elect directors, the number of directors of the Corporation shall be established by the Board of Directors. Election of directors need not be by written ballot. Directors need not be stockholders of the corporation.

(a) Classes of Directors. Subject to the rights of holders of any series of Preferred Stock to elect directors, the Board of Directors shall be and is divided into three classes, as nearly equal in number as possible, designated Class I, Class II and Class III. The Board of Directors is authorized to assign members of the Board of Directors already in office to Class I, Class II or Class III.

2.3 Terms of Office. Subject to the rights of holders of any series of Preferred Stock to elect directors, each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, that each director initially appointed to Class I shall serve for a term expiring at the corporation’s first annual meeting of stockholders; each director initially appointed to Class II shall serve for a term expiring at the corporation’s second annual meeting of stockholders; and each director initially appointed to Class III shall serve for a term expiring at the corporation’s third annual meeting of stockholders; provided further, that the term of each director shall continue until the election and qualification of a successor and be subject to such director’s earlier death, resignation or removal.

2.4 Quorum. The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors fixed by the Board of Directors shall constitute a quorum. If at any meeting of the Board of Directors there shall be less than such a quorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present.

2.5 Action at Meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law or by the Certificate of Incorporation.

2.6 Removal. Subject to the rights of holder of any series of Preferred Stock, directors of the corporation may be removed only for cause and only by the affirmative vote of the holders of at least 75% of the votes which all the stockholders would be entitled to cast in an election of directors.

 

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2.7 Vacancies. Subject to the rights of holder of any series of Preferred Stock, any vacancy or newly-created directorships on the Board of Directors, however occurring, shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director and shall not be filled by the stockholders. A director elected to fill a vacancy shall hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of a successor or until such director’s earlier death, resignation or removal.

2.8 Resignation. Any director may resign by delivering a resignation in writing or by electronic transmission to the corporation at its principal office or to the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some later time or upon the happening of some later event.

2.9 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders.

2.10 Special Meetings. Special meetings of the Board of Directors may be held at any time and place designated in a call by the Chairman of the Board, the Chief Executive Officer, the President, two or more directors, or by one director in the event that there is only a single director in office.

2.11 Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (a) in person or by telephone at least 24 hours in advance of the meeting, (b) by sending written notice via reputable overnight courier, telecopy or electronic mail, or delivering written notice by hand, to such director’s last known business, home or electronic mail address at least 48 hours in advance of the meeting, or (c) by sending written notice via first-class mail to such director’s last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting.

2.12 Meetings by Conference Communications Equipment. Directors may participate in meetings of the Board of Directors or any committee thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting.

2.13 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent to the action in writing or by electronic transmission, and the written consents or electronic transmissions are filed with the minutes of proceedings of the Board of Directors or committee.

 

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2.14 Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of law, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-laws for the Board of Directors. Except as otherwise provided in the Certificate of Incorporation, these Bylaws, or the resolution of the Board of Directors designating the committee, a committee may create one or more subcommittees, each subcommittee to consist of one or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.

2.15 Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary entities in any other capacity and receiving compensation for such service.

ARTICLE III

OFFICERS

3.1 Titles. The officers of the corporation shall consist of a Chief Executive Officer, a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chairman of the Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate.

3.2 Election. The Chief Executive Officer, President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting.

3.3 Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person.

 

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3.4 Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-laws, each officer shall hold office until such officer’s successor is elected and qualified, unless a different term is specified in the resolution electing or appointing such officer, or until such officer’s earlier death, resignation or removal.

3.5 Resignation and Removal. Any officer may resign by delivering a written resignation to the corporation at its principal office or to the Chief Executive Officer, the President or the Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some later time or upon the happening of some later event.

Any officer may be removed at any time, with or without cause, by vote of a majority of the directors then in office.

Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following such officer’s resignation or removal, or any right to damages on account of such removal, whether such officer’s compensation be by the month or by the year or otherwise, unless such compensation is expressly provided for in a duly authorized written agreement with the corporation.

3.6 Vacancies. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of Chief Executive Officer, President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of such officer’s predecessor and until a successor is elected and qualified, or until such officer’s earlier death, resignation or removal.

3.7 Chairman of the Board. The Board of Directors may appoint from its members a Chairman of the Board, who need not be an employee or officer of the corporation. If the Board of Directors appoints a Chairman of the Board, such Chairman shall perform such duties and possess such powers as are assigned by the Board of Directors and, if the Chairman of the Board is also designated as the corporation’s Chief Executive Officer, shall have the powers and duties of the Chief Executive Officer prescribed in Section 3.8 of these By-laws. Unless otherwise provided by the Board of Directors, the Chairman of the Board shall preside at all meetings of the Board of Directors and stockholders.

3.8 President; Chief Executive Officer. Unless the Board of Directors has designated the Chairman of the Board or another person as the corporation’s Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The Chief Executive Officer shall have general charge and supervision of the business of the Corporation subject to the direction of the Board of Directors. The President shall perform such other duties and shall have such other powers as the Board of Directors or the Chief Executive Officer (if the President is not the Chief Executive Officer) may from time to time prescribe. In the event of the absence, inability or refusal to act of the Chief Executive Officer or the President (if the President is not the Chief Executive Officer), the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the Chief Executive Officer and when so performing such duties shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer.

 

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3.9 Vice Presidents. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors.

3.10 Secretary and Assistant Secretaries. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents.

Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary.

In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the chairman of the meeting shall designate a temporary secretary to keep a record of the meeting.

3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned by the Board of Directors or the Chief Executive Officer. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation.

The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer.

3.12 Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors.

 

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ARTICLE IV

CAPITAL STOCK

4.1 Issuance of Stock. Subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any shares of the authorized capital stock of the corporation held in the corporation’s treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such lawful consideration and on such terms as the Board of Directors may determine.

4.2 Certificates of Stock. Every holder of stock of the corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by such holder in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman or Vice Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile.

Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, these By-laws, applicable securities laws or any agreement among any number of stockholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction.

There shall be set forth on the face or back of each certificate representing shares of such class or series of stock of the corporation a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the full text of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

4.3 Transfers. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws.

4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity and posting of such bond as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar.

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4.5 Record Date. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates.

If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. If no record date is fixed, the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose.

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

ARTICLE V

GENERAL PROVISIONS

5.1 Fiscal Year. Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the corporation shall begin on the first day of January of each year and end on the last day of December in each year.

5.2 Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors.

5.3 Waiver of Notice. Whenever notice is required to be given by law, by the Certificate of Incorporation or by these By-laws, a written waiver signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before, at or after the time stated in such notice, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

5.4 Voting of Securities. Except as the Board of Directors may otherwise designate, the Chief Executive Officer, the President or the Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at any meeting of stockholders or securityholders of any other entity, the securities of which may be held by this corporation.

 

5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action.

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5.6 Certificate of Incorporation. All references in these By-laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time.

5.7 Severability. Any determination that any provision of these By-laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-laws.

5.8 Pronouns. All pronouns used in these By-laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.

5.9 Forum for Adjudication of Certain Disputes. Unless the corporation consents in writing to the selection of an alternative forum (an “Alternative Forum Consent”), the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder, employee or agent of the corporation to the corporation or the corporation’s stockholders, (iii) any action asserting a claim against the corporation or any director, officer, stockholder, employee or agent of the corporation arising out of or relating to any provision of DGCL or the Certificate of Incorporation or these By-laws, or (iv) any action asserting a claim against the corporation or any director, officer, stockholder, employee or agent of the corporation governed by the internal affairs doctrine of the State of Delaware; provided, however, that, in the event that the Court of Chancery of the State of Delaware lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Delaware, in each such case, unless the Court of Chancery (or such other state or federal court located within the State of Delaware, as applicable) has dismissed a prior action by the same plaintiff asserting the same claims because such court lacked personal jurisdiction over an indispensable party named as a defendant therein. Failure to enforce the foregoing provisions would cause the corporation irreparable harm and the corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provisions. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Section 5.9. If any action the subject matter of which is within the scope of this Section 5.9 is filed in a court other than the Court of Chancery of the State of Delaware (or any other state or federal court located within the State of Delaware, as applicable) (a “Foreign Action”) by or in the name of any stockholder, such stockholder shall be deemed to have consented to (i) the personal jurisdiction of the Court of Chancery of the State of Delaware (or such other state or federal court located within the State of Delaware, as applicable) in connection with any action brought in any such court to enforce this Section 5.9 and (ii) having service of process made upon such stockholder in any such action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder. The existence of any prior Alternative Forum Consent shall not act as a waiver of the corporation’s ongoing consent right as set forth above in this Section 5.9 with respect to any current or future actions or claims.

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ARTICLE VI

AMENDMENTS

These By-laws may be altered, amended or repealed, in whole or in part, or new By-laws may be adopted by the Board of Directors or by the stockholders as provided in the Certificate of Incorporation.

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Exhibit 31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)

and 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Joseph Truitt, certify that:

 

Dated: November 7, 2019

Exhibit 31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)

and 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Brian Di Donato, certify that:

 

Dated: November 7, 2019

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Achillion Pharmaceuticals, Inc. (the “Company”) for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Joseph Truitt, President and Chief Executive Officer of the Company, hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18, United States Code, that to his knowledge:

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Achillion Pharmaceuticals, Inc. (the “Company”) for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Brian Di Donato, Chief Financial Officer of the Company, hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18, United States Code, that to her knowledge:

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.