Kite Pharma, Inc.
Kite Pharma, Inc. (Form: 10-K, Received: 02/29/2016 15:35:50)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number: 001-36508

 

KITE PHARMA, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

27-1524986

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

 

 

2225 Colorado Avenue

Santa Monica, California

 

90404

(Address of Principal Executive Offices)

 

(Zip Code)

(310) 824-9999

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

The NASDAQ Global Select Market

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes    x      No    ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes    ¨      No    x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    x      No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    x      No    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the closing price of the registrant’s common stock as reported on The NASDAQ Global Select Market on June 30, 2015, the last business day of the registrant’s most recently completed second quarter, was $1,863 million.

As of February 23, 2016, there were 48,839,557 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

 

 

 

 

 

 


Table of Contents

 

 

 

 

 

Page

PART I.

 

4

Item 1.

 

Business

 

4

Item 1A.

 

Risk Factors

 

28

Item 1B.

 

Unresolved Staff Comments

 

57

Item 2.

 

Properties

 

57

Item 3.

 

Legal Proceedings

 

57

Item 4.

 

Mine Safety Disclosures

 

57

 

 

 

 

 

PART II.

 

58

Item 5.

 

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

 

58

Item 6.

 

Selected Financial Data

 

60

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

61

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

70

Item 8.

 

Financial Statements and Supplementary Data

 

71

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

103

Item 9A.

 

Controls and Procedures

 

103

Item 9B.

 

Other Information

 

104

 

 

 

 

 

PART III.

 

105

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

105

Item 11.

 

Executive Compensation

 

105

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

105

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

 

105

Item 14.

 

Principal Accountant Fees and Services

 

105

 

 

 

PART IV.

 

106

Item 15.

 

Exhibits and Financial Statement Schedules

 

106

 

 

 

Signatures

 

107

 

 

 

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SPECIAL NOTE REGARDING FO RWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, or this Annual Report, may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part I, Item 1A, “Risk Factors” in this Annual Report.

We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Forward-looking statements in this Annual Report include, but are not limited to, statements about:

 

the success, cost and timing of our product development activities and clinical trials;

 

the ability and willingness of the National Cancer Institute, or the NCI, to continue research and development activities relating to our engineered autologous cell therapy, or eACT, pursuant to the Cooperative Research and Development Agreements, or CRADAs, with the U.S. Department of Health and Human Services, as represented by the NCI;

 

our ability to obtain and maintain regulatory approval of KTE-C19 and any other product candidates, and any related restrictions, limitations and/or warnings in the label of an approved product candidate;

 

the ability to license additional intellectual property relating to a product candidate targeting the EGFRvIII antigen from a third party and relating to additional product candidates from the National Institutes of Health and to comply with our existing license agreements;

 

our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;

 

the commercialization of our product candidates, if approved;

 

our plans and ability to research, develop and commercialize our product candidates, including under our research collaboration with Amgen Inc.;

 

our ability to attract collaborators with development, regulatory and commercialization expertise;

 

our ability to integrate T-Cell Factory B.V., or TCF, a Dutch company we acquired in March 2015, and our ability to potentially significantly expand our pipeline of TCR-based product candidates using TCF’s proprietary TCR-GENErator technology platform;

 

future agreements with third parties in connection with the commercialization of our product candidates and any other approved product;

 

the size and growth potential of the markets for our product candidates, and our ability to serve those markets;

 

the rate and degree of market acceptance of our product candidates;

 

regulatory developments in the United States and foreign countries;

 

our ability to develop, validate and utilize our own clinical manufacturing facility and commercial manufacturing facility;

 

our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;

 

the success of competing therapies that are or may become available;

 

our ability to attract and retain key scientific or management personnel;

 

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

our ability to in-license, acquire, or invest in complementary businesses, technologies, products or assets to further expand our portfolio of eACT-based product candidates or to complement our eACT-based product candidates;

 

our use of cash and other resources; and

 

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates.

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We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that ar e important to you. In addition, we cannot guarantee future results, level of activity, performance or achievements. Any forward-looking statement made by us in this Annual Report speaks only as of the date of this Annual Report or as of the date on which it is made. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Annual Report.

Trademarks and Trade names

We have common law, unregistered trademarks for Kite Pharma and eACT based on use of the trademarks in the United States. This Annual Report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Annual Report, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

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PART I

 

 

Item 1. Business

Overview

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to target and kill cancer cells. We do this using our engineered autologous cell therapy, or eACT, which we believe is a transformational approach to the treatment of cancer. eACT involves the genetic engineering of T cells to express either chimeric antigen receptors, or CARs, or T cell receptors, or TCRs. These modified T cells are designed to recognize and destroy cancer cells.

Immuno-oncology, which utilizes a patient’s own immune system to combat cancer, is one of the most actively pursued areas of research by biotechnology and pharmaceutical companies today. Interest and excitement for immuno-oncology is driven by recent, compelling efficacy data in cancers with historically bleak outcomes and the potential to achieve a cure, or functional cure, for some patients. We believe eACT presents a promising innovation in immunotherapy. eACT has been developed through our collaboration with the National Cancer Institute, or the NCI, where the program is led by Steven A. Rosenberg, M.D., Ph.D., a recognized pioneer in immuno-oncology. Our Founder, Chairman and Chief Executive Officer, Arie Belldegrun, M.D., FACS, in addition to his prior roles at Agensys, Inc. and Cougar Biotechnology, Inc., also has significant experience in this field dating back to his time at the NCI as a research fellow in surgical oncology and immunotherapy with Dr. Rosenberg.

A patient’s immune system, particularly T cells, is thought to play an important role in identifying and killing cancer cells. eACT involves modifying a patient’s T cells outside the patient’s body, or  ex vivo , causing the T cells to express CARs or TCRs, and then reinfusing the engineered T cells back into the patient. CARs can recognize native cancer antigens that are part of an intact protein presented on the cancer cell surface. TCRs broaden the therapeutic approach by recognizing fragments on the cancer cell surface derived from intracellular proteins. By combining both CAR and TCR approaches, we have generated a broad portfolio of product candidates to target both solid and hematological tumors.

Our Pipeline

We are currently conducting four company-sponsored pivotal studies of our lead product candidate, KTE-C19, a CAR-based therapy. We are conducting a Phase 2 clinical trial (ZUMA-1) of KTE-C19 in patients with refractory diffuse large B cell lymphoma, or DLBCL, including primary mediastinal B cell lymphoma, or PMBCL, and transformed follicular lymphoma, or TFL. DLBCL, PMBCL and TFL are types of aggressive non-Hodgkin lymphoma, or NHL. We are also conducting a Phase 2 clinical trial (ZUMA-2) of KTE-C19 in patients with relapsed/refractory mantle cell lymphoma, or MCL, a Phase 1-2 clinical trial (ZUMA-3) of KTE-C19 in adult patients with relapsed/refractory acute lymphoblastic leukemia, or ALL, and a Phase 1-2 clinical trial (ZUMA-4) of KTE-C19 in pediatric patients with relapsed/refractory ALL.

In December 2015, the U.S. Food and Drug Administration, or FDA, granted breakthrough therapy designation status to our lead product candidate, KTE-C19, for the treatment of patients with refractory DLBCL, PMBCL and TFL. Breakthrough therapy designation is granted by the FDA to expedite the development and review of new therapies to treat serious or life-threatening conditions. The criteria for breakthrough therapy designation require preliminary clinical evidence that demonstrates the therapy may have substantial improvement on at least one clinically significant endpoint over available therapy. This designation conveys all fast track program features, as well as more intensive FDA guidance on an efficient drug development program and eligibility for rolling review and priority review.  

KTE-C19 has also been granted orphan drug designation by the FDA to treat DLBCL and by the European Commission to treat DLBCL, PMBCL, ALL, MCL, chronic lymphocytic leukemia, or CLL, small lymphocytic lymphoma, and follicular lymphoma, or FL. The FDA designation may provide seven years of market exclusivity in the United States and the European Commission designation may provide 10 years of market exclusivity in Europe, each subject to certain limited exceptions. However, the U.S. and European orphan drug designations do not convey any advantages in, or shorten the duration of, the regulatory review or approval process.

We also have two Cooperative Research and Development Agreements, or CRADAs, with the U.S. Department of Health and Human Services, as represented by the NCI, through which we are funding the research and development of eACT-based product candidates utilizing CARs and TCRs for the treatment of advanced solid and hematological malignancies. Under the CRADAs, we have an exclusive option to negotiate commercial licenses from the National Institutes of Health, or the NIH, to intellectual property relating to CAR-and TCR-based product candidates developed in the course of the CRADA research plans.  Since entering into the first CRADA in August 2012, or 2012 CRADA, w e have secured multiple commercial license agreements with the NIH for intellectual property relating

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to TCR-based product candidates targeting certain SSX2, NY-ESO-1, HPV and MAGE antigens and for a CAR-based product candidate targeting EGFRvIII.

In addition, we have a Research Collaboration and License Agreement with Amgen Inc., or Amgen, pursuant to which we expect to develop and commercialize additional CAR-based product candidates directed against various targets contributed to the collaboration by Amgen.

Our clinical trials of KTE-C19, and those being conducted in collaboration with the NCI and Amgen, are summarized below. The NCI filed the investigational new drug applications, or INDs, with the FDA in order to conduct the ongoing clinical trials of the CAR- and TCR-based product candidates other than KTE-C19. We will have to submit separate INDs to conduct our own clinical trials relating to these product candidates.

 

 

Recent Developments

2016 CRADA

On January 4, 2016, we entered into our second CRADA, or 2016 CRADA, for the research and clinical development of a fully human anti-CD19 CAR-based product candidate for the treatment of B cell lymphomas and leukemias. Under the 2016 CRADA, we are collaborating with James N. Kochenderfer, M.D., an investigator in the Experimental Transplantation and Immunology Branch of the NCI, to evaluate this product candidate in a Phase 1 clinical study.  In addition, the 2016 CRADA will focus on the development of next-generation CAR programs directed against other novel antigens for the treatment of B cell lymphomas and leukemias.  We will also continue to advance multiple CAR and TCR programs under the 2012 CRADA entered into with the Surgery Branch of the NCI, led by Dr. Rosenberg.

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Our Strategy

Our goal is to be the leader in immuno-oncology across multiple therapeutic indications. To achieve this, we are developing a pipeline of eACT-based product candidates for the treatment of advanced solid and hematological malignancies. Key elements of our strategy are to:

Rapidly advance KTE-C19 through clinical development.

We have four ongoing company-sponsored pivotal studies of KTE-C19. We plan to report interim Phase 2 data from ZUMA-1 in the second half of 2016. If the interim results are sufficiently compelling, we intend to discuss with the FDA submitting a Biologics License Application, or BLA, for accelerated approval of KTE-C19 for the treatment of refractory DLBCL, PMBCL and TFL. Subject to the interim results and discussions with the FDA, we plan to submit the BLA at the end of 2016. If approved, we plan to commercially launch KTE-C19 in 2017.  We plan to report data from ZUMA-2 and the Phase 2 portions of ZUMA-3 and ZUMA-4 in 2017. If we believe the data are compelling, we plan to pursue FDA approval for these additional indications.  Assuming positive data from the current ZUMA program, we expect to conduct additional ZUMA studies of KTE-C19 in 2017 for the treatment of FL, CLL and in earlier lines of DLBCL.

The FDA may grant accelerated approval for product candidates for serious conditions that fill an unmet medical need based on a surrogate or intermediate clinical endpoint, including tumor shrinkage, because such shrinkage could provide a real clinical benefit to patients. Assuming compelling data, we believe our accelerated approval strategy of submitting a BLA at the end of 2016 on interim data is warranted, given the limited alternatives for patients with refractory, aggressive NHL. Even if accelerated approval is granted, confirmatory trials are commonly required and we expect to discuss our plans to fulfill our requirements to convert any accelerated approval to regular approval with the FDA.

We also expect to expand the ZUMA clinical program to Europe in 2016.

Advance multiple TCR-based product candidates to target solid tumors.

We believe the advancement of TCR-based product candidates that target solid tumors will increase the cancer population coverage and allow us to leverage the expected manufacturing and development capabilities relating to KTE-C19. We plan to file an IND relating to a TCR-based product candidate targeting a MAGE antigen by the end of 2016.

We also plan to continue to exclusively license and develop a portfolio of TCR-based product candidates targeting various cancers based on data from the NCI clinical trials that we are funding under the CRADAs. In addition, we believe that our European subsidiary, Kite Pharma EU B.V., or Kite Pharma EU, has the potential to significantly expand our pipeline of TCR-based product candidates. Using its proprietary TCR-GENErator technology platform, we believe Kite Pharma EU can rapidly and systematically discover tumor-specific TCRs. We believe this platform could generate a TCR-based product candidate that could enter the clinic as early as 2017.

We plan to develop a TCR-based product portfolio that targets specific antigens expressed by cancer cells irrespective of where the cancer originates. As a result, we believe this approach may allow for regulatory approvals of our personalized TCR-based product candidates without respect to cancer cell origin.

Continue to leverage our collaborations to selectively identify and advance additional product candidates.

We plan to advance multiple additional eACT-based product candidates under our collaborations, including with Amgen, bluebird bio, Inc., Alpine Immune Sciences, Inc., or AIS, the Netherlands Cancer Institute, or NKI, and Leiden University Medical Center.  We expect an IND to be filed for a CAR-based product candidate researched under the Amgen Agreement by the end of 2016.

In addition, our collaborations with the NCI provide us the opportunity to license products for oncology development based on human proof-of-concept data rather than preclinical animal data alone. We believe this approach significantly reduces the risk in our development programs. We plan to select products for development based on a favorable benefit-to-risk ratio and clinical proof-of-concept established by the NCI. Each CRADA has a five-year term, and may be terminated earlier by the NCI.  

In addition, we may in-license, acquire, or invest in complementary businesses, technologies, products or assets to further expand our portfolio of eACT-based product candidates or to complement our eACT-based product candidates.

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Establish commercialization and marketing capabilities of current and future pipeline products.

We anticipate that our commercial manufacturing facility in El Segundo, which is adjacent to Los Angeles International Airport, will be operational to support the planned commercial launch of KTE-C19 in 2017.  We intend to build a fully operational commercial organization to commercialize KTE-C19. We expect to partner with the transplant and lymphoma referral centers in the United States. We may also selectively partner with third parties to commercialize and market any approved product candidates outside the United States.

Engineered Autologous Cell Therapy (eACT)

White blood cells are a component of the immune system and are responsible for defending the body against infectious pathogens and other foreign material. There are several types of white blood cells, including T cells, natural killer cells, and B cells. T cells can be distinguished from other white blood cells by T cell receptors present on their cell surface. These receptors contribute to tumor surveillance by helping T cells recognize cancerous cells. The T cell has the ability to kill the cancerous cell once it is identified. When the T cells with cancer-specific receptors are absent, present in low numbers, of poor quality or rendered inactive by suppressive mechanisms employed by tumor tissue, cancer may grow and spread to various organs. In addition, standard of care treatments can be deleterious to T cells’ ability to kill cancer. We believe eACT has the potential to treat cancer by overcoming the limits of a person’s immunosurveillance by increasing the effectiveness and number of a patient’s cancer-specific T cells.

eACT involves genetically engineering T cells to express cancer-specific receptors as illustrated below.

 

 

The T cell engineering process that we have developed takes approximately two weeks from collection of the patient’s white blood cells to site delivery for infusion of the engineered T cells back to the patient. We provide eACT to patients in our clinical trials after they receive a short chemotherapy conditioning regimen, which is intended to improve the survival and proliferative capacity of the newly infused T cells.

Using eACT technology, T cells can be genetically modified to express one of two classes of cancer-specific receptors: CARs or TCRs. CARs recognize native cancer antigens that are part of an intact protein on the cancer cell surface. TCRs broaden the therapeutic approach by targeting cancer proteins that reside inside the cancer cells. In ordinary cell metabolism, intracellular proteins are broken down into fragments called peptides. These peptides are then “displayed” on the cell membrane by a “presenting” molecule called major histocompatibility complex, or MHC. While T cells may not be able to recognize cancer-specific proteins inside a cancer cell, T cells that are engineered with TCRs are able to recognize a specific peptide from an intracellular protein when it is displayed on the cancer cell surface.

T cells engineered with CARs or TCRs can proliferate inside a patient and have the potential to infiltrate the microenvironment of a solid cancer mass, killing large numbers of cancer cells. Furthermore, we believe T cells engineered with CARs or TCRs can potentially overcome several mechanisms of tumor escape to which endogenous T cells may be susceptible. Upon binding with a target cell and activation, the T cells release cytokines, which contribute to the killing of cancer cells. However, excessive cytokine release can result in a systemic inflammatory reaction consisting of fever and low blood pressure.

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CARs and TCRs are discussed in more detail below.

CARs

Engineering T cells with a CAR involves using a viral vector (a delivery vehicle) containing the CAR gene to transduce, or integrate, that gene into the T cell’s chromosomal make-up. The CAR gene encodes the single-chain CAR protein. Our KTE-C19 CAR is comprised of the following elements:

 

Target Binding Domain: At one end of the CAR is a target binding domain of an antibody that is specific to the target antigen CD19 on the cancer cell surface. This domain extends out of the engineered T cell into the extracellular space, where it can recognize target antigens. The target binding domain consists of a single-chain variable fragment, or scFv, of an antibody comprising variable domains of heavy and light chains joined by a short linker. This allows the expression of the CAR as a single-chain protein.

 

Transmembrane Domain and Hinge: This middle portion of the CAR links the scFv target binding domain to the activating elements inside the cell. This transmembrane domain “anchors” the CAR in the cell’s membrane. In addition, the transmembrane domain may also interact with other transmembrane proteins that enhance CAR function. In the extracellular region of the CAR, directly adjacent to the transmembrane domain, lies a “hinge” domain. This region of the CAR provides structural flexibility to facilitate optimal binding of the CAR’s scFv target binding domain with the target antigen on the cancer cell’s surface.

 

Activating Domains: Located within the T cell’s interior are two regions of the CAR responsible for activating the T cell upon binding to the target cell. The CD3 z element delivers an essential primary signal within the T cell, and the CD28 element delivers an additional, co-stimulatory signal. Together, these signals trigger T cell activation, resulting in proliferation of the CAR T cells and direct killing of the cancer cell. In addition, T cell activation stimulates the local secretion of cytokines and other molecules that can recruit and activate additional anti-tumor immune cells.

 

 

TCRs

Engineering T cells with a TCR involves using a viral vector containing TCR genes to transduce those genes into the T cell’s chromosomal makeup. The TCR genes encode two protein chains, which are designed to bind with specific peptides presented by MHC on the surface of certain cancer cells. The TCR protein chains are expressed on the T cell surface where they associate with CD3 proteins, which are natural components of the T cell. Upon binding of the TCR to the peptide-MHC complex on the cancer cell

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surfac e, the CD3 proteins deliver signals that trigger T cell activation, resulting in proliferation of the TCR T cells, direct killing of the cancer cell and stimulation of cytokines and other molecules that can recruit and activate additional anti-tumor immune cells.

TCR technology primarily targets cancer antigens that fall into the following main categories: self-antigens, viral antigens and neo-antigens, also known as cancer-specific antigens. Self-antigens are generally shared across patients and include differentiation markers and cancer testis antigens, or CTAs. CTAs are expressed on a wide variety of common tumor types of various histological origins. We believe a subset of CTAs, which include SSX2, NY-ESO-1 and MAGE, are appropriate eACT targets because their expression on normal tissue is generally restricted to tissues that do not express MHC in adults. Viral antigens, such as those expressed by oncogenes, such as HPV-E6 and HPV-E7, are also shared across patients and are not expressed on normal tissue. As a result, T cells engineered to target cells with such CTAs or viral antigens would primarily target cancer cells rather than non-cancerous cells. We are initially focused on developing CTA-specific and virus oncoprotein-specific TCR-based product candidates. Our 2012 CRADA was amended in 2015 to further the research and development of the next generation of TCR-based product candidates to target neo-antigens, which are those derived from mutations arising in the tumor.

 

 

CAR and TCR Differences

There are three main differences between CARs and TCRs:

 

MHC Restriction: Since TCRs recognize peptides only in the context of MHC molecules expressed on the surface of the target cell, their peptide specificity is termed MHC-restricted. In contrast, CAR target recognition is MHC-unrestricted. In humans, MHC molecules are known as human leukocyte antigen, or HLA, proteins. There are several HLA protein types which display genetic variation across the human population. As a result, a TCR-based product candidate would have to be matched to the HLA type of the patient.

 

Cancer Target Frequency: CARs recognize native cancer antigens that are part of an intact protein on the cancer cell surface. Bioinformatic studies predict that 20% to 30% of all encoded proteins may be extracellular or membrane-associated. TCRs broaden the therapeutic approach by recognizing specific peptides of intracellular proteins that are displayed on the cancer cell surface in combination with MHC.

 

Antigen-Presenting Cell Recognition: As opposed to CARs, TCRs have the potential to recognize cancer antigens not only presented directly on the surface of cancer cells but also presented by antigen-presenting cells in the tumor microenvironment and in secondary lymphoid organs. Antigen-presenting cells are native immune-system cells responsible for the amplification of the immune response.

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Other Immunotherapies

Immuno-oncology is one of the most actively pursued areas of research by biotechnology and pharmaceutical companies today. Over the past few decades, several novel treatment methodologies have emerged that modulate the immune system including vaccines and monoclonal antibodies. Therapeutic vaccines have historically been associated with modest efficacy in the treatment of cancer. They commonly utilize dendritic cells, a form of immune cell that presents tumor antigens to T cells, which can result in T cell activation. Similarly, monoclonal antibodies, after binding a cancer antigen, classically utilize an effector arm in order to stimulate an immunological response.

More recently, interest and excitement has centered around the use of bi-specific antibodies and checkpoint inhibitors. Bi-specific antibodies commonly target both the cancer antigen and T cell receptor, thus bringing both cancer cells and T cells in close proximity to maximize the likelihood of an immune response to the cancer cells. Checkpoint inhibitors, or CPIs, work by releasing the body’s natural “brakes” on the immune system. Tumors can evade immune surveillance by triggering co-inhibitory receptors that can blunt T cell effectiveness and proliferation. By targeting these receptors, CPIs release these brakes, thereby reactivating T cells. Both bispecific antibodies and CPIs require functioning T cell populations in order to exert their effect.

We believe our eACT presents a promising innovation in immunotherapy by focusing directly on the key immune mediator, the T cell. Our genetically engineered T cells bind to cancer cells directly, and as such, have the potential to kill a substantial number of tumor cells. In addition, we note that eACT may be synergistic with other forms of immunotherapy. As an example, eACT may potentially be used in combination with CPIs to enhance efficacy.

KTE-C19

Overview

We are initially advancing KTE-C19 for the treatment of refractory, aggressive NHL. NHL is a cancer of white blood cells, including B cells. CD19 is expressed on the surface of B cells, including malignant B cells, and it is not thought to be expressed on any other tissue. B cells are considered non-essential tissue, as they are not required for patient survival. We believe CD19 is an appropriate target for the treatment of all types of B cell leukemias and lymphomas.

Diffuse Large B Cell Lymphoma, Primary Mediastinal B cell Lymphoma and Transformed Follicular Lymphoma

Initially, we expect initially to seek approval of KTE-C19 for the treatment of patients with refractory DLBCL, PMBCL and TFL. According to the American Cancer Society, DLBCL is the most common subtype of NHL, accounting for approximately 30% of the total 70,000 NHL patients diagnosed each year in the United States. It is classified as an aggressive lymphoma, in which survival is measured in months rather than years.

First line therapy for patients with DLBCL usually consists of chemotherapy regimen known as R-CHOP (rituximab, cytoxan, adriamycin, vincristine and prednisone), which includes the use of a monoclonal antibody known as rituximab. Approximately 50% to 60% of DLBCL patients are cured with first line therapy.

For patients who relapse or are refractory to first line therapy, the current standard of care for second line therapy consists of a platinum-based chemotherapy regimen with rituximab. These second line chemotherapy regimens include R-ICE (rituximab, ifosfamide, carboplatin and etoposide) or R-DHAP (rituximab, dexamethasone, cytarabine and cisplatin).

Patients who respond to second line therapy may go on to receive hematopoietic stem cell transplantation, or HSCT. Patients who do not respond to second line therapy or relapse after HSCT are treated with a third line salvage chemotherapy. These patients have a poor prognosis and treatment is generally palliative with no curative treatment options.

FL is the second most common subtype of NHL and the most common type of indolent NHL, or iNHL. There are approximately 15,300 new diagnoses of FL in the United States each year. Conventional therapy for FL is not curative, and most patients develop progressive disease and chemo-resistance. A pivotal event in the history of some patients with FL is histological transformation to more aggressive malignancies, most commonly DLBCL.

Due to differences in clinicopathologic features and treatment regimens, PMBCL can be considered a different patient population to DLBCL. There are approximately 1,650 new cases of PMBCL in the United States each year. Patients can be generally classified as having either limited stage or advanced stage disease. Limited stage disease can be contained within one irradiation field. In contrast, advanced stage disease refers to disease that cannot be contained within one irradiation field, bulky disease (greater than 10 centimeter wide tumors), and tumors that have an associated pericardial or pleural effusion. Patients of advanced stage disease are typically treated with induction chemoimmunotherapy. Primary refractory disease occurs when initial therapy fails to achieve a complete response and the general approach is to administer systemic chemotherapy with or without rituximab with plans to proceed to high-

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dose chemotherapy and HSCT in those with chemotherapy-sensitive disease. The treatment of patients who are not candidates for HSCT, who fail to respond to second line chemothera py regimens, or who relapse after HSCT is generally palliative. Salvage therapy is rarely curative.

Other Lymphomas and Leukemias

We also expect to seek regulatory approval of KTE-C19 for the treatment of other lymphomas and leukemias, including MCL, ALL and CLL.

There are approximately 4,200 new cases of MCL in the United States each year. Therapy for MCL is not curative, and virtually all patients will have refractory or recurrent disease. Treatment of MCL is difficult due to the rapid development of resistance to therapy.

ALL is an aggressive form of leukemia with approximately 6,500 patients diagnosed with ALL in the United States each year. Approximately 90% of patients with ALL will demonstrate a complete remission with intensive induction chemotherapy. However, after consolidation and maintenance therapy, the majority of patients will relapse in the bone marrow. Although approximately half of patients with relapsed ALL will obtain a second complete remission, most will eventually die from leukemia. The prognosis of patients with relapsed or refractory ALL is poor, with median survival less than one year.

CLL is the most common leukemia, with approximately 14,600 new cases in the United States per year. It is characterized by a progressive accumulation of functionally incompetent lymphocytes which are monoclonal in origin. Most patients with CLL will have an initial complete or partial response to chemotherapy, but relapse invariably occurs after treatment discontinuation unless the patient undergoes allogeneic HSCT, which is the only known curative therapy. Almost all patients with CLL will develop progressive disease.

Clinical Experience

In December 2015, at the annual meeting of the American Society of Hematology, or ASH, we announced data from the Phase 1 portion of ZUMA-1. Seven patients were treated with KTE-C19, of which four achieved complete remissions and one achieved a partial remission, representing an overall objective response rate of 71%. All complete remissions were first observed at one month. Three patients had ongoing complete remissions at three months. The patient who achieved a complete remission but relapsed was retreated and achieved a partial remission. The one patient who initially achieved a partial remission relapsed and died due to disease progression.

Overall, KTE-C19 related adverse events included severe and life threatening toxicities, consisting predominantly of cytokine release syndrome and neurotoxicity, which were reversible except in one patient with dose-limiting toxicities. This patient experienced dose-limiting toxicities of cytokine release syndrome and neurotoxicity that were life-threatening toxicities and died within 30 days of KTE-C19 infusion due to intracranial hemorrhage deemed unrelated to KTE-C19 per the investigator. Supportive care, tocilizumab, and corticosteroids were used to manage adverse events.

The ZUMA-1 results were generally consistent with the results from the NCI Phase 1-2a clinical trial of anti-CD19 CAR T cell therapy in patients with relapsed/refractory lymphomas and leukemias. For KTE-C19, we use the identical anti-CD19 CAR construct and viral vector that was used in the NCI clinical trial of anti-CD19 CAR T cell therapy. We believe we have streamlined and optimized the NCI’s original process, including by removing human serum from the process to minimize risk of viral contamination, moving process steps from an open system to a closed system to minimize the risk of other contamination and standardizing the viral transduction process to help eliminate processing inconsistencies. In July 2014, the NCI submitted an IND amendment to use our streamlined and optimized process, and has since treated multiple patients with T cells prepared by the new process.

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As of November 30, 2015, the objectiv e response rate and complete response rate from the NCI trial are described in the table below.

 

 

In addition, as of November 30, 2015, 25 patients treated by the NCI were still in response and 21 of 22 patients with complete responses remained in remission.  The duration of the responses from the NCI trial are summarized in the table below.

 

 

Severe and life threatening toxicities attributed to anti-CD19 CAR T cells related to cytokine release syndrome and neurotoxicity, which began mostly in the first two weeks after cell infusion, were generally reversible.  Most prominent acute toxicities included symptoms thought to be associated with the cytokine release syndrome, such as fever, low blood pressure, hypoxia, heart dysfunction and kidney dysfunction. The symptoms of neurotoxicity included, among others, ataxia, confusion, somnolence and speech impairment.  Approximately 30% of all patients and 31% of patients with aggressive NHL that received the anti-CD19 CAR T cells processed under the new manufacturing process experienced Grade 3 or higher cytokine release syndrome, in each case attributed to the anti-CD19 CAR T cells.  Approximately 44% of all patients and 69% of patients with aggressive NHL that received the anti-CD19 CAR T cells processed under the new manufacturing process experienced Grade 3 or higher neurotoxicity, in each case attributed to the anti-CD19 CAR T cells. Grade 2 represents moderate toxicity, Grade 3 represents severe toxicity, Grade 4 represents life threatening toxicity, and Grade 5 represents toxicity resulting in death.  There have been Grade 4 events related to cytokine release syndrome and neurotoxicity. Several patients have also died, but the deaths were not attributed to the CAR T cells.

The NCI clinical trial completed enrollment in January 2016, and we expect to report on the ongoing follow-up of the treated patients.

As reported at ASH in December 2015 by the NCI, in a separate Phase 1 dose escalation study conducted by the Pediatric Oncology Branch of the NCI, administration of anti-CD19 CAR T cells resulted in a 60% complete response rate in 45 pediatric or young adult patients with relapsed/refractory ALL. Fifty-one percent of the 45 patients achieved a minimal residual disease, or MRD, negative complete response. As seen in the NCI Phase 1-2a clinical trial described above, infusion of anti-CD19 CAR T cells was associated with significant, acute toxicities, including febrile neutropenia, cytokine release syndrome, chemical laboratory abnormalities, low blood counts and transient neurological deficits.

Development Strategy

ZUMA-1

We expect to enroll approximately 120 patients with refractory DLBCL, PMBCL and TFL in ZUMA-1.  We expect ZUMA-1 to be conducted at approximately 25 sites, with objective response rate as the primary endpoint in Phase 2. In the Phase 2 portion of ZUMA-1, we expect to treat approximately 72 patients with DLBCL in cohort one and approximately 40 patients with PMBCL and TFL in cohort two.  We plan to conduct an interim analysis in 2016 of cohort one after 50 patients are treated and followed for three months.  If we believe the data are compelling and show a convincing benefit-to-risk ratio compared to historical data, we plan to discuss with the FDA submitting a BLA for accelerated approval of KTE-C19 as a treatment for patients with refractory DLBCL, PMBCL and TFL.

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Even if we receive FDA approval, we may be required to initiate a randomized confirmatory study in NHL in order to fulfill likely post-marketing clinical study requirements to convert any accelerated approval to regular approval. The design of this randomi zed confirmatory study would be confirmed pending regulatory discussion and emerging clinical data.

ZUMA-2

We expect to enroll approximately 70 patients with relapsed/refractory MCL in ZUMA-2.  We expect ZUMA-2 to be conducted at approximately 25 sites, with objective response rate as the primary endpoint.  We plan to report data from ZUMA-2 in 2017. If we believe the data are compelling, we plan to pursue FDA approval for the MCL indication.

ZUMA-3 and ZUMA-4

We expect to enroll approximately 75 adult patients with relapsed/refractory ALL in ZUMA-3 and approximately 75 pediatric patients with relapsed/refractory ALL in ZUMA-4.  We plan to transition to the Phase 2 portions of both trials in 2016 and report data from the Phase 2 portions of each trial in 2017.  If we believe the data are compelling, we plan to pursue FDA approval for the adult ALL and pediatric ALL indications.

We expect to expand the ZUMA clinical program to Europe in 2016. Assuming positive data from the current ZUMA program, we also expect to conduct additional ZUMA studies of KTE-C19 in 2017 for the treatment of FL, CLL and in earlier lines of DLBCL.

Additional eACT-Based Product Candidates

Pursuant to the CRADAs, we are funding multiple NCI clinical trials involving CAR- and TCR-based T cell therapies. We expect to select CAR- and TCR-based product candidates for development based on data from these clinical trials. Our collaboration with the NCI provides us the opportunity to license products for oncology development based on human proof-of-concept data rather than preclinical animal data alone. We believe this approach will significantly reduce the risk in our development programs. We plan to select product candidates for further development based on a favorable benefit-to-risk ratio and proof-of-concept established in the NCI clinical trials.

We also expect that the Amgen Agreement will expand our CAR-based product candidate pipeline and that Kite Pharma EU has the potential to significantly expand our TCR-based product candidate pipeline.  

CAR-Based Product Candidates

We may seek to develop additional CAR-based product candidates. Currently, we are funding an NCI Phase 1-2a clinical trial of a CAR-based T cell therapy targeting the EGFRvIII antigen in patients with glioblastoma, a highly malignant brain cancer. The NCI is conducting this trial at the NIH. The trial’s primary objectives are to (1) evaluate the safety of the administration of anti-EGFRvIII CAR T cell therapy in patients receiving the nonmyeloablative conditioning regimen, and Interleukin-2 and (2) determine the six month progression free survival of patients receiving anti-EGFRvIII CAR T cell therapy and Interleukin-2 following a nonmyeloablative but lymphoid depleting preparative regimen. The trial’s secondary objectives are to (1) determine the in vivo survival of the gene-engineered cells and (2) evaluate radiographic changes after treatment to measure objective tumor response. Patients are currently being enrolled into the Phase 1 dose escalation part of the trial and no results from this trial have been published.

We are also funding an NCI Phase 1 clinical trial of a fully human anti-CD19 CAR.  The trial’s primary objective is to assess the safety of giving T cells expressing a fully-human anti-CD19 CAR to patients with advanced B-cell cancer.  Patients are currently being enrolled into the Phase 1 dose escalation part of the trial and no results from this trial have been published.

TCR-Based Product Candidates

Pursuant to the 2012 CRADA, we are funding or expect to fund clinical trials at the NCI involving TCR-based T cell therapies targeting SSX2, NY-ESO-1, MAGE, HPV and KRAS antigens and neo-antigens. The Phase 2 clinical trial of a TCR-based therapy targeting the NY-ESO-1 antigen is being conducted by the NCI at the NIH. The trial’s primary objective is to determine whether the administration of anti-NY-ESO-1 plus high-dose Interleukin-2 following a nonmyeloablative lymphoid depleting preparative regimen may result in objective tumor regression in patients with metastatic cancers that express the NY-ESO-1 antigen. The trial’s secondary objectives are to (1) determine the in vivo survival of the gene engineered cells and (2) determine the toxicity profile of this treatment regimen. Patients are currently being enrolled into the dose escalation part of the trial and no results from this trial have been published.

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Two Phase 1-2a clinical trials of TCR-based therapies targe ting the MAGE antigen are being conducted by the NCI at the NIH. One trial’s primary objectives are to determine (1) a safe dose of the administration of autologous T cells transduced with an anti-MAGE-A3/A6, which is HLA-DP0401/0402 restricted, or MAGE-A3 -DP4, TCR and Interleukin-2 to patients following a nonmyeloablative but lymphoid depleting preparative regimen, (2) if this approach will result in objective tumor regression in patients with metastatic cancer expressing MAGE-A3-DP4 and (3) the toxicity p rofile of this treatment regimen. This trial’s secondary objective is to determine the in vivo survival of gene-engineered cells. The second trial’s purpose is to see if the anti-MAGE-A3, which is HLA-A1 restricted, cells cause tumors to shrink and to asse ss safety.  Patients are currently being enrolled into the Phase 1 dose escalation part of each of the trials. In November 2015, the NCI reported Phase 1 data from the clinical trial of anti-MAGE-A3-DP4 T cell therapy.  Fourteen patients were enrolled in t he Phase 1 portion of the study. One patient with cervical cancer, one with esophageal cancer, and one with urothelial cancer each experienced partial responses without dose limiting toxicities.  No results from the anti-MAGE-A3-A1 trial have been publishe d.

The Phase 1-2 clinical trial of a TCR-based therapy targeting the HPV-16 E6 antigen relating to certain cancers associated with the human papillomavirus is being conducted by the NCI at the NIH. The trial’s primary objectives are to determine (1) a safe dose of administration of autologous T cells transduced with an anti-HPV-16 E6 TCR and aldesleukin to patients following a nonmyeloablative but lymphodepleting preparative regimen and (2) the objective tumor response rate and duration in patients with metastatic or recurrent or refractory HPV-16+ cancers treated with this regimen. The trial’s secondary objective is to determine the toxicity of the treatment regimen and to study immunologic correlates associated with E6 TCR gene therapy for HPV-16+ cancers. Patients are currently being enrolled into the dose escalation part of the trial and no results from this trial have been published.  Christian Hinrichs is the principal investigator of this trial.

NCI planned clinical trials of TCR-based product candidates targeting certain SSX2, KRAS and HPV-16 E7 antigens, and neo-antigens have not yet begun.

With respect to developing a TCR-based product portfolio, we plan to use a novel Phase 2 design wherein patients with various cancers will be screened for tumor antigen expression as well as the patient specific HLA proteins that present the tumor antigen on the cancer cell surface. Patients will then be assigned a TCR-based therapy that matches both the tumor antigen expression and their presenting HLA protein. We believe this approach may allow for regulatory approvals of our personalized TCR-based product candidates without respect to cancer cell origin. As a result, we may be able to select the appropriate treatment from a portfolio of TCR-based product candidates on a patient-by-patient basis.

Preclinical Experience

While we are currently funding clinical trials at the NCI involving TCR-based T cell therapies, we have strong preclinical data supporting the potential efficacy of multiple TCR-based T cell therapies. For example, several different SSX2-specific TCR genes were screened for their expression and ability to specifically recognize SSX2-expressing cancer cells of a variety of histologies. Based on superior expression, potency and selective activity, an SSX2 TCR was identified as an attractive candidate for subsequent clinical evaluation. In addition to enabling us to select among different human TCR genes that target the same antigen, such preclinical studies allow us to make critical decisions regarding utilization of TCR genes derived from humans or mice, or otherwise engineered to optimize function. For instance, preclinical studies have demonstrated that a mouse-derived, or murine, TCR targeting the antigen NY-ESO-1 was equivalent to or better than the comparable human-based NY-ESO-1 TCR with respect to stable expression, cytokine production and target cell killing. Compared to certain human TCR protein chains, those that are fully or partially murine, may be less likely to become entwined with endogenous human TCR protein chains.

Manufacturing, Processing and Delivering to Patients

Because it is important to rapidly treat patients with highly aggressive cancers, we have developed a T cell engineering process for KTE-C19 that takes approximately two weeks from collection of the patient’s white blood cells to site delivery for infusion of the engineered T cells back to the patient. The processing of our lead product candidate, KTE-C19, begins with the collection of the patient’s white blood cells using a standard blood bank procedure. The collected cells are then sent to a central processing facility, where the peripheral blood mononuclear cells, including T cells, are isolated from the other sample components. These cells are stimulated to proliferate, then transduced with a retroviral vector to introduce the CAR gene into the patient’s T cells. These engineered cells are then propagated in cell culture bags until a sufficient number of cells are available for infusion back into the patient. The engineered T cells are then washed and frozen at the cell processing site, and shipped back to the clinical center where they can be administered to the patient. In preparation for administration of the engineered T cells, the patient undergoes a short chemotherapy conditioning regimen, which is intended to improve the survival and proliferative capacity of the newly infused T cells.

Using our clinical manufacturing facility and also our contract manufacturer, PCT, a subsidiary of Caladrius Biosciences, Inc., we are processing KTE-C19 for our ZUMA clinical trials. Cell processing activities are conducted at our facility and at PCT under current good manufacturing practices, or cGMP, using qualified equipment and materials. We have engaged a third-party contractor to

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manufacture the retroviral vector that delivers the applicable CAR gene into the T cells under cGMP. We believe all materials and components utilized in the production of the retroviral vector and final T cell product are readily available from qual ified suppliers.

We expect to continue to rely on PCT to supply some of our anticipated clinical trial demands. To meet projected needs for commercial demand, we plan to commission our commercial manufacturing facility to supply and process products on a patient-by-patient basis. Our commercial manufacturing facility is in El Segundo, adjacent to Los Angeles International Airport. We anticipate the El Segundo facility will be operational to support the planned commercial launch of KTE-C19 in 2017. Developing our own manufacturing capabilities may require more costs than we anticipate or result in significant delays. If we are unable to develop our own manufacturing capabilities, we will rely on contract manufacturers, including both current and alternate suppliers, to ensure sufficient capacity is available for commercial purposes prior to the submission of a BLA.

In November 2015, we entered into a strategic research collaboration with GE Global Research to develop a next generation, functionally integrated and automated manufacturing system for engineered T cell therapy. We believe this collaboration will accelerate the development of automation technologies for engineered T cell therapy that have the potential to reduce cost, improve speed and minimize variability. Under the terms of the agreement, we and GE Global Research will each contribute resources and relevant expertise to the partnership.

Intellectual Property

Intellectual property is of vital importance in our field and in biotechnology generally. We seek to protect and enhance proprietary technology, inventions, and improvements that are commercially important to the development of our business by seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties. We will also seek to rely on regulatory protection afforded through orphan drug designations, data exclusivity, market exclusivity and patent term extensions where available.

To achieve this objective, a strategic focus for us has been to identify and license key patents that provide protection and serve as an optimal platform to enhance our intellectual property and technology base. Well before the field of adoptive T cell immunotherapy raised commercial interest and started its transition to an industrial environment, we initiated a process of identifying patents with broad coverage in the area of CARs. Between 2009 and 2013, we identified, and ultimately licensed, issued patents with broad claims directed to the CAR concept. These patents were originally filed by investigators at the Weizmann Institute of Science, the NIH, University of California San Francisco, or UCSF, and Cell Genesys. This process was finalized in December 2013.

This effort was paralleled by the creation and execution in August 2012 of our first CRADA. As discussed below under “—Our Research and Development and License Agreements,” this agreement provides the framework under which we may license product-related intellectual property to support our pipeline development and commercialization activities, as well as enhance and extend the life-time of our patent portfolio.

Our intellectual property estate strategy is designed to provide multiple layers of protection, including: (1) patent rights with broad claims directed to core CAR constructs used in our products; (2) patent rights covering methods of treatment for therapeutic indications; (3) patent rights covering specific products; and (4) patent rights covering innovative manufacturing processes and methods for generating new constructs for genetically engineering T cells.

We believe our current layered patent estate, together with our efforts to develop and patent next generation technologies, provides us with substantial intellectual property protection. We have conducted extensive freedom to operate, or FTO, analyses of the current patent landscape with respect to our lead product candidate, and based on these analyses we believe that there are no valid claims in any third party patents, which would prevent our ability to commercialize KTE-C19. However, the area of patent and other intellectual property rights in biotechnology is an evolving one with many risks and uncertainties.  See “Risk Factors—Risks Related to Our Intellectual Property” for additional information.

Our current patent estate includes an exclusive license to a patent portfolio owned by Cabaret Biotech Ltd., or Cabaret, and directed to CAR constructs developed by Dr. Zelig Eshhar, Yeda-Weizmann, NIH, UCSF and Cell Genesys. Our CAR construct-directed patent portfolio includes 10 issued U.S. patents, seven of which are directed to core construct composition of matter and two of which are directed to methods of treatment for therapeutic indications. These patents first began to expire in April 2015, with the last of these patents, which broadly claims scFv-based CAR constructs and is also our most significant CAR-related patent, expiring in 2027. These patents represent all of the material patents underlying KTE-C19. We are working to develop the next generation of CAR and TCR technologies for use in this field, which we intend to patent on our own or to license from our collaborators, to expand this layer of our intellectual property estate.

Our current patent estate also includes an exclusive license from the NIH to patent applications related to CAR-based product candidates that target the EGFRvIII antigen for the treatment of brain cancer, head and neck cancer, and melanoma and TCR-based

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product candidates that target the CTA SSX2 for treatment of head and neck cancer, hepatocellular carcinoma, melanoma, prostate cancer, and sarcoma. Our patent estate further includes a co-exclusive license to these same product candidates for the treatment of certain other cancer types. We also have exclusive licenses from the NIH to patent applications related to TCR-based product candidates that target certain HPV, NY-ESO-1, and MAGE antigens.  

The identification of new technologies and initiation of the exclusive licensing process occur under the framework of the CRADAs between us and the NIH. Our product-specific intellectual property licensed to date includes six Patent Cooperation Treaty applications with priority dates in 2010, 2011, 2012, and 2013, corresponding U.S. non-provisional patent applications, and corresponding foreign patent applications in Canada, Australia, Europe, China, Israel and Japan, as well as additional pending U.S. provisional patent applications. The Patent Cooperation Treaty application with the 2010 priority date relates to our TCR-based product candidates targeting the SSX2 antigen, the Patent Cooperation Treaty application with the 2011 priority date relates to our CAR-based product candidate targeting the EGFRvIII antigen, the Patent Cooperation Treaty application with the 2012 priority date relates to our TCR-based product candidates targeting the NY-ESO-1 antigen, the Patent Cooperation Treaty application with the 2013 priority date relates to our TCR-based product candidates targeting HPV antigens, and the Patent Cooperation Treaty applications with the 2012 and 2013 priority dates relate to our TCR-based product candidates targeting the MAGE antigen. We may require an additional license relating to the EGFRvIII scFv target binding site in order to commercialize a CAR-based product candidate that targets the EGFRvIII antigen. We have no rights to any issued patents covering TCR-based product candidates.

Under the Amgen Agreement, we have a license to intellectual property rights to certain Amgen cancer targets.  In addition, we have certain intellectual property rights related to the TCR GENErator platform.  See “—T Cell Factory Acquisition” for additional information.

Our strategy is also to develop and obtain additional intellectual property covering innovative manufacturing processes and methods for genetically engineering T cells expressing new constructs. To support this effort, we have established expertise and development capabilities focused in the areas of preclinical research and development, manufacturing and manufacturing process scale-up, quality control, quality assurance, regulatory affairs and clinical trial design and implementation. We have filed a Patent Cooperation Treaty application, jointly with the NCI, relating to eACT closed manufacturing process, and expect to continue to file patent applications to expand this layer of our intellectual property estate.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the date of filing of the first non-provisional application to which priority is claimed. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-filed patent. The term of a patent that covers an FDA-approved drug may also be eligible for a patent term restoration of up to five years under the Hatch-Waxman Act, which is designed to compensate for the patent term lost during the FDA regulatory review process. The length of the patent term restoration is calculated based on the length of time the drug is under regulatory review. A patent term restoration under the Hatch-Waxman Act cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be restored. Moreover, a patent can only be restored once, and thus, if a single patent is applicable to multiple products, it can only be extended based on one product. Similar provisions are available in Europe and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug. When possible, depending upon the length of clinical trials and other factors involved in the submission of a BLA, we expect to apply for patent term extensions for patents covering our product candidates and their methods of use.

Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business; defend and enforce our patents; preserve the confidentiality of our trade secrets; and operate without infringing the valid enforceable patents and proprietary rights of third parties. Our ability to stop third parties from making, using, selling, offering to sell or importing our products may depend on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. With respect to both licensed and company-owned intellectual property, we cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our commercial products and methods of manufacturing the same.

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently

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discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to th e rights in related or resulting know-how and inventions.

Our Research and Development and License Agreements

Pursuant to the CRADAs, we have an exclusive option to negotiate commercial licenses from the NIH, to intellectual property relating to CAR- and TCR-based product candidates developed in the course of a CRADA research plan.  We currently have four patent license agreements with the NIH for intellectual property relating to various TCR-based product candidates and a CAR-based product candidate.  We also have a license agreement with Cabaret and its founder relating to intellectual property and know-how owned or licensed by Cabaret and relating to CAR constructs that encompass KTE-C19. We have also entered into the Amgen Agreement, a collaboration agreement with  bluebird bio, Inc.  and a license and research agreement with AIS.

For additional information regarding the CRADAs and our license agreements, see Note 6 to our financial statements appearing elsewhere in this Annual Report.

T-Cell Factory Acquisition

On March 17, 2015, we entered into a stock purchase agreement, or Purchase Agreement, with TCF and the shareholders of TCF, or the Sellers, to acquire all of the outstanding capital stock of TCF.  The signing and closing of the transaction happened concurrently whereupon TCF became our wholly-owned subsidiary and was renamed Kite Pharma EU.  The Purchase Agreement contains certain representations, warranties, covenants and indemnities by the parties thereto, in each case customary for a transaction of this nature and scope.

Pursuant to the Purchase Agreement, we paid €11.4 million (or approximately US$12.0 million based on a reference conversion rate of €0.95 to US$1), and issued €3.8 million in shares of our common stock, which equated to 66,120 shares of our common stock, to the Sellers.  The cash paid to the Sellers is subject to customary adjustments for net working capital.  €2.0 million was withheld from the Sellers at closing to satisfy any potential indemnity claims arising under the Purchase Agreement, the balance of which will be paid to the Sellers upon the termination of an indemnity holdback period of 18 months.  In addition, we paid €2.7 million (or approximately $2.9 million based on a reference conversion rate of €0.95 to $1) to TCF directly, which TCF paid, and will pay to its licensors and certain of its employees. 

We are obligated to pay up to €242.5 million upon the achievement of certain clinical, regulatory and sales milestones relating to TCR-based product candidates that may be developed by Kite Pharma EU. A portion of these milestone payments will be made to Kite Pharma EU directly to pay its licensors and employees.  At our option, a portion of the clinical and regulatory milestones may be paid in shares of our common stock to the Sellers. In connection with the acquisition, each of the Sellers entered into non-competition and non-solicitation agreements with us, and certain of the Sellers and other key scientists entered into employment agreements with Kite Pharma EU.

We acquired Kite Pharma EU for the opportunity to significantly expand our pipeline of TCR-based product candidates.  Using its proprietary TCR-GENErator technology platform, we believe Kite Pharma EU can rapidly and systematically discover tumor-specific TCRs. 

Kite Pharma EU has an exclusive license agreement with IBA GmbH, or IBA, for intellectual property rights relating to certain methods of selecting TCRs.  In addition, Kite Pharma EU has a non-exclusive license agreement with Sanquin Blood Supply Foundation, relating to certain methods of detecting and selecting TCRs. Kite Pharma EU also has a license agreement with the NKI for know-how, materials and protocols, and the right of first negotiation for certain intellectual property rights with relevance to TCRs that may be developed in Dr. Schumacher’s lab at the NKI over the next five years.  NKI, IBA and Sanquin Blood Supply Foundation have a right to a certain portion of the milestone payments that may be paid under the Purchase Agreement.  The intellectual property rights obtained from the NKI, IBA and Sanquin Blood Supply Foundation together form the basis of Kite Pharma EU’s proprietary TCR-GENErator technology platform. 

The Kite Pharma EU acquisition also brings us expertise from Europe’s leading scientists in the field of immuno-oncology as well as a strong partnership with the NKI, which is the only dedicated cancer center in the Netherlands and maintains an important role as a national and international center of scientific and clinical expertise, development and training. Dr. Schumacher, a preeminent scientist in the field of immuno-oncology and Deputy Director and Principal Investigator of NKI, serves as Chief Scientific Officer of Kite Pharma EU. 

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Competition

Presently, the biotechnology and pharmaceutical industries put significant resources in developing novel and proprietary therapies for the treatment of cancer. We compete with companies in the space of immunotherapy, as well as companies developing novel targeted therapies for cancer. We anticipate that we will face intense and increasing competition as new drugs and therapies enter the market and advanced technologies become available.

Due to their promising clinical therapeutic effect in clinical exploratory trials, we anticipate substantial direct competition from other organizations developing advanced T cell therapies. In particular, we expect to compete with (1) therapies with tumor infiltrating lymphocytes, or TILs, that are naturally occurring tumor-reactive T cells harvested, propagated ex vivo and re-infused into patients; and (2) therapies with genetically engineered T cells, similar to eACT, rendered reactive against tumor-associated antigens prior to their administration to patients. TIL therapy and genetically engineering T cells are being pursued by multiple companies, including Adaptimmune LLC, Celgene Corporation, bluebird bio, Inc., Lion Biotechnologies, Juno Therapeutics, Novartis and Mustang Bio, Inc. In particular, Novartis and Juno Therapeutics, with the support of Celgene Corporation, are in the process of research and development of their own version of an anti-CD19 CAR T cell therapy and we expect Adaptimmune to compete with any TCR-based product candidates that we develop. In addition, some companies, such as Cellectis, are pursuing allogeneic T cell products that could compete with eACT.

While we believe that other known types of immunotherapies, including those described under “—Other Immunotherapies” above, may potentially be used in conjunction with eACT, such as CPIs, to enhance efficacy, we do not expect substantial direct competition from these other types of immunotherapies. However, we cannot predict whether other types of immunotherapies may be enhanced and show greater efficacy, and we may have direct and substantial competition from such immunotherapies in the future.

Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achieving widespread market acceptance and may render our treatments obsolete or non-competitive. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical study sites and patient registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Government Regulation and Product Approval

As a biopharmaceutical company that operates in the United States, we are subject to extensive regulation. Our cell products will be regulated as biologics. With this classification, commercial production of our products will need to occur in registered and licensed facilities in compliance with cGMP for biologics. The FDA categorizes human cell- or tissue-based products as either minimally manipulated or more than minimally manipulated, and has determined that more than minimally manipulated products require clinical trials to demonstrate product safety and efficacy and the submission of a BLA for marketing authorization.

Government authorities in the United States (at the federal, state and local level) and in other countries extensively regulate, among other things, the research, development, testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of biopharmaceutical products such as those we are developing. Our product candidates must be approved by the FDA before they may be legally marketed in the United States and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries. Generally, our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed in the United States, although there can be important differences. Additionally, some significant aspects of regulation in Europe are addressed in a centralized way, but country-specific regulation remains essential in many respects. The process for obtaining regulatory marketing approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

U.S. Product Development Process

In the United States, the FDA regulates pharmaceutical and biological products under the Federal Food, Drug and Cosmetic Act, or FDCA, the Public Health Service Act, or PHSA, and their implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. FDA sanctions could include, among other actions, refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls or withdrawals from the market, product seizures, total or partial suspension of production or

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distribution inju nctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a biological product ma y be marketed in the United States generally involves the following:

 

completion of nonclinical laboratory tests and animal studies according to good laboratory practices, or GLPs, and applicable requirements for the humane use of laboratory animals or other applicable regulations;

 

submission to the FDA of an IND, which must become effective before human clinical trials may begin;

 

performance of adequate and well-controlled human clinical trials according to the FDA’s regulations commonly referred to as good clinical practices, or GCPs, and any additional requirements for the protection of human research patients and their health information, to establish the safety and efficacy of the proposed biological product for its intended use;

 

submission to the FDA of a BLA for marketing approval that includes substantive evidence of safety, purity, and potency from results of nonclinical testing and clinical trials;

 

satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product is produced to assess compliance with cGMP, to assure that the facilities, methods and controls are adequate to preserve the biological product’s identity, strength, quality and purity and, if applicable, the FDA’s current good tissue practices, or GTPs, for the use of human cellular and tissue products;

 

potential FDA audit of the nonclinical study and clinical trial sites that generated the data in support of the BLA; and

 

FDA review and approval, or licensure, of the BLA.

Before testing any biological product candidate, including our product candidates, in humans, the product candidate enters the preclinical testing stage. Preclinical tests, also referred to as nonclinical studies, include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the product candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs. For trials conducted at, or sponsored by, institutions receiving NIH funding for recombinant DNA research, prior to the submission of an IND to the FDA, a protocol and related documents must be submitted to, and the study registered with, the NIH Office of Biotechnology Activities, or the OBA, pursuant to the NIH Guidelines for Research Involving Recombinant DNA Molecules, or the NIH Guidelines. Compliance with the NIH Guidelines is mandatory for investigators at institutions receiving NIH funds for research involving recombinant DNA. However, many companies and other institutions, not otherwise subject to the NIH Guidelines, voluntarily follow them. The NIH is responsible for convening the recombinant DNA advisory committee, or RAC, that discusses protocols that raise novel or particularly important scientific, safety or ethical considerations at one of its quarterly public meetings. The OBA will notify the FDA of the RAC’s decision regarding the necessity for full public review of a protocol.

The clinical trial sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials and places the trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a biological product candidate at any time before or during clinical trials due to safety concerns or non-compliance. If the FDA imposes a clinical hold, trials may not recommence without FDA authorization and then only under terms authorized by the FDA. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such trials.

Clinical trials involve the administration of the biological product candidate to patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur. Each protocol and any amendments to the protocol must be submitted to the FDA as part of the IND. Clinical trials must be conducted and monitored in accordance with the FDA’s regulations comprising the GCP requirements, including the requirement that all research patients provide informed consent. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed. Clinical trials also must be reviewed by an institutional biosafety committee, or IBC, a local institutional committee that reviews and oversees basic and clinical research conducted at that institution. The IBC assesses the safety of the research and identifies any potential risk to public health or the environment.

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Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

Phase 1. The biological product is initially introduced into healthy human subjects and tested for safety. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

Phase 2. The biological product is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

 

Phase 3 . Clinical trials are undertaken to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk to benefit ratio of the product and provide an adequate basis for product labeling.

Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These clinical trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up.

During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Written IND safety reports must be promptly submitted to the FDA, the NIH and the investigators for serious and unexpected adverse events, any findings from other studies, tests in laboratory animals or in vitro testing that suggest a significant risk for human patients, or any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines that the information qualifies for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research patients are being exposed to an unacceptable health risk, including risks inferred from other unrelated immunotherapy trials. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the biological product has been associated with unexpected serious harm to patients.

Human immunotherapy products are a new category of therapeutics. Because this is a relatively new and expanding area of novel therapeutic interventions, there can be no assurance as to the length of the trial period, the number of patients the FDA will require to be enrolled in the trials in order to establish the safety, efficacy, purity and potency of immunotherapy products, or that the data generated in these trials will be acceptable to the FDA to support marketing approval.

Concurrently with clinical trials, companies usually complete additional studies and must also develop additional information about the physical characteristics of the biological product as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. To help reduce the risk of the introduction of adventitious agents with use of biological products, the PHSA emphasizes the importance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality, potency and purity of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the biological product candidate does not undergo unacceptable deterioration over its shelf life.

U.S. Review and Approval Processes

After the completion of clinical trials of a biological product, FDA approval of a BLA must be obtained before commercial marketing of the biological product. The BLA must include results of product development, laboratory and animal studies, human trials, information on the manufacture and composition of the product, proposed labeling and other relevant information. The FDA may grant deferrals for submission of data or full or partial waivers. The testing and approval processes require substantial time and effort and there can be no assurance that the FDA will accept the BLA for filing and, even if filed, that any approval will be granted on a timely basis, if at all.

Under the Prescription Drug User Fee Act, or PDUFA, as amended, each BLA must be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual product fee for biological products and an annual establishment fee on facilities used to manufacture prescription biological products. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on BLAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.

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Within 60 days following sub mission of the application, the FDA reviews a BLA submitted to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submissi on and may request additional information. In this event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, t he FDA begins an in-depth substantive review of the BLA. The FDA reviews the BLA to determine, among other things, whether the proposed product is safe, potent, and/or effective for its intended use, and has an acceptable purity profile, and whether the pr oduct is being manufactured in accordance with cGMP to assure and preserve the product’s identity, safety, strength, quality, potency and purity. The FDA may refer applications for novel biological products or biological products that present difficult que stions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not boun d by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the biological product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or REMS , is necessary to assure the safe use of the biological product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS. The FDA will not approve a BLA without a REMS, if required.

Before approving a BLA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. For immunotherapy products, the FDA also will not approve the product if the manufacturer is not in compliance with the GTPs, to the extent applicable. These are FDA regulations and guidance documents that govern the methods used in, and the facilities and controls used for, the manufacture of human cells, tissues, and cellular and tissue based products, or HCT/Ps, which are human cells or tissue intended for implantation, transplant, infusion, or transfer into a human recipient. The primary intent of the GTP requirements is to ensure that cell and tissue based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable disease. FDA regulations also require tissue establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing. Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements. To assure cGMP, GTP and GCP compliance, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production, and quality control.

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the BLA does not satisfy its regulatory criteria for approval and deny approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. If the agency decides not to approve the BLA in its present form, the FDA will issue a complete response letter that describes all of the specific deficiencies in the BLA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, or withdraw the application.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post marketing clinical trials, sometimes referred to as Phase 4 clinical trials, designed to further assess a biological product’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.

In addition, under the Pediatric Research Equity Act, or PREA, a BLA or supplement to a BLA must contain data to assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any product for an indication for which orphan designation has been granted. However, if only one indication for a product has orphan designation, a pediatric assessment may still be required for any applications to market that same product for the non-orphan indication(s).

Orphan Drug Designation

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

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generic ident ity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full BLA, to market the same biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA application user fee. 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, 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 quantities of the product to meet the needs of patients with the rare disease or condition.

We have received orphan drug designation for our lead product candidate, KTE-C19, for the treatment of DLBCL. There can be no assurance that we will receive orphan drug designation for additional indications or for any additional product candidates.

Expedited Development and Review Programs

The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new products that meet certain criteria. Specifically, new products are eligible for fast track designation if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. Fast track designation applies to the combination of the product and the specific indication for which it is being studied. Unique to a fast track product, the FDA may consider for review sections of the BLA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the BLA, the FDA agrees to accept sections of the BLA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the BLA.

Any product, submitted to the FDA for approval, including a product with a fast track designation, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new product designated for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Products studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

Breakthrough therapy designation is intended to expedite the development and review of products that treat serious or life-threatening conditions. The designation by FDA requires preliminary clinical evidence that a product candidate demonstrates substantial improvement over currently available therapy. The designation includes all of the fast track program features, as well as more intensive FDA interaction and guidance. The breakthrough therapy designation is a distinct status from both accelerated approval and priority review, which can also be granted to the same product if relevant criteria are met. If a product is designated as breakthrough therapy, FDA will expedite the development and review of such product.

Post-Approval Requirements

Any products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, and complying with FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting products for uses or in patient populations that are not described in the product’s approved uses (known as “off-label use”), limitations on industry-sponsored scientific and educational activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available products for off-label uses, if the physicians deem to be appropriate in their professional medical judgment, manufacturers may not market or promote such off-label uses.

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In addition, quality control and manufacturing procedures must continue to conform to applicable manufacturing requirements after approval to ensure the long-term stability of th e product. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Manufacturers and ot her entities involved in the manufacture and distribution of approved products are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA, including, among other things, recall or withdrawal of the product from the market. In addition, changes to the manufacturing process are strictly regulated, and depending on the signi ficance of the change, may require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and claims, are also subject to further FDA review and approval.

The FDA also may require post-marketing testing, known as Phase 4 testing, and surveillance to monitor the effects of an approved product. Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.

U.S. Patent Term Restoration and Marketing Exclusivity

The Biologics Price Competition and Innovation Act, or BPCIA, amended the PHSA to authorize the FDA to approve similar versions of innovative biologics, commonly known as biosimilars. A competitor seeking approval of a biosimilar must file an application to establish its molecule as highly similar to an approved innovator biologic, among other requirements. The BPCIA, however, bars the FDA from approving biosimilar applications for 12 years after an innovator biological product receives initial marketing approval. This 12-year period of data exclusivity may be extended by six months, for a total of 12.5 years, if the FDA requests that the innovator company conduct pediatric clinical investigations of the product. As an innovative biological product, KTE-C19 would receive this data protection if the FDA approves it for marketing.

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

Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.

Other U.S. Healthcare Laws and Compliance Requirements

In the United States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including but not limited to, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, or DOJ, and individual U.S. Attorney offices within the DOJ, and state and local governments. For example, our business practices, including our sales, marketing and scientific/educational grant programs may be required to comply with the anti-fraud and abuse provisions of the Social Security Act, the false claims laws, the patient data privacy and security provisions of the Health Insurance Portability and Accountability Act, or HIPAA, transparency requirements, and similar state laws, each as amended.

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The federal Anti-Kickback Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any remuneration, d irectly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value. The federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and for mulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor.

Additionally, the intent standard under the federal Anti-Kickback Statute was amended by the Patient Protection Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively, the Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (discussed below).

The civil monetary penalties statute imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to, or approval by, the federal government or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-reimbursable, uses.

HIPAA created additional federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

We may be subject to data privacy and security regulations by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, imposes requirements on certain types of individuals and entities relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.  

Additionally, the federal Physician Payments Sunshine Act within the Affordable Care Act, and its implementing regulations, require that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) report information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians and their immediate family members.

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In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of dr ug and biological products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distri bution chain. Several states have enacted legislation requiring pharmaceutical and biotechnology companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clin ical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on the extent to which third-party payors provide coverage, and establish adequate reimbursement levels for such products. In the United States, third-party payors include federal and state healthcare programs, private managed care providers, health insurers and other organizations. The process for determining whether a third-party payor will provide coverage for a product may be separate from the process for setting the price of a product or for establishing the reimbursement rate that such a payor will pay for the product. Third-party payors may limit coverage to specific products on an approved list, or also known as a formulary, which might not include all of the FDA-approved products for a particular indication. Third-party payors are increasingly challenging the price, examining the medical necessity and reviewing the cost-effectiveness of medical products, therapies and services, in addition to questioning their safety and efficacy. We or may need to conduct expensive pharmaco-economic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Different pricing and reimbursement schemes exist in other countries. In the EU, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

The marketability of any product candidates for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on healthcare pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Healthcare Reform

In March 2010, President Obama enacted the Affordable Care Act, which is  substantially changing healthcare financing and delivery by both governmental and private insurers, and significantly impacting the pharmaceutical and biotechnology industry.

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Among the Affordable Care Act’s provisions of importance to the pharmaceutical and biotechnology industries, in addition to those otherwise described above, are the following:

 

an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents apportioned among these entities according to their market share in some government healthcare programs;

 

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively and a cap on the total rebate amount for innovator drugs at 100% of the Average Manufacturer Price, or AMP;

 

 

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D;

 

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and

 

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

We anticipate that the Affordable Care Act will result in additional downward pressure on coverage and the price that we receive for any approved product, and could seriously harm our business, though we are still unsure what its full impact will be.  There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect such challenges and amendments to continue in the future. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms, such as the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, may prevent us from being able to generate revenue, attain profitability, or commercialize our products.  Additionally, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices.  Specifically, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.

We continue to evaluate the effect that the Affordable Care Act has on our business. Additionally, federal agencies have issued requests for information and interim and final regulations implementing certain other Affordable Care Act provisions that could affect our business. Final regulations, guidance and judicial orders are anticipated in the near future and we will continue to assess the Affordable Care Act’s impact on us as final regulations and guidance are issued.  

Further, in January 2016, CMS issued a final rule regarding the Medicaid drug rebate program. The final rule, effective April 1, 2016, among other things, revises the manner in which the “average manufacturer price” is to be calculated by manufacturers participating in the program and implements certain amendments to the Medicaid rebate statute created under the Affordable Care Act. In addition, it is possible that there will be further legislation or regulation that could harm our business, financial condition, and results of operations.

The Foreign Corrupt Practices Act

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

Additional Regulation

In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservancy and Recovery Act and the Toxic Substances Control Act, affect our business. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances used

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in, and wastes generated by, our operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. We belie ve that we are in material compliance with applicable environmental laws and that continued compliance therewith will not have a material adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations .

Europe / Rest of World Government Regulation

In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products. Whether or not we obtain FDA approval of a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the EU, for example, a clinical trial application must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the clinical trial application is approved in accordance with a country’s requirements, clinical trial development may proceed. Because biologically sourced raw materials are subject to unique contamination risks, their use may be restricted in some countries.

The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials must be conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

To obtain regulatory approval of an investigational drug or biological product under EU regulatory systems, we must submit a marketing authorization application. The application used to file the BLA in the United States is similar to that required in the EU, with the exception of, among other things, country-specific document requirements. The European Commission has granted KTE-C19 orphan drug designation to treat DLBCL, PMBCL, ALL, MCL, CLL, small lymphocytic lymphoma, and FL. The designation may provide 10 years of market exclusivity in Europe, subject to certain limited exceptions. However, the designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.

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

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

Employees

As of February 22, 2016, we had 185 employees, including employees of Kite Pharma EU, all but one of whom are full-time, 46 of whom hold Ph.D. or M.D. degrees, 129 of whom were engaged in research and development activities and 56 of whom were engaged in business development, finance, information systems, facilities, human resources or administrative support. None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

Corporate Information

We were incorporated in Delaware in June 2009. Our principal executive offices are located at 2225 Colorado Avenue, Santa Monica, California 90404, and our telephone number is (310) 824-9999. Our corporate website address is www.kitepharma.com . We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information with the SEC.  Our filings with the SEC are available free of charge on the SEC’s website at www.sec.gov and on our website under the “Investors” tab as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also read and copy, at SEC prescribed rates, any document we file with the SEC at the SEC's Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.  The contents of our website are not incorporated into this Annual Report and our reference to the URL for our website is intended to be an inactive textual reference only.  

Unless the context requires otherwise, references in this Annual Report to “we,” “us”, “our” and “Kite” refer to Kite Pharma, Inc. and its subsidiaries.

 

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Item 1A.  Ri sk Factors

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Annual Report. The occurrence of any of the following risks could harm our business, financial condition, results of operations and growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this Annual Report and those we may make from time to time.

Risks Related to Our Business and Industry

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

We are a clinical-stage biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in June 2009. For the years ended December 31, 2015 and 2014, we reported a net loss of $101.7 million and $42.6 million, respectively. As of December 31, 2015, we had an accumulated deficit of $159.7 million. We expect to continue to incur significant expenditures for the foreseeable future, and we expect these expenditures to increase as we continue our research and development of, and seek regulatory approvals for, product candidates based on our engineered autologous cell therapy, or eACT. Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

eACT represents a novel approach to cancer treatment that creates significant challenges for us.

eACT involves (1) harvesting T cells from the patient’s blood, (2) genetically engineering T cells to express cancer-specific receptors, (3) increasing the number of engineered T cells and (4) infusing the functional cancer-specific T cells back into the patient. Advancing this novel and personalized therapy creates significant challenges for us, including:

 

·

Educating medical personnel regarding the potential side effect profile of eACT, such as the potential adverse side effects related to cytokine release and neurotoxicity;

 

·

Using medicines to manage adverse side effects of eACT, such as tocilizumab and corticosteroids, which may not adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment;

 

·

Sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process our eACT-based product candidates;

 

·

Developing a robust and reliable process, while limiting contamination risks, for engineering a patient’s T cells ex vivo and infusing the engineered T cells back into the patient;

 

·

Conditioning patients with chemotherapy in conjunction with delivering eACT, which may increase the risk of adverse side effects;

 

·

Obtaining regulatory approval, as the U.S. Food and Drug Administration, or FDA, and other regulatory authorities have limited experience with commercial development of T cell therapies for cancer; and

 

·

Establishing sales and marketing capabilities upon obtaining any regulatory approval to gain market acceptance of a novel therapy.

In addition, we expect to use manufacturing and processing approaches to produce engineered T cells that are based on the original approach used by our collaborator, the National Cancer Institute, or NCI. While the NCI is using CAR- and TCR-based therapies in clinical trials that we are funding under an August 2012 Cooperative Research and Development Agreement, or 2012 CRADA, we cannot be sure that our engineered T cell therapy will obtain the same safety and efficacy results as those obtained by the NCI using its own original production methods.

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Our business is highly dependent on the success of KTE-C19, our lead product candidate. KTE-C19 and our other product candidates will require significant additional clinical testing before we can seek regulatory approval and pot entially launch commercial sales.

Our business and future success depends on our ability to obtain regulatory approval of and then successfully commercialize our lead product candidate, KTE-C19. All of our product candidates, including KTE-C19, will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. In addition, because KTE-C19 is our most advanced product candidate, and because our other product candidates are based on similar technology, if our clinical trials of KTE-C19 encounter safety, efficacy or manufacturing problems, developmental delays or regulatory issues or other problems, our development plans and business would be significantly harmed.

We are highly dependent on the National Cancer Institute for research and development and early clinical testing of our product candidates and on the National Institutes of Health for licensing intellectual property rights to future product candidates.

A substantial portion of our research and development has been conducted by the NCI under the 2012 CRADA. On January 4, 2016, we entered into a second CRADA, or 2016 CRADA, for the research and clinical development of additional engineered T cell therapy, including a fully human anti-CD19 CAR-based therapy for the treatment of B cell lymphomas and leukemias.

The NCI, with Dr. Steven A. Rosenberg as the principal investigator, is conducting multiple clinical trials of engineered T cell therapy targeting various antigens in small numbers of patients under the 2012 CRADA. We also expect to have the NCI, with Dr. James N. Kochenderfer as principal investigator, conduct additional clinical trials under the 2016 CRADA. We have limited control over the nature or timing of the NCI’s clinical trials and limited visibility into their day-to-day activities, including with respect to how they are providing and administering T cell therapy. For example, the research we are funding constitutes only a small portion of the NCI’s overall research. Other research being conducted by Dr. Rosenberg or Dr. Kochenderfer may at times receive higher priority than research on our programs. While we have used the results of the NCI’s clinical trial of anti-CD19 CAR T cell therapy to support our investigational new drug application, or IND, for our clinical trials of KTE-C19, these factors could adversely affect the timing of our future IND filings and our ability to conduct future planned clinical trials.

Under each CRADA, we have an exclusive option to negotiate commercial licenses from the National Institutes of Health, or the NIH, to intellectual property relating to CAR- and TCR-based product candidates developed in the course of the CRADA research plan. However, we would have to negotiate with the NIH for such a license. There can be no assurance that we would be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding the additional product candidates that we may seek to acquire. Further, to the extent we would like to negotiate a license to a patent filed before the relevant CRADA was entered into, another party may object to the NIH granting us a license during a 30-day public notification period, and the NIH may decide not to grant us the license.

Though each CRADA has a five-year term, with the 2012 CRADA expiring on August 30, 2017 and the 2016 CRADA expiring on January 4, 2021, the NCI may unilaterally terminate either CRADA at any time for any reason or for no reason upon at least 60 days prior written notice. If the NCI unilaterally terminates one or both CRADAs, part or all of the research and development of eACT would be suspended, and we may be unable to research, develop and license future product candidates.  

We may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to, the FDA may not permit us to proceed.

We expect that with the early clinical work performed by the NCI pursuant to the CRADAs and the additional research we are performing in-house, including pursuant to the Amgen Agreement, we may pursue the filing with the FDA of a number of INDs over the next several years. We expect to submit an IND for a second product candidate, a TCR-based product candidate, and an IND to be filed for a CAR product candidate researched under the Amgen Agreement, by the end of 2016. However, our timing of filing on the TCR product candidate will be primarily dependent on receiving further data from the NCI’s clinical trials and our timing of filing on all product candidates is subject to further research. We cannot be sure that submission of an IND will result in the FDA allowing further clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such clinical trials. For instance, the FDA may not allow us to use the NCI clinical trial data to support our INDs. Additionally, even if such regulatory authorities agree with the design and implementation of the clinical trials set forth in an IND or clinical trial application, we cannot guarantee that such regulatory authorities will not change their requirements in the future.

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Our clinical trials may fail to demonstrate adequately the safety and efficacy of any of our product candidates, which would prevent or delay regulatory approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of our product candidates, including KTE-C19, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that our product candidates are both safe and effective for use in each target indication. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. We expect there may be greater variability in results for products processed and administered on a patient-by-patient basis, like eACT, than for “off-the-shelf” products, like many drugs. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. Most product candidates that commence clinical trials are never approved as products.

Data from the NCI preclinical studies and clinical trials of anti-CD19 CAR T cell therapy should not be relied upon as evidence that later or larger-scale clinical trials will succeed. We have designed our ongoing Phase 1-2 single-arm multicenter clinical trial of KTE-C19 primarily to assess safety and efficacy in patients with refractory diffuse large B cell lymphoma, or DLBCL, primary mediastinal B cell lymphoma, or PMBCL, and transformed follicular lymphoma, or TFL. The NCI clinical trials of anti-CD19 CAR T cell therapy involved a limited number of patients, and only a subset of these patients have been diagnosed with refractory DLBCL, PMBCL and TFL. Our clinical trials may also evaluate different CAR T cell doses and chemotherapy conditioning regimens based on emerging safety and efficacy data. The results of the NCI trials to date may not predict results for our ongoing trial or any future studies. In addition, our manufacturing process for KTE-C19 includes what we believe are process improvements that are not part of the anti-CD19 CAR T cell production process that the NCI originally used in its clinical trials. While the NCI began using the same manufacturing process that is being used for KTE-C19, the NCI only treated a limited number of patients using this manufacturing process.

In addition, even if the trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval of our product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates.

We have limited experience as a company conducting clinical trials.

While we are currently conducting clinical trials of KTE-C19, all of the other preclinical and clinical trials relating to our product candidates have been and are being conducted by the NCI. Although we have recruited a team that has significant experience with clinical trials, we have limited experience as a company in conducting clinical trials. In part because of this lack of experience, we cannot be certain that our ongoing clinical trials will be completed on time or if the planned clinical trials will begin or be completed on time, if at all. Large-scale trials require significant financial and management resources, and reliance on third-party clinical investigators, contract research organizations, or CROs, or consultants. Relying on third-party clinical investigators or CROs may force us to encounter delays that are outside of our control.

Monitoring of patient safety in our ongoing and planned sponsored multicenter clinical trials will be more challenging than the monitoring currently being done by the NCI, which could adversely affect our ability to obtain regulatory approval.

The NCI is a center of excellence for clinical trials in cancer patients, with a large group of experienced staff and a clinical trial support system. Patients enrolled in the NCI clinical trials are generally hospitalized for extended periods of time for dedicated observation, and there is a ready availability of specialized health care professionals and intensive care unit beds if necessary. For our ongoing clinical trials of KTE-C19 and in our planned sponsored multicenter clinical trials of KTE-C19 and other product candidates, we have and expect to contract with academic medical centers and hospitals experienced in the assessment and management of toxicities arising during clinical trials. Nonetheless, the extent of patient observation and the appropriate treatment of toxicities may not be as optimal as is currently being done at the NCI, whether due to personnel changes, inexperience, changes of shift, house staff coverage or related issues. This could lead to more severe or prolonged toxicities or even patient deaths, which could result in us or the FDA delaying, suspending or terminating one or more of our clinical trials, and which could jeopardize regulatory approval. Medicines used at sites to help manage adverse side effects of KTE-C19, such as tocilizumab and corticosteroids, may not adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment. Use of these medicines may increase as we initiate new trial sites. All patients in the Phase 1 portion of ZUMA-1 received tocilizumab and most received corticosteroids. These medicines were infrequently used in the NCI Phase 1-2a clinical trial of anti-CD19 CAR T cell therapy.

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Our product candidates may cause undesirable side effects or have other properties that could halt their clinical development, prevent their regulatory approval, limit their commercial potential or result in significant negative consequences.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.

In the NCI Phase 1-2a clinical trial of anti-CD19 CAR T cell therapy, when the patients received the CAR T cells, all of them had low blood counts due to the chemotherapy conditioning regimen. Most prominent acute toxicities included symptoms thought to be associated with the release of cytokines, such as fever, low blood pressure, hypoxia, heart dysfunction and kidney dysfunction. Most patients also experienced neurotoxicity, such as ataxia, confusion, somnolence and speech impairment. There have been life threatening events related to cytokine release syndrome and neurotoxicity. Some of these events required intense medical intervention such as intubation or pressor support. Several patients have died, but the deaths were not attributed to the CAR T cells. In addition, in the NCI Phase 1 clinical trial of pediatric or young adult patients with relapsed/refractory acute lymphoblastic leukemia, or ALL, infusion of anti-CD19 CAR T cells was associated with significant, acute toxicities, including febrile neutropenia, cytokine release syndrome, chemical laboratory abnormalities, low blood counts and neurotoxicity.

As an anti-CD19 CAR T cell therapy, KTE-C19 has caused similar toxicities as the therapy in the NCI clinical trials as seen in the Phase 1 portion of the ZUMA-1 trial. As presented at the American Society of Hematology in December 2015, the KTE-C19 related adverse events included severe and life threatening toxicities, consisting predominantly of cytokine release syndrome and neurotoxicity, which were reversible except in the patient that experienced dose-limiting toxicities. This patient died within thirty days of treatment, but the death was deemed unrelated to KTE-C19.

Patients in the NCI clinical trials of the CAR-based product candidate targeting the EGFRvIII antigen and the TCR-based product candidates are expected to receive high dose Interleukin-2, which is associated with toxicities such as capillary leak syndrome, hypotension, impaired kidney and liver function, and mental status changes.

If unacceptable toxicities arise in the development of our product candidates, we or the NCI could suspend or terminate our trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff, particularly outside of the NCI as toxicities resulting from personalized T cell therapy are not normally encountered in the general patient population and by medical personnel. We have trained and expect to have to train medical personnel using eACT to understand the side effect profile of eACT for both our clinical trials and upon any commercialization of any eACT-based product candidates. Inadequate training in recognizing or managing the potential side effects of eACT could result in patient deaths. Any of these occurrences may harm our business, financial condition and prospects significantly.

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

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

 

·

the patient eligibility criteria defined in the protocol;

 

·

the size of the patient population required for analysis of the trial’s primary endpoints;

 

·

the proximity of patients to study sites;

 

·

the design of the trial;

 

·

our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

·

our ability to obtain and maintain patient consents; and

 

·

the risk that patients enrolled in clinical trials will drop out of the trials before the manufacturing and infusion of KTE-C19 or trial completion.

In addition, our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the

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number of qualified clinical investigators is limited, some of our clinical trial sites are also being used by some of our competitors, which may reduce the number of patients who are available for our clinical trials in such clinical trial site. Moreov er, because our product candidates represent a departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy and hematopoietic cell transplantation, rather than enroll patients in any future clinical trial.

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

Clinical trials are expensive, time-consuming and difficult to design and implement.

Human clinical trials are expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Because our product candidates are based on new technology and engineered on a patient-by-patient basis, we expect that they will require extensive research and development and have substantial manufacturing and processing costs. In addition, costs to treat patients with relapsed/refractory cancer and to treat potential side effects that may result from eACT can be significant. Accordingly, our clinical trial costs are likely to be significantly higher than for more conventional therapeutic technologies or drug products. In addition, our proposed personalized product candidates involve several complex and costly manufacturing and processing steps, the costs of which will be borne by us.  

The market opportunities for our product candidates may be limited to those patients who are ineligible for or have failed prior treatments and may be small.

The FDA often approves new therapies initially only for use in patients with relapsed or refractory metastatic disease. We expect to initially seek approval of our product candidates in this setting. Subsequently, for those products that prove to be sufficiently beneficial, if any, we would expect to seek approval in earlier lines of treatment and potentially as a first line therapy, but there is no guarantee that our product candidates, even if approved, would be approved for earlier lines of therapy, and, prior to any such approvals, we will have to conduct additional clinical trials.

Our projections of both the number of people who have the cancers we are targeting, as well as the subset of people with these cancers in a position to receive second or later lines of therapy, and who have the potential to benefit from treatment with our product candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, surveys of clinics, patient foundations, or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these cancers. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for our product candidates may be limited or may not be amenable to treatment with our product candidates. For instance, we expect our lead product candidate, KTE-C19, to initially target a small patient population that suffers from aggressive non-Hodgkin lymphomas, or NHL, and ALL. Even if we obtain significant market share for our product candidates, because the potential target populations are small, we may never achieve profitability without obtaining regulatory approval for additional indications.

KTE-C19 has received orphan drug status, but we may be unable to maintain or receive the benefits associated with orphan drug status, including market exclusivity.

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition or for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for a disease or condition will be recovered from sales in the United States for that drug or biologic. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full Biologics License Application, or BLA, to market the same biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity.

We have received orphan drug status for KTE-C19 for the treatment of DLBCL, but exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure the availability of sufficient quantities of the product to meet the needs of patients with the rare disease or condition. The European Commission has also granted KTE-C19 orphan drug designation for the treatment of DLBCL, PMBCL, ALL, mantle cell lymphoma, or MCL, chronic lymphocytic leukemia/small lymphocytic lymphoma, and follicular lymphoma. The designation may provide 10 years of market exclusivity in Europe, but is subject to certain limited exceptions. Even though we have obtained orphan drug designation for KTE-C19 for certain indications, we may be unable to obtain orphan drug designation for our future product candidates and we may not be the first to obtain marketing approval for any particular orphan indication.

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KTE-C19 has received breakthrough therapy designation for the treatment of refractory DLBCL, PMBCL and TFL, but there can be no assurance that such designation will result in expedited review or approval.

Breakthrough therapy designation is intended to expedite the development and review of products that treat serious or life-threatening conditions. We have received breakthrough therapy designation for KTE-C19 for the treatment of refractory DLBCL, PMBCL and TFL, but there can be no assurance that such designation will result in expedited review or approval. The FDA may also rescind the breakthrough therapy designation for KTE-C19 if subsequent data no longer support the designation. Breakthrough therapy designation does not change the standards for product approval. While we intend to seek breakthrough therapy designation for other product candidates, we may never receive such designations.  

If we fail to develop additional product candidates, our commercial opportunity will be limited.

We expect to initially develop our lead product candidate, KTE-C19. However, one of our strategies is to pursue clinical development of additional product candidates. Developing, obtaining regulatory approval for and commercializing additional product candidates, including additional TCR- or CAR-based product candidates, will require substantial additional funding and is prone to the risks of failure inherent in medical product development. We cannot provide you any assurance that we will be able to successfully advance any of these additional product candidates through the development process.

Even if we receive FDA approval to market additional product candidates for the treatment of cancer, we cannot assure you that any such product candidates will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize additional product candidates, our commercial opportunity will be limited. Moreover, a failure in obtaining regulatory approval of additional product candidates may have a negative effect on the approval process of any other, or result in losing approval of any approved, product candidate.

We operate our own clinical manufacturing facility and intend to operate our own commercial manufacturing facility, which will require significant resources and we may fail to successfully operate either or both facilities, which could adversely affect our clinical trials and the commercial viability of our product candidates.

We currently operate our own clinical manufacturing facility and also rely on outside vendors to manufacture clinical supplies and process intermediates, such as viral vectors, to support our clinical trials.  Our product candidates are currently and will continue to be manufactured on a patient-by-patient basis. We have not yet manufactured our product candidates on a commercial scale, and may not be able to achieve commercial manufacturing and processing on our own, including on a patient-by-patient basis, to satisfy demands for any of our product candidates. While we believe the manufacturing and processing approaches are appropriate to support clinical product development, we have limited experience in managing the T cell engineering process, and our processes may be more difficult or more expensive than the approaches taken by our competitors. We cannot be sure that the manufacturing processes employed by us will result in T cells that will be safe and effective, or have the same clinical properties as those used in any NCI-based T cell therapy.

We have leased approximately 18,000 square feet near our headquarters in Santa Monica, California, which we use as our clinical manufacturing facility and have also leased approximately 43,500 square feet in El Segundo, California to develop our commercial manufacturing facility. We are currently operating our clinical manufacturing facility, but our operations remain subject to review and oversight by the FDA and the FDA could object to our use of our clinical manufacturing facility. While we have completed construction of our commercial manufacturing facility, we have to complete facility validation, and we must receive approval from the FDA prior to licensure to manufacture our product candidates, which we may never obtain. Even if approved, we would be subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration and corresponding state agencies to ensure strict compliance with current good manufacturing practices, or cGMPs, and other government regulations.  Our license to manufacture product candidates will be subject to continued regulatory review.

We do not yet have sufficient information to reliably estimate the cost of commercial manufacturing and processing of our product candidates, and the actual cost to manufacture and process our product candidates could materially and adversely affect the commercial viability of our product candidates. As a result, we may never be able to develop a commercially viable product.

The manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of cell therapy products often encounter difficulties in production, particularly in scaling out and validating initial production and ensuring the absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our supply of product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of our product candidates will not occur in the future.

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We may also fail to manage the logistics of collecting and shipping patient material to the manufacturing site and shipping the product candidate back to the pat ient. Logistical and shipment delays and problems, whether or not caused by us or our vendors, could prevent or delay the delivery of product candidates to patients.

We may also experience manufacturing difficulties due to resource constraints or as a result of labor disputes. If we were to encounter any of these difficulties, our ability to provide our product candidates to patients would be jeopardized.

We are currently building our marketing and sales organization and are preparing to market products, if approved. If we are unsuccessful in establishing marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.

We currently have no sales or distribution capabilities and have no experience in marketing products. We are developing an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.

There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States or overseas.

A variety of risks associated with conducting research and clinical trials abroad and marketing our product candidates internationally could materially adversely affect our business.

We plan to initiate a clinical program for KTE-C19 in Europe in 2016 and ultimately seek regulatory approval of our product candidates outside of the United States. Accordingly, we expect that we will be subject to additional risks related to operating in foreign countries, including:

 

·

differing regulatory requirements in foreign countries;

 

·

unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

·

increased difficulties in managing the logistics of collecting and shipping patient material to a manufacturing site in the United States and shipping the product candidate back to the patient abroad;

 

·

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

·

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

·

foreign taxes, including withholding of payroll taxes;

 

·

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

·

difficulties staffing and managing foreign operations;

 

·

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

·

differing payor reimbursement regimes, governmental payors or patient self-pay systems, and price controls;

 

·

potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;

 

·

challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

·

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

·

business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with our international operations, including the operations of our European subsidiary, Kite Pharma EU B.V., may materially adversely affect our ability to attain or maintain profitable operations.

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

The biopharmaceutical industry is characterized by intense competition and rapid innovation. Our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety, tolerability, reliability, convenience of use, price and reimbursement.

Specifically, genetically engineering T cells faces significant competition in both the CAR and TCR technology space from multiple companies. Even if we obtain regulatory approval of our product candidates, the availability and price of our competitors’ products could limit the demand and the price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances. For additional information regarding our competition, see “Item 1. Business—Competition.”

We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including our President and Chief Executive Officer, our Executive Vice President of Research & Development and Chief Medical Officer, our Chief Scientific Officer and our Chief Financial Officer & Chief Operating Officer. The loss of the services of any of our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements could result in delays in product development and harm our business. Our strong relationship with the NCI is bolstered by our President and Chief Executive Officer’s relationship with Dr. Rosenberg of the NCI. If we lose our President and Chief Executive Officer or if Dr. Rosenberg leaves the NCI, our relationship with the NCI may deteriorate and our business could be harmed. We conduct substantially all of our operations at our facilities in Southern California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options and restricted stock units, or RSUs, that vest over time. The value to employees of stock options or RSUs that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

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We have grown rapidly and will need to continue to grow the size of our organization, and we may experience dif ficulties in managing this growth.

As our development and commercialization plans and strategies develop, and as we continue to transition into operating as a public company, we have rapidly expanded our employee base and expect to continue to add managerial, operational, sales, research and development, marketing, financial and other personnel. Current and future growth imposes significant added responsibilities on members of management, including:

 

·

identifying, recruiting, integrating, maintaining and motivating additional employees;

 

·

managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and

 

·

improving our operational, financial and management controls, reporting systems and procedures.

Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage our growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services, including substantial aspects of regulatory approval, clinical management and clinical manufacturing. There can be no assurance that the services of independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.

If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.

We may form or seek strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.

We may form or seek strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. Any delays in entering into new strategic partnership agreements related to our product candidates could delay the development and commercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.

If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. For instance, our research collaboration with Amgen Inc. and our collaboration with bluebird bio, Inc. require significant research and development commitments that may not result in the development and commercialization of additional product candidates. In addition, our collaboration with GE Global Research may not result in automation technologies that improve engineered T cell manufacturing. We cannot be certain that, following a strategic transaction or license, we will achieve the results, revenue or specific net income that justifies such transaction.

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We m ay not realize the benefits of acquisitions, including our acquisition of T-Cell Factory B.V., or other strategic transactions.

We acquired T-Cell Factory B.V., or TCF, on March 17, 2015 and renamed the acquired company Kite Pharma EU B.V. We actively evaluate various strategic transactions on an ongoing basis. We may acquire other businesses, products or technologies as well as pursue joint ventures or investments in complementary businesses. The success of acquisitions, including our acquisition of TCF, and any future strategic transactions depends on the risks and uncertainties involved including:

 

·

unanticipated liabilities related to acquired companies;

 

·

difficulties integrating acquired personnel, technologies and operations into our existing business;

 

·

retention of key employees;

 

·

diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisition integration challenges;

 

·

increases in our expenses and reductions in our cash available for operations and other uses;

 

·

disruption in our relationships with collaborators or suppliers as a result of such a transaction; and

 

·

possible write-offs or impairment charges relating to acquired businesses.

If any of these risks or uncertainties occur, we may not realize the anticipated benefit of any acquisition or strategic transaction. For example, TCF’s TCR-GENErator technology platform may fail to identify TCR-based product candidates that are safe and effective, or at all. Additionally, foreign acquisitions, including our acquisition of TCF, a Dutch company, are subject to additional risks, including those related to integration of operations across different cultures and languages, currency risks, potentially adverse tax consequences of overseas operations and the particular economic, political and regulatory risks associated with specific countries. For instance, we owe significant milestone payments to the sellers of TCF in euros, rather than dollars, and we have not hedged these payments.

Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition.

If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the clinical development of our product candidates, including KTE-C19. If approved, we will require significant additional amounts in order to launch and commercialize our product candidates.

Changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We may require additional capital for the further development and commercialization of our product candidates, including funding our internal manufacturing capabilities and Kite Pharma EU B.V. and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate.

We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or other research and development initiatives. Our license agreements and CRADAs may also be terminated if we are unable to meet the payment obligations under the agreements. We could be required to seek collaborators for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to our product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves.

Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.  

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

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect

37


your rights as a stockholder. The incurrence of indebtedness would result in increased fixed pa yment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could advers ely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms unfavorable to us.

Our internal computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer security breaches.

Despite the implementation of security measures, our internal computer systems and those of our future CROs and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on NCI for research and development of our product candidates and other third parties for the manufacture of our product candidates and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.

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

Our operations, and those of our CROs and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. In addition, we are reliant on the NCI for conducting research and development of our product candidates, and the NCI may be affected by government shutdowns or withdrawn funding. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We partly rely on third-party manufacturers to produce and process our product candidates on a patient by patient basis. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers or our manufacturing operations are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters, the location of our manufacturer of the CAR gene, and processing location are in California near major earthquake faults and fire zones. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, or our business may be found to be not compliant with regulatory standards requirements.  

We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to: comply with the laws of the FDA and other similar foreign regulatory bodies, provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies, comply with manufacturing standards we have established, comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws, or report financial information or data accurately or to disclose unauthorized activities to us. Similarly, our business could be found to be noncompliant with healthcare regulatory requirements.  If we obtain FDA approval of any of our product candidates and begin commercializing those products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our current activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. The healthcare laws and regulations that may affect our ability to operate include, but are not limited to:

 

·

the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or

38


 

recommendation of any good, facility, item or ser vice for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs;

 

·

federal civil and criminal false claims laws and civil monetary penalty laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other third-party payors that are false or fraudulent or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

 

·

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

 

·

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization;

 

·

the federal Physician Payment Sunshine Act, created under the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, which we refer to collectively as the Affordable Care Act, and its implementing regulations, which require certain manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services’ Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and

 

·

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.

Additionally, we may be subject to state and foreign equivalents of each of the healthcare laws described above, among others, some of which may be broader in scope. For example, we may be subject to: state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct or business noncompliance, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

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

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

 

·

decreased demand for our product candidates;

 

·

injury to our reputation;

 

·

withdrawal of clinical trial participants;

 

·

initiation of investigations by regulators;

 

·

costs to defend the related litigation;

 

·

a diversion of management’s time and our resources;

 

·

substantial monetary awards to trial participants or patients;

 

·

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

·

loss of revenue;

 

·

exhaustion of any available insurance and our capital resources;

 

·

the inability to commercialize any product candidate; and

 

·

a decline in our share price.

Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop, alone or with corporate collaborators. Our insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. While we have obtained clinical trial insurance for our clinical trials of KTE-C19, we may have to pay amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

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

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. As of December 31, 2015 we have U.S. net operating loss carryforwards of approximately $76.6 million. As a result of our private placements and our initial public offering, we have triggered two “ownership changes.” We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. Accordingly, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income will be subject to limitations, which will result in increased future tax liability to us .

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme volatility and disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could

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have a material adverse effect on our growth s trategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these diffi cult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

At December 31, 2015, we had approximately $392.8 million of cash and cash equivalents and $221.9 million of marketable securities. While we are not aware of any downgrades, material losses or other significant deterioration in the fair value of our cash equivalents and marketable securities since December 31, 2015, no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents and marketable securities or our ability to meet our financing objectives. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.

Risks Related to Our Reliance on Third Parties

We rely and will rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.

We depend and will depend upon independent investigators and collaborators, such as universities, medical institutions, CROs and strategic partners to conduct our preclinical and clinical trials under agreements with us, including without limitation the NCI. We negotiate budgets and contracts with CROs and study sites, which may result in delays to our development timelines and increased costs. We will rely heavily on these third parties over the course of our clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail to comply with applicable cGCP regulations, 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, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials must be conducted with biologic product produced under cGMPs and will require a large number of test patients. Our failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

Any third parties conducting our clinical trials are and will not be our employees and, except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could affect their performance on our behalf. If these third parties 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 or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval of or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.

Switching or adding third parties to conduct our clinical trials involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.

We partly rely on third parties to manufacture our clinical product supplies, and we may have to rely on third parties to produce and process our product candidates, if approved.

We partly rely on outside vendors to manufacture supplies and process our product candidates. Our reliance on a limited number of third-party manufacturers for clinical product supplies, and if we are unable to develop our own commercial manufacturing facility, for any commercial product supplies, exposes us to the following risks:

 

·

We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA may have questions regarding any replacement contractor. This may require new testing and

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regulatory interactions. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA ques tions, if any.

 

·

Our third-party manufacturers might be unable to timely formulate and manufacture our product or produce the quantity and quality required to meet our clinical and commercial needs, if any.

 

·

Contract manufacturers may not be able to execute our manufacturing procedures appropriately.

 

·

Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.

 

·

Manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration and corresponding state agencies to ensure strict compliance with cGMP and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.

 

·

We may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in the manufacturing process for our products.

 

·

Our third-party manufacturers could breach or terminate their agreement with us.

Our contract manufacturers are also subject to the same risks we face in developing our own manufacturing capabilities, as described above. Each of these risks could delay our clinical trials, the approval, if any of our product candidates by the FDA or the commercialization of our product candidates or result in higher costs or deprive us of potential product revenue. In addition, we will rely on third parties to perform release tests on our product candidates prior to delivery to patients. If these tests are not appropriately done and test data are not reliable, patients could be put at risk of serious harm.

Cell-based therapies rely on the availability of specialty raw materials, which may not be available to us on acceptable terms or at all.

eACT requires many specialty raw materials, some of which are manufactured by small companies with limited resources and experience to support a commercial product, and the suppliers may not be able to deliver raw materials to our specifications. In addition, those suppliers normally support blood-based hospital businesses and generally do not have the capacity to support commercial products manufactured under cGMP by biopharmaceutical firms. The suppliers may be ill-equipped to support our needs, especially in non-routine circumstances like an FDA inspection or medical crisis, such as widespread contamination. We also do not have contracts with many of these suppliers, and may not be able to contract with them on acceptable terms or at all. Accordingly, we may experience delays in receiving key raw materials to support clinical or commercial manufacturing.

 

In addition, some raw materials are currently available from a single supplier, or a small number of suppliers. We cannot be sure that these suppliers will remain in business, or that they will not be purchased by one of our competitors or another company that is not interested in continuing to produce these materials for our intended purpose.

If we or our third-party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials, by our third-party manufacturers. Our manufacturers are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage, handling and disposal of medical and hazardous materials. Although we believe that our manufacturers’ procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting from medical or hazardous materials. Our own manufacturing facilities make us subject to these same laws, regulations and risks. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical or hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, prospects, financial condition or results of operations.

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Risks Related to Government Regulation

The FDA regulatory approval process is lengthy and time-consuming, and we may experience significant delays in the clinical development and regulatory approval of our product candidates.

We have not previously submitted a BLA to the FDA, or similar approval filings to comparable foreign authorities. A BLA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. The BLA must also include significant information regarding the chemistry, manufacturing and controls for the product. We expect the novel nature of our product candidates to create further challenges in obtaining regulatory approval. For example, the FDA has limited experience with commercial development of T cell therapies for cancer. We also intend to obtain regulatory approval of future TCR-based product candidates regardless of cancer type or origin, which the FDA may have difficulty accepting if our clinical trials only involved cancers of certain origins. Accordingly, the regulatory approval pathway for our product candidates may be uncertain, complex, expensive and lengthy, and approval may not be obtained.

We may also experience delays in completing planned clinical trials for a variety of reasons, including delays related to:

 

·

the availability of financial resources to commence and complete the planned trials;

 

·

reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·

obtaining approval at each clinical trial site by an independent institutional review board, or IRB;

 

·

recruiting suitable patients to participate in a trial;

 

·

having patients complete a trial, including having patients enrolled in clinical trials dropping out of the trial before the product candidate is manufactured and returned to the site, or return for post-treatment follow-up;

 

·

clinical trial sites deviating from trial protocol or dropping out of a trial;

 

·

adding new clinical trial sites; or

 

·

manufacturing sufficient quantities of qualified materials under cGMPs and applying them on a subject by subject basis for use in clinical trials.

We could also encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our product candidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminated by us, the IRBs for the institutions in which such trials are being conducted, the Data Monitoring Committee for such trial, or by the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. The FDA’s review of our data of our ongoing clinical trials of KTE-C19 may, depending on the data, also result in the delay, suspension or termination of one or more clinical trials of KTE-C19, which would also delay or prevent the initiation of our other planned clinical trials. If we experience termination of, or delays in the completion of, any clinical trial of our product candidates, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenue will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenue.

The NCI may also experience similar difficulties in completing ongoing clinical trials and conducting future clinical trials of product candidates. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may ultimately lead to the denial of regulatory approval of our product candidates.

The FDA may disagree with our regulatory plan and we may fail to obtain regulatory approval of our product candidates.

We are currently conducting a Phase 1-2 clinical trial of KTE-C19 in patients with refractory DLBCL, PMBCL and TFL. We are also conducting a Phase 2 clinical trial of KTE-C19 in patients with relapsed/refractory MCL and Phase 1-2 clinical trials of KTE-C19 in adult patients with relapsed/refractory ALL and pediatric patients with relapsed/refractory ALL. If the interim results are sufficiently compelling, we intend to discuss with the FDA submission of a BLA for accelerated approval of KTE-C19 for the treatment of refractory DLBCL, PMBCL and TFL, and subsequently seek approval for relapsed/refractory MCL and relapsed/refractory ALL. Subject to the interim results and discussions with the FDA, we plan to submit the BLA at the end of 2016. However, the FDA could require longer-term follow-up results, results on the remaining patients from our clinical trial not included in the interim results, or additional data from our clinical trial that could delay or prevent our first BLA submission.  

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In addition, the general approach for FDA approval of a new biologic or drug is dispositive data from two well-controlled, Phase 3 clinical studies of the relevant biologic or drug in the relevant patient population. Phase 3 clinical studies typically involve hundreds of patients, have significant costs and take years to complete. We believe our accelerated approval strategy is warranted given the limited alternatives for patients with refractory DLBCL, PMBCL and TFL, but th e FDA may ultimately require a Phase 3 clinical trial prior to approval, particularly since eACT represents a novel and personalized treatment.  In addition, the standard of care may change with the approval of new products in the same indications that we are studying. This may result in the FDA or other regulatory agencies requesting additional studies to show that our product candidate is superior to the new products.

Our clinical trial results may also not support approval. In addition, our product candidates could fail to receive regulatory approval for many reasons, including the following:

 

·

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

 

·

we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that our product candidates are safe and effective for any of their proposed indications;

 

·

the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval, including due to the heterogeneity of patient populations;

 

·

we may be unable to demonstrate that our product candidates’ clinical and other benefits outweigh their safety risks;

 

·

the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

·

the data collected from clinical trials of our product candidates may not be sufficient to the satisfaction of the FDA or comparable foreign regulatory authorities to support the submission of a BLA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere;

 

·

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical supplies or of any manufacturing facility we develop; and

 

·

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.  

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

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

We may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the United States have requirements for approval of product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

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

Any regulatory approvals that we receive for our product candidates will require surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a risk evaluation and mitigation strategy in order to approve our product candidates, which could entail requirements for a medication guide, physician communication plans or additional elements to ensure safe use,

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such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FD A or a comparable foreign regulatory authority approves our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for our product candi dates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and cGCPs for any clinical t rials that we conduct post-approval. Later discovery of previously unknown problems with our product candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure t o comply with regulatory requirements, may result in, among other things:

 

·

restrictions on the marketing or manufacturing of our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

·

fines, warning letters or holds on clinical trials;

 

·

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;

 

·

product seizure or detention, or refusal to permit the import or export of our product candidates; and

 

·

injunctions or the imposition of civil or criminal penalties.

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

In addition, if we were able to obtain accelerated approval of KTE-C19, the FDA would require us to conduct a confirmatory study to verify the predicted clinical benefit and additional safety studies. The results from the confirmatory study may not support the clinical benefit, which would result in the approval being withdrawn.

Even if we obtain regulatory approval of our product candidates, the products may not gain market acceptance among physicians, patients, hospitals, cancer treatment centers and others in the medical community.

The use of engineered T cells as a potential cancer treatment is a recent development and may not become broadly accepted by physicians, patients, hospitals, cancer treatment centers and others in the medical community. We expect physicians in the large bone marrow transplant centers to be particularly influential and we may not be able to convince them to use eACT for many reasons. For example, certain of the product candidates that we will be developing target a cell surface marker that may be present on cancer cells as well as non-cancerous cells. It is possible that our product candidates may kill these non-cancerous cells, which may result in unacceptable side effects, including death. Additional factors will influence whether our product candidates are accepted in the market, including:

 

·

the clinical indications for which our product candidates are approved;

 

·

physicians, hospitals, cancer treatment centers and patients considering our product candidates as a safe and effective treatment;

 

·

the potential and perceived advantages of our product candidates over alternative treatments;

 

·

the prevalence and severity of any side effects;

 

·

product labeling or product insert requirements of the FDA or other regulatory authorities;

 

·

limitations or warnings contained in the labeling approved by the FDA;

 

·

the timing of market introduction of our product candidates as well as competitive products;

 

·

the cost of treatment in relation to alternative treatments;

 

·

the availability of coverage, adequate reimbursement and pricing by third-party payors and government authorities;

 

·

the willingness of patients to pay out-of-pocket in the absence of coverage by third-party payors and government authorities;

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·

relative convenience and ease of administratio n, including as compared to alternative treatments and competitive therapies; and

 

·

the effectiveness of our sales and marketing efforts.

In addition, although we are not utilizing embryonic stem cells or replication competent vectors, adverse publicity due to the ethical and social controversies surrounding the therapeutic use of such technologies, and reported side effects from any clinical trials using these technologies or the failure of such trials to demonstrate that these therapies are safe and effective may limit market acceptance of our product candidates. If our product candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, cancer treatment centers or others in the medical community, we will not be able to generate significant revenue.

Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our products, are more cost effective or render our products obsolete.

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

Successful sales of our product candidates, if approved, depend on the availability of coverage and adequate reimbursement from third-party payors. In addition, because our product candidates represent new approaches to the treatment of cancer, we cannot accurately estimate the potential revenue from our product candidates.

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Obtaining coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to new product acceptance.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement. Reimbursement by a third-party payor may depend upon a number of factors, including, but not limited to, the third-party payor’s determination that use of a product is:

 

·

a covered benefit under its health plan;

 

·

safe, effective and medically necessary;

 

·

appropriate for the specific patient;

 

·

cost-effective; and

 

·

neither experimental nor investigational.

Obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates.

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.

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

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The advancement of health reform may negatively impact our ability to sell our product candidates, if approved, profitably.

Third-party payors, whether domestic or foreign, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our product candidates, if approved, profitably. In particular, in 2010, the Affordable Care Act was enacted. The Affordable Care Act and its implementing regulations, among other things, revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient drugs and certain biologics, including our product candidates, under the Medicaid Drug Rebate Program are calculated, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs, and provided incentives to programs that increase the federal government’s comparative effectiveness research. Additionally, the Affordable Care Act expanded eligibility criteria for Medicaid programs, imposed a new Medicare Part D coverage gap discount program, expanded the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, and implemented a new Patient-Centered Outcomes Research Institute.  We are still unsure the full impact that the Affordable Care Act will have on our business.  There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect additional challenges and amendments in the future.

Other legislative changes have been proposed and adopted in the United States since the Healthcare Reform Act was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013 and, following passage of the Bipartisan Budget Act of 2015, will remain in effect until 2025, unless additional congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. For example, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices.  Specifically, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Further, in January 2016, CMS issued a final rule regarding the Medicaid drug rebate program. The final rule, effective April 1, 2016, among other things, revises the manner in which the “average manufacturer price” is to be calculated by manufacturers participating in the program and implements certain amendments to the Medicaid rebate statute created under the Affordable Care Act. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:

 

·

the demand for our product candidates, if we obtain regulatory approval;

 

·

our ability to set a price that we believe is fair for our products;

 

·

our ability to generate revenue and achieve or maintain profitability;

 

·

the level of taxes that we are required to pay; and

 

·

the availability of capital.

Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely affect our future profitability.

Risks Related to Our Intellectual Property

We depend on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm our business.

We are dependent on patents, know-how and proprietary technology, both our own and licensed from others.

We have several license agreements, including with Cabaret Biotech Ltd., or Cabaret, and Dr. Zelig Eshhar, the NIH, Amgen Inc. and Alpine Immune Sciences, Inc. These licenses may be terminated upon certain conditions. Any termination of these licenses could

47


result in the loss of significant rights and could harm our ability to commercialize our product candidates. In addition, Cabaret in-licenses some of the intellectual property rights it is licensing to us. To the extent Cabaret fails to meet its obligations under its license agreement, which we are not in control of, we may lose the benefits of our license agreement with Cabaret.

Disputes may also arise between us and our licensors regarding intellectual property subject to a license agreement, including:

 

·

the scope of rights granted under the license agreement and other interpretation-related issues;

 

·

whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

·

our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

·

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and

 

·

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

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.

In addition, our subsidiary, Kite Pharma EU B.V., has licenses to certain intellectual property rights relating to its TCR-GENErator platform, and we are subject to the same risks of termination and disputes with respect to our subsidiary’s licenses. See “Item 1. Business—T-Cell Factory Acquisition.” We are generally also subject to all of the same risks with respect to protection of intellectual property that we license, as we are for intellectual property that we own, which are described below. If we or our licensors fail to adequately protect this intellectual property, our ability to commercialize products could suffer.

 

If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and license agreements to protect the intellectual property related to our technologies. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

We primarily rely on our license agreement with Cabaret with respect to CAR-based product candidates generally and KTE-C19 specifically, and rely and expect to rely on license agreements with the NIH for other product candidates. Certain intellectual property which is covered by these agreements has been developed with funding from the U.S. government. As such, our rights in this intellectual property are subject to certain research and other rights of the government.

We anticipate additional patent applications will be filed both in the United States and in other countries, as appropriate. However, we cannot predict:

 

·

if and when patents will issue;

 

·

the degree and range of protection any issued patents will afford us against competitors including whether third parties will find ways to invalidate or otherwise circumvent our patents;

 

·

whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; or

 

·

whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose.

Composition of matter patents for biological and pharmaceutical products such as CAR- or TCR-based product candidates are generally considered to be the strongest form of intellectual property protection for those types of products, as such patents provide protection without regard to any method of use. We cannot be certain that the claims in our pending patent applications covering composition of matter of our product candidates will be considered patentable by the United States Patent and Trademark Office, or the USPTO, or by patent offices in foreign countries, or that the claims in any of our issued patents will be considered patentable by courts in the United States or foreign countries. Method of use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

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The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our product candidates or uses thereof in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the patentability, validity, enforceability or scope thereof, for example through inter partes review, or IPR, post-grant review or ex parte reexamination before the USPTO or oppositions and ot her comparable proceedings in foreign jurisdictions, which may result in such patents being cancelled, narrowed, invalidated or held unenforceable. For example, on November 16, 2015, an anonymous party filed for an ex parte reexamination of a patent that w e licensed pursuant to our agreement with Cabaret. If, as a result, one or more of the claims in this patent are determined to be unpatentable, invalid or unenforceable, our ability to block certain third party CAR products with this patent could be seriou sly impaired. Even if our patents and applications are unchallenged, they may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents and patent a pplications we hold with respect to our product candidates is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, our product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market our product candidates under patent protection would be reduced. United States patent applications containing or that at any time contained a claim not entitled to a priority date before March 16, 201 3 are subject to the “first to file” system implemented by the America Invents Act (2011).

This first to file system will require us to be cognizant going forward of the time from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. Furthermore, for United States applications in which all claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third-party or instituted by the USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.

In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our product discovery and development processes that involve proprietary know-how, information, or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

Third-party claims of intellectual property infringement may prevent or delay our product discovery and development efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may give rise to claims of infringement of the patent rights of others.

Third parties may assert that we are employing their proprietary technology without authorization. We are aware of a U.S. patent held by one of our competitors relating to certain CAR compositions of matter. Generally, conducting clinical trials and other development activities in the United States to develop data supporting an FDA new drug application is not considered “infringement.” If and when KTE-C19 or another of our CAR-based product candidates is approved by the FDA, that competitor may then seek to enforce its patent by filing a patent infringement lawsuit against us. On August 13, 2015, we filed a petition with the USPTO to institute an IPR proceeding of this competitor’s patent, requesting a determination that the claims in the patent are unpatentable. On February 11, 2016, the USPTO granted our petition to institute the IPR proceeding, and is now — in the absence of good cause or joinder of a second IPR petition —  required to reach a determination within 12 months from the institution of the proceeding. If the USPTO finds any particular claim of the patent unpatentable, and that determination is sustained (if appealed), that particular claim would not impede commercialization of KTE-C19 or any of our other CAR-based product candidates. If the USPTO upholds patentability, we as petitioner would be estopped from asserting in court any ground of invalidity that we raised or reasonably could have raised in the IPR proceeding. Any claim of this patent that has not been held to be unpatentable or invalid could potentially be used as a basis to claim infringement and, consequently, to try and block our ability to commercialize our CAR-based product candidates, unless we obtain a license under the applicable patent, or until the patent expires.

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Additionally, there may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of our product candidates, constructs or molecules used in or formed during the manufacturing pr ocess, or any final product itself, the holders of any such patents may be able to block our ability to commercialize the product candidate unless we obtained a license under the applicable patents, or until such patents expire or they are finally determin ed to be held unpatentable, invalid or unenforceable. In the U.S., issued patents enjoy a presumption of validity in court, but not at the USPTO, that can be overcome in litigation only with evidence that is clear and convincing, a heightened standard. Sim ilarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent m ay be able to block our ability to develop and commercialize the product candidate unless we obtained a license or until such patent expires or is finally determined to be held unpatentable, invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, our ability to commercialize our product candidates may be impaired or delayed, whi ch could in turn significantly harm our business. Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our product candidates. Defense of t hese claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure . We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our resea rch or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our product candidates, whi ch could harm our business significantly.

We may not be successful in obtaining or maintaining necessary rights to product components and processes for our development pipeline through acquisitions and in-licenses.

Presently we have rights to the intellectual property, through licenses from third parties and under patent applications that we own or will own, to develop KTE-C19 and certain other product candidates. Because our programs may involve additional product candidates that may require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to acquire, in-license or use these proprietary rights. For instance, while we have certain intellectual property directed to a CAR-based product candidate that targets the EGFRvIII antigen, we may require an additional license relating to the EGFRvIII scFv target binding site in order to commercialize a CAR-based product candidate that targets the EGFRvIII antigen. In addition, while we have patent rights directed to certain CAR constructs, we do not have, and do not expect to obtain, any intellectual property to broad TCR constructs. Rather, any intellectual property directed to TCR-based product candidates that we may obtain would be product specific.

Our product candidates may also require specific formulations to work effectively and efficiently and these rights may be held by others. We may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that we identify. 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.

The licensing and acquisition of third-party intellectual property rights is a competitive area, and companies, which may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive in order to commercialize our product candidates. More established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

For example, for licenses to additional product candidates, we would have to negotiate a license with the NIH or other third parties for the rights to certain patents and patent applications relating to such product candidates. There can be no assurance that we will be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding the additional eACT product candidates that we may seek to acquire.

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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.

Competitors may infringe our patents or the patents of our licensors. 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 one or more of our patents is not valid or is unenforceable, 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 one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.

Interference proceedings provoked by third parties or brought by the USPTO 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 result in a loss of our current patent rights and 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. Litigation or interference proceedings may result in a decision adverse to our interests and, even if we are 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 trade secrets or confidential information, 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. In addition, there could 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 substantial adverse effect on the price of our common stock.

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

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

Issued patents covering our product candidates could be found unpatentable, invalid or unenforceable if challenged in court or the USPTO.

If we or one of our licensing partners initiate legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that the patent covering our product candidate, as applicable, is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. 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 IPR, ex parte re-examination and post grant review in the United States, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). For example, on November 16, 2015, an anonymous party filed for an ex parte reexamination of a patent that we licensed pursuant to our agreement with Cabaret. Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our product candidates. The outcome following legal assertions of unpatentability, invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of unpatentability, invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection could have a material adverse impact on our business.

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Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. For example, in the recent case, Assoc. for Molecular Pathology v. Myriad Genetics, Inc., the U.S. Supreme Court held that certain claims to DNA molecules are not patentable. While we do not believe that any of the patents owned or licensed by us will be found invalid based on this decision, we cannot predict how future decisions by the courts, the U.S. Congress or the USPTO may impact the value of our patents.

We have limited foreign intellectual property rights and may not be able to protect our intellectual property rights throughout the world.

We have limited intellectual property rights outside the United States, and, in particular, our patents directed to CAR constructs do not extend outside of the United States. Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws 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 have not obtained 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 products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biopharmaceutical products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our 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.

 

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

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

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Risks Related to Our Common Stock

The price of our stock has been and may continue to be highly volatile, and you could lose all or part of your investment.

Prior to our initial public offering in 2014, there was no public market for our common stock. We cannot assure you that an active, liquid trading market for our shares will develop or persist. You may not be able to sell your shares quickly or at a recently reported market price if trading in our common stock is not active. The trading price of our common stock following our initial public offering has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section, these factors include:

 

·

the commencement, enrollment or results of our ongoing and planned clinical trials of our product candidates or any future clinical trials we may conduct, or changes in the development status of our product candidates;

 

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any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

 

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adverse results or delays in clinical trials;

 

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our or NCI’s decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

·

adverse regulatory decisions, including failure to receive regulatory approval of our product candidates;

 

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changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;

 

·

adverse developments concerning our manufacturers;

 

·

our inability to obtain adequate product supply for any approved product or inability to do so at acceptable prices;

 

·

our inability to establish collaborations if needed;

 

·

our failure to commercialize our product candidates;

 

·

additions or departures of key scientific or management personnel;

 

·

unanticipated serious safety concerns related to the use of our product candidates;

 

·

introduction of new products or services offered by us or our competitors;

 

·

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

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our ability to effectively manage our growth;

 

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the size and growth of our initial cancer target markets;

 

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our ability to successfully treat additional types of cancers or at different stages, including the ability of Kite Pharma EU B.V. to discover new TCR-based product candidates;

 

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actual or anticipated variations in quarterly operating results;

 

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our cash position;

 

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our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

·

publication of research reports about us or our industry, or immunotherapy in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

·

changes in the market valuations of similar companies;

 

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overall performance of the equity markets;

 

·

sales of our common stock by us or our stockholders in the future;

 

·

trading volume of our common stock;

 

·

changes in accounting practices;

 

·

ineffectiveness of our internal controls;

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·

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

·

significant lawsuits, including patent or stockholder litigation;

 

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general political and economic conditions; and

 

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other events or factors, many of which are beyond our control.

In addition, the stock market in general, and The NASDAQ Global Select Market and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

As of December 31, 2015, our executive officers, directors, and 10% stockholders beneficially owned approximately 27.8% of our voting stock, a significant portion of which is beneficially owned by Arie Belldegrun, our President, Chief Executive Officer and Chairman. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

Failure to establish and maintain adequate finance infrastructure and accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

As a public company, we operate in an increasingly demanding regulatory environment, including with respect to more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, include establishing and maintaining corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.

Our compliance with Section 404 of the Sarbanes-Oxley Act requires that we incur substantial accounting expense and expend significant management efforts. We complied with Section 404 at December 31, 2015 and while our testing did not reveal any material weaknesses in our internal controls, subsequent testing by our independent registered public accounting firm may reveal material weaknesses in our internal controls that we would be required to remediate in a timely manner so as to be able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act each year. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner each year, we could be subject to sanctions or investigations by the SEC, NASDAQ or other regulatory authorities which would require additional financial and management resources and could adversely affect the market price of our common stock. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

We have incurred and will incur significant increased costs as a result of operating as a public company, and our management has to devote substantial time to new compliance initiatives.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the Exchange Act, which requires, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and The NASDAQ Global Select Market to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the

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Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additiona l rules and regulations in these areas such as “say on pay” and proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and di sclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

Sales of our common stock by current stockholders may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate, and make it more difficult for you to sell shares of our common stock.

Certain holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

We have registered on Form S-8 all shares of common stock that are issuable under our 2014 Equity Incentive Plan, as amended, or the EIP. As a consequence, these shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.

In connection with our public offering of common stock in December 2015, we and our directors and executive officers have entered into lock-up agreements for a period of 90 days from December 9, 2015, subject to certain exceptions. We and our directors and executive officers may be released from lock-up prior to the expiration of the lock-up period at the sole discretion of Jefferies LLC and Citigroup Global Markets Inc. Upon expiration or earlier release of the lock-up, we and our directors and executive officers may sell shares into the market, which could adversely affect the market price of shares of our common stock.

Actual or potential sales of our common stock by our employees, including our directors and executive officers, pursuant to pre-arranged stock trading plans could cause our stock price to fall or prevent it from increasing for numerous reasons, and actual or potential sales by such persons could be viewed negatively by other investors.

In accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act, and our policies regarding stock transactions, a number of our employees, including certain executive officers, have adopted and may continue to adopt stock trading plans pursuant to which they arrange to sell shares of our common stock from time to time in the future. Generally, sales under such plans by our executive officers require public filings. Actual or potential sales of our common stock by such persons could cause the price of our common stock to fall or prevent it from increasing for numerous reasons. For example, a substantial number of shares of our common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing. Also, actual or potential sales by such persons could be viewed negatively by other investors.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to the EIP, 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 may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at

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prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to ou r existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock.

Pursuant to the EIP, our management is authorized to grant stock options and other equity awards to our employees, directors and consultants.

The number of shares of our common stock reserved for issuance under our EIP will automatically increase on January 1 of each year continuing through and including January 1, 2024, by 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or such lesser number of shares determined by our board of directors. In addition, the number of shares of our common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, or ESPP, will automatically increase on January 1 of each year continuing through and including January 1, 2024, by the lessor of (1) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, (2) 720,000 shares, or (3) a number determined by our board of directors that is less than (1) and (2). Unless our board of directors elects not to increase the number of shares underlying our EIP and ESPP each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

·

a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

·

a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;

 

·

a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, or by a majority of the total number of authorized directors;

 

·

advance notice requirements for stockholder proposals and nominations for election to our board of directors;

 

·

a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of all outstanding shares of our voting stock then entitled to vote in the election of directors;

 

·

a requirement of approval of not less than two-thirds of all outstanding shares of our voting stock to amend any bylaws by stockholder action or to amend specific provisions of our certificate of incorporation; and

 

·

the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

If securities or industry analysts issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if the clinical trials and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more analysts do not initiate coverage of us, cease coverage of us or fail to

56


publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

 

Item 1B. Unresolved Staff Comments

None.

 

 

Item 2. Properties

Our corporate headquarters are located in Santa Monica, California, which consists of a 20,000 square foot facility for administrative and research and development activities. The lease for the facility commenced on June 15, 2013 and has an initial 10-year term expiring on June 15, 2023. We have leased an additional 18,000 square feet near our headquarters in Santa Monica, California, which we use for clinical manufacturing and processing, research and development and offices.  The lease has an initial 10-year term expiring on January 31, 2025.  We have also leased a commercial manufacturing facility, which consists of approximately 43,500 square feet.  The facility is located in El Segundo, which is adjacent to Los Angeles International Airport. The lease has an initial 10-year and seven month term commencing on January 1, 2016. We anticipate the El Segundo facility will be operational to support the planned commercial launch of KTE-C19 in 2017. Lastly, we have leased additional administrative office space in Santa Monica with an initial two year and two month term expiring on August 31, 2017. We believe that our existing facilities are adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

 

 

Item 3. Legal Proceedings

From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

 

Item 4. Mine Sa fety Disclosures

Not applicable.

 

 

57


PART II

 

 

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

Our common stock has been traded on The NASDAQ Global Select Market since June 20, 2014 under the symbol KITE. Prior to such time, there was no public market for our common stock.  The following table sets forth for the periods indicated, the range of high and low quarterly closing sales prices of the common stock as quoted on the NASDAQ Global Select Market:

 

 

 

High

 

 

Low

 

Second Quarter 2014 (beginning June 20, 2014)

 

$

32.15

 

 

$

28.92

 

Third Quarter 2014

 

$

29.14

 

 

$

21.39

 

Fourth Quarter 2014

 

$

57.67

 

 

$

28.31

 

First Quarter 2015

 

$

87.62

 

 

$

57.68

 

Second Quarter 2015

 

$

65.27

 

 

$

46.39

 

Third Quarter 2015

 

$

76.50

 

 

$

48.97

 

Fourth Quarter 2015

 

$

87.00

 

 

$

56.99

 

 

Stock Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

The following graph shows the value of an investment of $100 from June 20, 2014 (the date our common stock commenced trading on The NASDAQ Global Select Market) through December 31, 2015, in our common stock, the Nasdaq Biotechnology Index, the Standard & Poor’s 500 Index (S&P 500), and Nasdaq Composite Index. The historical stock price performance of our common stock shown in the performance graph is not necessarily indicative of future stock price performance.

 

 

 

 

Cumulative Total Return date ended

 

 

 

6/20/2014

(Inception)

 

 

6/30/2014

 

 

9/30/2014

 

 

12/31/2014

 

 

3/31/2015

 

 

6/30/2015

 

 

9/30/2015

 

 

12/31/2015

 

Kite Pharma

 

$

100.00

 

 

$

170.12

 

 

$

167.65

 

 

$

339.24

 

 

$

339.29

 

 

$

358.65

 

 

$

327.53

 

 

$

362.47

 

Nasdaq Biotechnology

 

 

100.00

 

 

 

102.08

 

 

 

108.64

 

 

 

120.74

 

 

 

136.69

 

 

 

146.85

 

 

 

120.42

 

 

 

134.53

 

S&P

 

 

100.00

 

 

 

99.99

 

 

 

100.60

 

 

 

105.02

 

 

 

105.48

 

 

 

105.24

 

 

 

97.94

 

 

 

104.26

 

Nasdaq Composite

 

 

100.00

 

 

 

100.98

 

 

 

102.93

 

 

 

108.49

 

 

 

112.27

 

 

 

114.24

 

 

 

105.84

 

 

 

114.71

 

 

58


Holders

As of February 16, 2016 there were approximately 35 registered holders of record of our common stock.

Dividend Policy

We have not paid any dividends on our common stock since our inception and do not expect to pay dividends on our common stock in the foreseeable future. We currently intend to retain all available funds as well as future earnings, if any, to fund the development and expansion of our operations. Any future determination to pay dividends will be made at the discretion of our board of directors.

Securities Authorized for Issuance under Equity Compensation Plans

Incorporated by reference from the information in our Proxy Statement for our 2016 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this Annual Report relates.

Use of Proceeds from Initial Public Offering of Common Stock

In June 2014, we completed our initial public offering, or IPO, and sold 7,500,000 shares of our common stock at a price of $17.00 per share. Additionally, the underwriters exercised their option to purchase additional shares for an additional 1,125,000 shares at $17.00 per share. As a result of our IPO, we raised a total of approximately $134.1 million in net proceeds after deducting underwriting discounts and commissions of $10.3 million and offering expenses of $2.2 million.

As of December 31, 2015, we estimate that approximately $35.0 million the net proceeds from our IPO have been utilized to fund our KTE-C19 clinical program and other programs as well as working capital, including general operating expenses, as further described under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.

The net proceeds from our IPO will be used, together with our cash and cash equivalents and marketable securities, to fund continued advancement of our product pipeline, with the balance to be used to fund working capital and other general corporate purposes, which may include licensing, acquiring or investing in additional businesses, technologies, products, or assets of other products, businesses or technologies.

Purchases of Equity Securities by the Issuer or Affiliated Purchasers

None.

 

 

59


Item 6. Selected Financial Data

The selected statements of operations data for the periods presented and the selected balance sheet data for the periods presented (both in thousands, except for share and per share amounts) are derived from our financial statements appearing elsewhere in this Annual Report. Our historical results are not necessarily indicative of the results that can be expected in the future. The selected historical financial data below should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes appearing elsewhere in this Annual Report.

 

 

 

Years Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

Consolidated statements of operations data:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

17,258

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

76,369

 

 

 

23,089

 

 

 

5,088

 

General and administrative

 

 

44,207

 

 

 

13,569

 

 

 

1,339

 

Total operating expenses

 

 

120,576

 

 

 

36,658

 

 

 

6,427

 

Loss from operations

 

 

(103,318

)

 

 

(36,658

)

 

 

(6,427

)

Other income (expense), net

 

 

1,665

 

 

 

(5,911

)

 

 

61

 

Net loss

 

$

(101,653

)

 

$

(42,569

)

 

$

(6,366

)

Net loss attributable to common stockholders

 

$

(101,653

)

 

$

(43,658

)

 

$

(7,801

)

Net loss per share attributable to common stockholders-basic

   and diluted

 

$

(2.33

)

 

$

(1.91

)

 

$

(1.43

)

Weighted-average number of common shares used in net loss

   per share applicable to common stockholders-basic

   and diluted

 

 

43,636,652

 

 

 

22,822,204

 

 

 

5,473,384

 

 

 

 

As of December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

Consolidated balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and marketable securities

 

$

614,722

 

 

$

367,040

 

 

$

22,357

 

Working capital

 

 

594,924

 

 

 

361,645

 

 

 

21,236

 

Total assets

 

 

707,963

 

 

 

370,753

 

 

 

22,982

 

Preferred stock

 

 

 

 

 

 

 

 

20

 

Common stock and additional paid-in capital

 

 

775,637

 

 

 

420,890

 

 

 

36,996

 

Total stockholders’ equity

 

$

615,760

 

 

$

362,589

 

 

$

21,581

 

 

 

60


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Selected Financial Data” and the historical consolidated financial statements and the notes thereto included in “Financial Statements and Supplementary Data”. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to target and kill cancer cells. We do this using our engineered autologous cell therapy, or eACT, which we believe is a transformational approach to the treatment of cancer. eACT involves the genetic engineering of T cells to express either chimeric antigen receptors, or CARs, or T cell receptors, or TCRs. These modified T cells are designed to recognize and destroy cancer cells.

We are currently conducting four company-sponsored pivotal studies of our lead product candidate, KTE-C19, a CAR-based therapy. We are conducting a Phase 2 clinical trial (ZUMA-1) of KTE-C19 in patients with refractory diffuse large B cell lymphoma, or DLBCL, including primary mediastinal B cell lymphoma, or PMBCL, and transformed follicular lymphoma, or TFL. DLBCL, PMBCL and TFL are types of aggressive non-Hodgkin lymphoma, or NHL. We are also conducting a Phase 2 clinical trial (ZUMA-2) of KTE-C19 in patients with relapsed/refractory mantle cell lymphoma, or MCL, a Phase 1-2 clinical trial (ZUMA-3) of KTE-C19 in adult patients with relapsed/refractory acute lymphoblastic leukemia, or ALL, and a Phase 1-2 clinical trial (ZUMA-4) of KTE-C19 in pediatric patients with relapsed/refractory ALL.

We plan to report interim Phase 2 data from ZUMA-1 in the second half of 2016. If we believe the data are compelling, we plan to discuss with the FDA the filing of a Biologics License Application, or BLA, for accelerated approval of KTE-C19 as a treatment for patients with refractory DLBCL, PMBCL and TFL. Subject to the interim results and discussions with the FDA, we plan to submit the BLA at the end of 2016. If approved, we plan to commercially launch KTE-C19 in 2017.  We plan to report data from ZUMA-2 and the Phase 2 portions of ZUMA-3 and ZUMA-4 in 2017. If we believe the data are compelling, we plan to pursue FDA approval for these additional indications. 

Our Research and Development and License Agreements

We have two Cooperative Research and Development Agreements, or CRADAs, with the U.S. Department of Health and Human Services, as represented by the National Cancer Institute, or NCI, through which we are funding the research and development of eACT-based product candidates utilizing CARs and TCRs for the treatment of advanced solid and hematological malignancies. Under the CRADAs, we have an exclusive option to negotiate commercial licenses from the National Institutes of Health, or the NIH, to intellectual property relating to CAR-and TCR-based product candidates developed in the course of the CRADA research plans.  Since entering into the first CRADA in August 2012, w e have secured multiple commercial license agreements with the NIH for intellectual property relating to TCR-based product candidates targeting certain SSX2, NY-ESO-1, HPV and MAGE antigens and for a CAR-based product candidate targeting EGFRvIII.

In addition, we have a license agreement with Cabaret Biotech Ltd., or Cabaret, and its founder relating to intellectual property and know-how owned or licensed by Cabaret and relating to CAR constructs that encompass KTE-C19. We have also entered into a research collaboration and license agreement with Amgen Inc., or the Amgen Agreement, a collaboration agreement with  bluebird bio, Inc.  and a license and research agreement with Alpine Immune Sciences, Inc.

For additional information regarding the CRADAs and our license agreements, see Note 6 to our financial statements appearing elsewhere in this Annual Report.

Components of Operating Results

Revenues

As of December 31, 2015, our revenue has been limited to a portion of the upfront payment we received under the Amgen Agreement, reimbursed research and development costs relating to the Amgen targets and a portion of the payments we received under a research, development and commercialization agreement with the Leukemia & Lymphoma Society, Inc. We received an upfront payment of $60.0 million from Amgen in February 2015. Amgen will fund the research and development costs for all programs with certain limitations through any IND filing. We will reimburse Amgen for the research and development costs for any Kite program that progresses to an IND filing. Each company will then be responsible for clinical development and commercialization of their respective

61


therapeutic candidates, including all related expenses. We will be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 c linical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen.

We applied the FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, in evaluating the appropriate accounting for the Amgen Agreement. In accordance with this guidance, the $60.0 million upfront payment was recorded as deferred revenue and is being recognized over a four-year period. In addition, the Amgen research funding, which is due as the related services are performed under the Amgen Agreement, is recorded as revenue on a time and material basis, and the related costs are recorded as research and development expense in the consolidated statements of operations.

Under certain circumstances, we may be required to reimburse Amgen for research and development services for Kite targets. We will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed. Any costs reimbursed by Amgen that relate to a Kite program that progresses to an IND filing are recorded as deferred revenue until either an IND is filed and we are required to reimburse Amgen for such expenses, or the program ends without an IND filing, at which point the revenue will be recognized.

During the year ended December 31, 2015, we recognized $17.1 million of revenue under the Amgen Agreement. As of December 31, 2015, we had deferred revenue relating to the Amgen Agreement of $47.2 million.

In the future, we may generate revenue from a combination of product sales, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, milestone and other payments, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval of them, our ability to generate future revenue, and our results of operations and financial position, will be materially adversely affected.

Research and Development Expenses

To date, our research and development expenses have related primarily to the development of eACT. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf.  We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and contract research organizations that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them.

We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers.  We adjust our accrual as actual costs become known. Where at risk contingent milestone payments are due to third parties under research and development and collaboration agreements, the milestone payment obligations are expensed when the milestone results are achieved.

Under certain circumstances, we may be required to reimburse Amgen for research and development services. We will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed.

Research and development costs are expensed as incurred. Research and development expenses related to the development of eACT consist of expenses incurred in performing research and development activities, including cash and stock-based compensation and benefits for research and development employees and consultants, facilities expenses, overhead expenses, cost of laboratory supplies, manufacturing expenses, fees paid to third parties, including the NCI and contract research organizations.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase over the next several years as  our ZUMA clinical program progresses and as we seek to initiate clinical trials of additional eACT-based product candidates.  We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates. However, t is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates.

62


The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include, but are not limited to, the following:

 

·

per patient trial costs;

 

·

the number of patients that participate in the trials;

 

·

the number of sites included in the trials;

 

·

the countries in which the trials are conducted;

 

·

the length of time required to enroll eligible patients;

 

·

the number of doses that patients receive;

 

·

the drop-out or discontinuation rates of patients;

 

·

potential additional safety monitoring or other studies requested by regulatory agencies;

 

·

the duration of patient follow-up; and

 

·

the efficacy and safety profile of the product candidates.

In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.

Because eACT is still in the early stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. The increased costs associated with being a public company include expenses related to services associated with maintaining compliance with NASDAQ listing rules and SEC requirements, insurance and investor relations costs.

T-Cell Factory Acquisition

On March 17, 2015, we entered into a stock purchase agreement, or Purchase Agreement, with T-Cell Factory B.V., or TCF, and the shareholders of TCF, or the Sellers, to acquire all of the outstanding capital stock of TCF.  The signing and closing of the transaction happened concurrently whereupon TCF became our wholly-owned subsidiary and was renamed Kite Pharma EU B.V., or Kite Pharma EU.  The Purchase Agreement contains certain representations, warranties, covenants and indemnities by the parties thereto, in each case customary for a transaction of this nature and scope. We acquired TCF for the opportunity to significantly expand our pipeline of TCR-based product candidates.  Using its proprietary TCR-GENErator technology platform, we believe TCF may be able to rapidly and systematically discover tumor-specific TCRs.  For additional information, please see Note 13 appearing elsewhere in this Annual Report.

63


Results of Operations

Comparison of the Years Ended December 31, 2015 and 2014

The following table sets forth our results of operations for the years ended December 31, 2015 and 2014.

 

 

 

YEAR ENDED DECEMBER   31,

 

 

CHANGE

 

 

 

2015

 

 

2014

 

 

$

 

 

 

(in thousands)

 

 

 

 

 

Revenues

 

$

17,258

 

 

$

 

 

$

17,258

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

76,369

 

 

 

23,089

 

 

 

53,280

 

General and administrative

 

 

44,207

 

 

 

13,569

 

 

 

30,638

 

Total costs and expenses

 

 

120,576

 

 

 

36,658

 

 

 

83,918

 

Loss from operations

 

 

(103,318

)

 

 

(36,658

)

 

 

(66,660

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,809

 

 

 

371

 

 

 

1,438

 

Interest expense

 

 

(658

)

 

 

(6,269

)

 

 

5,611

 

Other income (expense)

 

 

514

 

 

 

(13

)

 

 

527

 

Total other income (expense)

 

 

1,665

 

 

 

(5,911

)

 

 

7,576

 

Net loss

 

$

(101,653

)

 

$

(42,569

)

 

$

(59,084

)

 

Revenue

Revenue was $17.3 million and $0 for the years ended December 31, 2015 and 2014, respectively. The increase in revenue during this period was primarily due to revenue recognized under the Amgen Agreement of $17.1 million, as well as $0.2 million of revenue recognized related to an agreement with the Leukemia and Lymphoma Society.

Research and Development Expenses

Research and development expenses were $76.4 million and $23.1 million for the years ended December 31, 2015 and 2014, respectively. The increase in research and development expenses during this period of $53.3 million was primarily due to:

 

·

$14.5 million in costs related to our eACT development program and Amgen pre-clinical development program;

 

·

$12.9 million of expenses related to clinical manufacturing, facilities, depreciation, travel, and other expenses;

 

·

$11.8 million in compensation expense related to increased research and development staff and consultant costs;

 

·

$10.0 million in stock-based compensation expense related to our research and development staff and consultants; and

 

·

$4.1 million in costs related to our Kite Pharma EU operations.

General and Administrative Expenses

General and administrative expenses were $44.2 million and $13.6 million for the years ended December 31, 2015 and 2014, respectively. The increase in general and administrative expenses during this period of $30.6 million was primarily due to:

 

·

$14.6 million of stock-based compensation expenses related to our administrative staff and consultants;

 

·

$8.2 million of expenses related to increased personnel costs, including employees and professional fees;

 

·

$4.6 million of expenses related to legal and accounting services, public company expenses, and other expenses; and

 

·

$3.2 million of expenses related to license obligations.

Interest Expense

Interest expense was $0.7 million and $6.3 million for the years ended December 31, 2015 and 2014, respectively. The decrease in interest expense during this period of $5.6 million was primarily due to the beneficial conversion feature on the 2014 Notes in fiscal 2014, as further described under Note 7 to our financial statements appearing elsewhere in this Annual Report, partially offset by the accretion of the contingent consideration recorded as a result of the acquisition of TCF, as further described under Note 13 to our financial statements appearing elsewhere in this Annual Report. The 2014 Notes converted into common shares at the initial public offering, and therefore there were no similar expenses in 2015.

64


Comparison of the Years Ended December 31, 2014 and 2013

The following table sets forth our results of operations for the years ended December 31, 2014 and 2013.

 

 

 

YEAR   ENDED DECEMBER 31,

 

 

CHANGE

 

 

 

2014

 

 

2013

 

 

$