CMTA Clementia Pharmaceuticals Inc.

The following tables present our selected financial data for the periods and as of the dates indicated and have been derived from the audited consolidated financial statements of the Company. Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB. You should read these tables in conjunction with our audited consolidated financial statements and accompanying notes thereto included in Item 18 of this Annual Report and Item 5 “Operating and Financial Review and Prospects” section of this Annual Report. Unless otherwise indicated, all references to “dollars” or the use of the symbol “$” are to United States dollars, the Company’s functional currency.

Our historical results are not necessarily indicative of the results that should be expected in any future period.

All of our operations are continuing operations.

Consolidated statements of operations data

Consolidated statements of financial position data

Exchange rate data

The following table sets forth, for the periods indicated, the high, low, average and end of period noon rates of exchange for one U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada during the respective periods.

On March 28, 2019, the Bank of Canada indicative rate of exchange was $1.00 = C$1.3429.

Not applicable.

Not applicable.

Our business involves a high degree of risk. Please carefully consider the risks we describe below in additional to the other information set forth elsewhere in this annual report and our other filings with the SEC. These material risks could adversely affect our business, financial condition and results of operations. See “Cautionary Note Regarding Forward-Looking Statements”.

Risks Related To Our Financial Position and Need For Capital

We are a clinical stage biopharmaceutical company with a limited operating history and have not generated any revenue from product sales. We have incurred significant operating losses and negative operating cash flows since our inception and anticipate that we will incur continued losses for the foreseeable future.

We are a clinical stage company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We were incorporated in November 2010. Our operations to date have been limited primarily to organizing and staffing our Company, raising capital and conducting research and development activities for palovarotene and other product candidates. We have never generated any revenue from product sales. We have not obtained regulatory approvals for palovarotene or any other product candidate.

We have funded our operations to date primarily through proceeds from our IPO and other public offerings, as well as issuances of redeemable convertible preferred stock. From our inception through December 31, 2018, we received gross proceeds of $137.9 million from our IPO, $80.8 million from our follow-on offering, and $102.2 million from the sale of our convertible and redeemable preferred shares. As of December 31, 2018, our cash and short-term investments were $170.0 million. We have incurred net losses in each year since our inception. Our net losses were $58.1, $115.5, $57.5, $75.9 and $12.3 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively, and our negative operating cash flows were $49.1, $35.6, $18.8, $17.6 and $9.7 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively. The majority of our operating losses have resulted from non-cash financing charges incurred in connection with the accounting for our preferred shares and embedded derivatives from 2014 to 2017, as well as costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our accumulated deficit and working capital. In addition, if we obtain marketing approval for palovarotene or any other product candidate, we will incur significant sales, marketing and outsourced-manufacturing expenses. We will also continue to incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from palovarotene or any other product candidate and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to sell, palovarotene. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

Absent our entering into a collaboration or partnership agreement, we expect to incur significant sales and marketing costs as we prepare to commercialize palovarotene or any other product candidates. Even if we initiate and successfully complete pivotal clinical trials of palovarotene or any other product candidates, and any such product candidate is approved for commercial sale, and despite expending these costs, our product candidate may not be a commercially successful drug. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.

We expect to need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

We are currently advancing palovarotene through clinical development. Developing our product candidates is expensive, and we expect our research and development and commercialization expenses to increase substantially in connection with our ongoing activities, particularly as we advance palovarotene in clinical trials. Depending on the status of regulatory approval or, if approved, commercialization of palovarotene or any other product candidates, as well as the progress we make in selling palovarotene or any other product candidates, we will require additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for palovarotene or any other product candidates or otherwise expand more rapidly than we presently anticipate.

As of December 31, 2018, our cash and short-term investments were $170.0 million. We expect that our existing cash and short-term investments will be sufficient to fund our operating expenses for at least the next twelve months following December 31, 2018. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to fund operations until profitability is achieved, if ever. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize palovarotene or any other product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates, or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

Risks Related to Product Development, Regulatory Approval and Commercialization

We depend heavily on the success of our only current product candidate, palovarotene, for which as of the date of this Annual Report, we have completed a Phase 2 clinical trial, and have initiated a Phase 3 trial in FOP and initiated a Phase 2 clinical trial in MO. We cannot be certain that we will be able to develop, obtain regulatory approval of, or successfully commercialize palovarotene for FOP, MO or any other indication.

We currently have no drug products for sale and may never be able to successfully develop drug products. We have invested the vast majority of our efforts and resources into the development of our only current product candidate, palovarotene, for the treatment of FOP and MO. Our business thus depends heavily on the successful non-clinical and clinical development, regulatory approval and commercialization of palovarotene, for which we have initiated, or are preparing to initiate clinical trials for the treatment of FOP and MO.

Palovarotene will require substantial additional clinical development, testing and regulatory approval before we may be permitted to commence its commercialization. The clinical trials of our product candidate are, and the manufacturing and marketing of our product candidate will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market this or any other product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through clinical trials that the applicable product candidate is safe and effective for use for the target indication. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. This process can take many years and may include post-marketing studies and surveillance, which may require the expenditure of substantial resources beyond the proceeds we raised in our IPO. Of the large number of drugs in development in the United States at any time, only a small percentage will successfully complete the U.S. Food and Drug Administration (FDA) regulatory approval process and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and clinical trials, we cannot assure you that our product candidate will be successfully developed or commercialized.

We are not permitted to market our product candidate in the United States until we receive approval of a new drug application (NDA) from the FDA, or market in any foreign countries until we receive the requisite approval from such countries. We recently met with the FDA and the agency agreed that we may submit our NDA for palovarotene based on our Phase 2 results in FOP. There is no guarantee that our NDA submission will be accepted for filing, or that palovarotene will be approved on the basis of these results. We will also meet with regulatory agencies in other countries to determine if our existing data is sufficient for filing. There is no guarantee that our Phase 2 results will be sufficient for filing in international markets. We also have an ongoing Phase 3 clinical trial to study a chronic and episodic regimen of palovarotene in patients with FOP. There is no guarantee that this trial will be successful or that the FDA will accept a supplemental NDA (sNDA) for this additional regimen. We have initiated a Phase 2 trial using palovarotene for the treatment of MO. While the FDA has recommended that we conduct a Phase 2 trial to inform the optimal dose and the appropriate choice of endpoints in MO followed by a Phase 3 trial, we believe that this Phase 2 study may, if it provides statistically strong evidence of an important clinical benefit, be sufficient for us to submit an NDA for palovarotene for MO. However, there is no guarantee that we will not be required to perform an additional pivotal trial of palovarotene in MO in order to gain approval. Moreover, the FDA has stated their preference for a Phase 2 trial followed by a Phase 3 trial. We cannot be certain that the FDA will not require that we conduct additional pivotal trials before we can submit an NDA for palovarotene for any indication.

The FDA may require that we conduct additional toxicity studies and may also require us to conduct additional non-clinical studies before submitting an NDA for palovarotene.

Obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of our product candidate for many reasons, including, among others:

Any of these factors and others, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market palovarotene or any other product candidate. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

The number of patients suffering from FOP and MO is small and has not been established with precision. If the actual number of patients with FOP or MO is smaller than we anticipate, we may encounter difficulties in enrolling patients in our clinical trials, thereby delaying or preventing development of palovarotene or any other product candidate, and if palovarotene or any other product candidate is approved, our revenue and ability to achieve profitability may be materially adversely affected.

There is no precise method of establishing the actual number of patients with FOP or MO in any geography over any time period. We estimate that the number of individuals affected by FOP is approximately 1.3 individuals per million lives globally and the number of individuals affected by MO is approximately 20 individuals per million lives worldwide. If we are not able to identify and recruit a sufficient number of FOP or MO patients, we will have difficulty completing our clinical trials. Because the estimated number of patients is so small, and particularly if the actual number of patients with FOP or MO is lower than we believe, we may be adversely affected.

Further, if palovarotene or any other product candidate is approved, the markets for FOP or MO could be smaller than we anticipate, which could limit our ability to achieve profitability.

If serious adverse events or unacceptable side effects are identified during the development of palovarotene or at any other time, we may need to delay, limit or terminate our clinical development activities, and such adverse events or unacceptable side effects may negatively impact the regulatory approval and commercial profile of palovarotene, and have other significant negative consequences.

Clinical trials by their nature utilize a sample of the potential patient population. Accordingly, any rare and severe side effects of palovarotene may be uncovered only in later stages of our product development activities or only in subsequent trials that we may conduct. Many product candidates that initially showed promise in early stage testing have later been found to cause side effects that prevented their further development. We have observed an increase in specific mucocutaneous side effects when higher doses of palovarotene are administered. These included dry skin, skin exfoliation, erythema (redness) generalized or localized pruritus (or itchiness), excoriation (or skin abrasion), rash and alopecia (or hair loss). These mucocutaneous side-effects may have required dose de-escalations. We are evaluating in our Phase 3 trial a chronic dosing regimen for a duration that will support lifetime chronic dosing of palovarotene and as a result, the severity of side effects observed to date may increase and new side effects may emerge. Since palovarotene is a retinoid and therefore a teratogen, women who are or expect to become pregnant will not be able to take palovarotene and major fetal abnormalities may occur if it is taken, as any fetus that is exposed can be affected. Moreover, the development of palovarotene or any other product candidate may cause certain undesirable side effects in certain patient populations or have characteristics that are unexpected, and we may need to abandon development or limit development to more narrow 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, any of which could adversely affect our business, prospects, financial condition and results of operations.

Further, it is possible that rare and severe side effects of palovarotene or any other product candidate may only be uncovered after palovarotene or any other product candidate receives marketing approval. This would result in a number of potentially significant negative consequences, including:

We believe that any of such events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing palovarotene or any other product candidate and significantly impact our ability to successfully commercialize palovarotene or any other product candidate and generate revenues.

Results from early clinical trials of palovarotene or any other product candidate are not necessarily predictive of the results of later nonclinical studies and clinical trials of palovarotene or any other product candidate. If later clinical trials are not successful, we will not be able to successfully develop, obtain regulatory approval for and commercialize palovarotene or any other product candidate.

Any trends we observe and results we obtain from our early clinical trials of palovarotene or any other product candidate may not necessarily be predictive of the results from later clinical trials. For example, as is common with Phase 2 trials, particularly with the first clinical trials to be conducted in a patient population, we explored numerous endpoints and analyzed the data from our Phase 2 clinical trials of palovarotene in a number of ways. Product candidates such as palovarotene in Phase 3 clinical trials may fail to demonstrate sufficient efficacy despite having progressed through initial clinical trials, even if certain analyses of primary or secondary endpoints or cross-study comparisons of pooled results in those early trials showed trends toward efficacy. Much of the data we present on the use of palovarotene for the treatment of FOP is drawn from the results of multiple clinical trials which have been pooled and then analyzed. While we believe this data is useful in informing the design of future clinical trials in palovarotene, cross-study comparisons of pooled results involve the inherent bias of post-hoc manipulation of data and choice of analytical methods, as well as methodological issues surrounding heterogeneity among studies contributing to the analyses; therefore, it is important to view such results in light of the totality of all available information, such as individual study results on pre-specified analyses of endpoints. Prior to obtaining approval for palovarotene, the results of our registration trials may have to demonstrate statistically significant improvements. Also, our later-stage clinical trials could differ in significant ways from our Phase 2 clinical trials of palovarotene, which may cause the outcome of these later-stage trials to differ from our earlier stage clinical trials. These differences may include changes to inclusion and exclusion criteria, efficacy endpoints and statistical design. For example, our Phase 3 clinical trial in FOP has implemented a chronic dosing regimen with increased dosing in the case of flare-ups and a primary endpoint of new HO volume as measured by whole body CT scans (WCTBs). This dosing regimen and primary endpoint of annualized change in new HO volume is different from those of our PVO-1A-201 study (‘201 study) and Part A of our PVO-1A-202 study (‘202 study), and different from the data we present herein on the use of palovarotene for the treatment of FOP; this Phase 3 primary endpoint is a continuous variable rather than a discrete, responder analysis, as was performed in our ‘201 study and Part A of our ‘202 study. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, non-clinical findings made while clinical trials were underway or safety or efficacy observations made in non-clinical studies and clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in non-clinical studies and clinical trials nonetheless failed to obtain FDA approval. If we fail to produce positive results in our clinical trials of palovarotene or any other product candidate, the development timeline and regulatory approval and commercialization prospects for palovarotene or any other product candidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.

Failures or delays in the commencement or completion of our planned clinical trials of palovarotene or any other product candidate could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

Successful completion of our clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of palovarotene. We have completed one Phase 2 trial which will form the basis of our NDA for palovarotene submission in 2019, we have initiated a Phase 3 trial which may expand the labeling for palovarotene in FOP, we have initiated one Phase 2 clinical trial in MO in April of 2018 and we initiated a Phase 1 trial of an ophthalmic formulation of palovarotene in October of 2018; however, we do not know if these trials or any future clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board, overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:

Product development costs for palovarotene for FOP, MO or for any other future indications we may pursue or for any other product candidates we may develop in the future will increase if we have delays in testing, or if we need to perform more or larger clinical studies than planned. If we experience delays in completion of any of our clinical trials, or if we, the FDA, other regulatory authorities, IRBs or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials of palovarotene for any indication, its commercial prospects may be harmed and our ability to generate product revenues will be delayed, if we are able to generate product revenue at all. Any delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial or even withdrawal of regulatory approval of palovarotene for any indication. In addition, if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of palovarotene could be significantly reduced.

We have never submitted an NDA before, and may be unable to do so for palovarotene.

The successful submission of an NDA is a complicated process. We have limited experience in preparing and submitting regulatory filings and have not submitted an NDA before. Consequently, we may be unable to successfully and efficiently execute and complete these planned clinical trials in a way that leads to NDA submission and approval of palovarotene. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of drug candidates that we develop. Failure to commence or complete, or delays in, our planned clinical trials would prevent or delay commercialization of palovarotene.

Potential changes in regulatory requirements, FDA guidance or unanticipated events during clinical trials of palovarotene or any other product candidate may result in changes to clinical trial protocols or additional non-clinical studies and clinical trial requirements, which could result in increased costs to us and could delay our development timeline.

Changes in regulatory requirements, FDA guidance or unanticipated events during our clinical trials may force us to amend clinical trial protocols or cause the FDA to impose new or additional clinical trial requirements. For example, based on our discussions with the FDA, the FDA has indicated that new HO volume is a clinically meaningful outcome for our clinical trials for palovarotene in FOP. However, there can be no assurance that the FDA may not later determine that mean new HO volume does not qualify as a clinically meaningful endpoint for our clinical trials for palovarotene. Further, we have had discussions with the FDA regarding endpoints related to our Phase 2 clinical trial in MO and we cannot be certain that the proposed study design will be acceptable to the FDA or that additional clinical studies will not be required. We have not yet discussed with the FDA our clinical trial for surgical release in FOP.

Amendments or changes to our clinical trial protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of clinical trials. If we experience delays completing, or if we terminate, any of our clinical trials, or if we are required to conduct non-clinical studies or additional clinical trials, the commercial prospects for palovarotene and any other product candidate may be harmed and our ability to generate product revenue will be delayed, if we are able to generate product revenue at all.

We rely, and expect that we will continue to rely, on third parties to conduct clinical trials for palovarotene and any other product candidate. If these third parties do not successfully carry out their contractual duties or fail to meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize palovarotene and any other product candidate and our business could be substantially harmed.

We do not have the ability to independently conduct clinical trials. We rely on universities, contract laboratories and other third parties, such as CROs, to conduct clinical trials on palovarotene and any other product candidate. We enter into agreements with third-party CROs to provide monitors for and to manage data for our ongoing clinical trials. We rely heavily on these parties for execution of clinical trials for palovarotene and any other product candidate and control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may, among other things:

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with regulations and guidelines, including current Good Clinical Practices (cGCPs) for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations and standards are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCPs regulations and standards through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.

Although we design our clinical trials for palovarotene and will do so for any future product candidate, CROs conduct all of the clinical trials. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of palovarotene and any other product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote to our program or our clinical products. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

If any of our relationships with these third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize palovarotene and any other product candidate. As a result, we believe that our financial results and the commercial prospects for palovarotene and any other product candidate in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

Sales of counterfeit palovarotene or unauthorized sales of palovarotene may have a material adverse effect on our revenues, business, results of operations and damage our brand and reputation.

Palovarotene may become subject to competition from counterfeit pharmaceutical products, which are pharmaceutical products sold under the same or very similar brand names and/or having a similar appearance to genuine products, but which are sold without proper licenses or approvals. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product.

Obtaining regulatory approval for palovarotene is a complex and lengthy process. If during the period while the regulatory approval is pending illegal sales of counterfeit palovarotene begin, consumers may buy such counterfeit palovarotene, which could have an adverse impact on our revenues, business and results of operations. In addition, if illegal sales of counterfeit palovarotene result in adverse side effects to consumers, we may be associated with any negative publicity resulting from such incidents.

Although pharmaceutical regulation control and enforcement systems throughout the world have been increasingly active in policing counterfeit pharmaceuticals, we may not be able to prevent third parties from manufacturing, selling or purporting to sell counterfeit products competing with our product candidate.

Further, we are aware that third parties are manufacturing unauthorized palovarotene for research use, and it is possible that unauthorized sales of palovarotene may be made through such channels without our knowledge.

The existence and any increase in production or sales of counterfeit palovarotene or unauthorized palovarotene could negatively impact our revenues, brand reputation, business and results of operations.

We rely completely on one third-party supplier to manufacture the active pharmaceutical ingredient (API) for palovarotene and another third-party supplier to manufacture final drug product, and we intend to rely on third parties to produce non-clinical, clinical and commercial supplies of any future product candidates.

We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of palovarotene, or any future product candidates, for use in the conduct of our non-clinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. We currently have the API for palovarotene manufactured by one supplier and final drug product supplied by another supplier. At this time, we have not identified secondary sources of clinical supplies of palovarotene and identifying an additional manufacturer would require significant delay and likely significant additional cost.

The facilities used by contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product will generally be required to complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after we submit our NDA or relevant foreign regulatory submission to the applicable regulatory agency.

We do not control the manufacturing process of, and are completely dependent on, our contract supplier to comply with cGMPs for manufacture of the API for our clinical trials, and upon another supplier for manufacture of final drug product. These manufacturers must successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies. In addition, although we have no direct control over these manufacturers’ ability to maintain adequate quality control, quality assurance and qualified personnel, we are responsible for ensuring that our materials and product candidates are manufactured in accordance with cGMPs. Furthermore, these manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the status of their facilities generally. If the FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidate are noncompliant, any pending NDAs or other applications for marketing authorization may not be approved until the facilities have a compliance status that is acceptable to the FDA or an applicable foreign regulatory agency. In such case, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market palovarotene and any future product candidate. Our reliance on these manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.

We do not have long-term supply agreements in place with any party, and each batch of palovarotene is individually contracted under a quality and supply agreement. If we engage new contractors, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon the same manufacturers and, potentially, collaboration partners to manufacture commercial quantities of palovarotene, if approved.

If we are unable to obtain the supplies we need at a reasonable price or on a timely basis, it could have a material adverse effect on our ability to complete the development of palovarotene or, if we obtain regulatory approval for palovarotene, to properly commercialize it.

Even though we have obtained orphan drug designation for palovarotene as a treatment for FOP and MO, there may be limits to the regulatory exclusivity afforded by such designation.

Even though we obtained orphan drug designation in July 2014 for palovarotene for the treatment of FOP by the FDA and the EMA, and in November 2017 for palovarotene for the treatment of MO by the FDA, there are limitations to exclusivity afforded by such designation. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs such as palovarotene, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active moiety as an already approved drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient care.

In Europe, orphan drugs may be able to obtain ten years of marketing exclusivity and up to an additional two years on the basis of qualifying pediatric studies. However, orphan exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria. Additionally, a marketing authorization holder may lose its orphan exclusivity if it consents to a second orphan drug application or cannot supply enough drug. Orphan drug exclusivity also can be lost when a second applicant demonstrates its drug is “clinically superior” to the original orphan drug.

Even though we have obtained Fast Track Designation from the FDA for palovarotene for the treatment of FOP, it may not lead to a faster development or regulatory review or approval process and does not increase the likelihood that palovarotene will receive marketing 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 needs for this condition, the drug sponsor may apply to the FDA for Fast Track Designation. Even though we have obtained Fast Track Designation for palovarotene for the treatment of FOP, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program. Many drugs that have received Fast Track Designation have failed to obtain approval.

Even though we have obtained Breakthrough Therapy Designation from the FDA for palovarotene for the treatment of FOP, it may not lead to a faster development or regulatory review or approval process and does not increase the likelihood that palovarotene will receive marketing approval.

The Breakthrough Therapy Designation is intended to expedite the development and review of products that treat serious or life-threatening conditions where “preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation of a product candidate as a Breakthrough Therapy provides potential benefits that include but are not limited to more frequent meetings with the FDA to discuss the development plan for the product candidate and ensure collection of appropriate data needed to support approval; more frequent written correspondence from the FDA about such things as the design of the proposed clinical trials; guidance on an efficient drug development program; organization commitment involving senior managers; and eligibility for rolling review and priority review. Breakthrough Therapy Designation does not change the standards for product approval. Even though we have obtained Breakthrough Therapy Designation for palovarotene for the treatment of FOP, we may not experience a faster development process, review or approval compared to conventional FDA procedures. Many drugs that have received Breakthrough Therapy Designation have failed to obtain approval.

Even though we have obtained a Rare Pediatric Disease designation from the FDA for palovarotene for the treatment of FOP, it does not guarantee that the NDA for the product will qualify for a priority review voucher upon approval, and it does not lead to a faster development or regulatory review process, or increase the likelihood that any of our product candidates will receive marketing approval.

Under the Rare Pediatric Disease Priority Review Voucher program, upon the approval of a qualifying NDA for the treatment of a rare pediatric disease, the sponsor of such an application would be awarded a rare pediatric disease priority review voucher that can be used to obtain priority review for a subsequent NDA or BLA (Biologic License Application). In February 2019, the FDA notified us that we obtained Rare Pediatric Disease designation for palovarotene for the treatment of patients with FOP. If a product candidate is designated before October 1, 2020, as is the case with palovarotene, the sponsor of a qualifying NDA for such a product is eligible to receive a voucher if the NDA is approved before October 1, 2022. However, there is no guarantee that any of our product candidates will be approved by that date, or at all, and, therefore, we may not be in a position to obtain a priority review voucher prior to expiration of the program, unless Congress further reauthorizes the program. Additionally, designation of a drug for a rare pediatric disease does not guarantee that an NDA will meet the other eligibility criteria for a rare pediatric disease priority review voucher at the time the application is approved. Finally, a Rare Pediatric Disease designation does not lead to faster development or regulatory review of the product, or increase the likelihood that it will receive marketing approval.

Expanded access studies may provide safety or efficacy data that differ from controlled clinical trials and could delay or limit approval.

Expanded access studies are uncontrolled, either carried out by individual investigators or under company-sponsored protocols, and may not be conducted in strict compliance with cGCPs or in identical patient populations to those studied in controlled studies, all of which can lead to a treatment effect which may differ from that in controlled trials. In addition, these studies provide only anecdotal evidence of efficacy for regulatory review, are not designed to be aggregated or reported as study results, and may provide highly variable information in light of the small number of patients.

Expanded access programs provide supportive safety information for regulatory review, and this safety information, including adverse events and any safety signals observed, will be reviewed as part of any palovarotene NDA we may submit. Any adverse events or reactions experienced by subjects in the expanded access program may be attributed to palovarotene and may delay or limit our ability to obtain regulatory approval with labeling that we consider desirable, or at all.

Even if we receive marketing approval for palovarotene in the United States, we may never receive regulatory approval to market palovarotene outside of the United States.

We have selected markets outside of the United States, including but not limited to parts of Europe, Asia, South America and Canada, where we intend to seek regulatory approval to market palovarotene. In order to market any product outside of the United States, however, we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of any such other country. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market palovarotene in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell palovarotene or any other product candidate, we may not be able to generate any revenue.

We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market palovarotene or any other product candidate, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.

Even if we receive marketing approval for palovarotene or any other product candidate, our product candidate may not achieve broad market acceptance, which would limit the revenue that we generate from its sales.

The commercial success of palovarotene or any other product candidate, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of palovarotene or any other product candidate among the medical community, including physicians, patients and healthcare payors. Market acceptance of palovarotene or any other product candidate, if approved, will depend on a number of factors, including, among others:

If palovarotene or any other product candidate is approved but does not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from palovarotene or any other product candidate to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that palovarotene or any other product candidate, in addition to treating its intended target indication, also provides incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of palovarotene and any other product candidate may require significant resources and may have limited or no success.

If we obtain approval to commercialize palovarotene or any other product candidate outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

If palovarotene or any other product candidate is approved for commercialization, we may enter into agreements with third parties to market it outside of the United States. We expect that we will be subject to additional risks related to entering into international business relationships, including:

Even if we receive marketing approval for palovarotene or any other product candidate, we may still face future development and regulatory difficulties.

Even if we receive marketing approval for palovarotene or any other product candidate, regulatory authorities may still impose significant restrictions on palovarotene or any other product candidate, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies. Palovarotene and any other product candidate will also be subject to ongoing FDA requirements governing the labeling, packaging, storage and promotion of the product as well as record keeping, submission of safety and other post-market information, and prohibitions regarding the promotion of off-label uses.

The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a Risk Evaluation and Mitigation Strategy. Any Risk Evaluation and Mitigation Strategy required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue. Further, the FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, and we could be subject to significant liability if, for example, physicians prescribe palovarotene to their patients in a manner that is inconsistent with the approved label and we are found to have promoted such off-label uses.

Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with palovarotene or any other product candidate, such as adverse events of unanticipated severity or frequency, or problems with the facility where our product candidate is manufactured, a regulatory agency may impose restrictions or penalties on our product candidate, the manufacturer or us, including requiring withdrawal of our product candidate from the market or suspension of manufacturing.

The occurrence of any regulatory penalty may inhibit or preclude our ability to commercialize palovarotene and any other future product candidates we may develop which in turn would inhibit or preclude our ability to generate revenue.

Competing therapies could emerge, adversely affecting our opportunity to generate revenue from the sale of our product candidate.

The biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of products that may be similar to palovarotene or any other product candidate or address similar markets. We believe it is probable that the number of companies seeking to develop products and therapies similar to our product will increase. Gene therapy, cell therapy and other approaches may also emerge for the treatment of any of the disease areas in which we focus.

Currently, there are no therapies that have been specifically approved for treatment of FOP. However, products approved for other indications, for example, corticosteroids and non-steroidal anti-inflammatory drugs, are used off-label to manage FOP symptoms during flare-ups, though none of these medications has been shown to prevent HO. Further, we are aware that Regeneron Pharmaceuticals Inc. is conducting a Phase 2 clinical trial in adults with FOP. Blueprint Medicines Corporation, BioCryst Pharmaceuticals, Keros Therapeutics and La Jolla Pharmaceutical Company are each in early stages of development of therapies for the treatment of FOP. See Item 4B, “Business Overview” for a more detailed discussion.

Many of our potential competitors, alone or with their strategic partners, could have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of treatments and the commercialization of those treatments. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

We may not be able to establish collaborations, and, if we are able to establish collaborations, we may not be able to establish them on commercially reasonable terms, which could result in alterations or delays of our development and commercialization plans.

Our drug development program and the potential commercialization of palovarotene and any other product candidate will require substantial additional cash to fund expenses. We may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of palovarotene and any other product candidate. We may be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators.

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 design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

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, reduce or delay its development program, 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 candidate or bring it to market and generate product revenue.

In addition, any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

We may not be successful in potential future efforts to identify or discover additional product candidates or we may expend our limited 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.

The success of our business depends primarily upon our ability to identify, develop and commercialize products. Although palovarotene is in clinical development, our research programs may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

Because we have limited financial and management resources, we are currently focused on our FOP and MO programs. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs 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 drugs. 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 future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations.

We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Although we do not currently have any products on the market, once we begin commercializing our product, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of our product candidate, if approved. Our future arrangements with third-party payors will 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 our product candidate, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do 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, including anticipated activities to be conducted by our sales team, were 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 and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

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

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, was enacted, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act, among other things, imposed reporting requirements on manufacturers related to drug samples and financial relationships with physicians and teaching hospitals, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual fees on manufacturers of certain branded prescription drugs, and established a Medicare Part D coverage gap discount program. The healthcare regulatory environment in the U.S. is still in flux, and judicial challenges and legislative initiatives to modify, limit, or repeal the Affordable Care Act continue, and may increase in light of the change in administration following the 2016 U.S. presidential election. For example, a recent Executive Order signed by the U.S. President directed executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of provisions of the Affordable Care Act that would impose a fiscal or regulatory burden on individuals and certain entities to the maximum extent permitted by law. In addition, the future implementation of the Affordable Care Act is not assured. By way of example, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the Affordable Care Act. The Budget Resolution is not a law; however, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. Congress has also proposed and may in the future propose legislation to replace elements of the Affordable Care Act that are repealed. We cannot predict the impact on our business of changes to current laws and regulations. However, any changes that lower reimbursements for products for which we may obtain regulatory approval, or that impose administrative and financial burdens on us, could adversely affect our business.

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. These changes include, among others, aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, starting in 2013. We expect that additional state and federal healthcare reform measures will be adopted in the future, which may alter or completely replace the existing healthcare financing structure. Any of these reform measures could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for any such product candidate that we may have developed or additional pricing pressures on our business. Similar initiatives and legislations may come into force in other jurisdictions as well, such as in the different countries of the European Union, where price ceilings and rebate systems are essential parts of the reimbursement of medicinal products. Some of these systems are being adapted on a regular or irregular basis to further reduce drug prices.

Even if approved, reimbursement policies could limit our ability to sell palovarotene and any other product candidate.

Market acceptance and sales of palovarotene and any other product candidate will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure what the level of reimbursement will be for palovarotene and any future product candidate and, if any reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, palovarotene and any other product candidate. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize palovarotene and any other product candidate. In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate with other available therapies. If reimbursement for our product candidate is unavailable in any country in which we seek reimbursement, limited in scope or amount, conditioned upon our completion of additional clinical trials, or set at unsatisfactory levels, our operating results could be materially adversely affected.

Risks Related To Our Intellectual Property Rights

We are heavily dependent on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we would not be able to continue developing or commercializing palovarotene or any other product candidate, if approved. If we breach any of the agreements under which we license the use, development and commercialization rights to palovarotene or any other product candidate or technology from third parties or if certain insolvency events were to occur, we could lose license rights that are important to our business.

We are a party to a number of license agreements under which we are granted rights to intellectual property that are important to our business and we may need to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that any future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. See Item 4B “Business Overview” for a description of our existing license agreements, which includes a description of the termination provisions of each such agreement.

As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of palovarotene or any other product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against palovarotene or any other product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.

Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

We may enter into additional licenses to third-party intellectual property that are necessary or useful to our business. Our current licenses and any future licenses that we may enter into impose various royalty payments, milestones, diligence and other obligations on us. If we fail to comply with any of our obligations under a current or future license agreement, such licensor may allege that we have breached our license agreement and may accordingly seek to terminate our license with them. In addition, future licensors may decide to terminate any such license at will. Termination of any of our current or future licenses could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize palovarotene or any other product candidate, if approved, as well as harm our competitive business position and our business prospects. Moreover, our current or future licenses may provide for a reversion to the licensor of our rights in regulatory filings or other intellectual property or data that we regard as our own in the event the license terminates under certain circumstances, such as due to breach.

In addition, if our current or future licensors fail to abide by the terms of the applicable license, if the licensors fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms, if at all, our business could suffer.

Moreover, our licensors under current licenses retain and our licensors under future licenses may retain certain rights and obligations. For example, the licensor may retain control over patent prosecution and maintenance under a license agreement, in which case we may not be able to adequately influence patent prosecution or prevent inadvertent lapses of coverage due to failure to pay maintenance fees. Similarly, the licensor may retain the sole right or a first right to enforce the licensed patents against infringement, in which case we may not be able to adequately influence or may be delayed in enforcing certain licensed patents.

Some intellectual property that we have licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers.

Some of the intellectual property rights we have licensed may have been generated through the use of U.S. government funding and may therefore be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). Moreover, intellectual property that we may own or license in the future may be subject to the applicable provisions of the Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property.

We currently do not plan to apply for U.S. government funding, but if we do, and we discover compounds or drug candidates as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act.

If we are unable to adequately protect our proprietary technologies, or obtain and maintain issued in-licensed patents that are sufficient to protect palovarotene or any future product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

Our commercial success will depend in part on our success in obtaining and maintaining issued owned and in-licensed patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technologies. We will seek to protect our proprietary position by filing patent applications in the United States and abroad related to our business plans. We also rely on trade secrets that protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. If we do not adequately protect our intellectual property and proprietary technologies, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

We cannot provide any assurances that any of our in-licensed patents have, or that any of our pending owned or in-licensed patent applications will mature into issued patents that include claims with a scope sufficient to protect palovarotene or any other product candidate, any additional features we develop for palovarotene or any other product candidate, or any new products or otherwise provide any competitive advantage. Other parties may have developed technologies that may be related or competitive to our approach and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our owned or in-licensed patent applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. Such third-party patent positions may limit or even eliminate our ability to obtain patent protection for certain inventions.

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we have or may obtain cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, ex parte re-examination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize palovarotene or any other product candidate.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may be interpreted in a manner adverse to our interests, or not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Even if an issued patent is held to be valid and enforceable, it may be interpreted in a manner adverse to our interests, or competitors may be able to design around any patents that we may own or in-license, such as through the use of pre-existing or newly developed technology. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. Moreover, the life of a patent and the term of any protection it may provide is limited. Given the period of time it takes to bring a drug to market, it is possible that some of our patent rights will expire or be near the end of their term before we obtain approval to sell palovarotene or any other product candidate, if such approval is obtained. For example, a U.S. patent licensed from F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (Roche) claiming palovarotene as a composition of matter has a statutory expiration date in 2021, without extensions or adjustments.

We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries, such as China. If these developments were to occur, they could have a material adverse effect on our sales.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our in-licensed patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

In addition, proceedings to enforce or defend our owned or in-licensed patents, if and when issued, could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our owned or in-licensed patents, if and when issued, that cover or which we believe cover palovarotene or any other product candidate (including any method of use) are invalidated or found unenforceable or interpreted in a manner adverse to our interests, such as to not cover the relevant product candidate, our financial position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered palovarotene or any other product candidate, our financial position and results of operations would also be materially and adversely impacted.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing palovarotene or any other product candidates, if approved.

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that palovarotene or any other product candidate or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize palovarotene or any future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of palovarotene or any other product candidate. Because patent applications can take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that palovarotene or any other product candidate may infringe, or which such third parties claim are infringed by our technologies. Moreover, we may fail to identify relevant third-party patents or patent applications, or we may incorrectly conclude that the claims of an issued patent were not relevant to our activities.

The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidate, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing palovarotene or any other product candidate.

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 or may choose to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our product. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:

Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject to claims challenging the inventorship or ownership of our owned or in-licensed patents and other intellectual property.

We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. For example, inventorship disputes may arise from conflicting obligations of consultants or others who are involved in developing palovarotene or any other product candidates.

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. The owners of intellectual property in-licensed to us could also face such claims. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we or our licensors are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Obtaining and maintaining our patent protection, including patents licensed from third parties, 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.

The U.S. Patent and Trademark Office (U.S. PTO), and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

If we or our licensors fail to maintain the patents and patent applications covering or otherwise protecting our product candidates, it could materially harm our business. In addition, to the extent that we have responsibility for taking any action related to the prosecution or maintenance of patents or patent applications in-licensed from a third party, any failure on our part to maintain the in-licensed intellectual property could jeopardize our rights under the relevant license and may expose us to liability.

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

Even if the patent applications we own or license are issued, competitors may infringe these patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put our patents or our licensors’ patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

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. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common shares.

Issued patents covering palovarotene or any other product candidate could be found invalid or unenforceable if challenged in court.

If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering palovarotene or any other product candidate, the defendant could counterclaim that the patent covering palovarotene or any other product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace.

Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g. opposition proceedings. Such proceedings could result in revocation or amendment of our patents or our licensors’ patents in such a way that they no longer cover palovarotene or any other product candidate or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on palovarotene or any other product candidate. Such a loss of patent protection would have a material adverse impact on our business.

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

Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those offered in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.

Competitors may use our technologies in jurisdictions where we do not have, or where we do not pursue and obtain, patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

Further, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Moreover, proceedings to enforce our patent rights, or those of our licensors or partners, in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our in-licensed patents, or any patents that we may own in the future, at risk of being invalidated or interpreted narrowly, could put our owned or in-licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent term and obtaining data exclusivity for our product candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of palovarotene or any other product candidate, one or more of the U.S. patents we may own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a restoration of patent term for one patent of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.

Changes in either U.S. or foreign patent law or interpretation of such laws could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and it therefore is costly, time-consuming and inherently uncertain. In addition, on September 16, 2011, the Leahy-Smith America Invents Act (AIA), was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.

An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the U.S. PTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the U.S. PTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in U.S. PTO proceedings compared to the evidentiary standard in United States federal court, a third party could potentially provide evidence in a U.S. PTO proceeding sufficient for the U.S. PTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the U.S. PTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Depending on decisions by the United States Congress, the federal courts, the U.S. PTO, or similar authorities in foreign jurisdictions, 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 in-licensed patents and patents that we might obtain in the future.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Some of our employees have been previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.

Although we are not aware of any claims currently pending against us, we may be subject to claims that we or our employees, advisors or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. We may be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our current and future product candidates, which would materially adversely affect our commercial development efforts.

General Company-Related Risks

We will need to develop and expand the size and scope of our Company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.

As of December 31, 2018, we had 45 full-time employees and in connection with operating as a public company and advancing our growth plans, we expect to increase our number of employees and the scope of our operations. To manage our anticipated development and expansion, 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. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of palovarotene and any other product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our Company.

We have limited experience operating internationally, are subject to a number of risks associated with our international activities and operations and may not be successful in our efforts to expand internationally.

We have collaboration, clinical trial and other relationships outside the United States, but we currently have limited operations outside of the United States and Canada. In order to meet our long-term goals, we would need to grow our international operations significantly. Consequently, we are and will continue to be subject to additional risks related to operating in foreign countries, including:

We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

The use of our product candidates in clinical trials and the sale of our product candidates, if approved, exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with our product candidates. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product 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, including as a result of interactions with alcohol or other drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

We maintain product liability and clinical trial insurance coverage in the U.S., Canada, United Kingdom (UK), France, Italy, Argentina, Spain, Germany, Belgium, the Netherlands, Sweden, Japan, Turkey, Brazil and Australia for our clinical trials with annual aggregate coverage limits in varying amounts up to $20 million. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtain marketing approval for our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A product liability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects could be materially adversely affected.

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel, including qualified accounting and financial personnel with appropriate public company experience.

We are highly dependent on the principal members of our executive team listed in Item 6A “Directors and Senior Management” located elsewhere in this document, the loss of whose services may adversely impact the achievement of our objectives. Any of our executive officers could leave our employment at any time, as all of our employees are “at will” employees. Recruiting and retaining other qualified employees for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in clinical trials may make it more challenging to recruit and retain qualified personnel. The inability to recruit key executives or the loss of the services of any executive or key employee might impede the progress of our development and commercialization objectives.

Further, as a newly public company, we may need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect

consequences related to the diversion of management resources from product development efforts.

We incur increased costs as a result of operating as a public company, and our management team will be required to devote substantial time to compliance initiatives.

As a public company, and particularly after we are no longer an “emerging growth company,” we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the U.S. Securities and Exchange Commission (SEC) and The Nasdaq Global Select Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.

After we are no longer an emerging growth company, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we will be required to furnish an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To maintain compliance with Section 404, we will continue to be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal and external resources to continue assessing and documenting the adequacy of internal control over financial reporting pursuant to the Committee of Sponsoring Organizations of the Treadway Commission 2013, continue steps to improve control processes as appropriate, continue to validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting.

Changes in our effective income tax rate could adversely affect our results of operations.

We are subject to income taxes in the Unites States and Canada and may be subject to income taxes in various foreign jurisdictions in the future, and our domestic and foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, the accounting for stock options and other share-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations by the U.S. Internal Revenue Service, Canadian Revenue Agency and related provincial tax authorities, and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our income tax provision resulting from the above-mentioned factors and others may be significant and could adversely affect our results of operations.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (NOLs) to offset future taxable income. Similarly, where control of a corporation has been acquired by a person or group of persons, subsection 111(5) of the Canadian Income Tax Act (Canadian Tax Act), and equivalent provincial income tax legislation restrict the corporation’s ability to carry forward noncapital losses from preceding taxation years. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code or an acquisition of control for the purposes of subsection 111(5) of the Canadian Tax Act has occurred after each of our previous issuances of common shares, preferred shares and convertible debt. In addition, if we undergo an ownership change or acquisition of control, our ability to utilize NOLs and non-capital losses could be limited by Section 382 of the Internal Revenue Code and subsection 111(5) of the Canadian Tax Act. As of December 31, 2018, we had Canadian federal and provincial net operating loss carry forwards of $136.1 million and $134.5 million, respectively, and unused federal tax credits of $1.7 million, all of which are set to expire over time to 2038. We also had Canadian federal and provincial research and development expenditure pools of $9.8 million and $11.3 million, respectively, without time limitations. We also had US unused orphan drug tax credits of $4.0 million as at December 31, 2018, which are set to expire over time to 2038 and Massachusetts R&D tax credits of $1.1 million, which are set to expire in 2038. The U.S. Tax Cuts and Jobs Act of 2017 generally reduced the amount of the orphan drug tax credit available in the U.S. and further limited the ability of taxpayers to claim such credit with respect to the costs of testing outside the United States. In addition, future changes in our share ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code or an acquisition of control for the purposes of subsection 111(5) of the Canadian Tax Act. Furthermore, our ability to utilize NOLs, credits and non-capital losses of companies that we may acquire in the future may be subject to limitations.

We may become a “controlled foreign corporation,” which may have adverse U.S. federal income tax consequences for a U.S. investor that owns substantial amounts of our common shares.

Although we believe we qualified as a controlled foreign corporation (CFC) in prior years, based on our current ownership structure, we do not believe we are currently a CFC for U.S. federal income tax purposes for the taxable year ending December 31, 2018. Given our ownership concentration, however, it is possible we could become a CFC if U.S. persons, each of whom own, directly or indirectly, including through non-U.S. persons (or is considered to own under applicable constructive ownership rules of the Code), 10% or more of the total combined voting power of all our classes of stock entitled to vote (U.S. Shareholders), together own more than 50% of the total vote or value of our stock. In such case, U.S. Shareholders may be subject to current U.S. federal income tax on certain types of income (generally passive income) regardless of whether corresponding cash distributions are made by us. In addition, gains recognized by U.S. Shareholders on the sale of our common shares may be reclassified, in whole or in part, as a dividend. The treatment of dividends paid or deemed paid by CFCs to certain U.S. persons has changed under the U.S. Tax Cuts and Jobs Act of 2017 and the CFC rules remain complex. Investors are urged to consult their own tax advisors regarding the possible application of the CFC rules in their particular circumstances. See the section entitled “Material U.S. Federal Income Tax Considerations—Controlled Foreign Corporation Considerations” under Item 10E “Taxation”.

Transfer pricing rules may adversely affect our income tax expense.

Many of the jurisdictions in which we will conduct business have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. Contemporaneous documentation must exist to support this pricing. The taxation authorities in these jurisdictions could challenge our arm’s length related party transfer pricing policies. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these taxation authorities are successful in challenging our transfer pricing policies, our income tax expense may be adversely affected and we could also be subjected to interest and penalty charges. Any increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.

Our deductions and credits in respect of scientific research and experimental development expenditures may be challenged by the Canadian tax authorities.

The Canadian taxation authorities may not necessarily agree with our determinations of the expenses and tax credits claimed by us, including research and development expenses and related tax credits. If the Canadian taxation authorities successfully challenge such expenses or the correctness of such income tax credits claimed, our operating results could be materially adversely affected. Furthermore, if the Canadian taxation authorities reduce the tax credit either by reducing the rate of the credit or the eligibility of some research and development expenses in the future, our operating results will be materially adversely affected.

Our orphan drug tax credits may be challenged by the U.S. tax authorities.

The U.S. taxation authorities may not necessarily agree with our determinations of the tax credits claimed by us, including our orphan drug tax credits. If the U.S. taxation authorities successfully challenge such tax credits claimed, our operating results could be materially adversely affected. Furthermore, if the U.S. taxation authorities further reduce the tax credit either by reducing the rate of the credit or the eligibility of certain clinical testing expenses in the future, our operating results will be materially adversely affected. As part of the 2017 U.S. tax reform, the orphan drug tax credit has been reduced from 50% to 25% of qualified clinical testing expenses for the tax year beginning January 1, 2018 and further limited the ability of taxpayers to claim such credit with respect to the costs of testing outside the United States. This rate reduction and other changes will decrease our future U.S. orphan drug tax credits available to be claimed.

We are likely a “passive foreign investment company,” which may have adverse U.S. federal income tax consequences for U.S. investors.

U.S. investors should be aware that we believe that we qualified as a passive foreign investment company (PFIC) for our taxable year ended December 31, 2018. We can give no assurance that we will not continue to be a PFIC for the taxable year-ended December 31, 2019. If we are a PFIC for any taxable year during a U.S. investor’s holding period of our common shares, a U.S. investor generally will be required to treat any gain realized upon a disposition of our common shares, or any so-called “excess distribution” received on our common shares, as ordinary income (not capital gain) earned over the U.S. investor’s holding period of our common shares, and to pay applicable taxes on such ordinary income as well as an interest charge on the gain or distribution as if the resulting taxes had been earned (and resulting tax due) ratably over the holding period. A U.S. investor may make certain elections (such as a “mark-to-market” election or a “qualified electing fund” election) to mitigate certain of the adverse U.S. federal income tax consequences of owning PFIC stock, but such elections have their own set of consequences and may not be available in certain circumstances. The PFIC rules are complex and they and any available elections may have a significant effect on U.S. investors. U.S. investors are urged to consult their own tax advisors regarding all aspects of the PFIC rules that may be applicable. See the section entitled “Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” under Item 10E “Taxation”.

We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising products or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.

Risks Related To Our Common Shares

Market volatility may affect our stock price and the value of your investment.

The market price for securities of biotechnology companies generally are likely to be volatile. In addition, the market price of our common shares may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:

We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common shares may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we have chosen to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If we continue to choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. If we continue to choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors will have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to domestic U.S. issuers, which may limit the information publicly available to our shareholders, and we may lose such status in the future.

As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Securities and Exchange Act of 1934 (Exchange Act) and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual meetings will be governed by Canadian requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our shares. Furthermore, as a foreign private issuer, we may take advantage of certain provisions in the Nasdaq listing rules that allow us to follow Canadian law for certain governance matters.

We may also lose our status as a foreign private issuer. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2019. We would lose our foreign private issuer status if, for example, more than 50% of our common shares are directly or indirectly held by residents of the United States on June 30, 2019 and we fail to meet additional requirements necessary to maintain our foreign private issuer status. More than 50% of our common shares are currently held by U.S. shareholders. We nonetheless currently meet the definition of a foreign private issuer as we have determined that a majority of our executive officers and directors are not, for purposes of this test, U.S. citizens or U.S. residents, a majority of our assets are not located in the U.S. and our business is administered principally in Canada. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms beginning on January 1, 2020, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of The Nasdaq Global Select Market. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These expenses will relate to, among other things, the obligation to prepare our financial information in accordance with U.S. generally accepted accounting principles in the future.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common shares.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm when required, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retrospective changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.

We had two material weaknesses in internal controls over financial reporting identified as of December 31, 2016 prior to our IPO, which were subsequently remediated or became not applicable.

Despite our efforts to maintain effective internal controls or due to the possibility of material weaknesses being identified, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Our charter documents and certain Canadian legislation could delay or deter a change of control, limit attempts by our shareholders to replace or remove our current management and limit the market price of our common shares.

Our authorized preferred shares are available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our articles grant our board of directors the authority, subject to the Canada Business Corporations Act (CBCA), to determine the special rights and restrictions granted to or imposed on any unissued series of preferred shares, and those rights may be superior to those of our common shares.

Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities to our shareholders to sell their shares.

In addition, provisions in the CBCA and in our articles of incorporation and by-laws, as amended and restated in connection with our IPO, may have the effect of delaying or preventing changes in our management, including provisions that:

These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Our executive officers, directors, principal stockholders and their affiliates continue to exercise significant control over our Company, which limits your ability to influence corporate matters and could delay or prevent a change in corporate control.

The existing holdings of our executive officers, directors, principal stockholders and their affiliates, including OrbiMed Private Investments IV, LP (OrbiMed), BDC Capital Inc. (BDC), and New Enterprise Associates, Inc. (NEA) and its affiliates represent beneficial ownership, in the aggregate, of a majority of our outstanding common shares. As a result, these stockholders, if they act together, will have significant influence over our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. These stockholders acquired their common shares for substantially less than the current trading price of the common shares and these stockholders may have interests, with respect to their common shares, that are different from other investors and the concentration of voting power among these stockholders may have an adverse effect on the price of our common shares. In addition, this concentration of ownership might adversely affect the market price of our common shares by:

See Item 7 “Major Shareholders and Related Party Transactions” in this Annual Report for more information regarding the ownership of our outstanding common shares by our executive officers, directors, principal stockholders and their affiliates.

Limitations on the ability to acquire and hold our common shares may be imposed under the Hart-Scott Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation.

Limitations on the ability to acquire and hold our common shares may be imposed under the Hart-Scott Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation. Such legislation generally permits the relevant governmental authority to review any acquisition of control over or of a significant interest in us, and grants the authority to challenge or prevent an acquisition on the basis that it would, or would be likely to, result in a substantial prevention or lessening of competition. In addition, the Investment Canada Act subjects an “acquisition of control” of a “Canadian business” (as those terms are defined therein) by a non-Canadian to governmental review if the book value of the Canadian business’ assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be of net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive our shareholders of the opportunity to sell their common shares at a control premium.

Future sales and issuances of our common shares or rights to purchase common shares, including pursuant to additional financings or our equity incentive plans could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common shares, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

The terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or palovarotene or any other product candidate or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

Moreover, pursuant to the stock option plan, our board of directors are authorized to grant stock options and other equity-based awards to our employees, directors and consultants. The number of shares available for future grant under the 2017 Omnibus Plan will automatically increase by an annual amount to be added the first day of each fiscal year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. On January 1, 2019, the number of shares available for future grant under the 2017 Omnibus Plan was automatically increased by 1,514,563. However, the increased number of shares available for issuance under the stock option plan has not been registered as at the date of this Annual Report. If our board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

We may be at an increased risk of securities class action litigation.

Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

We are governed by the corporate laws of Canada which in some cases have a different effect on shareholders than the corporate laws of Delaware.

We are governed by the CBCA, and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deferring or discouraging another party from acquiring control of our Company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between the CBCA and Delaware General Corporation Law (DGCL), that may have the greatest such effect include but are not limited to the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporate transactions or amendments to our articles) the CBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote; and (ii) under the CBCA a holder of 5% or more of our common shares can requisition a special meeting of shareholders, whereas such right does not exist under the DGCL.

U.S. civil liabilities may not be enforceable against us, our directors, our officers or certain experts named in this Annual Report.

We are governed by the CBCA and our principal place of business is in Canada. Many of our directors and officers, as well as certain experts named herein, reside outside of the U.S., and all or a substantial portion of their assets as well as all or a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us and such directors, officers and experts or to enforce judgments obtained against us or such persons, in U.S. courts, in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the U.S. Additionally, rights predicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the U.S. may not be enforceable in original actions, or actions to enforce

judgments obtained in U.S. courts, brought in Canadian courts, including courts in the Province of Quebec.

We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.

We have never declared or paid any cash dividend on our common shares and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings, if materialized, for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which you purchased them.

If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about us, our business or our market, our stock price and trading volume could decline.

The trading market for our common share will be influenced by the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. While we currently have research coverage by securities and industry analysts, there is no guarantee that we will be maintain such research coverage. If no or few securities or industry analysts cover our Company, the trading price and volume of our stock would likely be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, or provides more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Risks Relating to the Plan of Arrangement

Completion of the Arrangement is subject to several conditions that must be satisfied or waived.

The completion of the Arrangement is subject to a number of conditions precedent, some of which are outside of the control of the Company and the Purchaser Parties, including approval of the shareholders and the granting of the Final Order by the Superior Court of Québec pursuant to section 192 of the CBCA. In addition, the completion of the Arrangement by the Purchaser Parties is conditional on, among other things, dissent rights not having been exercised by the holders of more than 10% of the issued and outstanding shares and no Material Adverse Effect (as defined in the Arrangement Agreement) having occurred since the date of the Arrangement Agreement. There can be no certainty, nor can the Company or the Purchaser Parties provide any assurance, that these conditions will be waived or satisfied or, if satisfied, when they will be satisfied. Moreover, a substantial delay in obtaining satisfactory approvals could result in the Arrangement not being completed. If the Arrangement is not completed for any reason, there are risks that the announcement of the Arrangement and the dedication of substantial resources of the Company to the completion thereof could have a negative impact on the Company's current business relationships and could have a material adverse effect on the current and future operations, financial condition and prospects of the Company. In addition, failure to complete the Arrangement for any reason could materially negatively impact the trading price of the shares. If the Arrangement is not completed and the board of directors decides to seek an alternative transaction, there can be no assurance that it will be able to find a party willing to pay consideration for the shares that is equivalent to, or more attractive than, the consideration payable pursuant to the Arrangement.

The Arrangement Agreement may be terminated in certain circumstances, in which case an alternative transaction may not be available.

Each of the Company, the Purchaser and Ipsen has the right to terminate the Arrangement Agreement in certain circumstances. Accordingly, there is no certainty that the Arrangement Agreement will not be terminated by the Company, the Purchaser or Ipsen before the completion of the Arrangement. Failure to complete the Arrangement could materially negatively impact the trading price of the shares. If the Arrangement Agreement is terminated, there is no guarantee that equivalent or greater purchase prices for the shares will be available from an alternative party.

The Company will incur costs and may have to pay a termination fee or an expense reimbursement fee.

Certain costs relating to the Arrangement, such as legal, accounting and certain financial advisor fees, must be paid by the Company even if the Arrangement is not completed. If the Arrangement is not completed for certain reasons, the Company may also be required to pay the termination fee of $35,000,000 or an expense reimbursement fee of $4,000,000 to the Purchaser. If the Company is required to pay the termination fee or the expense reimbursement fee under the Arrangement Agreement, the financial condition and ability of the Company to fund current operations could be materially adversely affected.

The termination fee may discourage other parties from proposing a significant business transaction with the Company.

Under the Arrangement, the Company is required to pay the termination fee in the event that the Arrangement Agreement is terminated in circumstances related to a possible alternative transaction to the Arrangement. The termination fee may discourage other parties from attempting to propose a business transaction, even if such a transaction could provide better value to shareholders than the Arrangement.

Shareholders will no longer hold an interest in the Company following the Arrangement.

Following the Arrangement, shareholders will no longer hold any of the shares and shareholders will forego any future increase in value that might result from future growth and the potential achievement of the Company's long-term plans.

The Company's business relationships may be subject to disruption due to uncertainty associated with the Arrangement.

Parties with which the Company currently does business or may do business in the future may experience uncertainty associated with the Arrangement, including with respect to current or future business relationships with the Company or the Purchaser Parties. Such uncertainty could have a material and adverse effect on the business, financial condition, results of operations or prospects of the Company.

While the Arrangement is pending, the Company is restricted from taking certain actions.

The Arrangement Agreement restricts the Company from taking specified actions until the Arrangement is completed without the consent of the Purchaser. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Arrangement.

Interests of Certain Persons in the Arrangement.

Certain directors and officers of the Company may have interests in the Arrangement that may be different from, or in addition to, the interests of shareholders.

Clementia may be the target of legal claims, securities class action, derivative lawsuits and other claims.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into an agreement to be acquired. Third parties may also attempt to bring claims against Clementia seeking to restrain the Arrangement or seeking monetary compensation or other redress, which could delay or prevent consummation of the Arrangement. Even if the lawsuits are without merit or unsuccessful, defending against these claims can result in substantial costs and divert management time and resources.

Risks Relating to the CVRs

Holders of CVRs may never receive a payment in respect of the CVRs.

The entitlement to payment resulting from the CVRs will be reduced to nil if the milestone set out in the CVR Agreement (Milestone) is not achieved. There can be no guarantee that the Milestone will be achieved. If the Milestone is not achieved, the associated payment will never be made. No payment will be made in respect of the Milestone if the Milestone is not achieved on or prior to December 31, 2024. Even if the FDA accepts the submission an NDA for palovarotene as developed under IND 135403 based on the results of the phase II/III Clinical Trials which were being conducted by the Company as of the date of the Arrangement Agreement for the treatment of MO, there can be no guarantee that it will do so on or prior to December 31, 2024. In addition, no payment will be made in respect of the Milestone if any additional phase II or phase III clinical trial (other than any post-approval trial) is required for the submission of the NDA, and there can be no guarantee that no such additional phase II or phase III clinical trial (other than any post-approval trial) will be required.

CVRs may not be assigned or transferred except in very limited circumstances, limiting the ability for CVR holders to monetize the CVRs.

The CVRs will not be listed on any securities exchange and may not be transferred, pledged, encumbered or in any other manner transferred or disposed of, in whole or in part other than (i) upon the death of a holder, by will or intestacy; (ii) pursuant to a court order; (iii) by operation of law (including by consolidation or merger) or without consideration in connection with the dissolution, liquidation or termination of any corporation, limited liability company, partnership or other entity; (iv) in the case of CVRs held through book-entry or other similar nominee form, from a nominee to the beneficial owner and, if applicable, through an intermediary, to the extent allowable by the Depository Trust Company (DTC); or (v) pursuant to a CVR holder's right to abandon a CVR or the deemed acquisition of CVRs by the Purchaser or the Company in connection with the repayment of the after-tax proceeds attributable to options granted by the Company to certain key employees on February 18, 2019. This means that a CVR holder may not have any ability to recognize the value of any payment to be made in accordance with the CVR Agreement prior to the receipt of such a payment, if any.

Any payments in respect of the CVRs under the guarantee rank at parity with Ipsen's other unsecured indebtedness.

Ipsen has guaranteed the CVR payouts contemplated by the CVR Agreement. This guarantee represents an unsecured obligation of Ipsen and will rank equally in right of payment to all existing and future unsecured indebtedness of Ipsen. Any CVR payout under the guarantee will effectively be subordinated in right of payment to all of Ipsen's secured obligations to the extent of the collateral securing such obligations. In the event of a shortfall of funds after payment is made on such secured obligations, CVR holders will not receive the full CVR payout they may otherwise have been entitled to.

The treatment of CVRs for Canadian federal income tax purposes is unclear.

The Canadian federal income tax consequences to a shareholder in respect of the receipt of CVRs and the payments thereunder, and the reporting of amounts in respect thereof for Canadian federal income tax purposes, are not entirely clear. Shareholders are urged to consult their own tax advisors regarding the consequences to them of the receipt of CVRs and the payments thereunder.

The treatment of CVRs for U.S. federal income tax purposes is unclear.

There is no legal authority directly addressing the U.S. federal income tax treatment of CVRs received pursuant to the Arrangement. Accordingly, the amount, timing and character of any gain, income or loss with respect to the CVRs are uncertain. U.S. Holders should consult their tax advisors concerning the recognition of income, gain or loss, if any, resulting from the receipt of a CVR or the receipt of any payment in respect of a CVR.