S-1
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As filed with the Securities and Exchange Commission on July 3, 2017

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Sienna Biopharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware   2834   27-3364627

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

30699 Russell Ranch Road, Suite 140

Westlake Village, California 91362

(818) 629-2256

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Frederick C. Beddingfield III, M.D., Ph.D.

President and Chief Executive Officer

Sienna Biopharmaceuticals, Inc.

30699 Russell Ranch Road, Suite 140

Westlake Village, California 91362

(818) 629-2256

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Alan C. Mendelson, Esq.

Brian J. Cuneo, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, California 94025

Telephone: (650) 328-4600

Facsimile: (650) 463-2600

 

Timothy K. Andrews, Esq.

General Counsel and Secretary

Sienna Biopharmaceuticals, Inc.

30699 Russell Ranch Road, Suite 140

Westlake Village, California 91362

Telephone: (818) 629-2256

Facsimile: (818) 706-1214

 

Alan F. Denenberg, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

Telephone: (650) 752-2004

Facsimile: (650) 752-3604

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☒

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate

offering price (1)

 

Amount of

registration fee

Common Stock, $0.0001 par value per share

  $74,750,000   $8,664.00

 

 

 

(1) Includes a base offering of $65,000,000 of shares of common stock and $9,750,000 of shares of common stock that the underwriters have the option to purchase. Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated                 , 2017

Preliminary Prospectus

            Shares

 

 

LOGO

Common Stock

 

 

This is Sienna Biopharmaceuticals, Inc.’s initial public offering. We are selling              shares of our common stock.

We expect that the initial public offering price will be between $        and $        per share. Currently, no public market exists for our common stock. We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “SNNA.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements.

 

     Per Share      Total  

Public offering price

   $                   $               

Underwriting discounts and commissions (1)

   $      $  

Proceeds, before expenses, to us

   $      $  

 

(1) We refer you to “Underwriting” beginning on page 196 for additional disclosure regarding total underwriting compensation.

We have granted the underwriters an option for a period of 30 days to purchase up to an additional              shares from us, at the initial public offering price, less the underwriting discount.

 

 

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 11 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on                     , 2017.

 

 

 

J.P. Morgan    Cowen      BMO Capital Markets  

Prospectus dated                     , 2017


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     7  

RISK FACTORS

     11  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     60  

INDUSTRY AND MARKET DATA

     62  

USE OF PROCEEDS

     63  

DIVIDEND POLICY

     65  

CAPITALIZATION

     66  

DILUTION

     68  

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     70  

SELECTED CONSOLIDATED FINANCIAL DATA

     74  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     76  

BUSINESS

     96  

MANAGEMENT

     148  

EXECUTIVE COMPENSATION

     159  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     175  

PRINCIPAL STOCKHOLDERS

     182  

DESCRIPTION OF CAPITAL STOCK

     184  

SHARES ELIGIBLE FOR FUTURE SALE

     189  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     192  

UNDERWRITING

     196  

LEGAL MATTERS

     206  

EXPERTS

     206  

WHERE YOU CAN FIND MORE INFORMATION

     206  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

Neither we nor the underwriters have authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction. Through and including                     , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription

Sienna Biopharmaceuticals™, Sienna™, Topical by Design™, Topical Photoparticle Therapy™ and our logo are some of our trademarks used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® and ™ symbol, but those 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 right of the applicable licensor to these trademarks and tradenames.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before deciding to invest in our common stock, you should read this entire prospectus carefully, including the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes contained elsewhere in this prospectus. Unless the context otherwise requires or as otherwise noted, references in this prospectus to the “company,” “Sienna Biopharmaceuticals,” “Sienna,” “we,” “us” and “our” refer to Sienna Biopharmaceuticals, Inc. and its subsidiaries taken as a whole, and references to “Creabilis,” “Creabilis plc” or “Creabilis Holdings Limited” refer to our wholly-owned subsidiary and its subsidiary entities taken as a whole.

Overview

We are a clinical-stage biopharmaceutical company focused on bringing innovations in biotechnology to the discovery, development and commercialization of first-in-class, targeted, topical products in medical dermatology and aesthetics. Our objective is to develop our multi-asset pipeline of topical therapies that enhance the health, appearance and quality of life of dermatology patients. We are advancing multiple product candidates derived from our Topical by Design™ platform, all of which are designed to be suitable for chronic administration in patients with inflammatory skin diseases and other dermatologic and aesthetic conditions. Our lead candidate from this platform, SNA-120, is a first-in-class inhibitor of TrkA in Phase 2b clinical development for the treatment of pruritus, or itch, associated with psoriasis, as well as for psoriasis itself. Our second Topical by Design product candidate, SNA-125, is a dual JAK3/TrkA inhibitor being developed for the treatment of atopic dermatitis, psoriasis and pruritus. Additionally, we have advanced SNA-001, a silver particle treatment derived from our Topical Photoparticle Therapy™ platform, into pivotal clinical trials for both acne vulgaris and the reduction of unwanted light-pigmented hair. Our current product candidates derived from our two technology platforms are summarized in the chart below. We currently retain global commercial rights to all of our product candidates.

 

 

LOGO

 

a. Regulated as a drug pursuant to a new drug application (NDA) regulatory pathway.
b. Regulated as a Class II medical device under 510(k) marketing clearance pathway.

 



 

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There is a significant opportunity to address the historical lack of innovation in topical products for dermatology patients. Recent advances in biotechnology have enabled the development of novel, biologic drugs which act on specific molecular targets and pathways, and have been utilized to address inflammatory disorders. However, despite having shown impressive efficacy, use of these drugs has been limited to patients with more severe forms of disease due to the potentially significant side effects associated with systemic administration and their relatively high cost. Accordingly, the 80-90% of dermatology patients who present with mild-to-moderate disease severity or more localized disease have not benefitted from these advances. Today, such patients typically resort to non-specific, topical therapies such as corticosteroids and emollients, which are either marginally effective or unsuitable for chronic administration due to their side effects. We are focused on filling this innovation gap in dermatology by developing targeted, topical products suitable for chronic administration to serve the vast majority of patients suffering from these inflammatory skin diseases and other dermatologic and aesthetic conditions.

In comparison to many other segments of the biopharmaceutical industry, we believe that product development and commercialization in dermatology and aesthetics can be relatively efficient in terms of time and cost. In many cases, clinical studies to evaluate efficacy and safety are conducted using well established endpoints and regulatory pathways that allow for comparatively modest sample sizes and shorter durations of therapy. Additionally, the prescribing base of dermatologists in the United States is relatively concentrated compared to other medical specialties. We believe a targeted, specialty sales and marketing organization focused on dermatologists and aesthetic physicians will allow us to directly address these physicians and capture market share for our product candidates in North America. To realize the full commercial potential of our product candidates in other geographic markets and sales channels, we will evaluate alternate strategies, such as licensing and co-commercialization agreements with third parties. We believe that these industry dynamics provide an attractive backdrop to establish ourselves as a leader in dermatology and aesthetic product development and commercialization.

We have assembled a management team with extensive experience in product development and commercialization at several leading dermatology, aesthetics and biotechnology companies, including Kythera, Allergan, Medicis, Amgen and Novartis. In these roles, members of our senior management team were integrally involved in securing regulatory approval from the U.S. Food and Drug Administration, or FDA, for 17 new dermatology and aesthetic products, and establishing several leading global brands, including Botox, Juvederm, Kybella, Latisse, Dysport, Restylane, Solodyn, Cosentyx and Ilaris. We believe this collective experience and achievement provides us with significant and differentiated insight into scientific, regulatory and commercial aspects of drug development that can influence their overall success, as well as a broad network of relationships with leaders within the industry and medical community. We are further supported by a group of leading institutional investors, including ARCH Venture Partners, Venvest Capital, Partner Fund Management, Altitude Life Science Ventures, funds affiliated with Fidelity Management & Research Company, Asymmetry Capital Management, Omega Fund Management and investment funds advised by Clough Capital.

Our technology platforms and product candidates

Topical by Design™

Through our proprietary Topical by Design platform we develop targeted, topical treatments for inflammatory skin diseases and other conditions based on small molecules with well understood mechanisms of action. Using this technology, we site-selectively direct the conjugation of small polyethylene glycol, or PEG, polymers to selected pharmacologically active compounds. This modification alters the pharmacological activity of the active compound to refine its target selectivity while also changing its physicochemical profile. The resulting new chemical entities, or NCEs, are designed to penetrate the skin for highly localized delivery of the drug against the selected targets or pathway, while minimizing systemic exposure. By utilizing this targeted,

 



 

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topical approach, we create topical therapies that are specifically designed to be suitable for chronic administration. Further, these drug candidates, if successfully developed and approved, may be eligible for regulatory exclusivity as NCEs. Our lead product candidates from our Topical by Design platform are SNA-120 and SNA-125.

SNA-120 (pegcantratinib) is a first-in-class topical tropomyosin receptor kinase A, or TrkA, inhibitor for the treatment of pruritus associated with psoriasis, and which may also be effective for the treatment of psoriasis itself. It is designed to selectively inhibit TrkA, the high affinity receptor for nerve growth factor, or NGF, a known mediator of pruritus, or itch, and neurogenic inflammation associated with psoriasis. TrkA and NGF are recognized targets in psoriasis and are overexpressed in plaques. We believe that SNA-120 has the potential to treat pruritus associated with mild-to-moderate psoriasis, as well as improve the underlying psoriasis, with a more attractive safety profile than existing therapies.

SNA-120 has demonstrated statistically significant and clinically meaningful reductions in the pruritus associated with psoriasis, as well as favorable tolerability in psoriasis patients in a Phase 2b clinical trial. Statistically significant means that there is a low statistical probability, typically less than 5%, that the observed results occurred by chance alone, and clinically meaningful refers to an actual health benefit to the patient. In a Phase 2b trial, across the three dosing groups, SNA-120 treated subjects with at least moderate baseline pruritus experienced a 43-59% reduction in itch severity from baseline to week 8 versus a 21% reduction in the control group, and 62-69% of the subjects had mild or no pruritus by the end of therapy as measured by the pruritus visual analog scale, or VAS, versus 41% in the control group. The administered pruritus VAS is a measurement tool in which the subject depicts his/her itch severity on a scale from 0 (no itch) to 100 (worst possible itch). Additionally, we observed improvements in the underlying psoriasis as measured by the modified Psoriasis Area and Severity Index, or mPASI, with SNA-120 treated subjects experiencing a 40% reduction in baseline disease severity, as compared to a 17% reduction for control treated subjects. The mPASI is a weighted sum of psoriasis symptom scores ranging from 0 (no disease) to 72 (maximal disease). We plan to initiate additional clinical trials for SNA-120, including a Phase 2b clinical trial by the end of 2017 in order to expand our understanding of SNA-120 in pruritus and psoriasis and provide additional endpoint evaluation and validation, with data expected in the first half of 2019. We anticipate commencing Phase 3 trials in the second half of 2019.

Our second lead product candidate derived from our Topical by Design platform is SNA-125, a dual kinase inhibitor (JAK3/TrkA) in development for the treatment of atopic dermatitis, psoriasis, and pruritus. SNA-125 represents a novel approach to the treatment of inflammatory skin diseases and associated pruritus through a validated pathway, Janus kinase 3, or JAK3, that is well understood in this disease setting. JAK3 is required for immune cell development, and published literature supports that inhibition of JAK3 blocks the signaling of key cytokines and results in a reduction in the severity of autoimmune and inflammatory diseases in which those cytokines play a pivotal role. In our nonclinical development, we have observed anti-inflammatory effects of SNA-125 consistent with inhibition of JAK3, including the reduction of immune cell infiltration in a rabbit scar model. The combination of targeting two specific targets, JAK3 and TrkA, may provide improvements in the treatment of inflammatory skin disorders and their associated symptoms such as pruritus. We are completing nonclinical studies, and anticipate initiating clinical trials in atopic dermatitis and psoriasis in the first half of 2018.

Topical Photoparticle Therapy™

Our second technology platform, Topical Photoparticle Therapy, uses precisely engineered silver particles to absorb laser light and convert the light energy into heat to facilitate local tissue injury. This process of targeting thermal injury to specific dermal tissues using laser light and an efficient light-absorbing material is called selective photothermolysis. In our current development programs with SNA-001, we are utilizing selective photothermolysis to both treat acne vulgaris and reduce unwanted light-pigmented hair. In the case of acne, SNA-001 targets one of the key structures implicated in the pathogenesis, or origin, of acne, the sebaceous gland.

 



 

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In the case of unwanted light or mixed pigmented hair, which cannot be removed with lasers alone, SNA-001 targets the hair follicle. We have designed patented photoparticles tuned to the three most used wavelengths of the most common dermatologic lasers to facilitate compatibility with the existing installed base.

SNA-001, our lead product candidate from this platform, is a ready-to-use topical suspension of ultra-efficient, near-infrared light absorbing silver particles. In a clinical feasibility study of SNA-001 for the treatment of acne, there was a statistically significant reduction in mean total and inflammatory lesion counts in areas treated with SNA-001 and in areas treated with laser light alone at 12 weeks after last treatment. In a subgroup of subjects that received at least one treatment with high-power laser settings, the reductions in both total and inflammatory lesion counts from baseline to 12 weeks were statistically significant for SNA-001, but not for control treatment of laser light alone. In a clinical feasibility study of SNA-001 for the reduction of light-pigmented hair, there was a statistically significant reduction in hair counts from baseline to 12 weeks after last treatment in the SNA-001 treatment area, but not in the control area using laser alone. Statistically significant means that there is a low statistical probability that the reduction in light-pigmented hair in the SNA-001 treatment area occurred by chance alone. We are currently conducting pivotal trials for SNA-001 for both the treatment of acne and the reduction of light-pigmented hair, one for each of the three most common laser wavelengths in both indications, and we anticipate reporting initial topline data from these trials in the second half of 2018. Assuming data from these trials are positive, we expect to file the first 510(k) applications in the second half of 2019 for both indications.

Our strategy

Our strategy is to develop and commercialize innovative and differentiated medical dermatology and aesthetic treatment solutions that we believe can be successful in the marketplace. The key components of our strategy are to:

 

    Leverage our proprietary technology platforms to design and develop targeted, topical therapies;

 

    Rapidly advance our existing product candidates through clinical development;

 

    Continue building a diversified multi-asset pipeline of novel topical therapies;

 

    Maximize the global commercial potential of our product candidates; and

 

    Leverage the extensive experience of our management team in developing and commercializing multiple leading global dermatology brands.

Risks associated with our business

Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include the following, among others:

 

    We are a clinical-stage biopharmaceutical company with a limited operating history and no products approved for commercial sale, and we have incurred significant losses since our inception. We anticipate that we will continue to incur losses for the foreseeable future, which, together with our limited operating history, makes it difficult to assess our future viability.

 

    We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

 

    Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

 



 

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    We may be unable to obtain regulatory approval or clearance for our product candidates under applicable regulatory requirements. The denial or delay of any such approval or clearance would delay commercialization of our product candidates and adversely impact our potential to generate revenue, our business and our results of operations.

 

    Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration. Most of our competitors have significantly greater resources than we do and we may not be able to successfully compete.

 

    We rely on third parties in the conduct of all of our nonclinical and clinical trials. If these third parties do not successfully carry out their contractual duties, fail to comply with applicable regulatory requirements or meet expected deadlines, we may be unable to obtain regulatory approval for our product candidates.

 

    We currently rely on single source third-party suppliers to manufacture nonclinical and clinical supplies of our product candidates and we intend to rely on third parties to produce commercial supplies of any approved or cleared product candidate. The loss of these suppliers, or their failure to comply with applicable regulatory requirements or to provide us with sufficient quantities at acceptable quality levels or prices, or at all, would materially and adversely affect our business.

 

    If we are unable to obtain, maintain and enforce intellectual property protection directed to our Topical by Design and/or Topical Photoparticle Therapy technology and any future technologies that we develop, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.

Corporate information

We were founded on July 27, 2010 as a Delaware corporation under the name Sienna Labs Inc. In February 2016, we changed our name to Sienna Biopharmaceuticals, Inc. On December 6, 2016, we acquired our Topical by Design platform and related product candidates through our acquisition of Creabilis plc, a company incorporated in England and Wales, which we subsequently converted to Creabilis Holding Limited. Our principal executive offices are located at 30699 Russell Ranch Road, Suite 140, Westlake Village, California 91362, and our telephone number is (818) 629-2256. Our website address is www.SiennaBio.com. The information on, or that can be accessed through, our website is not part of this prospectus. We have included our website address as an inactive textual reference only.

Implications of being an emerging growth company

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the year following the fifth anniversary of the consummation of this offering, (2) the last day of the year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

    We will present only two years of audited consolidated financial statements, plus unaudited condensed consolidated financial statements for any interim period, and related management’s discussion and analysis of financial condition and results of operations;

 



 

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    We will avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

    We will provide less extensive disclosure about our executive compensation arrangements; and

 

    We will not require stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.

However, we are choosing to “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition periods for complying with new or revised accounting standards is irrevocable.

 



 

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THE OFFERING

 

Issuer

Sienna Biopharmaceuticals, Inc.

 

Common stock offered by us

             shares.

 

Common stock to be outstanding after
the offering


             shares.

 

Underwriters’ option to purchase
additional shares


             shares.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We currently expect to use the net proceeds from this offering to fund the clinical development of SNA-120 through top-line results in our Phase 2b trial, preclinical and clinical studies for SNA-125 through receipt of proof of concept data in each of atopic dermatitis and psoriasis, our ongoing pivotal clinical trials for SNA-001 through receipt of top-line results, internal research and development expenses and for working capital and general corporate purposes. See “Use of Proceeds” on page 63 for a more complete description of the intended use of proceeds from this offering.

 

Risk factors

See “Risk Factors” beginning on page 11 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market symbol

“SNNA”

The number of shares of common stock to be outstanding after this offering is based on 91,112,362 shares of common stock outstanding as of May 31, 2017 and includes an aggregate of 75,411,442 shares of common stock issuable upon conversion of our outstanding preferred stock and 4,084,139 shares of unvested restricted common stock at May 31, 2017, and excludes the following:

 

    3,631,332 shares of common stock issuable upon the exercise of outstanding stock options as of May 31, 2017 having a weighted-average exercise price of $0.48 per share;

 

    3,057,615 shares of common stock reserved for issuance pursuant to future awards under our 2010 Equity Incentive Plan, as amended, as of May 31, 2017, which will become available for issuance under our 2017 Incentive Award Plan after consummation of this offering;

 

                 shares of common stock reserved for issuance pursuant to future awards under our 2017 Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock; and

 



 

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                 shares of common stock reserved for issuance under our 2017 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the effectiveness of the registration statement to which this prospectus relates.

In addition, unless we specifically state otherwise, all information in this prospectus assumes:

 

    a              -for-              reverse stock split of our capital stock to be effected prior to the effectiveness of the registration statement of which this prospectus is a part;

 

    the automatic conversion of all shares of our outstanding preferred stock at May 31, 2017 into an aggregate of 75,411,442 shares of common stock immediately prior to the consummation of this offering;

 

    the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the consummation of this offering;

 

    no exercise of outstanding stock options subsequent to May 31, 2017; and

 

    no exercise of the underwriters’ option to purchase additional shares of common stock.

Unless otherwise specified and unless the context otherwise requires, we refer to our Series A-1, Series A-2, Series A-3 and Series B Preferred Stock collectively as “convertible preferred stock” or “preferred stock” in this prospectus, as well as for financial reporting purposes and in the financial tables included in this prospectus, as more fully explained in Note 12 to our audited consolidated financial statements included in this prospectus.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present our summary consolidated financial data. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We derived the following consolidated statement of operations data for the years ended December 31, 2015 and 2016 from our audited consolidated financial statements appearing elsewhere in this prospectus. The statement of operations data for the three months ended March 31, 2016 and 2017 and the balance sheet data as of March 31, 2017 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2017 and the results of operations for the three months ended March 31, 2016 and 2017. Our historical results are not necessarily indicative of our future results and results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the full year.

 

                (unaudited)  
    Year Ended
December 31,
    Three Months
Ended March 31,
 
    2015     2016     2016     2017  
    (in thousands, except share and per share data)  
Consolidated Statement of Operations Data:        

Operating expenses:

       

Research and development

  $ 2,407     $ 10,993     $ 1,935     $ 4,917  

General and administrative

    8,703       9,696       1,994       4,076  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,110       20,689       3,929       8,993  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (11,110     (20,689     (3,929     (8,993

Other income

    363       95       92       5  

Interest and other expense

    (547     (568     —         (1,165
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before taxes

    (11,294     (21,162     (3,837     (10,153

Income tax benefit

    —         —         —         46  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (11,294   $ (21,162   $ (3,837   $ (10,107
 

 

 

   

 

 

   

 

 

   

 

 

 

Per share information:

       

Net loss, basic and diluted

  $ (1.13   $ (2.13   $ (0.39   $ (0.90
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average shares outstanding

    10,030,000       9,944,000       9,887,000       11,195,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss, basic and diluted (unaudited)(1)

    $ (0.32     $ (0.15
   

 

 

     

 

 

 

Basic and diluted pro forma weighted average shares outstanding (unaudited) (1)

      65,607,000         66,858,000  
   

 

 

     

 

 

 

 

(1) The pro forma net loss per share of common stock, basic and diluted, for the year ended December 31, 2016 and the three months ended March 31, 2017 reflects the conversion of all outstanding shares of our preferred stock into shares of common stock immediately prior to the consummation of this offering. The pro forma net loss per share of common stock, basic and diluted, does not give effect to the issuance of shares from the proposed initial public offering nor do they give effect to potential dilutive securities where the impact would be anti-dilutive.

 



 

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The table below presents our consolidated balance sheet data as of March 31, 2017:

 

    on an actual basis;

 

    on a pro forma basis to give effect to: (i) our issuance and sale, during April 2017, of 17,524,469 shares of our Series B Preferred Stock for cash consideration of $36,531,508; (ii) the conversion of an aggregate of $3,940,364 in outstanding principal plus accrued but unpaid interest on convertible notes outstanding as of March 31, 2017 into 2,223,807 shares of our Series B Preferred Stock, which occurred during April 2017 in connection with our Series B Preferred Stock financing; (iii) the automatic conversion of all shares of our convertible preferred stock outstanding at March 31, 2017, together with the shares of Series B Preferred Stock we issued during April 2017, including shares issued in connection with the related conversion of our convertible notes, into an aggregate of 75,411,442 shares of our common stock, which will be effective immediately prior to the consummation of this offering; and (iv) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering; and

 

    on a pro forma as adjusted basis to give further effect to the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     (unaudited)
As of March 31, 2017
 
     Actual     Pro Forma      Pro Forma As
Adjusted(1)
 
    

(in thousands)

 

Consolidated Balance Sheet Data:

       

Cash

   $ 6,843     $ 43,375      $                   

Working capital

     (5,695     34,371     

Total assets

     61,456       97,988     

Notes payable, net of discount

     3,290       —       

Convertible preferred stock

     59,517       —       

Accumulated deficit

     45,459       46,076     

Total stockholders’ equity

     13,557       53,623     

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), would increase (decrease) the amount of cash, working capital, total assets and total stockholders’ equity by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and commissions and estimated offering expenses payable by us. We may also increase (decrease) the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the amount of cash, working capital, total assets and stockholders’ equity by approximately $             million, assuming the assumed initial public offering price per share, as set forth on the cover page of this prospectus, remains the same. The pro forma as adjusted information is illustrative only and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 



 

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RISK FACTORS

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

Risks Related to Our Limited Operating History, Financial Condition and Capital Requirements

We are a clinical-stage biopharmaceutical company with a limited operating history and no products approved for commercial sale, and we have incurred significant losses since our inception. We anticipate that we will continue to incur losses for the foreseeable future, which, together with our limited operating history, makes it difficult to assess our future viability.

We are a clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have no products approved or cleared for commercial sale and have not generated any revenue from product sales and have incurred losses in each year since our inception in July 2010. We have only a limited operating history upon which you can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. We continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the years ended December 31, 2015 and 2016 was approximately $11.3 million and $21.2 million, respectively, and for the three months ended March 31, 2016 and 2017 was approximately $3.8 million and $10.1 million, respectively. As of March 31, 2017, we had an accumulated deficit of $45.5 million. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase as we continue to develop our product candidates, conduct clinical trials and pursue research and development activities. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

Since our inception, we have invested a significant portion of our efforts and financial resources in research and development activities and the acquisition of Creabilis plc. Nonclinical studies and clinical trials for our product candidates will require substantial funds to complete. As of March 31, 2017, we had capital resources consisting of cash of $6.8 million. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the nonclinical and clinical development of our lead product candidates, SNA-120 and SNA-125, as well as our ongoing pivotal clinical trials for SNA-001, and the development of any other product candidates we may choose to pursue. These expenditures will include costs associated with conducting nonclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any nonclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our lead product candidates and any future product candidates. In addition, we are obligated to make certain milestone payments to former Creabilis shareholders upon the achievement of predetermined milestones, as well as success

 

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payments to certain of our existing stockholders if the market price of our common stock meets or exceeds certain specified share price thresholds. These payments, to the extent triggered and payable in cash, will also have an effect on our liquidity and capital needs. To the extent these success payment obligations are satisfied in shares of our common stock, holders of our common stock would be diluted.

We believe that the net proceeds from this offering, together with our existing cash, will allow us to fund our operating plan for at least the next twelve months. However, our operating plans may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of burdensome debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

Our future capital requirements depend on many factors, including:

 

    the scope, progress, results and costs of researching and developing our lead product candidates or any future product candidates, and conducting nonclinical studies and clinical trials, in particular our additional Phase 2b and planned Phase 3 pivotal clinical trials of SNA-120, our nonclinical studies of SNA-125 and our ongoing pivotal clinical trials for SNA-001;

 

    the timing of, and the costs involved in, obtaining regulatory approvals or clearances for our lead product candidates or any future product candidates;

 

    the number and characteristics of any additional product candidates we develop or acquire;

 

    the timing of any cash milestone payments to the former Creabilis shareholders if we successfully achieve certain predetermined milestones;

 

    the timing and amount of any success payments we elect to pay in cash to certain of our existing stockholders if the market price of our common stock meets or exceeds certain specified share price thresholds;

 

    the cost of manufacturing our lead product candidates or any future product candidates and any products we successfully commercialize, including costs associated with building out our supply chain;

 

    the cost of commercialization activities if our lead product candidates or any future product candidates are approved or cleared for sale, including marketing, sales and distribution costs;

 

    the cost of building a sales force in anticipation of product commercialization;

 

    our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;

 

    any product liability or other lawsuits related to our products;

 

    the expenses needed to attract and retain skilled personnel;

 

    the costs associated with being a public company;

 

    the costs associated with maintaining subsidiaries, including Creabilis, in foreign jurisdictions;

 

    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including ongoing litigation costs related to SNA-001 and the outcome of this and any other future patent litigation we may be involved in; and

 

    the timing, receipt and amount of sales of any future approved or cleared products, if any.

 

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Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to:

 

    delay, limit, reduce or terminate nonclinical studies, clinical trials or other development activities for our lead product candidates or any future product candidate;

 

    delay, limit, reduce or terminate our research and development activities; or

 

    delay, limit, reduce or terminate our efforts to establish sales and marketing capabilities or other activities that may be necessary to commercialize our lead product candidates or any future product candidate, or reduce our flexibility in developing or maintaining our sales and marketing strategy.

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

Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control and may be difficult to predict, including:

 

    the timing and cost of, and level of investment in, research, development and commercialization activities relating to our product candidates, which may change from time to time;

 

    the timing of receipt of approvals or clearances for our product candidates from regulatory authorities in the United States and internationally;

 

    the timing and status of enrollment for our clinical trials;

 

    the timing of any cash milestone payments to the former Creabilis shareholders if we successfully achieve certain predetermined milestones;

 

    the timing and amount of any success payments we elect to pay in cash to certain of our existing stockholders if the market price of our common stock meets or exceeds certain specified share price thresholds, as well as fluctuations in our non-cash expenses related to the periodic revaluations of the fair value of the success payments;

 

    coverage and reimbursement policies with respect to our product candidates, if approved or cleared, and potential future drugs or devices that compete with our product candidates;

 

    the cost of manufacturing our product candidates, as well as building out our supply chain, which may vary depending on the quantity of production and the terms of our agreements with manufacturers;

 

    expenditures that we may incur to acquire, develop or commercialize additional product candidates and technologies;

 

    the level of demand for our products, if approved or cleared, which may vary significantly over time;

 

    future accounting pronouncements or changes in our accounting policies; and

 

    the timing and success or failure of nonclinical studies and clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners.

The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the

 

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market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.

Our success payment obligations to certain of our existing stockholders may result in dilution to our other stockholders, may be a drain on our cash resources, or may cause us to incur debt obligations to satisfy the payment obligations.

In October 2015, we entered into a Success Payment Agreement with certain of our existing stockholders, pursuant to which we agreed to make success payments to such stockholders. These success payments are based on certain specified threshold per share values of our common stock measured at specific times during the success payment period, which began on the effective date of the Success Payment Agreement and ends on the fifth anniversary of the Success Payment Agreement, in October 2020. Success payments are payable in cash or, in our sole discretion, common stock, and will be owed, if ever, in the event that the value of our common stock meets or exceeds certain specified share price thresholds on any of the following dates during the success payment period: (1) any date after the 90th day after we complete this initial public offering; (2) the date on which we sell, lease, transfer or exclusively license all or substantially all of our assets to another company; and (3) the date on which we merge or consolidate with or into another entity (other than a merger in which our pre-merger stockholders own a majority of the shares of the surviving entity). In the case of an initial public offering, success payments are triggered when the per share value of our common stock, as determined based on the average trading price of a share of our common stock over the consecutive 90-day period preceding the date the success payment is triggered, meets or exceeds specified per share thresholds. In the case of an asset sale, license or sale of the company, success payments are triggered when the per share value of our common stock, as determined based on the consideration paid in the transaction for each share of our stock, meets or exceeds specified per share thresholds. Each per share threshold is associated with a success payment, ascending from $10.0 million at $9.15 per share to $35.0 million at $12.20 per share to $60.0 million at $18.30 per share, in each case subject to adjustment for any stock dividend, stock split, combination of shares, or other similar events. These share price thresholds correspond to approximately $833.4 million, $1.1 billion and $1.7 billion, respectively, in market capitalization, based on the number of our shares outstanding as of May 31, 2017. Any previous success payments made to stockholders pursuant to the Success Payment Agreement are credited against the success payment owed as of any future valuation date. The first payout is $10.0 million, the second payout is $35.0 million (inclusive of the first $10.0 million success payment, if previously paid) and the third payout is $60.0 million (inclusive of any previous success payments, if made). The success payments paid to such stockholders will not exceed, in aggregate, $60.0 million.

This offering will trigger the potential for success payments to the stockholders party to the Success Payment Agreement. However, during the first year following this offering we will not be required to make any success payments triggered by the per share market value of our common stock until the first anniversary of the closing of this offering (or a 90-day grace period following such anniversary, at our option if we are contemplating a capital market transaction during such grace period). In order to satisfy our obligations to make these success payments, if and when they are triggered, we may issue equity securities that may cause dilution to our stockholders, or we may use our existing cash or incur debt obligations to satisfy the success payment obligation in cash, which may adversely affect our financial position. In addition, these success payments may impede our ability to raise money in future public offerings of debt or equity securities or to obtain a third party line of credit.

The success payment obligations to certain of our existing stockholders may cause GAAP operating results to fluctuate significantly from quarter to quarter, which may reduce the usefulness of our GAAP financial statements.

Our success payment obligations to certain of our stockholders are recorded as a liability on our balance sheet. Under generally accepted accounting principles in the United States, or GAAP, we are required to

 

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remeasure the fair value this liability as of each quarter end. Factors that may lead to increases or decreases in the estimated fair value of this liability include, among others, changes in the value of our common stock, changes in the volatility of our common stock, changes in the applicable term of the success payments and changes in the risk free interest rate. As a result, our operating results and financial condition as reported by GAAP may fluctuate significantly from quarter to quarter and from year to year and may reduce the usefulness of our GAAP financial statements. As of December 31, 2016 and March 31, 2017, the estimated fair value of the liability associated with the success payments was $1.3 million and $2.3 million, respectively.

Risks Related to Our Business

Our business is dependent on the successful development, regulatory approval and commercialization of our product candidates.

Our portfolio includes our lead product candidates: SNA-120, a topical tropomyosin receptor kinase A, or TrkA, inhibitor in clinical development for the treatment of pruritus associated with psoriasis as well as the underlying psoriasis; SNA-125, a topical Janus kinase 3 (JAK3)/TrkA inhibitor in nonclinical trials for the treatment of atopic dermatitis, psoriasis and pruritus; and SNA-001, a topical suspension of silver particles in pivotal trials for the treatment of acne and for the reduction of light-pigmented hair. The success of our business, including our ability to finance our company and generate any revenue in the future, will primarily depend on the successful development, regulatory approval or clearance and commercialization of our product candidates. In the future, we may also become dependent on other product candidates that we may develop or acquire. The clinical and commercial success of our product candidates will depend on a number of factors, including the following:

 

    the ability to raise any additional required capital on acceptable terms, or at all;

 

    timely completion of our nonclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;

 

    whether we are required by the U.S. Food and Drug Administration, or the FDA, or similar foreign regulatory agencies to conduct additional clinical trials or other studies beyond those planned to support the approval and commercialization of our product candidates or any future product candidates;

 

    acceptance of our proposed indications and primary endpoint assessments relating to the proposed indications of our product candidates by the FDA and similar foreign regulatory authorities;

 

    our ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities the safety, efficacy and acceptable risk to benefit profile of our lead product candidates or any future product candidates;

 

    the prevalence, duration and severity of potential side effects or other safety issues experienced with our product candidates or future approved products, if any;

 

    the timely receipt of necessary marketing approvals or clearances from the FDA and similar foreign regulatory authorities;

 

    achieving and maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory requirements applicable to our lead product candidates or any future product candidates or approved products, if any;

 

    the willingness of physicians, operators of clinics and patients to utilize or adopt SNA-001 as a procedural solution;

 

    the ability of third parties upon which we rely to manufacture clinical trial and commercial supplies of our product candidates or any future product candidates, remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices, or cGMP;

 

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    our ability to successfully develop a commercial strategy and thereafter commercialize our product candidates or any future product candidates in the United States and internationally, if approved or cleared for marketing, reimbursement, sale and distribution in such countries and territories, whether alone or in collaboration with others;

 

    acceptance by physicians, payors and patients of the benefits, safety and efficacy of our product candidates or any future product candidates, if approved or cleared, including relative to alternative and competing treatments;

 

    patient demand for our product candidates, if approved or cleared;

 

    our ability to establish and enforce intellectual property rights in and to our product candidates or any future product candidates; and

 

    our ability to avoid third-party patent interference, intellectual property challenges or intellectual property infringement claims.

These factors, many of which are beyond our control, could cause us to experience significant delays or an inability to obtain regulatory approvals or clearances or commercialize our product candidates. Even if regulatory approvals or clearances are obtained, we may never be able to successfully commercialize any of our product candidates. Accordingly, we cannot provide assurances that we will be able to generate sufficient revenue through the sale of our product candidates or any future product candidates to continue our business.

We may be unable to obtain regulatory approval or clearance for our product candidates under applicable regulatory requirements. The denial or delay of any such approval or clearance would delay commercialization of our product candidates and adversely impact our potential to generate revenue, our business and our results of operations.

To gain approval to market our product candidates, we must provide the FDA and foreign regulatory authorities with clinical data that adequately demonstrate the safety and efficacy of the product for the intended indication applied for in the applicable regulatory filing. Product development is long, expensive and uncertain processes, and delay or failure can occur at any stage of any of our clinical development programs. A number of companies in the biotechnology, pharmaceutical and medical device industries have suffered significant setbacks in clinical trials, even after promising results in earlier nonclinical or clinical studies. These setbacks have been caused by, among other things, nonclinical findings made while clinical studies were underway and safety or efficacy observations made in clinical studies, including previously unreported adverse events. Success in nonclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we may conduct.

While our product candidates SNA-120 and SNA-125 will be regulated as drug products under a new drug application, or NDA, pathway, SNA-001 will be regulated as a medical device. In the United States, before we can market SNA-001, or a new use of, new claim for or significant modification to SNA-001, we must first receive clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA, from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process or a device that was legally marketed prior to May 28, 1976 (pre-amendments device). To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence.

Our product candidates SNA-120 and SNA-001 are currently in clinical development and our product candidate SNA-125 is currently in preclinical development. We currently have no products approved or cleared for sale, and we may never obtain regulatory approval or clearance to commercialize our lead product candidates.

 

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The research, testing, manufacturing, labeling, approval, clearance, sale, marketing and distribution of drug and medical device products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and such regulations differ from country to country. We are not permitted to market our product candidates in the United States or in any foreign countries until they receive the requisite approval or clearance from the applicable regulatory authorities of such jurisdictions.

The FDA or any foreign regulatory bodies can delay, limit or deny approval of our product candidates for many reasons, including:

 

    our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that any of our product candidates is safe and effective for the requested indication;

 

    the FDA’s or the applicable foreign regulatory agency’s disagreement with our trial protocol or the interpretation of data from nonclinical studies or clinical trials;

 

    our inability to demonstrate that the clinical and other benefits of any of our product candidates outweigh any safety or other perceived risks;

 

    the FDA’s or the applicable foreign regulatory agency’s requirement for additional nonclinical studies or clinical trials;

 

    the FDA’s or the applicable foreign regulatory agency’s non-approval of the formulation, labeling or specifications of SNA-120 or SNA-125;

 

    the FDA’s or the applicable foreign regulatory agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers upon which we rely; or

 

    the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data insufficient for approval.

Of the large number of biopharmaceutical and medical device products in development, only a small percentage successfully complete the FDA or other regulatory approval or clearance processes and are commercialized.

Even if we eventually complete clinical testing and receive approval or clearance from the FDA or applicable foreign agencies for any of our product candidates, the FDA or the applicable foreign regulatory agency may grant approval or clearance contingent on the performance of costly additional clinical trials which may be required after approval. The FDA or the applicable foreign regulatory agency also may approve or clear our lead product candidates for a more limited indication or a narrower patient population than we originally requested, and the FDA, or applicable foreign regulatory agency, may not approve or clear our product candidates with the labeling that we believe is necessary or desirable for the successful commercialization of such product candidates. For example, SNA-120, if approved, may only receive a label covering pruritus, a symptom of psoriasis, but may not receive labeling covering the treatment of psoriasis.

Any delay in obtaining, or inability to obtain, applicable regulatory approval or clearance would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects.

Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure or delay can occur at any time during the clinical trial process. Success in nonclinical studies and early clinical trials does not ensure that later clinical trials will be successful. A number of companies in the biotechnology, pharmaceutical and medical device industries have suffered significant setbacks in clinical trials,

 

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even after positive results in earlier nonclinical studies or clinical trials. These setbacks have been caused by, among other things, nonclinical findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. The results of nonclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through nonclinical studies and initial clinical trials. Notwithstanding any potential promising results in earlier studies and trials, we cannot be certain that we will not face similar setbacks. Even if our clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

Although two of our lead product candidates, SNA-120 and SNA-001, are in clinical development, we may experience delays in completing ongoing studies or trials and initiating planned studies or trials, and we cannot be certain that studies or trials for our product candidates will begin on time, not require redesign, enroll an adequate number of subjects on time or be completed on schedule, if at all. Clinical trials can be delayed or terminated for a variety of reasons, including delays or failures related to:

 

    the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical trials;

 

    obtaining regulatory approval to commence a trial;

 

    reaching agreement on acceptable terms with prospective contract research organizations, or 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 institutional review board, or IRB, approval at each site;

 

    recruiting suitable patients to participate in a trial;

 

    having subjects complete a trial or return for post-treatment follow-up;

 

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

 

    addressing subject safety concerns that arise during the course of a trial;

 

    adding a sufficient number of clinical trial sites; or

 

    obtaining sufficient quantities of product candidate for use in nonclinical studies or clinical trials from third-party suppliers.

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

 

    we may receive feedback from regulatory authorities that requires us to modify the design of our clinical trials;

 

    clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs;

 

    the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

    our third-party contractors may fail to comply with regulatory requirements, fail to maintain adequate quality controls, or simply be unable to provide us with sufficient product supply to conduct and complete nonclinical studies or clinical trials of our product candidates in a timely manner, or at all;

 

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    we or our investigators might have to suspend or terminate clinical trials of our product candidates for various reasons, including non-compliance with regulatory requirements, a finding that our product candidates have undesirable side effects or other unexpected characteristics, or a finding that the participants are being exposed to unacceptable health risks;

 

    the cost of clinical trials of our product candidates may be greater than we anticipate;

 

    the quality of our product candidates or other materials necessary to conduct nonclinical studies or clinical trials of our product candidates may be insufficient or inadequate;

 

    regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate; and

 

    future collaborators may conduct clinical trials in ways they view as advantageous to them but that are suboptimal for us.

For example, the FDA has recommended that, for the future Phase 3 pivotal trials of SNA-120 for the treatment of pruritus associated with psoriasis, we utilize the 11-point itch Numeric Rating Scale, or I-NRS, as the primary endpoint for assessing efficacy, rather than the pruritus visual analog scale, or VAS, used in the completed Phase 2b trial of SNA-120, despite the similarity between the two scales. The I-NRS scale requires patients to select a number between zero (no itch) to ten (the worst possible itch), but unlike a VAS, which uses a continuous scale, patients must select a specific whole number and not mark a point on the usual scale. It is possible that using the I-NRS scale could produce results that differ from results we saw in the prior Phase 2b trial in which the VAS scale was used.

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

 

    incur unplanned costs;

 

    be delayed in obtaining marketing approval for our product candidates or not obtain marketing approval at all;

 

    obtain marketing approval in some countries and not in others;

 

    obtain marketing approval for indications or patient populations that are not as broad as intended or desired;

 

    obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

    be subject to additional post-marketing testing requirements; or

 

    have the treatment removed from the market after obtaining marketing approval or clearance.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial 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 drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

Further, conducting clinical trials in foreign countries, as we may do for certain of our product candidates, presents additional risks that may delay completion of our clinical trials. These risks include the failure of

 

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enrolled patients in foreign countries to adhere to clinical protocol as a result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory schemes, as well as political and economic risks relevant to such foreign countries.

Principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or a regulatory authority concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of the marketing application we submit. Any such delay or rejection could prevent or delay us from commercializing our current or future product candidates.

If we experience delays in the completion, or termination, of any nonclinical study or clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or not realized at all.

In addition, any delays in completing our clinical trials may increase our costs, slow down our product candidate development and approval or clearance process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval or clearance of our product candidates.

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

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. We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. 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;

 

    clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating; and

 

    our ability to obtain and maintain patient consents.

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

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

 

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Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval or clearance, if any.

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 comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.

If unacceptable side effects arise in the development of our product candidates, we, the FDA, the IRBs at the institutions in which our studies are conducted, or the DSMB could suspend or terminate our clinical 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 patients 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. We expect to have to train medical personnel using our product candidates to understand the side effect profiles for our clinical trials and upon any commercialization of any of our product candidates. Inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death. Any of these occurrences may harm our business, financial condition and prospects significantly.

If any of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

 

    regulatory authorities may withdraw their approval of the product;

 

    we may be required to recall a product or change the way such product is administered to patients;

 

    additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;

 

    regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

    we may be required to implement a Risk Evaluation and Mitigation Strategy, or REMS, or create a Medication Guide outlining the risks of such side effects for distribution to patients;

 

    we could be sued and held liable for harm caused to patients;

 

    the product may become less competitive; and

 

    our reputation may suffer.

Any of the foregoing events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved or cleared, and result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.

As a company, we have never completed a Phase 3 program or obtained marketing approval for any product candidate and we may be unable to successfully do so for any of our product candidates. Failure to successfully complete any of these activities in a timely manner for any of our product candidates could have a material adverse impact on our business and financial performance.

Conducting a pivotal clinical trial and preparing, and obtaining marketing approval for, a product candidate is a complicated process. Although members of our management team have participated in pivotal trials and obtained marketing approvals for product candidates in the past while employed at other companies, we as a company have not done so. As a result, such activities may require more time and cost more than we anticipate.

 

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We are currently conducting pivotal clinical trials for SNA-001 and we anticipate commencing pivotal Phase 3 clinical trials for SNA-120 after the completion of our additional Phase 2b clinical trial. Failure to successfully complete, or delays in, our pivotal trials or related regulatory submissions would prevent us from or delay us in obtaining regulatory approval for, or clearance of, our product candidates. In addition, it is possible that the FDA may refuse to accept for substantive review any NDAs or medical device marketing applications that we submit for our product candidates or may conclude after review of our applications that they are insufficient to obtain marketing approval or clearance of our product candidates. If the FDA does not accept our applications or issue marketing authorizations for our product candidates, it may require that we conduct additional clinical, nonclinical or manufacturing validation studies and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA-required studies, approval of any NDA or receipt of other marketing authorizations for any other applications that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDAs or clear our 510(k) submissions or grant other marketing authorizations.

Any delay in obtaining, or an inability to obtain, marketing approvals would prevent us from commercializing our product candidates, generating revenues and achieving and sustaining profitability. If any of these outcomes occur, we may be forced to abandon our development efforts for our product candidates, which could significantly harm our business.

Even if our lead product candidates or any future product candidates obtain regulatory approval or clearance, they may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.

Even if we obtain FDA or other regulatory approvals or clearances, the commercial success of any of our current or future product candidates will depend significantly on the broad adoption and use of the resulting product by physicians and patients for approved indications. Our product candidates may not be commercially successful. For a variety of reasons, including among other things, competitive factors, pricing or physician preference, the degree and rate of physician and patient adoption of our current or future product candidates, if approved or cleared, will depend on a number of factors, including:

 

    the clinical indications for which the product is approved or cleared and patient demand for approved or cleared products that treat those indications;

 

    the safety and efficacy of our product as compared to other available therapies;

 

    the availability of coverage and adequate reimbursement from managed care plans and other healthcare payors for any of our product candidates that may be approved;

 

    acceptance by physicians, operators of clinics and patients of the product as a safe and effective treatment;

 

    physician and patient willingness to adopt a new therapy over other available therapies to treat approved indications;

 

    overcoming any biases physicians or patients may have toward particular therapies for the treatment of approved indications;

 

    proper training and administration of our product candidates by physicians and medical staff;

 

    patient satisfaction with the results and administration of our products and overall treatment experience, including, for example, a smaller or no effect on the visual symptoms of psoriasis while relieving pruritus;

 

    the cost of treatment with our product candidates in relation to alternative treatments and reimbursement levels, if any, and willingness to pay for the product, if approved or cleared, on the part of insurance companies and other third-party payers, physicians and patients;

 

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    the willingness of patients to pay for certain of our products, particularly our aesthetic products, such as SNA-001, if approved or cleared, especially during economically challenging times;

 

    the revenue and profitability that our products may offer a physician as compared to alternative therapies;

 

    the prevalence and severity of side effects;

 

    limitations or warnings contained in the FDA-approved or cleared labeling for our products;

 

    the compatibility, or clearance for use, of our SNA-001 product with the lasers available in aesthetic professionals’ offices;

 

    the willingness of physicians, operators of clinics and patients to utilize or adopt SNA-001 as a procedural solution;

 

    any FDA requirement to undertake a REMS;

 

    the effectiveness of our sales, marketing and distribution efforts;

 

    adverse publicity about our products or favorable publicity about competitive products; and

 

    potential product liability claims.

We cannot assure you that our current or future product candidates, if approved, will achieve broad market acceptance among physicians and patients. Any failure by our product candidates that obtain regulatory approval or clearance to achieve market acceptance or commercial success would adversely affect our results of operations.

SNA-125, if approved for the treatment of pruritus or the underlying psoriasis, may compete with SNA-120, if approved for the treatment of pruritus or the underlying psoriasis, which could reduce the commercial success of SNA-120, if both are approved.

SNA-120 and SNA-125 are both designed to inhibit TrKA. We believe that SNA-125, by inhibiting both JAK3 and TrkA, has the potential to offer enhanced efficacy over SNA-120 in the treatment of pruritus and the underlying psoriasis, which could make SNA-125 a more compelling treatment for pruritus or the underlying psoriasis. To the extent both SNA-120 and SNA-125 are approved for pruritus or the underlying psoriasis, physicians and patients may prefer to use SNA-125 instead of SNA-120, and the revenue we would derive from SNA-120 could be reduced. If SNA-120 and SNA-125 compete for treatment of the same indications, the incremental revenue derived from SNA-125 may be less than if SNA-125 and SNA-120 did not treat the same indications.

We currently rely on single source third-party suppliers to manufacture nonclinical and clinical supplies of our product candidates and we intend to rely on third parties to produce commercial supplies of any approved or cleared product candidate. The loss of these suppliers, or their failure to comply with applicable regulatory requirements or to provide us with sufficient quantities at acceptable quality levels or prices, or at all, would materially and adversely affect our business.

We do not currently have nor do we plan to build or acquire the infrastructure or capability internally to manufacture supplies of our product candidates or the materials necessary to produce our product candidates for use in the conduct of our nonclinical studies or clinical trials, and we lack the internal resources and the capability to manufacture any of our product candidates on a nonclinical, clinical or commercial scale. The facilities used by our contract manufacturers to manufacture our product candidates are subject to various regulatory requirements and may be subject to the inspection of the FDA or other regulatory authorities. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as cGMPs (or the Quality System Regulation, or QSR,

 

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in the case of our device product candidates). If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or comparable regulatory authorities in foreign jurisdictions, we may not be able to rely on their manufacturing facilities for the manufacture or our product candidates. In addition, we have limited control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority finds these facilities inadequate for the manufacture of our product candidates or if such facilities are subject to enforcement action in the future or are otherwise inadequate, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates.

We currently rely on third parties at key stages in our supply chain. There are a limited number of suppliers for materials we use in our product candidates and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our nonclinical studies and clinical trials, and if approved, ultimately for commercial sale. In the case of SNA-001, we have an agreement with nanoComposix to supply the silver nanoplates used to manufacture SNA-001 for nonclinical studies and clinical trials on an exclusive basis, subject to certain exceptions in the event of certain specified supply failures. In the case of SNA-120 and SNA-125, we currently obtain our supplies of drug substance and drug product through individual purchase orders. We do not have any control over the process or timing of the acquisition or manufacture of materials by our manufacturers. We generally do not begin a nonclinical study or clinical trial unless we believe we have access to a sufficient supply of a product candidate to complete such study or trial. Prior to submitting an NDA for SNA-120, we must complete nonclinical toxicity studies. We have not yet determined whether our existing manufacturers will be able to supply sufficient drug substance or drug product to conduct these studies, and if they are unable to do so, this would likely result in a delay of our NDA submission and approval of SNA-120. In addition, any significant delay in, or quality control problems with respect to, the supply of a product candidate, or the raw material components thereof, for an ongoing study or trial could considerably delay completion of our nonclinical studies or clinical trials, product testing and potential regulatory approval of our product candidates.

We expect to continue to depend on third-party contract manufacturers for the foreseeable future, but, except with respect to nanoComposix for the clinical supply of the silver nanoplates used to manufacture SNA-001, we have not entered into supply agreements with our current contract manufacturers or with any alternate suppliers and we currently do not have any supply agreements for the commercial production of the materials used to manufacture our product candidates.

We currently use only a single manufacturer for each component of the manufacturing process for each of our lead product candidates, and we have not yet engaged any manufacturers for the commercial supply of our product candidates. Although we intend to enter into such agreements prior to commercial launch of any of our product candidates, we may be unable to enter into any such agreement or do so on commercially reasonable terms, which could have a material adverse impact upon our business. Moreover, if there is a disruption to one or more of our third-party manufacturers’ or suppliers’ relevant operations, or if we are unable to enter into arrangements for the commercial supply of our product candidates, we will have no other means of producing our lead product candidates until they restore the affected facilities or we or they procure alternative manufacturing facilities or sources of supply. Our ability to progress our nonclinical and clinical programs could be materially and adversely impacted if any of the third party suppliers upon which we rely were to experience a significant business challenge, disruption or failure due to issues such as financial difficulties or bankruptcy, issues relating to other customers such as regulatory or quality compliance issues, or other financial, legal, regulatory or reputational issues. Additionally, any damage to or destruction of our third-party manufacturers’ or suppliers’ facilities or equipment may significantly impair our ability to manufacture our product candidates on a timely basis.

In addition, to manufacture our lead product candidates in the quantities that we believe would be required to meet anticipated market demand, our third-party manufacturers may need to increase manufacturing capacity

 

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and, in some cases, we plan to secure alternative sources of commercial supply, which could involve significant challenges and may require additional regulatory approvals. In addition, the development of commercial-scale manufacturing capabilities may require us and our third-party manufacturers to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. Neither we nor our third-party manufacturers may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all. If our manufacturers or we are unable to purchase the raw materials necessary for the manufacture of our product candidates on acceptable terms, at sufficient quality levels, or in adequate quantities, if at all, the commercial launch of our lead product candidates or any future product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of such product candidates, if approved or cleared.

We rely on third parties in the conduct of all of our nonclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, fail to comply with applicable regulatory requirements or meet expected deadlines, we may be unable to obtain regulatory approval for our product candidates.

We currently do not have the ability to independently conduct nonclinical studies that comply with the regulatory requirements known as good laboratory practice, or GLP, requirements. We also do not currently have the ability to independently conduct any clinical trials. The FDA and regulatory authorities in other jurisdictions require us to comply with regulations and standards, commonly referred to as good clinical practice, or GCP, requirements for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct GLP-compliant nonclinical studies and GCP-compliant clinical trials on our product candidates properly and on time. While we have agreements governing their activities, we control only certain aspects of their activities and have limited influence over their actual performance. The third parties with whom we contract for execution of our GLP-compliant nonclinical studies and our GCP-compliant clinical trials play a significant role in the conduct of these studies and trials and the subsequent collection and analysis of data. These third parties are not our employees and, except for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our GLP-compliant nonclinical studies and GCP-compliant clinical trials, we remain responsible for ensuring that each of our GLP nonclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol and applicable laws and regulations, and our reliance on the CROs does not relieve us of our regulatory responsibilities.

Many of the third parties with whom we contract may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities that could harm our competitive position. If the third parties conducting our nonclinical studies or our clinical trials do not perform their contractual duties or obligations, experience significant business challenges, disruptions or failures, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our protocols or to GCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties. This could be difficult, costly or impossible, and our nonclinical studies or clinical trials may need to be extended, delayed, terminated or repeated. As a result we may not be able to obtain regulatory approval in a timely fashion, or at all, for the applicable product candidate, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

 

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Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration. Most of our competitors have significantly greater resources than we do and we may not be able to successfully compete.

The biotechnology, pharmaceutical and medical device industries in particular are characterized by rapidly advancing technologies, intense competition and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing and marketing of healthcare products competitive with those that we are developing. We face competition from a number of sources, such as pharmaceutical companies, medical device companies, generic drug companies, biotechnology companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and development capabilities, clinical trial expertise, intellectual property portfolios, experience in obtaining patents and regulatory approvals for product candidates and other resources than we do. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. In addition, certain of our product candidates, if approved, may compete with other dermatological products, including over-the-counter, or OTC, treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices.

If approved for the treatment of pruritus, or the underlying psoriasis, SNA-120 and SNA-125 will face competition from a number of approved treatments for psoriasis, including branded topical drugs and generic versions where available. In many cases, these products have been developed, and are being marketed, by well-established companies such as Maruho, Valeant, Incyte, GlaxoSmithKline and Pfizer. We believe that SNA-125, if approved for the treatment of atopic dermatitis, will also face potential competition from well-established companies that market, or are expected to market, branded and generic corticosteroids or topical calcineurin inhibitors.

If approved for the treatment of acne vulgaris, SNA-001 will face competition from a number of branded and generic oral and topical antimicrobials, oral and topical retinoids and oral contraceptives, including branded therapeutics, as well as potential competition from a similar procedure using gold particles that is currently in development by a third party. We believe SNA-001 would also face competition from a number of currently available procedural solutions for the treatment of acne, including chemical peels, laser or light-based treatments, and photodynamic therapy. If approved for light-pigmented hair removal or reduction, we also anticipate that SNA-001 would compete with hair reduction procedures using laser or intense pulsed light, which are available in dermatologist offices, medical spas and laser treatment centers, as well as against products designed for at-home use by the patient.

Certain alternative treatments offered by competitors may be available at lower prices and may offer greater efficacy or better safety profiles. Additional products and treatments, including numerous injectable biological products which have been approved or are currently in clinical trials, may also receive regulatory approval in one or more territories in which we compete, and these existing and new products may be more effective, more widely used and less costly than ours. Newly developed systemic or non-systemic treatments that replace existing therapies that are currently only utilized in patients suffering from severe disease may also have lessened side effects or reduced prices compared to current therapies, which make them more attractive for patients suffering from mild to moderate disease. Even if a generic product or an OTC product is less effective than our product candidates, a less effective generic or OTC product may be more quickly adopted by physicians and patients than our competing product candidates based upon cost or convenience.

For additional information regarding our competition, see the section of this prospectus captioned “Business—Competition.”

 

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If coverage and adequate reimbursement from third-party payors are not available, it may make it difficult for us to sell certain of our products profitably.

Our ability to successfully commercialize our SNA-120 and SNA-125 product candidates and potentially some or all of our future product candidates that we may develop will depend in part on the extent to which governmental authorities, private health insurers and other third-party payors establish adequate coverage and reimbursement for such product candidates. Patients who are prescribed treatments for their conditions and providers furnishing such services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products and the procedures using our products.

Significant uncertainty exists as to the coverage and reimbursement status of newly approved products. A trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. Third-party payors also are increasingly challenging the effectiveness of and prices charged for medical products and services. Therefore, as a result of these cost containment measures, coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be sufficient enough to successfully commercialize any product candidates that we develop.

In the United States, private third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. However, no uniform policy requirement for coverage and reimbursement for products exists among third-party payors and coverage and reimbursement can differ significantly from payor to payor. Each plan determines whether or not it will provide coverage, what amount it will pay, and with respect to pharmaceutical products, on what tier of its formulary such product will be placed. The position of a prescription drug on a formulary generally determines the co-payment that a patient will need to make to obtain the product and can strongly influence the adoption of a product by patients and physicians. Each plan may separately require us to provide scientific and clinical support for the use of our products and, as a result, the coverage determination process is often a time-consuming and costly process with no assurance that coverage and adequate reimbursement will be applied consistently or obtained at all. Our inability to promptly obtain coverage and adequate reimbursement from both government-funded and private payors for any approved products that we develop could significantly harm our operating results, our ability to raise capital needed to commercialize our product candidates and our overall financial condition.

We currently have no sales organization. If we are unable to establish sales capabilities on our own or through third parties, we may not be able to market and sell our product candidates effectively in the United States and foreign jurisdictions, if approved, or generate product revenue.

We currently do not have a sales organization. In order to commercialize our product candidates in the United States and foreign jurisdictions, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If any of our product candidates receive regulatory approval, we expect to establish a sales organization with technical expertise and supporting distribution capabilities to commercialize each such product candidate, which will be expensive and time consuming. We have no prior experience in the marketing, sale and distribution of pharmaceutical products or medical devices and there are significant risks involved in building and managing a sales organization, including our ability to hire, retain, and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. We may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements on acceptable terms or at all, we

 

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may not be able to successfully commercialize our product candidates. If we are not successful in commercializing our product candidates or any future product candidates, either on our own or through arrangements with one or more third parties, we may not be able to generate any future product revenue and we would incur significant additional losses.

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

As of May 31, 2017, we had 40 full-time employees. We will need to continue to expand our managerial, operational, finance and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize our lead product candidates or any future product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

    manage our clinical trials effectively;

 

    identify, recruit, retain, incentivize and integrate additional employees, including sales personnel;

 

    manage our internal development and operational efforts effectively while carrying out our contractual obligations to third parties; and

 

    continue to improve our operational, financial and management controls, reports systems and procedures.

If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop our lead product candidates or any future product candidates, conduct our clinical trials and commercialize our current or any future product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, particularly our President and Chief Executive Officer, as well as our senior scientists and other members of our senior management team. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline, initiation or completion of our planned clinical trials or the commercialization of our lead product candidates or any future product candidates. Although we have entered into employment agreements with our senior management team, these agreements do not provide for a fixed term of service.

Competition for qualified personnel in the biotechnology and pharmaceuticals field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and if we initiate commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our current or future 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 any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranty. Claims could also be asserted under state consumer protection acts. In addition, we may be required to defend ourselves in the event an injury occurs from the negligent use of a laser in a procedure using SNA-001 or

 

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a laser malfunction causing injury during an aesthetic procedure. 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 current or future product candidates;

 

    injury to our reputation;

 

    withdrawal of clinical trial participants;

 

    costs to defend the related litigation;

 

    a diversion of management’s time and our resources;

 

    substantial monetary awards to trial participants or patients;

 

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

 

    loss of revenue; and

 

    the inability to commercialize our current or any future product candidates.

Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the commercialization of our current or any future product candidates we develop. We currently carry product liability insurance covering our clinical trials in the amount of $10 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient funds to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain approval for marketing any of our product candidates, we intend to expand our insurance coverage to include the sale of such product candidate; however, we may be unable to obtain this liability insurance on commercially reasonable terms or at all.

If we are not successful in discovering, developing, acquiring and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our effort will focus on the continued nonclinical and clinical testing and potential approval or clearance of our lead product candidates, a key element of our strategy is to discover, develop and commercialize a diverse portfolio of product candidates to serve the dermatology market. We are seeking to do so through our internal research programs and may explore strategic collaborations for the development or acquisition of new products. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

    the research methodology or technology platform used may not be successful in identifying potential product candidates;

 

    competitors may develop alternatives that render our product candidates obsolete or less attractive;

 

    product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

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    a product candidate may be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

    a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and;

 

    a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors, if applicable.

If we fail to develop and successfully commercialize other product candidates, our business and future prospects may be harmed and our business will be more vulnerable to any problems that we encounter in developing and commercializing our lead product candidates.

We have in the past engaged and may in the future engage in strategic transactions that could affect our liquidity, dilute our existing stockholders, increase our expenses and present significant challenges in focus and energy to our management or prove not to be successful.

From time to time, we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of intellectual property, products or technologies. In December 2016, we acquired the entire issued share capital of Creabilis plc, which became our direct wholly-owned subsidiary. Pursuant to the share purchase agreement for the Creabilis acquisition, we made an upfront payment of approximately $212,000 in cash, issued 8,263,097 shares of our Series A-3 Preferred Stock to the former Creabilis shareholders and settled approximately $6.7 million of Creabilis liabilities. Upon the achievement of certain specified clinical, regulatory and approval milestones for SNA-120 and SNA-125, we are obligated to pay the former Creabilis shareholders up to an aggregate of $58.0 million, which consists of an aggregate of $25.0 million in cash and $33.0 million in shares of our common stock. In addition, upon the achievement of certain annual net sales milestone thresholds for qualifying products, including SNA-120 and SNA-125, we are required to pay the former Creabilis shareholders up to an aggregate of $80.0 million in cash as well as one-time royalties of less than 1% on net sales of qualified products that exceed these net sales thresholds in the year such threshold is achieved. Our first contingent payment of $5.0 million, subject to certain offsets, which is payable in shares of our common stock, will become due upon the sooner to occur of the commencement of our additional Phase 2b trial for SNA-120 and the one-year anniversary of the closing of the transaction December 2017, subject to certain limited exceptions. See “Business—Significant Transaction—Acquisition of Creabilis plc.”

Additional potential transactions that we may consider in the future include a variety of business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. The Creabilis acquisition and any future transactions could result in potentially dilutive issuances of our equity securities, including our common stock, or the incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of which could affect our financial condition, liquidity and results of operations. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all. These transaction may never be successful and may require significant time and attention of management. In addition, the integration of any business that we may acquire in the future may disrupt our existing business and may be a complex, risky and costly endeavor for which we may never realize the full benefits of the acquisition.

If we do not successfully integrate Creabilis into our business operations, our business could be adversely affected.

The process of integrating an acquired business, technology, service, intellectual property, products or product candidates into our business may result in unforeseen operating difficulties and expenditures, including diversion of resources and management’s attention from our core business. Our ability as an organization to integrate acquisitions, including Creabilis’ business, is relatively unproven. As a result of our acquisition of Creabilis in December 2016, we have undergone substantial changes in a short period of time and our business

 

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has changed and broadened in size and the scope of products we are developing. In addition, our business immediately shifted from being fully domestic to including international employees, entities, operations and facilities. Integrating the operations of a new business with that of our own is a complex, costly and time-consuming process, which requires significant management attention and resources to integrate the business practice and operations. The integration process may disrupt the businesses and, if implemented ineffectively, would preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating the Creabilis business in order to realize the anticipated benefits of the acquisitions could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations. Prior to the acquisition, Creabilis operated independently, with its own business, corporate culture, locations, employees and systems. There may be substantial difficulties, costs and delays involved in any integration of other businesses, including Creabilis, with that of our own. These may include:

 

    distracting management from day-to-day operations;

 

    an ability to retain key executives and employees of Creabilis, which may reduce the value of the acquisition or give rise to additional integration costs;

 

    challenges associated with integrating Creabilis’ intellectual property and prosecuting the acquired intellectual property;

 

    risks associated with the assumption of the liabilities of Creabilis;

 

    inheriting and uncovering previously unknown issues, problems and costs from Creabilis;

 

    risks and costs associated with inheriting a supply chain of third-party manufacturers with whom Creabilis had not yet established long-term contractual relationships;

 

    realization of assets and settlement of liabilities at amounts equal to estimated fair value as of the acquisition date of any acquisition or disposition;

 

    costs and delays in implementing common systems and procedures, including technology, compliance programs, financial systems, distribution and general business operations, among others; and

 

    increased difficulties in managing our business due to the addition of international locations.

These risks may be heightened in the case of Creabilis because the majority of the business’ operations and employees are located in Europe. Any one or all of these factors may increase operating costs or lower anticipated financial performance. Many of these factors are also outside of our control. In addition, dispositions of certain key products, technologies and other rights may affect our business operations.

In addition, even if the operations of Creabilis are integrated successfully, we may not realize the full benefits of the acquisition, including the cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frames, or at all. Additional unanticipated costs may be incurred in the integration of the business. All of these factors could cause a reduction to our earnings, decrease or delay the expected accretive effect of the transaction, and negatively impact the price of our common stock.

The failure to successfully integrate the business operations of Creabilis and any other business we may acquire would have a material adverse effect on our business, financial condition and results of operations.

The international aspects of our business expose us to a variety of business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States, which could materially adversely affect our business.

We currently have limited international operations in Italy, the United Kingdom and Luxembourg. Doing business internationally, including any future efforts by us or a collaborator to commercialize our product

 

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candidates outside the United States, involves a number of risks related to these international markets or business relationships, including but not limited to:

 

    different regulatory requirements for product approvals in foreign countries;

 

    different approaches by reimbursement agencies regarding the assessment of the cost effectiveness of our products;

 

    reduced protection for intellectual property rights in certain foreign countries;

 

    unexpected changes in tariffs, trade barriers and regulatory requirements;

 

    different reimbursement systems for dermatological medications and for clinicians treating patients with dermatological conditions;

 

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

 

    multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, immigration laws, labor laws, regulatory requirements and other governmental approvals, permits and licenses;

 

    foreign taxes, including withholding of payroll taxes;

 

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

 

    financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;

 

    difficulties in staffing and managing foreign operations by us or our collaboration partners;

 

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

 

    certain expenses including, among others, expenses for travel, translation and insurance;

 

    limits in our or our collaboration partners’ ability to penetrate international markets;

 

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

 

    potential liability resulting from activities conducted on our behalf by distributors or other vendors we engage;

 

    regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions or its anti-bribery provisions; and

 

    business interruptions resulting from natural disasters, outbreak of disease or geopolitical actions, including war, terrorism, political unrest, boycotts, curtailment of trade or other business restrictions.

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our product candidates.

We may seek collaboration arrangements for the commercialization, or potentially for the development, of certain of our product candidates depending on the merits of retaining commercialization rights for ourselves as compared to entering into collaboration arrangements. We will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time-consuming to negotiate, document, implement and maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so chose to enter into such arrangements. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

 

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Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborations are subject to numerous risks, which may include risks that:

 

    collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations;

 

    collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in their strategic focus due to their acquisition of competitive products or their internal development of competitive products, availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities;

 

    collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial, abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

    collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates;

 

    a collaborator with marketing, manufacturing and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;

 

    we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;

 

    collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;

 

    disputes may arise between us and a collaborator that causes the delay or termination of the research, development or commercialization of our current or future product candidates or that results in costly litigation or arbitration that diverts management attention and resources;

 

    collaborations may be terminated, and, if terminated, this may result in a need for additional capital to pursue further development or commercialization of the applicable current or future product candidates;

 

    collaborators may own or co-own intellectual property covering products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property;

 

    disputes may arise with respect to the ownership of any intellectual property developed pursuant to our collaborations; and

 

    a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.

We will incur significant costs as a result of operating as a public company, and our management will devote substantial time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, which could result in sanctions or other penalties that would harm our business.

We will incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, and regulations regarding corporate governance practices. The listing requirements of The NASDAQ Global Market and the rules of the Securities and Exchange Commission, or SEC, require that we satisfy certain corporate

 

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governance requirements relating to director independence, filing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, the reporting requirements, rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.

After this offering, we will be subject to Section 404 of The Sarbanes-Oxley Act of 2002, or Section 404, and the related rules of the SEC, which generally require our management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Beginning with the second annual report that we will be required to file with the SEC, Section 404 requires an annual management assessment of the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

To date, we have never conducted a review of our internal control for the purpose of providing the reports required by these rules. During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a public company we will be required to file accurate and timely quarterly and annual reports with the SEC under the Securities Exchange Act of 1934, as amended. In order to report our results of operations and financial statements on an accurate and timely basis, we will depend on CROs to provide timely and accurate notice of their costs to us. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from The NASDAQ Global Market or other adverse consequences that would materially harm to our business.

Unfavorable global economic or political conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. Furthermore, the market for aesthetic medical procedures may be particularly vulnerable to unfavorable economic conditions. In particular, we do not currently plan to pursue coverage and reimbursement for procedures using SNA-001, if cleared, for acne or other clinical indications and, as a result, demand for this product will be tied to discretionary spending levels of our targeted patient population. A global

 

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financial crisis or a global or regional political disruption could cause extreme volatility in the capital and credit markets. A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including weakened demand for our lead product candidates or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the political or economic climate and financial market conditions could adversely impact our business.

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters and other facilities are located in the Northern Los Angeles Area, which in the past has experienced both severe earthquakes and wildfires. We do not carry earthquake insurance. Earthquakes, wildfires or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Furthermore, integral parties in our supply chain are similarly vulnerable to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.

Significant disruptions of information technology systems or breaches of data security could materially adversely affect our business, results of operations and financial condition.

We collect and maintain information in digital form that is necessary to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have established physical, electronic, and organizational measures to safeguard and secure our systems to prevent a data compromise, and rely on commercially available systems, software, tools, and monitoring to provide security for our information technology systems and the processing, transmission and storage of digital information. We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may or could have access to our confidential information. Our internal information technology systems and infrastructure, and those of our current and any future collaborators, contractors and consultants and other third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization.

The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity

 

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and sophistication of attempted attacks and intrusions from around the world have increased. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information or other intellectual property. The costs to us to mitigate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service and other harm to our business and our competitive position. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Moreover, if a computer security breach affects our systems or results in the unauthorized release of personally identifiable information, our reputation could be materially damaged. In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to various federal and state privacy and security laws, if applicable, including the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Clinical Health Act of 2009, and its implementing rules and regulations, as well as regulations promulgated by the Federal Trade Commission and state breach notification laws. We would also be exposed to a risk of loss or litigation and potential liability, which could materially adversely affect our business, results of operations and financial condition.

Our employees and independent contractors, including principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our results of operations.

We are exposed to the risk that our employees and independent contractors, including principal investigators, consultants, any future commercial collaborators, service providers and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the laws and regulations of the FDA and other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies; manufacturing standards; U.S. federal and state healthcare fraud and abuse, data privacy laws and other similar non-U.S. laws; or laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, the creation of fraudulent data in our nonclinical studies or clinical trials, or illegal misappropriation of product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third-parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid and other U.S. healthcare programs, individual imprisonment, other sanctions, 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.

Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our

 

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product and product candidates and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage.

Risks Related to Intellectual Property

Our Topical by Design and Topical Photoparticle Therapy technologies and any future products that we commercialize could be alleged to infringe patent rights and other proprietary rights of third parties, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and/or limit our ability to commercialize our products.

Our commercial success depends on our ability to develop, manufacture and market our Topical by Design and Topical Photoparticle Therapy technologies and use our proprietary technology without infringing the patents and other proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results and financial condition to suffer. We operate in an industry with extensive intellectual property litigation. As the biopharmaceutical and dermatological product industries expand and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we may need to challenge to continue our operations as currently contemplated.

Whether merited or not, we may face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including patents held by our competitors or by non-practicing entities. We may also face allegations that our employees have misappropriated the intellectual property rights of their former employers or other third parties. Litigation may make it necessary to defend ourselves by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. Regardless of whether claims that we are infringing patents or other intellectual property rights have merit, the claims can be time consuming, divert management attention and financial resources and are costly to evaluate and defend. Results of any such litigation are difficult to predict and may require us to stop treating certain conditions, obtain licenses or modify our products and features while we develop non-infringing substitutes, or may result in significant settlement costs. For example, litigation can involve substantial damages for infringement (and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees), and the court could prohibit us from selling or licensing our products unless the third party licenses rights to us, which it is not required to do at a commercially reasonable price or at all. If a license is available from a third party, we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our products. We may also have to redesign our products so they do not infringe third-party intellectual property rights, which may not be possible at all or may require substantial monetary expenditures and time, during which our products may not be available for manufacture, use, or sale.

In addition, patent applications in the United States and many international jurisdictions are typically not published until 18 months after the filing of certain priority documents (or, in some cases, are not published until

 

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they issue as patents) and publications in the scientific literature often lag behind actual discoveries. Thus, we cannot be certain that others have not filed patent applications or made public disclosures relating to our technology or our contemplated technology. A third party may have filed, and may in the future file, patent applications covering our products or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, depending on whether the timing of the filing date falls under certain patent laws, we may have to participate in a priority contest (such as an interference proceeding) declared by the United States Patent and Trademark Office, to determine priority of invention in the United States. For example, in October 2015, Patent Interference No. 106,037 was declared by the Patent Trial and Appeal Board, or the PTAB, between our U.S. Patent No. 8,821,941, which is directed to treating hair follicles with plasmonic particles, and U.S. Patent Application No. 13/789,575, which lists Massachusetts General Hospital, or GHC, as assignee. Although the PTAB entered judgment against GHC in October 2016, GHC has filed an appeal with the U.S. Court of Appeals for the Federal Circuit. The costs of this and other proceedings could be substantial, and it is possible that such efforts would be unsuccessful if it is determined that the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. Although we are not currently subject to any claims from third parties asserting infringement of their intellectual property rights, in the future, we may receive claims from third parties asserting infringement of their intellectual property rights. Future litigation may be necessary to establish our intellectual property rights or to defend ourselves by determining the scope, enforceability and validity of third-party intellectual property rights. There can be no assurance with respect to the outcome of any current or future litigation brought by or against us, and the outcome of any such litigation could have a material adverse impact on our business, operating results and financial condition. Litigation is inherently unpredictable and outcomes are uncertain. Further, as the costs and outcome of these types of claims and proceedings can vary significantly, it is difficult to estimate potential losses that may occur. Accordingly, we are unable at this time to estimate the effects of these potential future lawsuits on our financial condition, operations or cash flows.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

With respect to adverse proceedings in which we are currently involved (see “Business—Legal Proceedings”), we plan to vigorously protect our intellectual property rights. However as with all adverse proceedings, regardless of the merits of third-party claims, such proceedings are time-consuming and costly to litigate or settle, and may divert managerial attention and resources away from our business objectives. Successful pending claims against us could result in monetary liability and/or prevent us from operating our business, or portions of our business. Resolution of claims may require us to obtain rights to third-party intellectual property rights, which may be expensive to procure, or we may be required to cease using certain intellectual property altogether. These and other risks are inherent to adverse proceedings involving intellectual property.

 

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If we are unable to obtain, maintain and enforce intellectual property protection directed to our Topical by Design and/or Topical Photoparticle Therapy technology and any future technologies that we develop, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.

We have not pursued or maintained, and may not pursue or maintain in the future, patent protection for our products in every country or territory in which we may sell our products. In addition, we cannot be sure that any of our pending patent applications or pending trademark applications will issue or that, if issued, they will issue in a form that will be advantageous to us. The United States Patent and Trademark Office, or the USPTO, international patent offices or judicial bodies may deny or significantly narrow claims made under our patent applications and our issued patents may be successfully challenged, may be designed around, or may otherwise be of insufficient scope to provide us with protection for our commercial products. Further, the USPTO, international trademark offices or judicial bodies may deny our trademark applications and, even if published or registered, these trademarks may not effectively protect our brand and goodwill. Like patents, trademarks also may be successfully opposed or challenged.

We cannot be certain that the steps we have taken will prevent unauthorized use or unauthorized reverse engineering of our technology. Moreover, third parties may independently develop technologies that are competitive with ours and such competitive technologies may or may not infringe our intellectual property. The enforcement of our intellectual property rights also depends on the success of our legal actions against these infringers in the respective country or forum, but these actions may not be successful. As with all granted intellectual property, such intellectual property may be challenged, invalidated or circumvented, may not provide specific protection and/or may not prove to be enforceable in actions against specific alleged infringers.

The market for biopharmaceuticals and dermatological treatments is highly competitive and subject to rapid technological change. Our success depends, in part, upon our ability to maintain a competitive position in the development and protection of technologies and products for use in these fields and upon our ability to obtain, maintain and enforce our intellectual property rights in connection therewith. We seek to obtain and maintain patents and other intellectual property rights to restrict the ability of others to market products that misappropriate our technology and/or infringe our intellectual property to unfairly and illegally compete with our products. If we are unable to protect our intellectual property and proprietary rights, our competitive position and our business could be harmed, as third parties may be able to make, use, or sell products that are substantially the same as ours without incurring the sizeable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market. With respect to our Topical Photopartical Technology, under our exclusive supply and license agreement with nanoComposix, we are solely responsible for the prosecution of the licensed patent rights throughout the world, at our expense, and we have the first right to enforce within our licensed field and defend the licensed patent rights throughout the world, at our expense.

We use a combination of patents, trademarks, know-how, confidentiality procedures and contractual provisions to protect our proprietary technology. However, these protections may not be adequate and may not provide us with any competitive advantage. For example, patents may not issue from any of our currently pending or any future patent applications, and our issued patents and any future patents that may issue may not survive legal challenges to their scope, validity or enforceability, or provide significant protection for us.

If we or one of our current or future collaborators were to initiate legal proceedings against a third party to enforce a patent covering one of our lead product candidates or future product candidates, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO, even outside the context of

 

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litigation. The outcome following legal assertions of 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 and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.

Even if our patents are determined by a court to be valid and enforceable, they may not be interpreted sufficiently broadly to prevent others from marketing products similar to ours or designing around our patents. For example, third parties may be able to make product that are similar to ours but that are not covered by the claims of our patents. Third parties may assert that we or our licensors were not the first to make the inventions covered by our issued patents or pending patent applications. The claims of our issued patents or patent applications when issued may not cover our proposed commercial technologies or the future products that we develop. We may not have freedom to commercialize unimpeded by the patent rights of others. Third parties may have dominating, blocking, or other patents relevant to our technology of which we are not aware. There may be prior public disclosures or art that could be deemed to invalidate one or more of our patent claims. Further, we may not develop additional proprietary technologies in the future, and, if we do, they may not be patentable.

Patent law can be highly uncertain and involve complex legal and factual questions for which important principles remain unresolved. In the United States and in many international jurisdictions, policy regarding the breadth of claims allowed in patents can be inconsistent. The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, international courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and international legislative bodies. Those changes may materially affect our patents, our ability to obtain patents or the patents and patent applications of our licensors.

Patent reform legislation in the United States could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. For example, on September 16, 2011, the Leahy-Smith America Invents Act, or Leahy-Smith Act, was signed into law. The Leahy-Smith Act included a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The United States Patent and Trademark Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, only became effective on March 16, 2013. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, which could have a material adverse effect on our business and financial condition.

In addition, we have a number of international patents and patent applications, and expect to continue to pursue patent protection in many of the significant markets in which we intend to do business. The laws of some international jurisdictions may not protect intellectual property rights to the same extent as laws in the United States, and many companies have encountered significant difficulties in obtaining, protecting, and defending such rights in international jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in international jurisdictions, our business prospects could be substantially harmed. Varying filing dates in international countries may also permit intervening third parties to allege priority to certain technology.

Patent terms may be shortened or lengthened by, for example, terminal disclaimers, patent term adjustments, supplemental protection certificates, and patent term extensions. Patent term extensions and supplemental

 

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protection certificates, and the like, may be impacted by the regulatory process and may not significantly lengthen patent term. Non-payment or delay in payment of patent fees or annuities, delay in patent filings or delay in extension filing (including any patent term extension or adjustment filing), whether intentional or unintentional, may also result in the loss of patent rights important to our business. Certain countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of any patents.

In addition to the protection afforded by patents, we rely on confidentiality agreements to protect confidential information and proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. 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 cannot guarantee that we have entered into such agreements with each party that may have or have had access to our confidential information or proprietary technology and processes. We also seek to preserve the integrity and confidentiality of our data and other confidential information 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 detecting the disclosure or misappropriation of confidential information and enforcing a claim that a party illegally disclosed or misappropriated confidential information is difficult, expensive and time-consuming, and the outcome is unpredictable. Further, we may not be able to obtain adequate remedies for any breach. In addition, our confidential information may otherwise become known or be independently discovered by competitors, in which case we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. We may in the future rely on trade secret protection, which would be subject to the risks identified above with respect to confidential information.

Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we review our competitors’ products, and may in the future seek to enforce our patents or other rights against potential infringement. However, the steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. Any inability to meaningfully protect our intellectual property could result in competitors offering products that incorporate our product or service features, which could reduce demand for our products. In addition, we may need to defend our patents from third-party challenges, such as (but not limited to) interferences, derivation proceedings, re-examination proceedings, post-grant review, inter partes review, third-party submissions, oppositions, nullity actions, or other patent proceedings. We may need to initiate infringement claims or litigation. Adverse proceedings such as litigation can be expensive, time consuming and may divert the efforts of our technical and managerial personnel, which could in turn harm our business, whether or not we receive a determination favorable to us. In addition, in an infringement proceeding, a court or other judicial body may decide that the patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any litigation could put one or more of our patents at risk of being invalidated or interpreted narrowly. Some of our competitors may be able to devote significantly more resources to intellectual property litigation, and may have significantly broader patent portfolios to assert against us if we assert our rights against them. Further, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised during litigation.

We may not be able to correctly estimate or control our future operating expenses in relation to obtaining intellectual property, enforcing intellectual property and/or defending intellectual property, which could affect

 

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operating expenses. Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, including the costs of preparing, filing, prosecuting, defending, and enforcing patent and trademark claims and other intellectual property-related costs, including adverse proceedings (such as litigation) costs.

With respect to our Topical by Design technology, if we do not obtain rights to commercialize certain compounds, there is a risk that such rights will be exploited by another entity. As with all licenses to third parties in specific fields of use, there is a risk of impermissible exploitation by such third parties outside the licensed field.

With respect to our Topical Photoparticle Therapy technology, if the nanoComposix agreement is terminated or narrowed, we could lose intellectual property rights that may be material to our Topical Photoparticle Therapy products. This agreement may be terminated by nanoComposix for our nonpayment or material breach, in either case, after the opportunity to cure and final determination in arbitration, or for our failure to receive FDA regulatory approval to sell a licensed product by August 2022, or for our insolvency or bankruptcy, or if we or our affiliate or future sublicensee initiates or voluntarily joins as a party to any legal action that challenges the validity or enforceability of the nanoComposix licensed patent rights, or nanoComposix’s title thereto, or by joint written agreement. We may enter into additional licenses and agreements in the future and, as with all such arrangements, if we do not comply with obligations, we may suffer adverse consequences. Likewise, we are party to several agreements that although do not currently have a material impact on intellectual property, may become material if certain obligations are not fulfilled by any of the contracting parties.

Our intellectual property agreements with third parties may be subject to disagreements over contract interpretation, which could narrow the scope of our rights to the relevant intellectual property or technology or increase our financial or other obligations to our licensors.

Certain provisions in our intellectual property agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology, or affect financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact conceives or develops intellectual property that we regard as our own. Our assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.

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

We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and distraction to management and other employees.

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

Filing, prosecuting and defending patents on product candidates, including all of the licensed rights under our exclusive supply and license agreement with nanoComposix, in all countries throughout the world would be

 

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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 and other intellectual property protection, particularly those relating to biopharmaceuticals, 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.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or conflict with third-party rights. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. In addition, third parties may file first for our trademarks in certain countries. If they succeeded in registering such trademarks, and if we were not successful in challenging such third-party rights, we may not be able to use these trademarks to market our products in those countries. In such cases, over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then our marketing abilities may be impacted.

We have not yet registered trademarks for a commercial trade name for our lead product candidates in the United States or foreign jurisdictions and failure to secure such registrations could adversely affect our business.

We have not yet registered trademarks for a commercial trade name for our lead product candidates in the United States or any foreign jurisdiction, if approved. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

 

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If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

We may not be able to protect our proprietary information and technology adequately. Although we use reasonable efforts to protect our proprietary information, technology, and know-how, our employees, consultants, contractors and outside scientific advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our proprietary information, technology or know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect proprietary information, technology, and know-how. We rely, in part, on non-disclosure and confidentiality agreements with our employees, consultants and other parties to protect our proprietary information, technology, and know-how. These agreements may be breached and we may not have adequate remedies for any breach. Moreover, others may independently develop similar or equivalent proprietary information, and third parties may otherwise gain access to our proprietary knowledge.

Risks Related to Government Regulation

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval or other marketing authorizations for our product candidates, our business will be substantially harmed.

The time required to obtain approval or other marketing authorizations by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. Neither we nor any future collaborator is permitted to market SNA-120, SNA-125 or any future drug product candidates in the United States until we receive regulatory approval of an NDA from the FDA, nor can we or any future collaborator market SNA-001 or any future product candidates under the 510(k) clearance process in the United States until we receive clearance or marketing authorization from the FDA.

Prior to obtaining approval to commercialize SNA-120, SNA-125 and any other drug product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or foreign regulatory agencies, that such product candidates are safe and effective for their intended uses. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if we believe the nonclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. The FDA may also require us to conduct additional nonclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program. In addition, the FDA typically refers applications for novel drugs, like SNA-120 and potentially other of our future product candidates, to an advisory committee comprised of outside experts. The FDA is not bound by the recommendation of the advisory committee, but it considers such recommendation when making its decision.

If our pivotal trials for SNA-001 are successful, we expect to pursue FDA clearance of SNA-001 for the treatment of acne and the reduction of light-pigmented hair under the FDA’s 510(k) premarket notification process. Before we can market SNA-001 for these indications in the United States, we are required to obtain clearance from the FDA under Section 510(k) of the FDCA. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. Under certain conditions, a medical device is required to be received under pre-market approval, or PMA, application

 

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from the FDA. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on extensive data, including, but not limited to, technical, nonclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. However, some devices are automatically subject to the PMA pathway regardless of the level of risk they pose because they have not previously been classified into a lower risk class by the FDA. Manufacturers of these devices may request that FDA review such devices in accordance with the de novo classification procedure, which allows a manufacturer whose novel device would otherwise require the submission and approval of a PMA prior to marketing to request down-classification of the device on the basis that the device presents low or moderate risk. If the FDA agrees with the down classification based on a de novo submission, the FDA will authorize the device for marketing. This device type can then be used as a predicate device for future 510(k) submissions. The process of obtaining regulatory clearances or approvals, or completing the de novo classification process, to market a medical device can be costly and time consuming, and we may not be able to successfully obtain pre-market reviews on a timely basis, if at all.

If the FDA requires us to go through a lengthier, more rigorous examination for our products than we expect, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that SNA-001 or other future product candidates for which we pursue 510(k) clearance will require us to obtain approval through the PMA process, which is generally more costly and uncertain and can take from one to three years, or longer, from the time the application is submitted to the FDA until an approval is obtained. Further, even where a PMA is not required, we cannot assure you that we will be able to obtain 510(k) clearances with respect to such product candidates or modifications to previously cleared products.

The FDA or any foreign regulatory bodies can delay, limit or deny approval or clearance of our product candidates or require us to conduct additional nonclinical or clinical testing or abandon a program for many reasons, including:

 

    the FDA or the applicable foreign regulatory agency’s disagreement with the design or implementation of our clinical trials;

 

    negative or ambiguous results from our clinical trials or results that may not meet the level of statistical significance required by the FDA or comparable foreign regulatory agencies for approval;

 

    serious and unexpected drug-related side effects experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;

 

    our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that our product candidates are safe and effective for the proposed indication, or in the case of the 510(k) clearance process, that our product candidate is substantially equivalent to a predicate device;

 

    the FDA’s or the applicable foreign regulatory agency’s disagreement with the interpretation of data from nonclinical studies or clinical trials;

 

    our inability to demonstrate the clinical and other benefits of our product candidates outweigh any safety or other perceived risks;

 

    the FDA’s or the applicable foreign regulatory agency’s requirement for additional nonclinical studies or clinical trials;

 

    the FDA’s or the applicable foreign regulatory agency’s disagreement regarding the formulation, labeling or the specifications of our product candidates;

 

    the FDA’s or the applicable foreign regulatory agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or

 

    the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data insufficient for approval.

 

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

Even if we eventually complete clinical testing and receive approval of an FDA or foreign marketing application for our product candidates, the FDA or the applicable foreign regulatory agency may grant approval or other marketing authorization contingent on the performance of costly additional clinical trials, including post-market clinical trials, and/or the implementation of a REMS, in the case of SNA-120, SNA-125 and any other drug product candidates, which may be required to ensure safe use of the drug after approval. The FDA or the applicable foreign regulatory agency also may approve or authorize for marketing a product candidate for a more limited indication or patient population than we originally requested, and the FDA or applicable foreign regulatory agency may not approve or authorize the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Any delay in obtaining, or inability to obtain, applicable regulatory approval or other marketing authorization would delay or prevent commercialization of that product candidate and would materially adversely impact our business and prospects.

Moreover, obtaining FDA clearance under the FDA’s 510(k) clearance process can be expensive and uncertain, and generally takes from several months to several years, and generally requires detailed and comprehensive scientific and clinical data. Notwithstanding the expense, these efforts may never result in marketing authorization. Even if we were to obtain the requisite marketing authorization, it may not be for the uses we believe are important or commercially attractive, in which case we would not be permitted to market our product for those uses.

In order to market any product in the European Economic Area (which is composed of the 28 Member States of the European Union plus Norway, Iceland and Liechtenstein), or EEA, and many other foreign jurisdictions, separate regulatory approvals are required. In the EEA, medicinal products, such as SNA-120 and SNA-125, can only be commercialized after obtaining a Marketing Authorization, or MA. Before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

Our medical device product candidates must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix the Conformité Européene, or CE, mark to such products, without which they cannot be sold or marketed in the EEA. To demonstrate compliance with the essential requirements for such product candidates, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its product candidates with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, or a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity. As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed

 

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against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. If we are unable to demonstrate conformity of SNA-001 and our manufacturers with these requirements, or otherwise fail to remain in compliance with applicable European laws and directives, we would be unable to affix (or continue to affix) the CE mark to SNA-001, which would prevent us from selling SNA-001 within the EEA.

Further, based on our preliminary discussions with our Notified Body, the National Standards Authority of Ireland, SNA-001, when intended for the removal of light-pigmented hair, may currently not fall under the EU Medical Devices Directive but under EU Regulation (EC) 1223/2009 on cosmetic products, or the EU Cosmetics Products Regulation. As a result, SNA-001, when intended for removal of light-pigmented hair, may need to comply with the requirements of the EU Cosmetics Products Regulation, which are generally not more burdensome than those imposed by the Medical Devices Directive. However, this may change with the application of the new EU Medical Devices Regulation, which was adopted on April 5, 2017. The EU Medical Devices Regulation explicitly provides that high intensity electromagnetic radiation (e.g., infra-red, visible light and ultra-violet) emitting equipment intended for use on the human body, including coherent and non-coherent sources, monochromatic and broad spectrum, such as lasers and intense pulsed light equipment, for skin resurfacing, tattoo or hair removal or other skin treatment, falls under its scope. The EU Medical Devices Regulation will however not become fully applicable until three years from its entry into force, and it is not yet clear whether the inclusion within its scope of high intensity electromagnetic radiation emitting equipment for hair removal would result in SNA-001 (which is a topical product applied in combination with commercially available lasers) falling under the EU Medical Devices Regulation when intended for removal of light-pigmented hair.

The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatory approvals or to do so on a timely basis, and even if we do file we may not receive necessary approvals to commercialize our products in any market.

In addition, the FDA and other regulatory authorities may change their policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance or other marketing authorizations of our future products under development on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain approvals or marketing authorizations, increase the costs of compliance or restrict our ability to maintain any marketing authorizations we may have obtained. For example, as part of the Food and Drug Administration Safety and Innovation Act enacted in 2012, Congress enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are intended to clarify and improve medical device regulation both pre- and post-clearance and approval.

Modifications to our product candidates cleared under the 510(k) clearance process, if any, may require new 510(k) clearances or other marketing authorizations, and if we make modifications to such products without obtaining requisite marketing authorization, we may be required to cease marketing or recall the modified products until clearances or other marketing authorizations are obtained.

Any modification to a 510(k)-cleared product or a device authorized for marketing that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s

 

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decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We may make modifications or add features to any of our product candidates that are cleared under the 510(k) clearance process in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMA applications for modifications to our products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. Any delay or failure in obtaining required clearances or approvals for such changes would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Any of these actions would harm our operating results.

We intend to request a special protocol assessment, from the FDA relating to our planned Phase 3 program for SNA-120, and we cannot guarantee that the FDA will issue an agreement on the SPA. Even if we do obtain FDA’s agreement, an SPA would not guarantee approval of SNA-120 or any other particular outcome from regulatory review.

If we successfully complete our planned Phase 2b trial of SNA-120, we intend to request agreement from the FDA under a special protocol assessment, or SPA, for our planned Phase 3 clinical trials of SNA-120 in patients with pruritus associated with psoriasis vulgaris. The FDA’s SPA process is designed to facilitate the FDA’s review and approval of drugs by allowing the FDA to evaluate the proposed design and size of certain clinical trials that are intended to form the primary basis for determining a drug product’s efficacy. Upon specific request by a clinical trial sponsor, the FDA will evaluate the protocol and respond to a sponsor’s questions regarding, among other things, primary efficacy endpoints, trial conduct and data analysis, within 45 days of receipt of the request. The FDA ultimately assesses whether the protocol design and planned analysis of the trial are acceptable to support regulatory approval of the product candidate with respect to the effectiveness of the indication studied. All agreements and disagreements between the FDA and the sponsor regarding an SPA must be clearly documented in an SPA letter or the minutes of a meeting between the sponsor and the FDA.

However, an SPA agreement does not guarantee approval of a product candidate, even if the trial is conducted in accordance with the protocol. Moreover, even if the FDA agrees to the design, execution, and analysis proposed in protocols reviewed under the SPA process, the FDA may revoke or alter its agreement in certain circumstances. In particular, an SPA agreement is not binding on the FDA if public health concerns emerge that were unrecognized at the time of the SPA agreement, other new scientific concerns regarding product safety or efficacy arise, the sponsor fails to comply with the agreed upon trial protocols, or the relevant data, assumptions or information provided by the sponsor in a request for the SPA change or are found to be false or omit relevant facts. In addition, even after an SPA agreement is finalized, the SPA agreement may be modified, and such modification will be deemed binding on the FDA review division, except under the circumstances described above, if the FDA and the sponsor agree in writing to modify the protocol and such modification is intended to improve the study. The FDA retains significant latitude and discretion in interpreting the terms of the SPA agreement and the data and results from any study that is the subject of the SPA agreement.

There is no assurance that the FDA will agree with the design and size of any Phase 3 clinical program for which we request an SPA. Even if we do obtain agreement on an SPA, we cannot assure you that our planned Phase 3 clinical trial will succeed, will be deemed binding by the FDA under an SPA, if granted, or will result in any FDA approval for SNA-120. Moreover, if the FDA revokes or alters its agreement under an SPA, or interprets the data collected from the clinical trial differently than we do, the FDA may not deem the data sufficient to support an application for regulatory approval, which could materially adversely affect our business, financial condition and results of operations.

 

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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 or other marketing authorizations we obtain for our product candidates may be subject to limitations on the indicated uses for which the product may be marketed or the conditions of approval or marketing authorization, or contain requirements for potentially costly post-market testing and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a REMS as a condition of approval of our drug product candidates, such as SNA-120 and SNA-125, which could include requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority authorizes our product candidates for marketing, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for our product candidates 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 (including the QSR in the case of any of our product candidates cleared under the 510(k) clearance process), and GCP requirements for any clinical trials 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 to 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 or untitled letters or holds on clinical trials;

 

    refusal by the FDA to accept new marketing applications or supplements, approve or otherwise authorize for marketing pending applications or supplements to applications filed by us or suspension or revocation of approvals or other marketing authorizations;

 

    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. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and devices and to spur innovation, but its ultimate implementation is unclear. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

In addition, we cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, that requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new

 

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regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within the Office of Management and Budget, or OMB, on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one provisions and other previously issued executive orders relating to the review of federal regulations, however it is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

Our product candidates, if authorized for marketing, may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our product candidates, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, if such products are marketed, could have a negative impact on us.

With respect to any of our product candidates cleared under the 510(k) clearance process, we will be subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. There are similar reporting requirements for our drug product candidates, if and when they are approved. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in clearance of future products.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future. Recalls involving our product candidates, if and when they are cleared or approved or otherwise authorized for marketing, could be particularly harmful to our business, financial condition and results of operations.

Depending on the corrective action we take to redress a device product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals, clearances, or other marketing authorizations for the device before we may market or distribute the corrected device. Seeking such authorizations may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. If we obtain marketing authorizations and market our medical device product candidates, we may

 

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initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales.

We may be subject to healthcare laws and regulations relating to our business, and could face substantial penalties if we are determined not to have fully complied with such laws, which would have an adverse impact on our business.

Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors, customers and patients, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell and distribute our products for which we obtain marketing approval. Such laws include:

 

    the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a U.S. healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the U.S. federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;

 

    U.S. federal civil and criminal false claims laws and civil monetary penalties laws, including the civil False Claims Act, which, among other things, impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the U.S. government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the U.S. government;

 

    the U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

    HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and its implementing regulations, which also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without appropriate authorization by covered entities subject to the rule, such as health plans, healthcare clearinghouses and healthcare providers as well as their business associates that perform certain services for or on their behalf involving the use or disclosure of individually identifiable health information;

 

   

the U.S. Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics 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 government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires

 

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applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members;

 

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

 

    analogous state and non-U.S. laws and regulations, such as state anti-kickback and false claims laws, which may apply to our business practices, including, but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical and device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws and regulations that require manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and pricing information; and state and non-U.S. 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.

Efforts to ensure that our current and future business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities may conclude that our business practices, including our consulting and advisory board arrangements with physicians and other healthcare providers, some of whom receive stock options as compensation for services provided, do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory laws that may apply to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other U.S. healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired. If any of the above occur, it could adversely affect our ability to operate our business and our results of operations.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

In the U.S. and some non-U.S. jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively the Affordable Care Act, was enacted in the United States to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The law has continued the downward pressure on the pricing of medical items and services, especially under the Medicare

 

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program, and increased the industry’s regulatory burdens and operating costs. Among the provisions of the Affordable Care Act of importance to our potential product candidates are the following:

 

    an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents;

 

    an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States which, due to subsequent legislative amendments, has been suspended from January 1, 2016 to December 31, 2017, and, absent further legislative action, will be reinstated starting January 1, 2018;

 

    an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

    a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

 

    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 manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

    extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;

 

    expansion of eligibility criteria for Medicaid programs in certain states;

 

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

 

    a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;

 

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

 

    an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges and amendments to the Affordable Care Act in the future. The new Presidential Administration and U.S. Congress will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. It is uncertain the extent to which any such changes may impact our business or financial condition.

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. These changes include the Budget Control Act of 2011, which, among other things, resulted in reductions to Medicare payments to providers of 2% per fiscal year and will remain in effect through 2025; the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years; and the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, ended the use of the sustainable growth rate formula and provides for a 0.5% update to physician payment rates for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products.

 

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Individual states in the United States have also become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical product and medical device pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and medical devices to purchase and which suppliers will be included in their prescription drug and other healthcare programs.

We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved or cleared product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. 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 new requirements or policies, or if we are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

Risks Related to Our Common Stock and This Offering

Our stock price may be volatile and you may not be able to resell shares of our common stock at or above the price you paid.

The trading price of our common stock following this offering could be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this prospectus and others such as:

 

    results from, and any delays in, our clinical trials for our lead product candidates, or any other future clinical development programs;

 

    announcements of regulatory approval or disapproval of our current or any future product candidates;

 

    failure or discontinuation of any of our research and development programs;

 

    announcements relating to future licensing, collaboration or development agreements;

 

    delays in the commercialization of our current or any future product candidates;

 

    acquisitions and sales of new products, technologies or businesses;

 

    manufacturing and supply issues related to our product candidates for clinical trials or future product candidates for commercialization;

 

    quarterly variations in our results of operations or those of our future competitors;

 

    changes in earnings estimates or recommendations by securities analysts;

 

    announcements by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital commitments;

 

    developments with respect to intellectual property rights;

 

    our commencement of, or involvement in, litigation;

 

    changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;

 

    any major changes in our board of directors or management;

 

    new legislation in the United States relating to the sale or pricing of pharmaceuticals;

 

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    FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

    product liability claims or other litigation or public concern about the safety of our product candidates;

 

    market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors; and

 

    general economic conditions in the United States and abroad.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical, medical device and biotechnology stocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

An active, liquid and orderly market for our common stock may not develop, and you may not be able to resell your common stock at or above the public offering price.

Prior to this offering, there has been no public market for shares of our common stock, and an active public market for our shares may not develop or be sustained after this offering. We and the representatives of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, an active trading market may not develop following the consummation of this offering or, if it is developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses, applications, or technologies using our shares as consideration.

If securities or industry analysts do not publish research or reports about our business, or if they 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. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, 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 our clinical trials and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to 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.

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

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading

 

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market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock before giving effect to this offering. Accordingly, if you purchase our common stock in this offering, you will incur immediate substantial dilution of approximately $         per share, based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover of this prospectus, and our pro forma net tangible book value as of March 31, 2017. In addition, following this offering, purchasers in this offering will have contributed approximately     % of the total gross consideration paid by stockholders to us to purchase shares of our common stock, through March 31, 2017, but will own only approximately     % of the shares of common stock outstanding immediately after this offering. Furthermore, if the underwriters exercise their option to purchase additional shares, or outstanding options and warrants are exercised, you could experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section titled “Dilution.”

If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.

We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, our stock price may decline.

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.

Prior to this offering as of May 31, 2017, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially owned approximately 36.0% of our voting stock and, upon the closing of this offering, that same group will hold approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options). Therefore, even after this offering these stockholders will have the ability to influence us through this ownership position. 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.

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

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the

 

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trading price of our common stock could decline. Based upon the number of shares outstanding as of May 31, 2017, upon the closing of this offering, we will have outstanding a total of              shares of common stock, assuming no exercise of the underwriters’ overallotment option. Of these shares, approximately              shares of our common stock, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable, without restriction, in the public market immediately following this offering.

The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, as of May 31, 2017, up to approximately 91.1 million additional shares of common stock will be eligible for sale in the public market, approximately 32.4 million of which shares are held by directors, executive officers and other affiliates and will be subject to Rule 144 under the Securities Act. J.P. Morgan Securities LLC and Cowen and Company, LLC may, however, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

In addition, as of May 31, 2017, approximately 6.7 million shares of common stock that are either subject to outstanding options or reserved for future issuance under our equity incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

After this offering, the holders of approximately 81.3 million shares of our common stock, or approximately 89.2% of our total outstanding common stock as of May 31, 2017, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to vesting schedules and to the lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.

Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. We currently expect to use substantially all of the net proceeds of this offering to fund the clinical development of SNA-120 through top-line results in our Phase 2b trial, preclinical and clinical studies for SNA-125 through receipt of proof of concept data in each of atopic dermatitis and psoriasis, our ongoing pivotal clinical trials for SNA-001 through receipt of top-line results, internal research and development expenses and for working capital and general corporate purposes. However, our use of these proceeds may differ substantially from our current plans. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.

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

We have incurred substantial losses during our history and do not expect to become profitable in the near future, and we may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. 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 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research and development tax credits) to offset its post-change income or taxes may be limited. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of this offering and/or subsequent shifts in our

 

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stock ownership (some of which shifts are outside our control). As a result, if we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income could be subject to limitations. Similar provisions of state tax law may also apply. As a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect immediately prior to the consummation of this offering will contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions will include the following:

 

    a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

 

    no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

    the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

    the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

    the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

 

    the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;

 

    a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

    the requirement that a special meeting of stockholders may be called only by the chief executive officer or the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

    advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction. For a description of our capital stock, see the section titled “Description of Capital Stock.”

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

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In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws to be effective immediately prior to the completion of this offering and our indemnification agreements that we have entered into with our directors and officers provide that:

 

    We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.

 

    We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.

 

    We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.

 

    We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.

 

    The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.

 

    We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

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

Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

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

We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future. Since we do not intend to pay dividends, your ability to receive a return on your investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

    our expectations regarding the potential market size and size of the potential patient populations for our product candidates, if approved or cleared for commercial use;

 

    our clinical and regulatory development plans for our product candidates;

 

    our expectations with regard to our platform technologies and our ability to utilize these platforms to discover, develop and advance additional product candidates;

 

    the timing of commencement of future nonclinical studies and clinical trials and research and development programs;

 

    our ability to acquire, discover, develop and advance product candidates into, and successfully complete, clinical trials;

 

    our intentions and our ability to establish collaborations and/or partnerships;

 

    the timing or likelihood of regulatory filings and approvals or clearances for our product candidates;

 

    our commercialization, marketing and manufacturing capabilities and expectations;

 

    our intentions with respect to the commercialization of our product candidates;

 

    the pricing and reimbursement of our product candidates, if approved;

 

    the implementation of our business model and strategic plans for our business, product candidates and technology platforms, including additional indications for which we may pursue;

 

    the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates, including the projected terms of patent protection;

 

    estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital;

 

    our use of proceeds from this offering;

 

    our future financial performance;

 

    developments and projections relating to our competitors and our industry, including competing therapies and procedures; and

 

    other risks and uncertainties, including those listed under the caption “Risk Factors.”

These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and

 

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elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find More Information.”

 

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INDUSTRY AND MARKET DATA

This prospectus contains estimates, projections and other information concerning our industry, our business, and the markets for our product candidates, including data regarding the estimated patient population and market size for our product candidates, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of              shares of common stock in this offering will be approximately $         million at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that net proceeds will be approximately $         million at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $         million, assuming the assumed initial public offering price stays the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

We currently expect to use our net proceeds from this offering, together with our existing cash, as follows:

 

    approximately $         million to fund the clinical development of SNA-120 through top-line results in our Phase 2b trial;

 

    approximately $         million to fund our preclinical and clinical studies for SNA-125 through receipt of proof of concept data in each of atopic dermatitis and psoriasis;

 

    approximately $         million to fund our ongoing pivotal clinical trials for SNA-001 through receipt of top-line results; and

 

    the balance to fund internal research and development expenses and for working capital and general corporate purposes.

However, due to the uncertainties inherent in the clinical development and regulatory approval process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes. As such, our management will retain broad discretion over the use of the net proceeds from this offering. The amounts and timing of our expenditures will depend upon numerous factors, including (i) the time and cost necessary to advance our product candidates through our ongoing and planned nonclinical studies and clinical trials; (ii) the time and cost associated with our research and development activities; (iii) our ability to obtain regulatory approval or clearance for and subsequently commercialize our product candidates; and (iv) the time and cost necessary to develop nonclinical and clinical supplies and a commercial-scale manufacturing process for product candidates, as well as the infrastructure to commercialize our product candidates.

We believe that our existing cash, together with the net proceeds from this offering, will be sufficient to fund our planned operations for at least 12 months following the date of this offering. Following this offering, we will require substantial capital in order to initiate our Phase 3 program for SNA-120 and our clinical program of SNA-125, as well as to complete the clinical development, seek regulatory approval or clearance and commercialize any of our current product candidates, as well as complete the nonclinical and clinical

 

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development of any additional product candidates we choose to pursue. For additional information regarding our potential capital requirements, see “We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts” under the heading “Risk Factors.”

Pending the use of the proceeds from this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities, certificates of deposit or government securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of March 31, 2017:

 

    on an actual basis;

 

    (i) our issuance and sale, during April 2017, of 17,524,469 shares of our Series B Preferred Stock for cash consideration of $36,531,508.08; (ii) the conversion of an aggregate of $3,940,363.62 in outstanding principal plus accrued but unpaid interest on convertible notes outstanding as of March 31, 2017 into 2,223,807 shares of our Series B Preferred Stock, which occurred during April 2017 in connection with our Series B Preferred Stock financing; (iii) the automatic conversion of all shares of our convertible preferred stock outstanding at March 31, 2017, together with the shares of Series B Preferred Stock we issued during April 2017, including shares issued in connection with the related conversion of our convertible notes, into an aggregate of 75,411,442 shares of our common stock, which will be effective immediately prior to the consummation of this offering; and (iv) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering; and

 

    on a pro forma as adjusted basis to give further effect to the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this information together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     (unaudited)
March 31, 2017
 
     Actual     Pro Forma     Pro
Forma, as
Adjusted (1)
 
    

(in thousands, except share and per
share data)

 

Cash

   $ 6,843     $ 43,375     $               
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Convertible preferred stock, par value $0.0001 per share: 88,136,785 shares authorized, 55,663,166 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     59,517       —      

Preferred stock, par value of $0.0001 per share: no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

     —         —      

Common stock, $0.0001 par value per share: 120,531,317 shares authorized, 15,397,222 shares issued and outstanding, actual; 120,531,317 shares authorized, 90,808,664 shares issued and outstanding, pro forma; and 300,000,000 shares authorized,              shares issued and outstanding, pro forma as adjusted(2)

     1       9    

Additional paid-in capital

     (907     99,285    

Accumulated other comprehensive income

     405       405    

Accumulated deficit

     (45,459     (46,076  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     13,557       53,623    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 58,166     $ 97,988     $  
  

 

 

   

 

 

   

 

 

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) the amount of cash, additional paid-in capital, total

 

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  stockholders’ equity and total capitalization by approximately $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $        , assuming the assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus) remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(2) Shares of common stock issued and outstanding, actual, pro forma and pro forma as adjusted, includes 4,017,260 shares of restricted common stock that were unvested at March 31, 2017.

The outstanding share information in the table above excludes the following:

 

    3,935,037 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2017 having a weighted-average exercise price of $0.47 per share;

 

    2,057,608 shares of common stock reserved for issuance pursuant to future awards under our 2010 Equity Incentive Plan, as amended, as of March 31, 2017, which will become available for issuance under our 2017 Incentive Award Plan after consummation of this offering;

 

                 shares of common stock reserved for issuance pursuant to future awards under our 2017 Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock; and

 

                 shares of common stock reserved for issuance pursuant to future awards under our 2017 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the effectiveness of the registration statement to which this prospectus relates.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of our common stock after this offering. As of March 31, 2017, we had a historical net tangible book value of $(39.1) million, or $(2.54) per share of common stock. Our net tangible book value represents total tangible assets less total liabilities all divided by the number of shares of common stock outstanding on March 31, 2017, including 4,017,260 shares of restricted common stock that were unvested at March 31, 2017. Our pro forma net tangible book value as of March 31, 2017, before giving effect to this offering, was $1.0 million, or $0.01 per share of our common stock. Pro forma net tangible book value, before the issuance and sale of shares in this offering, includes 4,017,260 shares of restricted common stock that were unvested at March 31, 2017 and gives effect to:

 

    our issuance and sale, during April 2017, of 17,524,469 shares of our Series B Preferred Stock for cash consideration of $36,531,508;

 

    the conversion of an aggregate of $3,940,364 in outstanding principal plus accrued but unpaid interest on convertible notes outstanding as of March 31, 2017 into 2,223,807 shares of our Series B Preferred Stock, which occurred during April 2017 in connection with our Series B Preferred Stock financing;

 

    the automatic conversion of all shares of our convertible preferred stock outstanding at March 31, 2017, together with the shares of Series B Preferred Stock we issued during April 2017, including shares issued in connection with the related conversion of our convertible notes, into an aggregate of 75,411,442 shares of our common stock, which will be effective immediately prior to the consummation of this offering; and

 

    the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering.

After giving effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2017 would have been approximately $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to new investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $               

Historical net tangible book value per share as of March 31, 2017

   $ (2.54  

Pro forma increase in net tangible book value per share

     2.55    
  

 

 

   

Pro forma net tangible book value per share as of March 31, 2017

     0.01    

Increase in pro forma net tangible book value per share attributable to new investors

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution per share to new investors participating in this offering

     $  
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value as of March 31, 2017 after this offering by approximately $        million, or approximately $        per share, and would decrease (increase) dilution to investors in this offering by approximately $        per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of

 

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1,000,000 in the number of shares we are offering would increase (decrease) our pro forma as adjusted net tangible book value as of March 31, 2017 after this offering by approximately $        million, or approximately $        per share, and would decrease (increase) dilution to investors in this offering by approximately $        per share, assuming the assumed initial public offering price per share remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters fully exercise their option to purchase additional shares, pro forma as adjusted net tangible book value after this offering would increase to approximately $        per share, and there would be an immediate dilution of approximately $        per share to new investors.

To the extent that outstanding options with an exercise price per share that is less than the pro forma as adjusted net tangible book value per share are exercised, new investors will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following table shows, as of March 31, 2017, on a pro forma as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus), before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us (in thousands, except share and per share amounts and percentages):

 

     Shares Purchased     Total Consideration     Average
Price Per

Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

               $                            $               

Investors participating in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $        100   $  

The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 2017 and excludes the following:

 

    3,935,037 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2017 having a weighted-average exercise price of $0.47 per share;

 

    2,057,608 shares of common stock reserved for issuance pursuant to future awards under our 2010 Equity Incentive Plan, as amended, as of March 31, 2017, which will become available for issuance under our 2017 Incentive Award Plan after consummation of this offering;

 

                 shares of common stock reserved for issuance pursuant to future awards under our 2017 Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock; and

 

                 shares of common stock reserved for issuance pursuant to future awards under our 2017 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the effectiveness of the registration statement to which this prospectus relates.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

The following unaudited pro forma combined financial information is based on the historical financial statements of Sienna Biopharmaceuticals, Inc. and Creabilis Holdings Limited (“Creabilis”) after giving effect to our acquisition of Creabilis described in Note 4 to our audited financial statements for the year ended December 31, 2016.

The unaudited pro forma combined statement of operations for the year ended December 31, 2016 is presented as if our acquisition of Creabilis occurred on January 1, 2016.

We acquired Creabilis on December 6, 2016, and, from that date our consolidated financial statements include the operations of Creabilis. The transaction has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed have been recorded at fair value, including the recognition of acquired in-process research and development (“IPR&D”), a related deferred tax liability and contingent consideration, representing the liability for the agreement to pay future milestones and potential one-time royalties. Any excess of the consideration transferred over the fair values of net assets acquired has been recorded as goodwill. The fair values of current assets and liabilities approximated their book or payoff value. We utilized a third party valuation firm to assist in the determination of the fair values of acquired IPR&D asset and contingent consideration liability, which were determined using several significant unobservable inputs for projected cash flows and a discount rate commensurate with our cost of capital and expectation of the revenue growth for products based on their life cycle stage.

The unaudited pro forma combined financial information is not intended to represent or be indicative of our consolidated results of operations that we would have reported had the Creabilis acquisition been completed as of the date presented, and should not be taken as a representation of our future consolidated results of operations. Pro forma adjustments reflected in the pro forma income statement are based on items that are factually supportable and directly attributable to the transaction. Any nonrecurring items included in the Sienna or the Creabilis historical consolidated financial statements have not been eliminated. Pro forma adjustments relate to nonrecurring interest expense, as described in Note (b).

The unaudited pro forma combined financial information does not reflect any operating efficiencies and/or cost savings that we may achieve with respect to combining the companies. The following unaudited financial information should be read with the accompanying notes, the financial statements of Creabilis and the notes thereto included elsewhere in this prospectus and the financial statements of Sienna Biopharmaceuticals, Inc. and the notes thereto included elsewhere in this prospectus.

 

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Sienna Biopharmaceuticals, Inc.

Unaudited Pro Forma Combined Statement of Operations

For the Year Ended December 31, 2016

(in thousands, except per share data)

 

     Sienna
Biopharmaceuticals,
Inc.
    Creabilis
(d)
    Pro Forma
Adjustments
           Pro Forma
Combined
       

Revenue

   $ —       $ —       $ —          $ —      
  

 

 

   

 

 

   

 

 

      

 

 

   

Operating Expenses:

             

Research and development

     10,993       582       —            11,575    

General and administrative

     9,696       3,731       —            13,427       (a
  

 

 

   

 

 

   

 

 

      

 

 

   

Total operating expenses

     20,689       4,313       —            25,002    
  

 

 

   

 

 

   

 

 

      

 

 

   

Loss from operations

     (20,689     (4,313     —            (25,002  

Other income

     95       —         —            95    

Interest and other expense

     (568     (4,829     4,829        (b     (568  
  

 

 

   

 

 

   

 

 

      

 

 

   

Net loss before taxes

     (21,162     (9,142     4,829          (25,475  

Taxation

     —         98       —            98    
  

 

 

   

 

 

   

 

 

      

 

 

   

Net loss

   $ (21,162   $ (9,044   $ 4,829        $ (25,377  
  

 

 

   

 

 

   

 

 

      

 

 

   

Loss per common share—basic and diluted

   $ (2.13          $ (2.55  

Weighted average number of common shares—basic and diluted

     9,944,000              9,944,000       (c

 

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Sienna Biopharmaceuticals, Inc.

Notes to Unaudited Pro Forma Combined Statement of Operations

Note 1—Basis of presentation

The unaudited pro forma combined statements of operations for the year ended December 31, 2016 is based on the historical financial statements of Sienna Biopharmaceuticals, Inc. and Creabilis, as prepared in accordance with International Financial Reporting standards (“IFRS”) as issued by the International Accounting Standards Board, after giving effect to our acquisition of Creabilis described in Note 4 to our financial statements for the year ended December 31, 2016.

We account for business combinations pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 805, Business Combinations. In accordance with ASC 805, the Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired.

The unaudited pro forma combined financial information is not intended to represent or be indicative of our results of operations or financial position that would have been reported had the acquisition been completed as of the date presented, and should not be taken as a representation of our future consolidated results of operations or financial position. The unaudited pro forma combined financial information does not reflect any operating efficiencies and/or cost savings that we may achieve with respect to the combined companies.

For purposes of these unaudited combined pro forma statements of operations, the acquisition of Creabilis is assumed to have occurred on January 1, 2016. The pro forma statement of operations for the year ended December 31, 2016 combined the results of Creabilis from January 1, 2016 through December 5, 2016 (prior to our acquisition on December 6, 2016) and our results for the year ended December 31, 2016.

Note 2—Pro forma adjustments

The pro forma adjustments are based on our preliminary estimates and the following adjustments have been reflected or noted in the unaudited pro forma combined financial information:

 

  (a) Includes one-time non-recurring transaction costs of $1.9 million associated with the acquisition.

 

  (b) Reflects the removal of interest expense related to Creabilis’ borrowings and convertible notes payable to third parties of $4.8 million. These notes were fully satisfied as a result of the acquisition.

 

  (c) There was no adjustment to weighted average shares, basic and diluted, as we issued 8,263,097 shares of Series A-3 convertible preferred stock, which is excluded from the calculation of basic and diluted shares as the impact would be anti-dilutive.

 

  (d) Represents Creabilis’ results of operations for the period from January 1, 2016 to December 5, 2016 (prior to our acquisition on December 6, 2016), as converted from GBP to USD using the average exchange rate for the period of 1.35585, with no GAAP to IFRS adjustments to net loss required. The Creabilis operating loss under IFRS, or total operating expenses in GAAP format, has been allocated to research and development and general and administrative operating expenses in a manner consistent with GAAP reporting. Additionally, finance costs in the IFRS format are included in interest and other expense in the GAAP format. Creabilis became a wholly owned subsidiary after Sienna’s acquisition on December 6, 2016.

 

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     1 Jan 16 -
5 Dec 16
£‘000
IFRS (i)
         1 Jan 16 -
5 Dec 16
£‘000
US GAAP
(ii)
    1 Jan 16 -
5 Dec 16
$‘000
US GAAP
(iii)
 

Employee costs

     (752       

Legal, professional and accountancy costs

     (1,299       

Depreciation

     (6       

Other operating costs

     (928       

Other operating income

     8         

Other gains/(losses)—net

     (203       
     Operating expenses     
     Research and development      429       582  
     General and administrative      2,751       3,731  
  

 

 

      

 

 

   

 

 

 

Group operating loss

     (3,180   Total operating expenses      (3,180     (4,313
  

 

 

      

 

 

   

 

 

 

Finance costs

     (3,562       

Finance income

     —           
  

 

 

      

 

 

   

 

 

 

Net finance costs

     (3,562   Interest and other expense      (3,562     (4,829
  

 

 

      

 

 

   

 

 

 

Loss before taxation

     (6,742   Net loss before taxes      (6,742 )     (9,142 )

Taxation

     73     Taxation      73       98  
  

 

 

      

 

 

   

 

 

 

Loss for the period

     (6,669   Net loss      (6,669     (9,044
  

 

 

      

 

 

   

 

 

 

 

(i) The Creabilis financial information has been extracted from the Creabilis financial statements for the period from January 1, 2016 to December 5, 2016.
(ii) The Creabilis financial information has been re-presented based on Sienna’s accounting policies and presentations. There are no differences between US GAAP and IFRS.
(iii) The Creabilis financial information presented in accordance with Sienna’s accounting policies and presentations has been translated from GBP into USD at a rate of 1.35585.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected historical consolidated financial data below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the audited consolidated financial statements and related notes included elsewhere in this prospectus.

The selected consolidated statement of operations data for the years ended December 31, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and 2016 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected statement of operations data for the three months ended March 31, 2016 and 2017 and the selected balance sheet data as of March 31, 2017 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2017 and the results of operations for the three months ended March 31, 2016 and 2017.

Our historical results are not necessarily indicative of our future results and results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the full year.

 

     Year Ended
December 31,
    (unaudited)
Three Months Ended
March 31,
 
     2015     2016     2016     2017  
    

(in thousands, except share and per share data)

 

Consolidated Statement of Operations Data:

        

Operating expenses:

        

Research and development

   $ 2,407     $ 10,993     $ 1,935     $ 4,917  

General and administrative

     8,703       9,696       1,994       4,076  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,110       20,689       3,929       8,993  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,110     (20,689     (3,929     (8,993

Other income

     363       95       92       5  

Interest and other expense

     (547     (568  

 

—  

 

 

 

(1,165

  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before taxes

     (11,294     (21,162     (3,837     (10,153

Income tax benefit

     —         —         —         46  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,294   $ (21,162   $ (3,837   $ (10,107
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information:

        

Net loss, basic and diluted

   $ (1.13   $ (2.13   $ (0.39   $ (0.90
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average shares outstanding

     10,030,000       9,944,000       9,887,000       11,195,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss, basic and diluted (unaudited) (1)

     $ (0.32     $ (0.15
    

 

 

     

 

 

 

Basic and diluted pro forma weighted average shares outstanding (unaudited) (1)

       65,607,000         66,858,000  
    

 

 

     

 

 

 

 

(1) The pro forma net loss per share of common stock, basic and diluted, for the year ended December 31, 2016 and the three months ended March 31, 2017 reflects the conversion of all outstanding shares of our convertible preferred stock into shares of common stock immediately prior to the consummation of this offering. The pro forma net loss per share of common stock, basic and diluted, does not give effect to the issuance of shares from the proposed initial public offering nor do they give effect to potential dilutive securities where the impact would be anti-dilutive.

 

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     As of December 31,      (unaudited)
As of March 31,
 
     2015      2016      2017  
    

(in thousands)

 

Consolidated Balance Sheet Data:

        

Cash

   $ 4,962      $ 9,091      $ 6,843  

Working capital

     4,631        640        (5,695

Total assets

     5,754        62,377        61,456  

Notes payable, net of discount

     —          —          3,290  

Convertible preferred stock

     20,350        59,517        59,517  

Accumulated deficit

     14,190        35,352        45,459  

Total stockholders’ equity

     4,051        22,117        13,557  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a clinical-stage biopharmaceutical company focused on bringing innovations in biotechnology to the discovery, development and commercialization of first-in-class, targeted, topical products in medical dermatology and aesthetics. Our objective is to develop our multi-asset pipeline of topical therapies that enhance the health, appearance and quality of life of dermatology patients. We are advancing multiple dermatology product candidates from our Topical by Design™ platform, all of which are designed to be suitable for chronic administration in patients with inflammatory skin diseases and other dermatologic and aesthetic conditions. Our lead candidate from this platform, SNA-120, is a first-in-class inhibitor of TrkA in Phase 2b clinical development for the treatment of pruritus, or itch, associated with psoriasis, as well as for psoriasis itself. Our second Topical by Design product candidate, SNA-125, is a dual JAK3/TrkA inhibitor being developed for the treatment of atopic dermatitis, psoriasis and pruritus. Additionally, we have advanced SNA-001, a silver particle treatment from our Topical Photoparticle Therapy™ platform, into pivotal clinical trials for both acne vulgaris and the reduction of unwanted light-pigmented hair. We currently retain global commercial rights to all of our product candidates.

Since our inception in 2010, we have invested a significant portion of our efforts and financial resources in research and development activities and the acquisition of Creabilis plc in December 2016. We have not generated any revenue from product sales and, to date, have funded our operations primarily through private placements of our preferred stock and debt securities. At March 31, 2017, we had cash of $6.8 million. In April 2017, we raised approximately $40.5 million in our Series B Preferred Stock financing, including the conversion of outstanding debt securities. We have incurred net losses in each year since inception, including net losses of $21.2 million and $11.3 million in the years ended December 31, 2016 and 2015, respectively, and $10.1 million and $3.8 million as of March 31, 2017 and 2016, respectively. As of March 31, 2017, we had an accumulated deficit of $45.5 million. We expect to continue to incur losses for the foreseeable future and expect to incur increased expenses as we advance our product candidates through clinical trials and regulatory submissions. We do not expect to generate revenue from product sales unless, and until, we obtain regulatory approval or clearance from the FDA for our product candidates. If we obtain regulatory approval or clearance for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. In addition, we expect that our expenses will increase substantially as we continue nonclinical studies and clinical trials for, and research and development of, our product candidates and maintain, expand and protect our intellectual property portfolio. As a result, we will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as potential collaboration agreements. Our failure to obtain sufficient funds on acceptable terms as and when needed could have a material adverse effect on our business, consolidated results of operations and financial condition.

We rely on third parties in the conduct of our nonclinical studies and clinical trials and for manufacturing and supply of our product candidates. We have no internal manufacturing capabilities, and we will continue to

 

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rely on third parties, many of whom are single-source suppliers, for our nonclinical and clinical trial materials, as well as the commercial supply of our products. In addition, we do not yet have a sales organization or commercial infrastructure. Accordingly, we will incur significant expenses to develop a sales organization or commercial infrastructure in advance of generating any product sales.

On December 6, 2016, we acquired our Topical by Design platform and related product candidates, SNA-120 and SNA-125, through our acquisition of Creabilis plc, or Creabilis, in exchange for an upfront payment of approximately $0.2 million in cash, 8,263,097 shares of Series A-3 Preferred Stock with a fair value of $11.2 million, the settlement of $6.7 million of liabilities, and certain contingent payments. Upon closing of the transaction, Creabilis became our direct wholly-owned subsidiary. We will be required to make contingent payments in cash and stock upon the achievement of certain development, approval and sales milestones. In particular, upon the achievement of certain specified development and approval milestones for SNA-120 and SNA-125, we are obligated to pay the former Creabilis shareholders up to an aggregate of $58.0 million, which consists of an aggregate of $25.0 million in cash and $33.0 million in shares of our common stock. In addition, upon the achievement of certain annual net sales milestone thresholds for qualifying products, including SNA-120 and SNA-125, we are required to pay the former Creabilis shareholders up to an aggregate of $80.0 million in cash as well as one-time royalties of less than 1% on net sales of qualified products that exceed these net sales thresholds in the year such threshold is achieved. Our first contingent payment of $5.0 million, subject to certain offsets, is payable in shares of our common stock at the then current stock price. This payment will become due upon the sooner to occur of the commencement of our additional Phase 2b trial for SNA-120 or December 2017. We currently anticipate this payment to become due in the fourth quarter of 2017. Based on current development timelines, we do not anticipate making any milestone payments during the year ended 2018. See “—Critical Accounting Policies and Use of Estimates—Creabilis Acquisition” below.

In October 2015, we entered into a Success Payment Agreement with certain of our existing stockholders, pursuant to which we agreed to make success payments to such stockholders. These success payments are based on certain specified threshold per share values of our common stock measured at specific times during the success payment period, which began on the effective date of the Success Payment Agreement and ends on the fifth anniversary of the Success Payment Agreement, in October 2020. Success payments are payable in cash or, in our sole discretion, common stock, and will be owed, if ever, in the event that the value of our common stock meets or exceeds certain specified share price thresholds on any of the following dates during the success payment period: (1) any date after the 90th day after we complete this initial public offering; (2) the date on which we sell, lease, transfer or exclusively license all or substantially all of our assets to another company; and (3) the date on which we merge or consolidate with or into another entity (other than a merger in which our pre-merger stockholders own a majority of the shares of the surviving entity). In the case of an initial public offering, success payments are triggered when the per share value of our common stock, as determined based on the average trading price of a share of our common stock over the consecutive 90-day period preceding the date the success payment is triggered, meets or exceeds specified per share thresholds. In the case of an asset sale, license or sale of the company, success payments are triggered when the per share value of our common stock, as determined based on the consideration paid in the transaction for each share of our stock, meets or exceeds specified per share thresholds. Each per share threshold is associated with a success payment, ascending from $10.0 million at $9.15 per share to $35.0 million at $12.20 per share to $60.0 million at $18.30 per share, in each case subject to adjustment for any stock dividend, stock split, combination of shares, or other similar events. These share price thresholds correspond to approximately $833.4 million, $1.1 billion and $1.7 billion, respectively, in market capitalization, based on the number of our shares outstanding as of May 31, 2017. Any previous success payments made to stockholders pursuant to the Success Payment Agreement are credited against the success payment owed as of any future valuation date. The first payout is $10.0 million, the second payout is $35.0 million (inclusive of the first $10.0 million success payment, if previously paid) and the third payout is $60.0 million (inclusive of any previous success payments, if made). The success payments paid to such stockholders will not exceed, in aggregate, $60.0 million.

 

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This offering will trigger the potential for success payments to the stockholders party to the Success Payment Agreement. However, during the first year following this offering we will not be required to make any success payments triggered by the per share market value of our common stock until the first anniversary of the closing of this offering (or a 90-day grace period following such anniversary, at our option if we are contemplating a capital market transaction during such grace period). In order to satisfy our obligations to make these success payments, if and when they are triggered, we may issue equity securities that may cause dilution to our stockholders, or we may use our existing cash or incur debt obligations to satisfy the success payment obligation in cash, which may adversely affect our financial position. In addition, these success payments may impede our ability to raise money in future public offerings of debt or equity securities or to obtain a third party line of credit.

Upon their issuance, the success payments did not require any future service to be provided by the recipients and as such, the success payments were accounted for under ASC 815, Derivatives and Hedging. Accordingly, we recorded an initial liability at fair value and will remeasure the liability each reporting period, with changes being recognized in the statement of operations. The fair value of the success payments liability was estimated based on a third-party valuation using a model which simulates the future movement of stock prices based on several key variables. The following variables were incorporated in the estimated fair value of the success payment liability: estimated term of the success payments, fair value of common stock, expected volatility, risk-free interest rate, probabilities and dates of anticipated exit events on the basis of which payments may be triggered. The computation of expected volatility was estimated using a combination of available information about the historical volatility of stocks of similar publicly-traded companies for a period matching the expected term assumption. Based on this analysis, we recorded a liability of $0.7 million upon execution of the Success Payments Agreement in October 2015 and reflected this amount as general and administrative expense for the year ended December 31, 2015. The change in the fair value of the liability through December 31, 2015 was de minimis. During the year ended December 31, 2016 and the three months ended March 31, 2017, we recorded other expense of $0.6 million and $1.1 million, respectively due to remeasurement of the liability.

In evaluating the fair value information, judgement is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates. Significant increases or decreases in the probabilities of meeting the common stock price thresholds or in the timing or likelihood of achieving the triggering events and other inputs could result in a significantly higher or lower fair value measurement, respectively.

Components of Our Results of Operations

Revenue

We have not generated any revenue from the sale of our products, and we do not expect to generate any revenue unless and until we obtain regulatory clearance or approval of, and commercialize, our product candidates.

Research and Development Expenses

Since our inception, we have focused significant resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. Research and development costs are expensed as incurred. These costs include direct program expenses, which are payments made to third parties that specifically relate to our research and development, such as payments to clinical research organizations, clinical investigators, manufacturing of clinical material, pre-clinical testing and consultants. In addition, employee costs (including salaries, payroll taxes, benefits, stock-based compensation and travel) for employees contributing to research and development activities are classified as research and development costs. We allocate direct external costs to our product candidates; internal costs are not allocated to specific product candidates.

 

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We expect to continue to incur substantial research and development expenses in the future as we develop our product candidates. In particular, we expect to incur substantial research and development expenses for the additional Phase 2b trial for SNA-120, the nonclinical studies and clinical trials for SNA-125 and the completion of our ongoing pivotal trials for SNA-001. We also expect to continue investing in our internal research and development efforts to develop new product candidates for dermatology and aesthetics.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of SNA-120, SNA-125 and SNA-001 or any future product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates. See “Risk Factors” for a discussion of the risks and uncertainties associated with our research and development projects.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation and travel. Other general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, and professional services fees for auditing, tax and general legal services. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for potential commercialization of our product candidates, increase our headcount and support our operations as a public company, including increased expenses related to legal, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, foreign subsidiary management, directors and officers liability insurance premiums and investor relations activities.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements included elsewhere in this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results.

Clinical Trial Accruals

As part of the process of preparing our consolidated financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors and consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. Our objective is to reflect the appropriate trial expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient

 

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progression and the timing of various aspects of the trial. We determine accrual estimates through financial models taking into account discussion with applicable personnel and outside service providers as to the progress or state of consummation of trials, or the services completed. During the course of a clinical trial, we adjust the rate of clinical expense recognition if actual results differ from our estimates. We make estimates of accrued expenses as of each balance sheet date in our consolidated financial statements based on the facts and circumstances known at that time. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low for any particular period. Through March 31, 2017, there have been no material adjustments to our prior period estimates of accrued expenses for clinical trials. Our clinical trial accrual is dependent in part upon the timely and accurate reporting of contract research organizations and other third-party vendors.

In-Process Research and Development and Goodwill

Intangible assets acquired in a business combination are recognized separately from goodwill and are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Intangible assets related to in-process research and development, or IPR&D, are treated as indefinite lived intangible assets and not amortized until they become definite lived assets, typically upon regulatory approval. At that time, we will determine the useful life of the asset and begin amortization. Intangible assets are reviewed for impairment at least annually or if indicators of potential impairment exist. There were no impairments of intangible assets for the year ended December 31, 2016 or for the three months ended March 31, 2017.

Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable assets acquired and liabilities assumed in a business combination. We evaluate goodwill for impairment annually and upon the occurrence of triggering events or substantive changes in circumstances that could indicate a potential impairment. An impairment loss is recognized when the fair value of the reporting unit to which the goodwill relates is below its carrying value for the difference between the fair value and its carrying amounts. There was no impairment of goodwill for the year ended December 31, 2016 or for the three months ended March 31, 2017.

Success Payments

We have certain payment obligations related to the Success Payment Agreement that we entered into with certain of our existing stockholders in October 2015. These success payments are based on certain specified threshold per share values of our common stock measured at specific times through October 2020. Success payments are payable in cash or, in our sole discretion, common stock, and will be owed, if ever, in the event that the value of our common stock meets or exceeds certain specified share price thresholds. The success payments paid to such stockholders will not exceed, in aggregate, $60.0 million.

Upon their issuance, the success payments did not require any future service to be provided by the recipients and as such, the success payments were accounted for under ASC 815, Derivatives and Hedging. Accordingly, we recorded an initial liability at fair value and will remeasure the liability each reporting period, with changes being recognized in the statement of operations (with decreases in the fair value of the liability recorded in other income and increases in the fair value of the liability recorded in interest and other expense). The fair value of the success payments liability was estimated based on a third-party valuation using a model which simulates the future movement of stock prices based on several key variables. The following variables were incorporated in the estimated fair value of the success payment liability: estimated term of the success payments, fair value of common stock, expected volatility, risk-free interest rate, probabilities and dates of anticipated exit events on the basis of which payments may be triggered. The computation of expected volatility was estimated using a combination of available information about the historical volatility of stocks of similar publicly-traded companies for a period matching the expected term assumption.

In determining the fair value of the success payments, judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques could

 

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result in materially different fair value estimates. Significant increases or decreases in the probabilities of meeting the common stock price thresholds or in the timing or likelihood of achieving the triggering events and other inputs could result in a significantly higher or lower fair value measurement, respectively.

Stock-Based Compensation

We measure employee and director stock-based compensation expense for all stock based awards at the grant date based on the fair value measurement of the award. The expense is recorded on a straight-line basis over the requisite service period, which is generally the vesting period, for the entire award. Expense is adjusted for actual forfeitures of unvested awards as they occur. Stock options issued to non-employees are accounted for in accordance with the provisions of ASC 505-50, Equity-Based Payments to Non-Employees, which requires valuing the stock options on their grant date and remeasuring such stock options at the current fair value at the end of each reporting period until they vest.

We calculate the fair value measurement of stock options using the Black-Scholes valuation model. In determining the fair value of stock options granted, the following weighted average assumptions were used in the Black-Scholes option-pricing model for awards granted for the year-ended December 31, 2016 and the three months ended March 31, 2017. There were no options granted during the year ended December 31, 2015.

 

     Year Ended
December 31,
   (unaudited)
Three Months Ended
March 31,
     2016    2017

Expected stock price volatility

   46.72–54.76%    61.90–64.09%

Expected dividend yield

   —%    —%

Expected term (in years)

   4–10    5.89–10

Risk-free interest rate

   1.12–2.42%    2.26–2.60%

Due to limited historical data, we estimate stock price volatility based on the actual volatility of comparable publicly traded companies over the expected life of the award. We have never paid, and do not expect to pay dividends in the foreseeable future. The expected term represents the average time that awards that vest are expected to be outstanding. For employee awards that have an early exercise provision, there is sufficient information to utilize four years as an expected term. For awards without an early exercise provision, there is not sufficient history of stock option exercises to estimate the expected term and, thus, we calculate the expected term using the simplified method, based on the midpoint between the average vesting date and the contractual term. For all non-employees, the expected term is equivalent to the contractual term of 10 years. The risk-free rate is based on the United States Treasury yield curve for the expected life of the option. The fair value of the common stock utilized in the fair value estimation of award arrangements has been determined by our board of directors, utilizing contemporaneous third party valuations as further discussed below. In accordance with ASU No. 2016-09, as early adopted, we elected to record forfeitures as they occur and do not adjust expense based on an estimated forfeiture rate.

We recorded noncash stock-based compensation expense for employee and nonemployee stock option grants for the years ended December 31, 2016 and 2015 and the three months ended March 31, 2017 and 2016, as follows:

 

     Year Ended
December 31,
     (unaudited)
Three Months Ended
March 31,
 
     2016      2015      2017      2016  
     (in thousands)      (in thousands)  

Research and development

   $ 104      $ 8      $ 34      $ 26  

General and administrative

     254        103        99        48  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 358      $ 111      $ 133      $ 74  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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In connection with our Series A-3 Preferred Stock financing in October 2015, our existing investors were given a one-time option to sell up to 50% of their shares of our capital stock back to us. Approximately $7.4 million of the proceeds from our Series A-3 Preferred Stock financing was used to repurchase an aggregate of 6,046,000 shares of common stock and preferred stock from these investors at a repurchase price of $1.22 per share. We recorded cash stock-based compensation expense of $4.1 million for the year ended December 31, 2015 related to these repurchases, which represents the aggregate amount paid for the repurchases in excess of the fair market value of the repurchased shares.

As of March 31, 2017, there was $1.5 million of unrecognized compensation expense related to unvested employee stock award agreements, which is expected to be recognized over a weighted-average period of approximately 2.86 years. For stock option awards subject to graded vesting, we recognize compensation cost on a straight-line basis over the service period for the entire award.

The 2010 Plan allows us to grant to employees the right to exercise stock options in exchange for cash before the requisite services are provided (e.g., before the award is vested under its original terms); however, such arrangements permit us to subsequently repurchase such shares at the exercise price if the employee ceases to be a service provider. Such an exercise is not substantive for accounting purposes. Therefore, the payment received for the exercise price is recognized as an early exercise liability in the consolidated balance sheets and will be transferred to common stock and additional paid-in capital as such shares vest. As of December 31, 2016 and March 31, 2017, 5,264,017 and 4,017,260 unvested shares were issued and outstanding, respectively. In connection with these unvested shares, we recorded an early exercise liability as of December 31, 2016 and March 31, 2017 of $0.8 million and $0.6 million, respectively, of which $0.4 million and $0.3 million is included in other current liabilities and $0.4 million and $0.4 million is included in other non-current liabilities in the consolidated balance sheet at December 31, 2016 and March 31, 2017, respectively. These shares are excluded from basic net loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature.

Common Stock Valuation

There are significant assumptions and estimates required in determining the fair value of our common stock. Due to the absence of an active market for our common stock, the fair value of our common stock was determined in good faith by our board of directors, with the assistance and upon the recommendation of management, based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, including:

 

    contemporaneous valuations of our shares of common stock;

 

    the prices of each of our series of preferred stock sold by us to outside investors in arm’s length transactions, and the rights, preferences and privileges of each of these series of preferred stock relative to our common stock;

 

    our consolidated results of operations, financial position and the status of our research and development efforts;

 

    the composition of our management team and board of directors;

 

    the material risks related to our business;

 

    the market performance of publicly traded companies in the life sciences and biotechnology sectors;

 

    the likelihood of achieving a liquidity event for the holders of our shares of common stock, such as a sale of the company or an initial public offering, given prevailing market conditions;

 

    the lack of marketability of our common stock; and

 

    external market conditions affecting the life sciences and biotechnology industry sectors.

 

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Although it is reasonable to expect that the completion of our initial public offering will increase the value of our common stock as a result of increased liquidity and marketability and the elimination of the liquidation preferences of our convertible preferred stock, the amount of additional value cannot be measured with precision or certainty. If we had made different assumptions than those described below, the fair value of the underlying common stock and amount of our stock-based compensation expense, net loss and net loss per share amounts would have differed. Following the closing of our initial public offering, the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date.

The following table summarizes the grant dates, number of underlying shares and related fair value of stock options granted to employees from January 1, 2016 through March 31, 2017. There were no stock options granted during the year ended December 31, 2015.

 

Date of Grant

   Number of
shares
underlying
option
grants
     Exercise
price per
share ($)
     Per share
estimated
fair value
of
common
stock ($)
 

January 27, 2016

     7,310,548        0.40        0.44  

March 8, 2016

     323,531        0.40        0.44  

June 2, 2016

     170,000        0.40        0.44  

October 5, 2016

     1,433,559        0.40        0.44  

March 13, 2017

     658,000        0.82        0.82  

The fair value of the shares of our common stock underlying our stock options was estimated on each grant date by our board of directors. In order to determine the fair value of our common shares underlying granted stock options, our board of directors considered, among other things, timely valuations of our common shares prepared by unrelated third-party valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The valuation of our common stock included contemporaneous valuation analyses to determine the then current fair value of our common stock. In performing the valuation analyses, key assumptions reflected in the calculations included the anticipated timing of a potential liquidity event, the estimated volatility of our common stock, and the discount for lack of marketability of our common stock.

In October 2015, we determined the valuation of our common stock with the assistance of an independent third-party firm utilizing the Precedent Transaction Method (“Backsolve”) relating to our Series A-3 Preferred Stock financing. The Backsolve method is a market approach that derives an implied total equity value from a transaction involving a company’s own securities. The price of a company’s security that was involved in a recent arms-length transaction is used as a reference point in an allocation of value. The Backsolve method requires considering the rights and preferences of each class of equity and solving for the total market value of invested capital that is consistent with a recent transaction in the company’s own securities, considering the rights and preferences of each class of equity. After estimating the total equity value, it is allocated to the various equity classes. The value allocation method used was the option-pricing model. We concluded the fair value of the common stock on a per share basis to be $0.40. This was the basis for the value of the stock options granted in 2016.

Subsequent to December 31, 2016, we reassessed the determination of the fair value of the common shares underlying the 9,237,638 stock options granted in 2016. As a result of the reassessment, we determined that the fair value of the common shares in 2016 increased from $0.40 per common share to $0.44 per common share, which was higher than the fair value per share as initially determined by the board of directors on the respective grant dates of January 27, 2016, March 8, 2016, June 2, 2016 and October 5, 2016. The increase to both

 

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recognized and unrecognized share-based compensation expense due to the use of this higher share price, was approximately $58,000 and $0.2 million, respectively.

During December 2016, after the Creabilis acquisition, we determined the valuation of our common stock with the assistance of an independent third-party. This valuation utilized a hybrid approach and considered the value under two distinct scenarios: Later Exit scenario and IPO scenario. To estimate the equity value to be allocated to each equity class outstanding under the Later Exit scenario, the current equity value is estimated at the valuation date and then allocated to the current equity value utilizing the Option Pricing Method at the valuation date. Under the IPO scenario, various factors were taken into consideration such as the recent acquisition of Creabilis and the acquired portfolio of drug candidates and the expectation to begin preparing for an IPO, to estimate the equity value to be allocated to each equity class outstanding. The aforementioned conclusions under the Later Exit and IPO Scenarios were probability adjusted to reflect the likelihood of occurrence. We concluded the fair value of the common stock on a per share basis to be $0.82. This was the basis for the value of the stock options granted in March 2017.

Creabilis Acquisition

In December 2016, we entered into a Share Purchase Agreement, or the Purchase Agreement, to acquire the entire issued share capital of Creabilis. Upon closing of the transaction, we obtained the Topical by Design platform and related product candidates, SNA-120 and SNA-125. Upon closing, Creabilis became our direct wholly-owned subsidiary in exchange for an upfront payment of approximately $0.2 million in cash, 8,263,097 shares of Series A-3 convertible preferred stock with a fair value of $11.2 million, the settlement of $6.7 million of liabilities and certain contingent payments up to an aggregate of $58.0 million in a combination of cash and stock upon the achievement of certain development and approval milestones. In addition, we are obligated to make certain contingent payments up to an aggregate of $80.0 million in cash upon the achievement of certain annual net sales thresholds and one time cash royalties of less than 1% of the amount by which annual net sales exceed each threshold.

Our first contingent payment relates to the commencement of our additional Phase 2b trial for SNA-120, pursuant to which we will become obligated to pay the former Creabilis shareholders $5.0 million, subject to offsets, in shares of our common stock at the then-current stock price. We currently anticipate this payment to become due in the fourth quarter of 2017.

The transaction has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed have been recorded at fair value, with the remaining purchase price recorded as goodwill. The fair values of current assets and liabilities approximated their book or payoff value. We utilized a third party valuation firm to assist in the determination of the fair values of acquired assets and liabilities, which are based on preliminary cash flow projections and other assumptions. The fair values of acquired intangible assets were determined using several significant unobservable inputs for projected cash flows and a discount rate commensurate with our cost of capital and expectation of the revenue growth for products based on their life cycle stage.

We acquired tangible assets consisting of cash of $0.1 million, prepaid expenses and other current assets of $0.3 million, and less than $0.1 million of property and equipment and financial investments and identifiable intangible assets of $42.3 million related to IPR&D. We assumed accounts payable of $0.2 million, accrued expenses of $0.4 million, accrued compensation of $0.3 million, and a deferred tax liability of $9.4 million related to the acquisition of the IPR&D assets in a non-taxable transaction. Accordingly, the net assets acquired amounted to $32.4 million.

The agreement to pay the future milestones and potential one-time royalties resulted in the recognition of contingent consideration, which was recognized at the inception of the transaction. Subsequent changes to the estimated amounts of contingent consideration to be paid will be recognized in the consolidated statement of

 

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operations. The fair value of the contingent consideration is based on preliminary cash flow projections, which are based on expected product sales, probabilities around the achievement of certain development, approval and sales milestones and other assumptions. Based on these assumptions, the fair value of the contingent consideration was determined to be $24.1 million at the date of acquisition and at December 31, 2016 and $25.5 million as of March 31, 2017. The fair value of the contingent consideration was determined by a third-party valuation firm by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate commensurate with our cost of capital and expectation of the revenue growth for products based on their life cycle stage.

We recorded a deferred tax liability for the non-deductible IPR&D intangible assets acquired which resulted in goodwill in the amount of $9.8 million. Goodwill will not be amortized but will be tested at least annually for impairment. No impairment has been recognized as of December 31, 2016 or as of March 31, 2017.

For the year ended December 31, 2016 and the three months ended March 31, 2017, the Creabilis net loss included in our consolidated statement of operations and net loss was $0.2 million and $0.4 million, respectively.

Net Operating Loss and Research and Development Carryforwards

As of December 31, 2016, we had deferred tax assets of $20.0 million and deferred tax liabilities of approximately $9.3 million. The deferred tax assets have been offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily composed of net operating loss, or NOL, tax carryforwards. As of December 31, 2016, we had federal and state NOL carryforwards of $11.2 million and foreign NOL carryforwards of $40.0 million available to potentially offset future taxable income. As of December 31, 2016, we also had federal research and development tax credit carryforwards of approximately $0.4 million available to potentially offset future federal income taxes. The federal and state NOL carryforwards and research and development tax credit carryforwards expire at various dates between 2030 and 2036. In general, if we experience a greater than 50 percentage point aggregate change in ownership of certain significant stockholders over a three-year period, or a Section 382 ownership change, utilization of our pre-change NOL or research and development credit carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended. Such limitations may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization and may be substantial. We have not conducted an assessment to determine whether there may have been a Section 382 ownership change. If we have experienced a Section 382 ownership change or if we experience a Section 382 ownership change as a result of this offering or future changes in our stock ownership, some of which changes are outside of our control, the tax benefits related to the NOL or research and development carryforwards may be limited or lost.

 

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Results of Operations

Comparison of the Three Months Ended March 31, 2017 and 2016

The following table sets forth our results of operations for the periods indicated:

 

     (unaudited)
Three Months Ended
March 31,
     Change  
     2017      2016      $      %  
     (in thousands, except percentages)  

Operating expenses:

     

Research and development

   $ 4,917      $ 1,935        2,982        154.1

General and administrative

     4,076        1,994        2,082        104.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     8,993        3,929        5,064        128.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (8,993      (3,929      (5,064      128.9  

Other income

     5        92        (87      (94.6

Interest and other expense

     (1,165      —          (1,165      *  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss before taxes

     (10,153      (3,837      (6,316      164.6  

Income tax benefit

     46        —          46        *  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (10,107    $ (3,837      (6,270      163.4
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Percentage not meaningful.

Research and development expenses

Research and development expenses were $4.9 million for the three months ended March 31, 2017, compared to $1.9 million for the three months ended March 31, 2016. Clinical trial costs and supplies increased by $2.2 million, headcount related costs such as wages, taxes and bonuses increased by $0.4 million, and manufacturing costs increased by $0.5 million.

General and administrative expenses

General and administrative expenses were $4.1 million for the three months ended March 31, 2017, compared to $2.0 million for the three months ended March 31, 2016. The increase of $2.1 million was primarily due to an increase in the fair value of the contingent consideration liability relating to the acquisition of Creabilis of $1.4 million. This liability relates to the additional amounts we agreed to pay based on the achievement of certain development, approval and sales milestones and is revalued at each balance sheet date based on a third party valuation. The change in the fair value at each balance sheet date is recorded as general and administrative expenses. See further discussion in the Notes to Unaudited Interim Condensed Consolidated Financial Statements. The additional increase relates to an increase of $0.5 million in personnel and related costs, an increase in outside services of $0.4 million for tax and audit fees, recruiting costs, market research studies and other consultants to perform various other administrative functions. These increases were offset in part by a $0.5 million decrease in legal fees.

Other income

Other income was $5,000 and $92,000 for the three months ended March 31, 2017 and 2016, respectively. The decrease in other income was primarily attributable to changes in the fair value of the success payment liability, and a one-time payment for clinical material during the first three months of 2016.

 

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Interest and other expense

Interest and other expense of $1.2 million for the three months ended March 31, 2017 related to a $1.1 million revaluation of the success payment liability and $0.1 million of amortization of the debt discount relating to the Series B Bridge Notes.

Income tax benefit

Income tax benefit for the three months ended March 31, 2017 was $46,000. The income tax benefit resulted from a tax liability established at March 31, 2017 relating to the beneficial conversion feature due to the 15% discount on conversion of the convertible notes that was bifurcated and allocated to additional paid-in capital. See further discussion in Note 8, “Convertible Notes” and Note 13, “Income Taxes” of our unaudited interim consolidated financial statements in this prospectus.

Comparison of the Years Ended December 31, 2016 and 2015

The following table sets forth our results of operations for the periods indicated:

 

     Year Ended
December 31,
     Change  
     2016      2015      $      %  
     (in thousands, except percentages)  

Operating expenses:

     

Research and development

   $ 10,993      $ 2,407      $ 8,586        356.7

General and administrative

     9,696        8,703        993        11.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     20,689        11,110        9,579        86.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (20,689      (11,110      (9,579      86.2  

Other income

     95        363        (268      (73.8

Interest and other expense

     (568      (547      (21      3.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (21,162    $ (11,294    $ (9,868      87.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses

Research and development expenses were $11.0 million for the year ended December 31, 2016, compared to $2.4 million for the year ended December 31, 2015. The increase of $8.6 million was primarily due to increases in headcount related expenses, ramp up of manufacturing costs, and expenses related to clinical trial materials to support our ongoing SNA-001 pivotal trial. Headcount related costs including wages, taxes, bonuses and travel expenses increased by $3.1 million. Clinical trial costs for SNA-001 increased by $3.7 million and manufacturing costs increased by $1.7 million.

General and administrative expenses

General and administrative expenses were $9.7 million for the year ended December 31, 2016, compared to $8.7 million for the year ended December 31, 2015. The increase of $1.0 million was due to an increase of $1.7 million in transaction costs associated with the Creabilis acquisition, a $1.6 million increase in personnel and related costs, and an increase in outside services of $2.6 million for legal, tax and audit fees, recruiting costs, market research studies and other administrative services. These increases were offset by $4.1 million of expense recorded in 2015 for a one-time repurchase of shares in excess of their fair market value, and $0.7 million related to recording the success payment liability.

Other income (expense)

Other income was $0.1 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively. The decrease of $0.3 million was due to a one-time payment received in 2015 for a non-refundable

 

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payment in connection with the negotiation of a potential agreement, which terminated without further commitment.

Interest and other expense of $0.5 million in the year ended December 31, 2015 was primarily the interest expense on the convertible promissory notes issued in three tranches in December 2014, May 2015 and August 2015, all of which converted into Series A-3 Preferred Stock in October 2015. Interest and other expense of $0.6 million in the year ended December 31, 2016 relates to the remeasurement of the success payment liabilities. See further discussion in Note 9, “Success Payment Liability” of the audited consolidated financial statements in this prospectus.

Liquidity, Capital Resources and Requirements

We have incurred operating losses and have an accumulated deficit as a result of ongoing efforts to develop our product candidates, including conducting nonclinical and clinical trials and providing general and administrative support for these operations. We had an accumulated deficit of $35.4 million and $45.5 million as of December 31, 2016 and March 31, 2017, respectively. We had net losses of $21.2 million and $11.3 million for the years ended December 31, 2016 and 2015, respectively, and $10.1 million and $3.8 million for the three months ended March 31, 2017 and 2016, respectively. We had net cash used in operating activities of $17.7 million and $10.0 million for the years ended December 31, 2016 and 2015, respectively, and net cash used in operating activities of $6.0 million and $2.7 million for the three months ended March 31, 2017 and 2016. We anticipate that operating losses and net cash used in operating activities will increase over the next several years as we further develop SNA-120 and SNA-125, move into later and more costly stages of product development, develop new product candidates, hire personnel and prepare for regulatory submissions and the commercialization of our product candidates.

We have historically financed our operations primarily through private placements of preferred stock and debt securities and will continue to be dependent upon equity and/or debt financing until we are able to generate positive cash flows from our operations. In January 2017, we entered into a note purchase agreement pursuant to which we issued, in two tranches, subordinated convertible promissory notes (the “Series B Bridge Notes”) in an aggregate principal amount of $3.9 million, with an annual interest rate of 6.0% and a maturity date of January 27, 2018. In April 2017, in connection with the issuance of Series B Preferred Stock, the entire outstanding principal under the Series B Bridge Notes, plus accrued interest, converted into 2,223,807 shares of Series B Preferred Stock. In April 2017, we issued an aggregate of 17,524,469 shares of our Series B Preferred Stock for aggregate proceeds to us of $36.5 million, excluding the shares of Series B Preferred Stock issued upon conversion of the Series B Bridge Notes described above.

We expect that our current capital resources will be sufficient to fund operations through at least the next 12 months based on our planned cash burn rate. We will need to raise substantial additional capital to fund our operations through the sale of our equity securities, incurring debt, entering into licensing or collaboration agreements with partners, grants or other sources of financing. There can be no assurance that sufficient funds will be available to us at all or on attractive terms when needed from these sources. If we are unable to obtain additional funding from these or other sources when needed it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose.

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

 

   

the scope, progress, results and costs of researching and developing our lead product candidates or any future product candidates, and conducting nonclinical studies and clinical trials, in particular our

 

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Phase 2b and planned Phase 3 pivotal clinical trials of SNA-120, our nonclinical studies of SNA-125 and our ongoing pivotal clinical trials for SNA-001;

 

    the timing of, and the costs involved in, obtaining regulatory approvals or clearances for our lead product candidates or any future product candidates;

 

    the number and characteristics of any additional product candidates we develop or acquire;

 

    the timing of any cash milestone payments to the former Creabilis shareholders if we successfully achieve certain predetermined milestones;

 

    the timing and amount of any success payments we elect to pay in cash to certain of our existing shareholders if the market price of our common stock meets or exceeds certain specified share price thresholds;

 

    the cost of manufacturing our lead product candidates or any future product candidates and any products we successfully commercialize, including costs associated with building our supply chain;

 

    the cost of commercialization activities if our lead product candidates or any future product candidates are approved or cleared for sale, including marketing, sales and distribution costs;

 

    the cost of building a sales force in anticipation of product commercialization;

 

    our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;

 

    any product liability or other lawsuits related to our products;

 

    the expenses needed to attract and retain skilled personnel;

 

    the costs associated with being a public company;

 

    the costs associated with maintaining subsidiaries in foreign jurisdictions;

 

    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including ongoing litigation costs related to SNA-001 and the outcome of this and any other future patent litigation we may be involved in; and

 

    the timing, receipt and amount of sales of any future approved or cleared products, if any.

Cash Flows Comparison of the Three Months Ended March 31, 2017 and 2016

The following table sets forth our cash flows for the periods indicated:

 

     (unaudited)
Three Months Ended
March 31,
 
     2017      2016  
     (in thousands)  

Net cash provided by (used in)

     

Operating activities

   $ (6,004    $ (2,725

Investing activities

     (50      (31

Financing activities

     3,912        4,947  

Effect of exchange rate changes on cash

     (106      —    
  

 

 

    

 

 

 

Net (decrease) increase in cash

   $ (2,248    $ 2,191  
  

 

 

    

 

 

 

Net Cash Used in Operating Activities

During the three months ended March 31, 2017, net cash used in operating activities was $6.0 million and consisted primarily of a net loss of $10.1 million, offset by the increase in fair value of both the success payment

 

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liability and the contingent consideration of $1.1 million and $1.4 million, respectively. In addition, there was a $1.6 million favorable change in accounts payable and other accrued liabilities. The increase in accounts payable and other accrued liabilities was due to our overall growth and increased research and development spending.

During the three months ended March 31, 2016, net cash used in operating activities was $2.7 million and consisted primarily of a net loss of $3.8 million, offset by a $1.2 million increase in accounts payable and other accrued liabilities. The increase related to increases in legal fees, additional consultants for audit services and an increase in clinical trial activities.

Net Cash Used in Investing Activities

During the three months ended March 31, 2017 and March 31, 2016 net cash used in investing activities was $50,000 and $31,000, respectively, and represented purchases of property and equipment.

Net Cash Provided by Financing Activities

During the three months ended March 31, 2017, net cash provided by financing activities was $3.9 million from the proceeds received from the Series B Bridge Notes.

During the three months ended March 31, 2016, net cash provided by financing activities was $4.9 million from proceeds received for the Series A-3 Preferred Stock financing prior to quarter end, preceding the issuance of the shares in the subsequent quarter.

Comparison of the Years Ended December 31, 2016 and 2015

Cash Flows

The following table sets forth our cash flows for the periods indicated:

 

     Year Ended
December 31,
 
     2016      2015  
     (in thousands)  

Net cash provided by (used in)

     

Operating activities

   $ (17,682    $ (9,979

Investing activities

     (7,059      (88

Financing activities

     28,842        14,620  

Effect of exchange rate changes on cash

     28        —    
  

 

 

    

 

 

 

Net increase in cash

   $ 4,129      $ 4,553  
  

 

 

    

 

 

 

Net Cash Used in Operating Activities

During the year ended December 31, 2016, net cash used in operating activities was $17.7 million and consisted primarily of a net loss of $21.2 million, a $2.9 million favorable change in accounts payable and other accrued liabilities and non-cash amounts related to stock-based compensation expense of $0.4 million. The increase in accounts payable and other accrued liabilities was due to accrued transaction costs of $1.2 million related to the acquisition of Creabilis, additional accruals of $0.7 million related to headcount related expenses as well as a $1.0 million increase in accounts payable relating to our overall growth and increased research and development spending.

During the year ended December 31, 2015, net cash used in operating activities was $10.0 million and consisted primarily of a net loss of $11.3 million, a $0.6 million increase in prepaid expenses and other current

 

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assets related to contract research organization pre-funding payments offset by a $0.7 million non-cash amount recorded for the fair value of the success payments and a $0.4 million non-cash amount relating to the conversion of notes plus a $0.7 million increase in accounts payable and other accrued liabilities, primarily related to an increase in accounts payable as a result of growth and the timing of payments.

Net Cash Used in Investing Activities

During the year ended December 31, 2016, net cash used in investing activities was $7.1 million, of which $6.8 million related to the purchase of Creabilis.

Net cash used in investing activities was $0.1 million during the year ended December 31, 2015 and represented purchases of property and equipment.

Net Cash Provided by Financing Activities

During the year ended December 31, 2016, net cash provided by financing activities was $28.8 million, consisting primarily of $28.0 million in proceeds from the sale of our Series A-3 Preferred Stock plus the exercise of employee stock options.

During the year ended December 31, 2015, net cash provided by financing activities was $14.6 million, consisting of $18.6 million from proceeds from our Series A-3 Preferred Stock financing offset by the repurchase of common stock and preferred stock of $3.2 million.

Contractual Obligations and Contingent Liabilities

The following summarizes our significant contractual obligations as of December 31, 2016:

 

     Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 
     (in thousands)  

Operating leases

   $ 686      $ 188      $ 459      $ 39      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations

   $ 686      $ 188      $ 459      $ 39      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We entered into a lease agreement in May 2016 for our headquarters in Westlake Village, California. The term of the lease commenced in October 2016 and terminates in February 2020. The total estimated lease payments for this facility over the remaining term of the lease are approximately $0.7 million. As part of the agreement, we signed a $0.1 million irrevocable standby letter of credit that serves as the security deposit. We have a 26 month lease for office space in Carlsbad, California which expires on June 30, 2017. Although the lease contains a renewal option, we do not plan to renew.

On June 6, 2017, we amended the lease agreement for our headquarters in Westlake Village to include approximately 6,000 additional square feet of office space, beginning upon the completion of certain improvements, which is currently estimated to be August 1, 2017 and includes an allowance for leasehold improvement of up to $0.1 million. The amendment will terminate on February 29, 2020 and includes a renewal period for a term of three years, consistent with the original lease. The expansion space is subject to fixed rate escalation increases with an initial base rent of $16,000 per month and total payments over the lease term of approximately $0.5 million.

We have contingent payment obligations related to the acquisition of Creabilis for clinical, regulatory and sales milestones. Our first contingent payment of $5.0 million, subject to offsets, is payable in shares of our common stock at the then current stock price. This payment will become due upon the sooner to occur of the commencement of our additional Phase 2b trial for SNA-120 or the one-year anniversary of the closing of the

 

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transaction December 2017. We currently anticipate this payment to become due in the fourth quarter of 2017. Based on current development timelines, we do not anticipate making any milestone payments during the year ended 2018. For more detail regarding amounts to be paid, see “Creabilis Acquisition” above.

We have certain payment obligations related to the Success Payment Agreement that we entered into with certain of our existing stockholders in October 2015. These success payments are based on certain specified threshold per share values of our common stock measured at specific times through October 2020. Success payments are payable in cash or, in our sole discretion, common stock, and will be owed, if ever, in the event that the value of our common stock meets or exceeds certain specified share price thresholds on any of the following dates during the success payment period: (1) any date after the 90th day after we complete this initial public offering; (2) the date on which we sell, lease, transfer or exclusively license all or substantially all of our assets to another company; and (3) the date on which we merge or consolidate with or into another entity (other than a merger in which our pre-merger stockholders own a majority of the shares of the surviving entity). In the case of an initial public offering, success payments are triggered when the per share value of our common stock, as determined based on the average trading price of a share of our common stock over the consecutive 90-day period preceding the date the success payment is triggered, meets or exceeds specified per share thresholds. In the case of an asset sale, license or sale of the company, success payments are triggered when the per share value of our common stock, as determined based on the consideration paid in the transaction for each share of our stock, meets or exceeds specified per share thresholds. Each per share threshold is associated with a success payment, ascending from $10.0 million at $9.15 per share to $35.0 million at $12.20 per share to $60.0 million at $18.30 per share, in each case subject to adjustment for any stock dividend, stock split, combination of shares, or other similar events. Any previous success payments made to stockholders pursuant to the Success Payment Agreement are credited against the success payment owed as of any future valuation date. The success payments paid to such stockholders will not exceed, in aggregate, $60.0 million. During the first year following this offering we will not be required to make any success payments triggered by the per share market value of our common stock until the first anniversary of the closing of this offering (or a 90-day grace period following such anniversary, at our option if we are contemplating a capital market transaction during such grace period). In order to satisfy our obligations to make these success payments, if and when they are triggered, we may issue equity securities that may cause dilution to our stockholders, or we may use our existing cash or incur debt obligations to satisfy the success payment obligation in cash, which may adversely affect our financial position.

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

We have an exclusive license and supply agreement with nanoComposix, pursuant to which we owe minimum annual royalties of $50,000 or low single digit royalties on net sales of licensed products.

Indemnification

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

In accordance with our certificate of incorporation and bylaws, we have indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims.

 

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Off-Balance Sheet Arrangements

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

Stock Purchase Rights

In January 2016, in connection with his commencement of employment with us, our board of directors granted Dr. Beddingfield, our Chief Executive Officer, the right to purchase 3,249,943 shares of our common stock for a purchase price of $0.40 per share, which the board of directors determined was the fair market value on the date of grant. With respect to 2,670,335 shares subject to the stock purchase right, 1/4th of the shares vested on January 1, 2017, and 1/48th of the shares vest monthly thereafter, subject to Dr. Beddingfield continuing to provide services to us through each such vesting date. With respect to 289,804 shares subject to the stock purchase right, 50% of the shares vest on the first date the volume-weighted average trading price of our common stock equals or exceeds $12.10 per share, and 1/24th of the shares vest monthly thereafter, subject to Dr. Beddingfield continuing to provide services to us through each such vesting date. With respect to the remaining 289,804 shares subject to the stock purchase right, 50% of the shares vested upon achievement of a milestone related to clinical development, and 1/24th of the shares vest monthly thereafter, subject to Dr. Beddingfield continuing to provide services to us through each such vesting date. We determined that the stock purchase rights effectively represented an option and the fair value of the option was $0.5 million, which is being amortized as compensation expense over the performance period of the award with $0.1 million and $36,000 recognized as compensation expense for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively.

In May 2016, Dr. Beddingfield exercised his stock purchase rights in full and purchased restricted stock that vests on the same schedule as the stock purchase rights by providing a promissory note to us in the principal amount of $1,299,977.20, with an interest rate of 1.43% per annum. The promissory note was considered to be substantively non-recourse and, as such, the issuance of the unvested restricted shares in exchange for the note continued to constitute a stock option for accounting purposes. As the promissory note is non-recourse, it is not reflected on our December 31, 2016 and March 31, 2017 balance sheets. All of the shares subject to the award were unvested at December 31, 2016 and 778,847 shares vested during the three months ended March 31, 2017. The principal and interest of the promissory note will be forgiven by our board of directors in 2017.

Irrevocable Election Under Jumpstart Our Business Startups Act of 2012 (JOBS Act)

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted

In August 2014, the Financial Accounting Standards Board, or FASB, issued accounting standard update, or ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. We adopted this ASU for the year ended December 31, 2016.

 

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In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to retrospectively adjust the consolidated financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior-period information had been revised. The guidance is effective for annual periods beginning after December 15, 2015 and is to be applied prospectively to adjustments of provisional amounts that occur after the effective date. Early application is permitted. We adopted this ASU for the year ended December 31, 2016.

In November 2015, the FASB issued ASU No. 2015-7, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which updated and simplified the presentation of deferred income taxes. Current generally accepted accounting principles require an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Earlier application is permitted. The adoption of this standard did not have a material impact on the consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and allows for the recognition of forfeitures as they occur rather than based on an estimated forfeiture rate. The amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We adopted this ASU for the year ended December 31, 2016.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed with a measurement date after January 1, 2017. The adoption of this standard did not have a material impact on the consolidated financial statements and disclosures.

Accounting Pronouncements Being Evaluated

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. This guidance is effective for fiscal years beginning after December 15, 2017, with an option to early adopt for fiscal years beginning after December 15, 2016 . We have decided not to early adopt and the adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. The standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. We are currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but do not expect it to have a significant impact.

 

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In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which seeks to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard becomes effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but do not expect it to have a significant impact.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The update is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The purpose of Update No. 2016-18 is to clarify guidance and presentation related to restricted cash in the statement of cash flows. The amendment requires beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. We are currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but do not expect it to have a significant impact.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but do not expect it to have a significant impact.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but do not expect it to have a significant impact.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants on accounting and financial disclosures.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. As of March 31, 2017, we had cash of $6.8 million and restricted cash of $0.1 million, which consist of bank deposits. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant. At March 31, 2017, we had $3.9 million of convertible notes outstanding. In April 2017, the outstanding principal and accrued but unpaid interest for all outstanding convertible notes was converted into shares of Series B convertible preferred stock in connection with our Series B convertible preferred stock financing.

As a result of the acquisition of Creabilis, we now have wholly-owned foreign subsidiaries that operate in euros and british pounds. As such, in the future we may be subject to fluctuations in foreign currency exchange rate risk. However, we do not expect foreign currency fluctuations to have a material impact on our results of operations. We currently do not hedge any foreign currency exposure.

 

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BUSINESS

Overview

We are a clinical-stage biopharmaceutical company focused on bringing innovations in biotechnology to the discovery, development and commercialization of first-in-class, targeted, topical products in medical dermatology and aesthetics. Our objective is to develop our multi-asset pipeline of topical therapies that enhance the health, appearance and quality of life of dermatology patients. We are advancing multiple product candidates derived from our Topical by Design™ platform, all of which are designed to be suitable for chronic administration in patients with inflammatory skin diseases and other dermatologic and aesthetic conditions. Our lead candidate from this platform, SNA-120, is a first-in-class inhibitor of Tropomyosin receptor kinase A, or TrkA, in Phase 2b clinical development for the treatment of pruritus, or itch, associated with psoriasis, as well as for psoriasis itself. Our second Topical by Design product candidate, SNA-125, is a dual JAK3/TrkA inhibitor being developed for the treatment of atopic dermatitis, psoriasis and pruritus. Additionally, we have advanced SNA-001, a silver particle treatment derived from our Topical Photoparticle Therapy™ platform, into pivotal clinical trials for both acne vulgaris and the reduction of unwanted light-pigmented hair. We believe our management team is well-positioned to execute on our objectives, having served in clinical and commercial leadership roles at several marquee dermatology, aesthetics and biotechnology companies, including Kythera, Allergan, Medicis, Amgen and Novartis.

There is a significant opportunity to address the historical lack of innovation in topical products for dermatology patients. Recent advances in biotechnology have enabled the development of novel, biologic drugs which act on specific molecular targets and pathways, and have been utilized to address inflammatory disorders. However, despite having shown impressive efficacy, use of these drugs has been limited to patients with more severe forms of disease due to the potentially significant side effects associated with systemic administration and their relatively high cost. Accordingly, the 80-90% of dermatology patients who present with mild-to-moderate disease severity or more localized disease have not benefitted from these advances. Today, such patients typically resort to non-specific, topical therapies such as corticosteroids and emollients, which are either marginally effective or unsuitable for chronic administration due to their side effects. We are focused on filling this innovation gap in dermatology by developing targeted topical products suitable for chronic administration to serve the vast majority of patients suffering from these inflammatory skin diseases and other dermatologic and aesthetic conditions.

Through our proprietary Topical by Design platform we develop targeted, topical treatments for inflammatory skin diseases and other conditions by creating new chemical entities, or NCEs, based on small molecules with well understood mechanisms of action. Using this technology, we site-selectively direct the conjugation of small polyethylene glycol, or PEG, polymers to selected pharmacologically active compounds. This modification alters the pharmacological activity of the active compound to refine its target selectivity while also changing its physicochemical profile. The resulting NCEs are designed to penetrate the skin for highly localized delivery of the drug against the selected targets or pathway, while minimizing systemic exposure. By utilizing this targeted, topical approach, we create topical therapies that are specifically designed to be suitable for chronic administration. Our lead product candidates from our Topical by Design platform are:

 

    SNA-120 (pegcantratinib), a first-in-class topical TrkA inhibitor for the treatment of pruritus associated with psoriasis, and which may also be effective for the treatment of psoriasis itself. A Phase 2b trial was completed for SNA-120 that demonstrated statistically significant improvements in the pruritus associated with psoriasis, positive trends in the improvement of psoriasis severity, and a favorable safety and tolerability profile. We plan to initiate additional clinical trials for SNA-120, including a Phase 2b clinical trial by the end of 2017 in order to expand our understanding of SNA-120 in pruritus and psoriasis and provide additional endpoint evaluation and validation, with data expected in the first half of 2019. We anticipate commencing Phase 3 trials in the second half of 2019.

 

   

SNA-125, a topical Janus kinase 3 (JAK3)/TrkA inhibitor with the potential to treat various inflammatory skin conditions, including atopic dermatitis, psoriasis and pruritus. Non-clinical studies

 

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have demonstrated anti-inflammatory activity in an animal model, and a favorable safety profile. We believe that by inhibiting both JAK3 and TrkA, SNA-125 has the potential to be a differentiated, best-in-class topical therapy. We are completing nonclinical studies to enable clinical trials in the first half of 2018.

Our second technology platform, Topical Photoparticle Therapy, utilizes silver particles applied on the skin to direct the light from commercially available lasers to the sebaceous gland and hair follicle to cause selective photothermolysis, a method of using light energy to produce heat in a specific tissue and facilitate local tissue injury. SNA-001, our lead product candidate from this platform, is a topical suspension of silver particles under development for the treatment of acne and for the reduction of light-pigmented hair, including white, gray, blonde, light brown and light red hair. In the case of acne, SNA-001 targets one of the key structures implicated in the pathogenesis of acne, the sebaceous gland. In the case of unwanted light or mixed pigmented hair, which cannot be removed with lasers alone, SNA-001 targets the hair follicle. Our studies have shown significant reductions in acne lesions and in light-pigmented hair following a small number of procedures with SNA-001. We are currently conducting three pivotal trials for the treatment of acne and anticipate reporting initial topline data from these studies in the second half of 2018. Concurrently, we are conducting three pivotal trials for SNA-001 for the reduction of light-pigmented hair, with initial topline data expected in the second half of 2018. Assuming data from these trials are positive, we expect to file the first 510(k) applications in the second half of 2019 for both indications.

Prescription medical dermatology products represented an approximately $19 billion global market in 2016, which is projected to grow to over $25 billion by 2020. Prescription drugs indicated for the treatment of psoriasis, atopic dermatitis and acne accounted for approximately 50% of this market, and we believe that the treatment of pruritus, which affects the vast majority of psoriasis and atopic dermatitis patients and a large percentage of patients with other chronic conditions, presents a substantial additional market opportunity. Demand for treatments of dermatologic conditions is driven, in part, by the highly visible nature of skin disease and distressing symptoms the patient experiences, such as itch, burning, or pain, all of which negatively impact quality of life. As new products are developed to address these unmet needs, we believe patients, physicians and payors will prefer the use of effective topical treatments that are suitable for chronic use in the broader patient population. We design and develop our targeted topical products with these criteria in mind, and believe they will play an important role in the treatment of various underserved skin conditions in the future.

The market for non-surgical, aesthetic dermatologic procedures was estimated at $6.8 billion in the United States in 2016, and is characterized by the significant willingness of patients to pay out of pocket for aesthetic improvements. In addition to addressing acne in the medical dermatology market, our Topical Photoparticle Therapy platform targets an aesthetic market opportunity in the reduction of unwanted light-pigmented hair, and we believe our Topical Photoparticle Therapy product candidate SNA-001, if cleared, will play an important role in the market for non-surgical, aesthetic dermatologic procedures.

In comparison to many other segments of the biopharmaceutical industry, we believe that product development and commercialization in medical dermatology and aesthetics can be relatively efficient in terms of time and cost. In many cases, clinical studies to evaluate efficacy and safety are conducted using well established endpoints and regulatory pathways that allow for comparatively modest sample sizes and shorter durations of therapy. Additionally, the prescribing base of dermatologists in the United States is relatively concentrated compared to other medical specialties. We believe a targeted, specialty sales and marketing organization focused on dermatologists and aesthetic physicians will allow us to directly address these physicians and capture market share for our product candidates in North America. To realize the full commercial potential of our product candidates in other geographic markets and sales channels, we will evaluate alternate commercialization strategies, including licensing and co-commercialization agreements with third parties. We believe that these industry dynamics provide an attractive backdrop to establish ourselves as a leader in medical dermatology and aesthetic product development and commercialization.

 

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We have assembled a management team with extensive experience in product development and commercialization at several leading dermatology, aesthetics and biotechnology companies, including Kythera, Allergan, Medicis, Amgen and Novartis. In these roles, members of our senior management team were integrally involved in securing regulatory approval from the U.S. Food and Drug Administration, or FDA, for 17 new dermatology and aesthetic products, and establishing several leading global brands, including Botox, Juvederm, Kybella, Latisse, Dysport, Restylane, Solodyn, Cosentyx and Ilaris. We believe this collective experience and achievement provides us with significant and differentiated insight into scientific, regulatory and commercial aspects of drug development that can influence our overall success, as well as a broad network of relationships with leaders within the industry and medical community. We are further supported by a group of leading institutional investors, including ARCH Venture Partners, Venvest Capital, Partner Fund Management, Altitude Life Science Ventures, funds affiliated with Fidelity Management & Research Company, Asymmetry Capital Management, Omega Fund Management and investment funds advised by Clough Capital.

Our Strategy

Our strategy is to develop and commercialize innovative and differentiated medical dermatology and aesthetic treatment solutions that we believe can be successful in the marketplace. The key components of our strategy are to:

 

    Leverage our proprietary technology platforms to design and develop targeted, topical therapies. There is an untapped opportunity to bring innovative topical therapies to the 80-90% of dermatology patients with mild-to-moderate inflammatory disease severity, for whom systemic therapies are inappropriate and existing topical therapies are marginally effective or unsuitable for chronic administration. We believe that our two proprietary technology platforms, Topical by Design and Topical Photoparticle Therapy, are positioned to yield multiple topical products for this large underserved population, as well as potentially in other therapeutic areas where topical approaches may provide clinical benefit. We have validated our platforms by advancing lead product candidates from both platforms beyond clinical proof-of-concept. Importantly, by applying our technology platforms to well understood biological targets and pathways, we may be able to reduce the risks associated with the development of novel, targeted topical therapies.

 

    Rapidly advance our existing product candidates through clinical development. Our first Topical by Design product candidate, SNA-120, has shown statistically significant and clinically meaningful reductions in the pruritus associated with psoriasis in a Phase 2b trial. We plan to initiate an additional Phase 2b trial by the end of 2017. We expect to initiate clinical trials for our next product candidate from the Topical by Design platform, SNA-125, in the first half of 2018 and to report proof-of-concept data in atopic dermatitis and psoriasis in the second half of 2018. We believe these highly differentiated topical therapies have the potential to address multi-billion dollar market opportunities across atopic dermatitis, psoriasis, and pruritus. Our Topical Photoparticle Therapy product candidate, SNA-001, is currently in pivotal trials for both acne vulgaris and the reduction of unwanted light-pigmented hair. We intend to complete these trials efficiently and advance SNA-001 to our first regulatory filing in the United States and international markets in the second half of 2019.

 

   

Continue building a diversified multi-asset pipeline of novel topical therapies. Our objective is to build a well-balanced, multi-asset portfolio targeting the medical dermatology and aesthetics markets, with a strong focus on topical products and large patient populations with unmet needs. To achieve this, we will selectively pursue development of our current product candidates SNA-120, SNA-125 and SNA-001 in additional indications where they could have meaningful impact while, over time, selecting additional clinical development candidates from our preclinical pipeline of NCEs based on our Topical by Design technology. We also plan to invest in our internal research efforts to bring forth new product candidates for medical dermatology and aesthetics, as well as in other therapeutic areas for which localized, topical drug delivery could deliver clinical benefit. Our internal research efforts are led by the scientific team that originally developed the Topical by Design technology platform. In

 

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addition to our internal discovery efforts, we may choose to selectively in-license or acquire complementary, external product candidates by leveraging the insights, network and experience of our management team.

 

    Maximize the global commercial potential of our product candidates. We retain worldwide commercial rights to all of our product candidates. If approved, we intend to commercialize our product candidates independently by establishing specialized field medical, sales and marketing organization focused on dermatologists and aesthetic physicians in North America. In certain sales channels and geographies, we will evaluate alternate strategies to maximize the potential value of our assets, such as licensing and co-commercialization agreements with third parties.

 

    Leverage the extensive experience of our management team in developing and commercializing multiple leading global dermatology brands. We have assembled a management team with extensive experience in product development and commercialization at several leading dermatology and aesthetics companies, including Kythera, Allergan, Medicis, Amgen and Novartis. Our Chief Executive Officer and Chief Medical Officer are practicing dermatologists whose close proximity to patients provides them with deep insight into the needs of patients as well as the changing treatment landscape. We have long-standing experience in the dermatology community and strong relationships with opinion leaders, regulatory agencies, advocacy groups and medical practitioners. In addition, our team has established credibility from a track record of success working with regulators to attain approval of multiple products, many of which were first-in-class and required the development and validation of new endpoints and agreement on the development pathways. These experiences enable us to better understand unmet medical needs, design and execute efficient clinical trial programs, craft effective regulatory strategies and identify new development opportunities. Recent consolidation in the medical dermatology and aesthetics industry has created an opportunity for us to work closely with physicians to identify unmet needs and deliver innovative products to patients.

Overview of the Dermatology Market

Dermatology is a medical specialty encompassing a broad range of conditions, diseases, and aesthetic concerns associated with the skin, hair, nails and mucous membranes. The specialty is generally segmented into two categories: medical dermatology, which refers to the treatment of conditions and diseases including psoriasis, atopic dermatitis, pruritus, acne and rosacea, and aesthetics, which focuses on improving the patient’s appearance, most frequently the signs of aging or undesirable cosmetic features, such as unwanted wrinkles, fat or excessive body hair.

Dermatologic conditions can have significant effects on patients’ quality of life, due to the highly visible nature of skin disease and distressing symptoms felt by the patient, such as itching, burning, or pain. For example, itch from psoriasis has been shown to have a strong negative correlation with a patient’s quality of life on par with other severe chronic conditions. Acne vulgaris frequently results in significant emotional distress and other psychological issues from the social stigma associated with disease, and severe acne can cause permanent scarring, anxiety, and depression.

Due to the severe impact on patients’ lives, the medical dermatology market is large, with approximately $19 billion in global sales in 2016. Given high unmet need in indications for which there are currently no approved or adequate topical therapies, such as pruritus, psoriasis and atopic dermatitis, we expect the demand for innovative topical products to continue to expand. Similarly, the market for non-surgical, aesthetic procedures is large, estimated at approximately $6.8 billion in the United States in 2016, driven by consumers’ strong desire to reduce visible signs of aging and cosmetic concerns. The physician practice of dermatology has evolved to encompass both medical dermatology and aesthetics as a means to satisfy patient needs and improve practice revenue as trends in consumer demand and the health of the economy fluctuate. The increasing appetite of consumers for cosmetic improvements to their appearance has fueled a cash pay market in aesthetic dermatology that has favorable economic implications for treating physicians. Reflecting this convergence of medical and

 

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aesthetic dermatology, most dermatologists practice in both medical dermatology and aesthetics. For example, in a survey of 103 dermatologists that we conducted, 89% indicated that their practices are “Medical and Aesthetic Dermatology.” Dermatology procedures and other treatments have aligned with current practice and enable dermatologists to address medical as well as aesthetic concerns, with some procedures serving as an adjunct or alternative therapy. Procedural treatments are an integral part of the well-established approach to treating dermatological conditions with multiple therapeutic options, whereby many patients use multiple drugs and procedural treatments in parallel or in sequence, due to the limited availability of effective, targeted therapeutics suitable for long-term use.

The vast majority of dermatology patients are treated with topical products. The most frequently prescribed topical products are corticosteroids, which accounted for approximately 40 million prescriptions in the United States in 2015 according to IMS Health. Despite their efficacy, topical corticosteroids are often used for only short-term relief of chronic conditions such as atopic dermatitis and psoriasis, because side effects limit their long-term use. As a result, we believe there is a significant unmet need for non-steroidal topical therapies suitable for long-term use. This is evidenced by the topical calcineurin inhibitors Elidel and Protopic rapidly displacing topical steroids for atopic dermatitis, until boxed warnings for side effects significantly limited their use. Additionally, Eucrisa, a topical PDE4 inhibitor that was recently approved for atopic dermatitis, is projected to have multi-billion dollar peak sales potential globally, primarily driven by its favorable safety profile.

Our Technology Platforms and Product Candidates

We have two proprietary technology platforms focused on topical dermatology products: our Topical by DesignTM platform and our Topical Photoparticle TherapyTM platform. We are utilizing these technology platforms to build a pipeline of product candidates that we believe will address significant unmet needs in medical dermatology and aesthetics, as summarized in Figure 1 below:

Figure 1. Our Pipeline

 

 

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a. Regulated as a drug pursuant to a new drug application (NDA) regulatory pathway.
b. Regulated as a Class II medical device under 510(k) marketing clearance pathway.

 

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Topical by Design Platform

Our proprietary Topical by Design platform is designed to enable the topical application of potent active pharmaceuticals against known biologic targets while minimizing exposure to the systemic circulation. Applying this technology, we have created a pipeline of drug candidates with unique pharmacological profiles that are designed to be suitable for chronic administration. The principal innovation of the Topical by Design technology is the linkage of a short polymer to a pharmacologically active compound, typically a small molecule, through a bridging unit, resulting in an NCE, as illustrated in Figure 2 below.

Figure 2. Creation of New Chemical Entities with the Topical by Design Platform

 

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The active compound is selected based on the target or pathway of interest. For example, one of our lead product candidates, SNA-125, targets JAK3 which is a validated target in atopic dermatitis and psoriasis. In a single chemical transformation, a short polymer is covalently linked to the small molecule through a bridging unit. Both the polymer, a short PEG tail, and the bridging unit, define the pharmacology of the active compound and refine its target selectivity. Furthermore, the polymer changes the physicochemical characteristics of the new molecule. Drug candidates derived from the Topical by Design technology are necessarily amphiphilic, soluble in both aqueous and lipid environments. This enables sufficient penetration into the skin where the drug effect is desired and achievement of high local drug concentrations with low systemic absorption. To the extent there is any systemic absorption, in our nonclinical studies, the drug candidates have demonstrated pharmacokinetics consistent with rapid clearance by the kidneys in minutes. We have not detected systemic exposure of SNA-120, another lead product candidate, at the limit of detection in our clinical studies to date.

Clinically, the advantageous physicochemical properties resulting in high resident drug concentration in the skin and low systemic exposure may allow for concentrated, local treatment of cutaneous inflammation and other dermatoses by efficiently addressing validated targets while maintaining a favorable safety profile. Further, these drug candidates, if successfully developed and approved, may be eligible for regulatory exclusivity as NCEs. Our primary focus is the development of drug candidates for dermatological conditions. However, we believe that our Topical by Design technology may also address other therapeutic needs where localized drug delivery that avoids

 

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systemic exposure is desirable, such as ophthalmological, gastrointestinal or pulmonary conditions. To the extent we believe applications beyond dermatology are viable, we may explore alternatives to monetize the potential for our Topical by Design platform.

Our lead product candidates developed through the Topical by Design technology platform are SNA-120 and SNA-125.

SNA-120

SNA-120 is designed to selectively inhibit TrkA, the high affinity receptor for nerve growth factor, or NGF, a known mediator of pruritus, or itch, and neurogenic inflammation associated with psoriasis. TrkA and NGF are recognized targets in psoriasis and are overexpressed in plaques. We believe that SNA-120 has the potential to treat pruritus associated with psoriasis, as well as improve the underlying psoriasis, while being suitable for chronic administration. SNA-120 has demonstrated statistically significant and clinically meaningful reductions in the pruritus associated with psoriasis, as well as favorable tolerability in psoriasis patients in a Phase 2b clinical trial. We plan to initiate additional clinical trials for SNA-120, including a Phase 2b clinical trial by the end of 2017 in order to expand our understanding of SNA-120 in pruritus and psoriasis and provide additional endpoint evaluation and validation, with data expected in the first half of 2019.

Pruritus

Pruritus is a common and persistent symptom of many inflammatory skin diseases and is often described as one of the most distressing symptoms. The medical community’s awareness of the clinical significance of pruritus has grown in recent years as endpoints measuring the intensity of pruritus have demonstrated a strong impact on patients’ quality of life. Pruritus manifests itself in different ways in different diseases and may be driven by different mechanisms of action. As such, the FDA recommends that pruritus treatments be studied in the context of the specific disease for which they will be used, which in the case of SNA-120 is pruritus associated with psoriasis.

Psoriasis and Associated Pruritus Market

Psoriasis vulgaris is a chronic inflammatory skin disease that affects approximately 2-3% of the global population. Psoriasis is characterized by thickened plaques of inflamed, itchy, red skin covered with thick, silvery scales typically found at the elbows, knees, trunk and scalp. Patients are generally categorized as mild, moderate or severe, with approximately 80-90% of patients having mild or moderate forms of the disease according to GlobalData. The disease ranges from a single, small, localized lesion in some patients to a severe generalized eruption with complete body coverage. It is a chronic, complex, multifactorial immune-mediated disease that requires long-term treatment. According to Kalorama Information, sales of drugs for the treatment of psoriasis globally were $4.8 billion in 2016 and expected to grow to $8.1 billion by 2020. Drug spend is driven largely by the recent introductions of new systemic biologic therapies, which can be highly effective in reducing the appearance of plaques, but are only prescribed for the roughly 10-20% of the psoriasis population with more severe disease. The majority of patients use at least one topical therapy and pricing for these topicals is approximately $500-800 per 60g tube, which generally represents a one month supply of a single therapy for mild disease.

Pruritus is one of the most common chronic symptoms in psoriasis. In fact, the word “psoriasis” originates from the Greek word psora, which means “to itch.” Chronic itch poses specific problems and is a particularly relevant clinical and patient concern as resultant scratch can lead to the appearance of new plaques or the exacerbation of existing psoriatic plaques, a well described process known as the Koebner phenomenon. A National Psoriasis Foundation study of 17,488 patients found that pruritus was experienced by 79% of patients, making it the second most commonly reported symptom, after scaling (94%). In a clinical study we conducted of 160 psoriatic patients, 97.4% of patients had pruritus and 68.7% had at least moderate pruritus at baseline.

 

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Previously there has been a lack of awareness of the substantial effect of pruritus on psoriatic patients’ quality of life, with dermatologists primarily focusing on improving the visible appearance of psoriasis. Because the itch of psoriasis has a burning quality to it, it may at times have been categorized as pain rather than itch, resulting in itch being under-appreciated. Increased attention in the literature has revealed pruritus to be as important to patients as the visible appearance. At a recent FDA public meeting to discuss patient-focused drug development for psoriasis, patients rated the symptom of “itching” as having the most significant impact on their daily lives, equal in importance to “flaking and scaling.” Psoriatic patients with pruritus have a significant decrease in Health Related Quality of Life, or HRQoL, compared to those without pruritus, with a significant correlation between Dermatology Life Quality Index scoring and pruritus intensity. In patients with moderate-to-severe psoriasis, improvement in pruritus has been reported to correlate with improvement in quality of life scores.

Limitations of Current Therapies

The typical psoriasis patient has moderately pruritic plaques covering less than 10% body surface area and is prescribed topical medication. The most common topicals are corticosteroids, Vitamin D derivatives, such as Dovonex, Vitamin A derivatives, such as Tazorac, and crude coal tar preparations. None of these topical therapies adequately treat the important and often neglected symptom of pruritus associated with psoriasis. There are no specific, chronic topical anti-pruritic therapies to treat the pruritus associated with psoriasis vulgaris that have been approved. Our research indicates that patients often seek relief from pruritus by using an array of topical products available over the counter, or OTC, and without prescription. However, OTC medications like antihistamines offer little relief for the itch associated with psoriasis.

Corticosteroids, as monotherapy or in combination with Vitamin D derivatives, are the most effective topicals for treating plaques and may modestly impact pruritus in some patients, but are limited to short-term use because of association with localized atrophy or thinning of the skin and the potential to systemically suppress the body’s ability to make normal amounts of endogenous corticosteroids. Non-steroidal topicals, such as Vitamin D derivatives, have moderate efficacy and can cause skin irritation with some patients reporting burning sensations associated with their use, potentially exacerbating pruritic symptoms.

Ultraviolet, or UV, light therapy is recommended for those patients who are not well managed with topical therapy and/or have more widespread and diffuse psoriatic plaque involvement. These treatments can be effective but require multiple visits to the doctor’s office each week and have been shown to increase patients’ risk of developing skin cancer. For patients with more severe psoriatic plaque involvement, those who do not respond to UV therapy or seeking more rapid onset of relief, systemic drugs may be prescribed. The most common oral treatments are the immunosuppressive drug methotrexate, cyclosporine, and the Vitamin A derivative acitretin. These treatments are associated with systemic side effects including liver toxicity, hypertension, renal impairment, and, in the case of acitretin, the risk of birth defects, and therefore require routine monitoring. More recently, the Phosphodiesterase-4, or PDE, inhibitor apremilast has been approved as a systemic therapy for moderate-to-severe psoriasis with good efficacy, however side effects including neutropenia and depression have been reported. Moreover, despite improvement in visible plaques, based on patient reports, these treatments may not be adequately effective in treating the pruritus associated with psoriasis. This is particularly relevant given that studies have found no correlation between visible psoriasis plaque severity and pruritus disease severity in patients.

For patients that have moderate psoriasis and do not respond to oral treatments or UV therapy, or for patients that have severe psoriasis, physicians prescribe injectable biologic treatments. A number of injectable or intravenous biologic drugs have been approved over the years, including Enbrel, Humira, Remicade, Stelara, Cosentyx and Taltz. Many of these drugs are monoclonal antibodies, a type of complex protein molecule. Some of these drugs act by inhibiting TNF-alpha, IL-17 or IL-12/IL-23. While these injectable biologic drugs can have exceptional efficacy in reducing the appearance of plaques, they may have potentially life-threatening side effects resulting from infection or cancer, especially when used as a chronic treatment. Furthermore, these drugs are very expensive, costing tens of thousands of dollars annually, and as such are reserved for the severe patient

 

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populations or those patients with extensive body surface area coverage that do not respond to other treatments. Despite significant reductions in the visible plaques of patients on injectable biologic drugs, some patients still have persistent pruritus. Figure 3 below illustrates the current paradigm for the treatment of psoriasis.

Figure 3. Current Psoriasis Treatment Paradigm

 

 

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Our Solution: SNA-120

SNA-120 is our topical product candidate for the treatment of pruritus and psoriasis. We are studying SNA-120 in mild-to-moderate psoriasis patients with associated pruritus. In addition, we believe SNA-120 has the potential to treat residual pruritus in patients with moderate-to-severe psoriasis who utilize a combination of topical and systemic treatments. SNA-120 is designed to address pruritus associated with psoriasis as well as the underlying psoriasis and biology of the disease, and, if approved, would likely be the first prescription topical treatment indicated for pruritus associated with psoriasis.

The target of SNA-120 is TrkA, the high affinity receptor for NGF. Binding of NGF to TrkA induces TrkA autophosphorylation and leads to the activation of transient receptor potential cation channel subfamily V member 1 (TRPV1) through phosphatidylinositol-4,5-bisphosphate 3-kinase (PI3K) and protein kinase C (PKC). TRPV1 activation results in the transmission of pain, burning and itch sensation to the central nervous system by peripheral sensory nerves. Both NGF and TrkA are upregulated in the epidermis, the outer layer of the skin, of psoriasis patients. In psoriatic lesions specifically, NGF is overexpressed by keratinocytes and causes sustained activation of the TrkA-

 

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TRPV1 axis, contributing to neurogenic inflammation, nerve sensitization, neurite outgrowth and the clinical manifestation of burning/itching sensation in the skin. In pruritic patients, psoriatic skin is more heavily innervated in the superficial dermis and epidermis with cutaneous nerves expressing elevated levels of NGF and TrkA.

SNA-120 inhibits the intracellular kinase domain of TrkA, blocking downstream activation of TRPV1 and reducing the signaling of itch sensation by peripheral nerves. Persistent inhibition of TrkA also decreases upregulation and potentiation of TRPV1 activity, an important component of neurogenic inflammation in psoriasis. We believe that SNA-120 also has the potential to address the underlying pathophysiology of psoriatic lesion development in addition to its effect on itch. Figure 4 below illustrates the pathophysiology of psoriatic itch and the mechanism of action of SNA-120.

Figure 4. Pathophysiology of Psoriatic Itch and the Mechanism of Action of SNA-120

 

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SNA-120 Clinical Development

SNA-120 is being developed for the treatment of pruritus associated with mild-to-moderate psoriasis and we believe it also has the potential to concurrently improve the psoriatic plaques, including associated scaling, erythema, and induration. We expect to initiate additional clinical trials for SNA-120, including a Phase 2b trial by the end of 2017 to expand our understanding of SNA-120 in pruritus and psoriasis and provide additional endpoint evaluation and validation. An investigational new drug application, or IND, for SNA-120 was submitted to the FDA in July 2010 for evaluation in the treatment of mild-to-moderate psoriasis by Creabilis, which remains the IND sponsor; however, prior to the initiation of our Phase 2b trial, we intend to change the IND sponsor to Sienna Biopharmaceuticals. To date, seven sponsor-initiated clinical trials and one investigator-initiated trial have been completed, four in Phase 1 and four in Phase 2. SNA-120 has been administered to 36 healthy volunteers and 336 patients, for up to 12 weeks. In these trials, SNA-120 was observed to be well tolerated, with a favorable safety profile and no demonstrable systemic exposure at the specified detection limit used in the trial. Additionally, SNA-120 showed statistically significant improvements in pruritus associated with psoriasis and had a positive impact on psoriasis disease severity among pruritic subjects.

The key attributes of SNA-120 observed in our development program to date are:

 

    Effective relief of chronic pruritus associated with psoriasis, as supported by clinically meaningful and statistically significant Phase 2b results;

 

    Favorable safety profile and low systemic exposure, potentially enabling chronic use across a wide range of patients; and

 

    Positive impact on psoriasis disease severity among pruritic subjects.

 

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Clinical Development Plan

In our interactions with the FDA, the FDA has recognized pruritus due to psoriasis as a distinct indication. Based on these interactions, and prior to commencing our Phase 3 trials, we plan to conduct additional nonclinical chronic toxicity studies, additional manufacturing work and scale development and validation for endpoints in pivotal Phase 3 trials.

We also plan to conduct an additional Phase 2b trial in order to further inform our patient population, clinical endpoints, duration of treatment and dose for our anticipated Phase 3 trial. The planned Phase 2b trial will: evaluate SNA-120 safety and efficacy in a refined target population, focusing on patients with at least moderate itch associated with mild-to-moderate psoriasis; explore two doses across multiple endpoints for 12 weeks; validate the use of the 11-point itch Numeric Rating Scale, or I-NRS, for measuring pruritus severity, define a clinically meaningful improvement in pruritus in the study population, and capture more extensive patient and clinician reported data on the impact of pruritus and psoriasis on patient HRQoL.

To gain approval of SNA-120, we must submit nonclinical, clinical and chemistry data that adequately demonstrate the safety, purity, potency, efficacy and compliant manufacturing of the product in a new drug application, or NDA, or other applicable regulatory filing. Nonclinical studies for SNA-120 required for NDA submission include safety pharmacology, pharmacokinetics/bioavailability and single/repeat-dose toxicity studies, including chronic studies of up to nine months duration, a two-year dermal carcinogenicity study, genotoxicity, local tolerance and relevant reproductive toxicity testing.

We must also submit two adequate and well-controlled Phase 3 clinical trials, of similar design, with statistically significant results to demonstrate the safety and efficacy of the drug. As with all topical drug products, satisfactory data on dermal safety and maximal use conditions with SNA-120 must be provided. SNA-120 is an NCE; thus, data from a cardiovascular safety study to measure the effect of the drug on the QT interval, or evidence supporting a waiver for this study, must be provided. SNA-120 is intended for long-term intermittent use; therefore, data from a long-term safety study must be submitted.

Prior to approval, the FDA will inspect the manufacturing facilities at which the product is produced to assess compliance with current good manufacturing practice, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity.

Regulatory feedback obtained from two European medicines regulatory agencies, the Medicines and Healthcare products Regulatory Agency (MHRA), in the United Kingdom and the Medicines Evaluation Board (MEB), in the Netherlands, indicated that the pivotal Phase 3 trials could leverage the placebo-controlled design used in the completed Phase 2b trial, rather than using approved products as the comparator, given that there are currently no approved topical therapies for pruritus. Additional meetings with European medicines regulatory agencies are expected and will provide further guidance.

Planned Phase 2b Trial

Concurrent with the toxicology studies required to initiate Phase 3 pivotal trials, we plan to conduct a multicenter, randomized, double-blind, placebo-controlled, Phase 2b trial to evaluate the safety, efficacy, and tolerability of SNA-120 in subjects with moderate pruritus associated with mild-to-moderate psoriasis vulgaris. The primary objectives of this study are to characterize the efficacy of SNA-120 at two doses, 0.05% and 0.5% w/w where w/w denotes the mass fraction, as compared to placebo when administered topically twice daily (BID) for the treatment of pruritus associated with psoriasis, as well as the treatment of psoriasis. Pruritus severity will be assessed using the 11-point I-NRS where 10 corresponds to “worst itch imaginable” and 0 corresponds to “no itch.” Additionally, the patient administered 100 mm itch visual analog scale, or VAS, a continuous scale with 100 mm corresponding to the “worst possible itch” and 0 mm corresponding to “no itch” will be assessed for concordance with the I-NRS. Psoriasis disease severity will be measured using both the

 

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5-point Investigator’s Global Assessment, or IGA, from 0 (none) to 4 (severe), as well as the Psoriasis Area and Severity Index, or PASI, which is a weighted sum of symptom scores for erythema, scaling and plaque thickness over different parts of the body. Scores for the PASI range from 0 (no disease) to 72 (maximal disease).

Further, this study is expected to:

 

    Establish the threshold for a clinically meaningful change on the I-NRS, in a pre-defined pruritic population with NRS ³ 5, in anticipation of the scale being utilized as the primary endpoint measurement in our pivotal Phase 3 trials;

 

    Determine sample size required to power the Phase 3 trials; and

 

    Validate new patient-reported outcome, or PRO, measures that specifically assess:

 

    Impacts of psoriasis on self-perceptions (including self-perceived bother, embarrassment, self-consciousness, and attractiveness);

 

    Impact of itch on sleep;

 

    Psoriasis signs and symptoms, such as bleeding, burning, flaking and pain; and

 

    Impact of pruritus and psoriasis on patient HRQoL.

Following completion of this trial, we intend to hold an End-of-Phase 2, or EOP2, meeting with the FDA ahead of initiating our Phase 3 clinical program to further refine our clinical and nonclinical development plans for SNA-120. Following the EOP2 meeting, we plan to seek a special protocol assessment, or SPA, for our Phase 3 protocols.

Completed Phase 2b Trial

SNA-120 was evaluated in a multicenter, randomized, double-blind, placebo-controlled Phase 2b clinical trial in 160 subjects that were 18 years of age and older with stable, mild-to-moderate psoriasis affecting up to 10% body surface area. The primary efficacy objective of this study was to characterize the efficacy of SNA-120 at three doses (0.05% w/w, 0.1% w/w and 0.5% w/w) as compared to placebo when administered topically twice daily (BID) for eight weeks for the treatment of psoriasis. There were three pre-specified efficacy measures:

 

    Overall management of psoriasis as measured by IGA (primary endpoint);

 

    Improvement of psoriasis severity as measured by mPASI (secondary endpoint); and

 

    Improvement in the psoriatic pruritus subpopulation as measured by VAS (secondary endpoint)

No significant improvements in disease response rates were observed for SNA-120 as measured by IGA. However, after eight weeks, SNA-120 treatment groups achieved a mean reduction in disease severity as measured by mPASI between 37.1% and 42.8%, with one dose (0.05% w/w) reaching statistical significance (p=0.0180) as compared to vehicle control.

The pre-specified pruritus secondary endpoint, specifically, the change from baseline in pruritus VAS score in subjects with at least moderate psoriasis-related pruritus at baseline, was included in the Phase 2b trial due to the understood role of the NGF-TrkA-TRPV1 axis in signaling itch through sensory nerves. Additionally, we believed that inclusion of this endpoint was important based on increasing evidence that the incidence and severity of chronic pruritus was substantially under-reported in psoriasis.

In the 108 subject subset, or 70.6 % of the full study population, reporting at least moderate pruritus (VAS ³40 mm) at baseline, a reduction in pruritus VAS was observed for all SNA-120 treatment groups, with statistical significance compared to vehicle control reached for the 0.05% (p=0.0067) and 0.5% (p=0.0124) dose groups at week 8 (secondary endpoint). The mean changes in baseline VAS for the 0.05%, 0.1%, and 0.5% doses at week 8 were -37.1mm, -31.5 mm, and -36.4 mm, respectively, compared with vehicle at -16.1 mm. Figure 5 below sets forth the mean reductions from baseline VAS in all SNA-120 treatment groups in the completed Phase 2b trial.

 

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For purposes of the presentation of the statistical results, a p-value is a measure of statistical significance of the observed results, or the probability that the observed results was achieved purely by chance. By convention, a p-value of 0.05 or lower is commonly considered statistically significant (e.g., a p-value of <0.05 means that there is a 5% chance that the observed result was purely due to chance). The FDA utilizes the reported statistical measures when evaluating the results of a clinical trial, including statistical significance as measured by p-value as an evidentiary standard of efficacy, to evaluate the reported evidence of a drug product’s safety and efficacy.

Figure 5. Impact of SNA-120 on Pruritus VAS Compared to Vehicle in Subgroup with Baseline Pruritus VAS ³40 mm (N=108)

 

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The Phase 2b trial also resulted in the following findings:

 

    SNA-120 treated subjects with at least moderate baseline pruritus experienced 43-59% reduction in itch severity from baseline to week eight;

 

    62-69% of SNA-120 treated subjects in the pruritic population had mild or no pruritus by end of treatment as measured by VAS compared with 41% of subjects treated with vehicle; and

 

    46-62% of SNA-120 treated subjects had at least a 50% reduction in VAS from baseline at week eight compared to 32% of subjects on vehicle.

Post-Hoc Analysis of Psoriasis Disease Severity in Phase 2b Trial

We also conducted a post-hoc analysis of psoriasis disease severity among subjects reporting at least moderate pruritus (VAS ³40 mm) at baseline. This analysis revealed that at week 8, all SNA-120 treatment groups experienced greater mean reductions in total mPASI scores than the vehicle group. Statistical significance was reached for the 0.05% (p<0.001) and 0.5% (p<0.02) dose groups. Subjects treated with SNA-120 experienced about a 40% reduction in baseline disease severity, as measured by mPASI, compared to a 17% reduction for vehicle treated subjects. In conjunction with the effect on pruritus in this population, we believe

 

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these data suggest that SNA-120 improves both pruritus and the underlying psoriasis. Improvement in psoriasis may reflect the anti-proliferative effects of TrkA inhibition by SNA-120 on keratinocyte proliferation. It also may be a consequence of inhibiting pruritus, by blocking of NGF-TrkA-TRPV1 signaling in sensory neurons, and breaking the “itch-scratch” cycle. Figure 6 below sets forth the mean reductions from baseline mPASI total score in all SNA-120 treatment groups in the completed Phase 2b trial.

Figure 6. Impact of SNA-120 on mPASI Total Score Compared to Vehicle in Subgroup with Baseline Pruritus VAS ³40 mm (N=108)

 

 

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To explore a potential dose range, the doses selected for the Phase 2b trial of 0.5% and 0.05% w/w were above and below the dose studied in a previously completed Phase 2a trial (0.1% w/w). The Phase 2b trial was not powered to detect differences in doses and the results demonstrated no significant difference or obvious trends in efficacy between the three doses in assessments of either psoriasis disease severity or pruritus severity. This finding of no dose response may indicate that our selected dose range is approaching the top of the dose-response curve. Nonclinical work undertaken in parallel with the trial provided some rationale for this conclusion. At the lowest concentration of 0.05%, SNA-120 reached levels in the skin that elicited greater than 90% inhibition of the target kinase.

In our Phase 2b trial, SNA-120 exhibited a favorable safety profile. Specifically, we observed the following:

 

    Low incidence of adverse events, or AEs, which were characterized as mostly mild or moderate;

 

    No SNA-120 was detected in blood samples down to a detection limit of 2.5ng/ml; and

 

    No drug-related application site AEs were observed.

In the safety population of 160 subjects, 73 experienced treatment emergent AEs, or TEAEs. TEAEs occurred in 33-55% of subjects in the SNA-120 group and 53% of subjects in the vehicle group. The most frequently reported AEs were pruritus, headache, nasopharyngitis and diarrhea. Figure 7 below sets forth the incidence and types of adverse events experienced by subjects in the completed Phase 2b trial.

 

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Figure 7. Phase 2b Trial Adverse Events (Incidence ³ 5%), Number (%) of Subjects

 

Adverse Event   

SNA-120

0.05%

n=40

  

SNA-120

0.1%

n=40

  

SNA-120

0.5%

n=40

  

SNA-120

Overall

n=120

  

Vehicle

n=40

Total TEAEsa

   13 (33)    17 (43)    22 (55)    52 (43)    21 (53)

Nasopharyngitis

   1 (3)    0    3 (8)    4 (3)    1 (3)

Headache

   2 (5)    2 (5)    1 (3)    5 (4)    0

Diarrhea

   0    1 (3)    2 (5)    3 (3)    1 (3)

Psoriasis

   0    0    2 (5)    2 (2)    1 (3)

URTI

   0    0    0    0    2 (5)

Pruritus

   4 (10)    2 (5)    3 (8)    9 (7.5)    6 (15)

Back pain

   0    2 (5)    0    2 (2)    0

Fatigue

   2 (5)    0    0    2 (2)    0

Cough

   2 (5)    0    0    2 (2)    0

 

a Counting is by subject, not event.

Pruritus was reported as an AE in nine (7.5%) SNA-120 subjects and six (15%) vehicle subjects. Five (12.5%) study subjects withdrew due to this AE in the vehicle arm as compared to the withdrawal of three (2.5%) subjects in the SNA-120 arm. There were no drug-related serious AEs, or SAEs.

Summary of Phase 2b safety profile for SNA-120

The findings for SNA-120 in the completed Phase 2b trial are consistent with data from prior SNA-120 clinical studies. To date, 36 healthy volunteers and 336 patients have received SNA-120 for up to 12 weeks. SNA-120 has been shown to be well-tolerated at concentrations up to 0.5% (w/w) for up to eight weeks twice daily (BID) and 12 weeks once daily (QD) application. To date, no clinically significant changes in safety laboratory tests, physical examination, vital signs or 12-lead ECG have been observed.

Six SAEs were reported in these prior trials, none of which was considered drug related. Reported AEs were mostly mild or moderate in severity. The most common AEs reported across the seven prior trials were pruritus, eczema, headache, nasopharyngitis and application-site pruritus. The frequency of events does not appear to be dose dependent. Figure 8 below sets forth the incidences and types of treatment emergent adverse events from SNA-120 sponsor-initiated studies.

 

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Figure 8. Treatment Emergent Adverse Events from all SNA-120 Sponsor-Initiated Studies, Treatment for up to 8 Weeks, All Doses Combined (Incidence ³1%)

 

Adverse events   

SNA-120

n=350

  

Vehicle

n=127

Pruritus

   21 (6%)    9 (7%)

Eczema

   20 (6%)    4 (3%)

Headache

   16 (5%)    3 (2%)

Nasopharyngitis

   11 (3%)    3 (2%)

Application site pruritus

   11 (3%)    3 (2%)

Application site reaction

   9 (3%)    2 (2%)

Diarrhea

   9 (3%)    2 (2%)

Dermatitis atopic

   7 (2%)    6 (5%)

Rhinitis

   7 (2%)    3 (2%)

Cough

   7 (2%)    0

Upper respiratory tract infection

   6 (2%)    4 (3%)

Back pain

   6 (2%)    1 (<1%)

Rash

   5 (1%)    0

Dermatitis

   4 (1%)    2 (2%)

Psoriasis

   4 (1%)    1 (<1%)

Fatigue

   4 (1%)    1 (<1%)

Vomiting

   4 (1%)    1 (<1%)

Human plasma from over 340 patients treated with SNA-120 has been analyzed for concentrations of SNA-120, its putative metabolite (the amide of SNA-120) and K252a, the unconjugated parent compound of SNA-120. None of the samples analyzed have been found to have plasma levels above the lower level of quantification for SNA-120, amide of SNA-120 or K252a, following single and multiple administrations. These clinical data are generally consistent with nonclinical in vivo experiments detecting very limited levels of SNA-120 or its derivatives in plasma following epicutaneous administration. SNA-120 is rapidly cleared following intravenous delivery. The pharmacokinetic profile reveals a volume of distribution similar to blood volume, meaning once in the blood it does not appear to be distributed out of the blood and into tissues readily. Because the drug remains in the systemic circulation once there, and its molecular size is below the threshold limit for glomerular filtration, it is rapidly cleared by the renal system. Following intravenous administration, the half-life for SNA-120 is only 10 minutes. Taken together, this evidence supports our belief that drug candidates produced from the Topical by Design platform demonstrate low systemic exposure.

Other Planned Studies

We intend to conduct additional studies to support the clinical development and regulatory submission package. These studies may include two Phase 3 pivotal trials to demonstrate safety and efficacy, maximal use pharmacokinetic studies to confirm the low systemic exposure of SNA-120, dermal safety studies, a drug-drug interaction study, a thorough QT study and a long-term safety study.

Market Opportunity for SNA-120

There are currently no approved prescription products indicated for treatment of pruritus associated with psoriasis, and, if approved, SNA-120 would likely be the first targeted topical pruritus treatment available to patients by prescription. Reduced itching is the primary benefit sought by psoriatic patients, on par with reduced

 

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flaking and scaling, when considering new treatments according to a recent FDA patient panel. Additionally, although we have not yet conducted any head-to-head clinical studies of SNA-120 compared to other non-steroidal topical drugs intended for chronic use, such as Vitamin D analogues, we have seen SNA-120’s improvement in the visible appearance of psoriasis in our clinical studies to date at a level consistent with third party studies of those other non-steroidal topicals. Based on these factors, we believe that physicians could prescribe SNA-120 as a first-line treatment for pruritus associated with psoriasis, thereby helping patients avoid the prolonged use of topical corticosteroids.

We anticipate that SNA-120, if approved, would be marketed to dermatologists with a strong focus on medical conditions. In the United States, there are approximately 7.9 million psoriasis patients, of which approximately 80% have pruritus. We estimate that approximately 1.7 million patients will visit their dermatologists to seek treatment for their chronic pruritus annually. Of particular focus for SNA-120 are the majority of patients who seek chronic management of the signs and symptoms of disease while avoiding the use of corticosteroids or systemic therapy.

If approved, we expect SNA-120 to be priced in line with branded topical medications for psoriasis including Taclonex, Dovenex, and Tazorac. Branded topical pricing is well established and payors are supportive of cost-effective therapies that can address patient needs without having to resort to expensive biologics. We expect patients would require about 100g of topical product per month assuming a twice daily application on 7% body surface area, the average body surface area for patients in our additional Phase 2b trial.

Over time, there could be an opportunity to expand the addressable opportunity for SNA-120 by broadening the label to other pruritus indications and/or populations including prurigo nodularis and pruritus in the elderly population, where NGF is thought to play a role. Other opportunities could include developing additional formulations for intensely pruritic areas such as the scalp. Finally, we could expand the opportunity through a sales force targeting physicians beyond dermatology, such as primary care, likely through partnerships.

SNA-125

Our second lead product candidate derived from our Topical by Design platform is SNA-125. It is a dual kinase inhibitor (JAK3/TrkA) in development for the treatment of atopic dermatitis, psoriasis, and pruritus. SNA-125 represents a novel approach to the treatment of inflammatory skin diseases and associated pruritus through a validated pathway, JAK3, that is well understood in this disease setting. SNA-125 also inhibits TrkA at a higher level of potency than SNA-120. JAK3 is required for immune cell development, and published literature supports that inhibition of JAK3 blocks the signaling of key cytokines, such as IL-2, IL-4 and IL-15, in T cells and NK cells, and results in a reduction in the severity of autoimmune and inflammatory diseases in which those cytokines play a pivotal role. In a nonclinical study, we have observed anti-inflammatory effects of SNA-125 consistent with inhibition of JAK3, including the reduction of immune cell infiltration in a rabbit scar model. Figure 9 below shows the JAK3 signaling pathway and the point of SNA-125 inhibitory action.

 

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Figure 9. Inhibitory Action of SNA-125 on JAK3 Pathway

 

LOGO

There is clinical evidence to support the role of topical JAK3 inhibitors, such as tofacitinib, for the treatment of atopic dermatitis and/or psoriasis. In a randomized, double-blind, prospective, vehicle-controlled Phase 2 study of 69 subjects with atopic dermatitis conducted by Pfizer, topical tofacitinib demonstrated clinical efficacy with patients experiencing a mean 82% reduction in their Eczema Area Severity Index total score, compared with a 30% decrease in vehicle-treated controls after 4 weeks treatment. In a randomized, double-blind, prospective, vehicle-controlled Phase 2b trial of 435 subjects with mild-to-moderate plaque psoriasis, topical tofacitinib (2%, BID) demonstrated significant efficacy compared with control treatment whereby 22.5% of subjects achieved clear or almost clear and ³2 grade improvement on the Calculated Physician’s Global Assessment at week 8. The study also demonstrated rapid and significant improvement in pruritus severity for tofacitinib compared with control. The clinical benefit of JAK inhibition, combined with SNA-125’s higher potency on TrkA, may confer a greater effect on psoriasis disease endpoints in addition to pruritus and result in an improved profile in this indication. We believe the potential systemic safety issues that limit the use of tofacitinib and other JAK inhibitor compounds in topical administration, can be overcome with SNA-125 through our Topical by Design technology that confers low systemic exposure. As a result, we believe SNA-125 has the potential to provide substantial improvements over currently approved topical therapies for atopic dermatitis, psoriasis and associated pruritus, including improved efficacy, by targeting both conventional and neurogenic inflammatory pathways, targeting pruritus, and providing better local tolerability and minimal systemic exposure. Further, because of the minimal to no systemic exposure, we believe that SNA-125 has the potential to be better suited for chronic administration than other topical JAK3 inhibitors, such as topical tofacitinib.

 

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Overview of atopic dermatitis

Atopic dermatitis is an inflammatory skin disease involving an abnormal skin barrier and disruption in the skin’s ability to insulate the body from exposure to external stimuli. It is a disease of unknown origin that usually starts in early infancy and is typified by pruritus, eczematous lesions, xerosis (dry skin), and lichenification of the skin (thickening of the skin and increase in skin markings). Atopic dermatitis is also referred to as eczema and atopic eczema. Atopic dermatitis is associated with other atopic diseases, for example, asthma, allergic rhinitis, urticaria, acute allergic reactions to foods and increased immunoglobulin E production, in many patients. The American Academy of Dermatology estimates that 10-20% of children suffer from atopic dermatitis. Safety concerns with steroids are very high in this population and parents of affected children are highly focused on minimizing short- and long-term side effects from steroid use. Generally, the disease burden of atopic dermatitis decreases as patients age, leaving 1-3% of adults suffering from atopic dermatitis. As of 2016, the prevalence of atopic dermatitis is estimated at 16 million in the United States. Approximately 75% of atopic dermatitis patients have mild-to-moderate disease according to GlobalData.

There is an unmet need for new therapies for atopic dermatitis, as there are few safe and effective non-steroidal options suitable for chronic use. Topical corticosteroids are the predominant therapies used for mild-to-moderate atopic dermatitis, which is also treated with other topical immunomodulators such as calcineurin inhibitors. The treatment paradigm begins with education on proper skin care including the use of mild soaps and moisturizing lotions (emollients) and the elimination of any potential allergen triggers. Topical steroids are used next and research indicates that these work well for a large proportion of atopic dermatitis patients; however, current topical medications have local and systemic safety risks. Side effects associated with topical corticosteroid use include local application-site reactions, such as atrophy or thinning of the skin. Because of the abnormal skin barrier and systemic absorption of steroids, there are concomitant systemic side effect risks such as diabetes, weight gain, hirsutism and the potential to systemically suppress the body’s ability to make normal amounts of endogenous corticosteroids, which can lead to reduced or delayed growth in adolescents. Chronic inadvertent exposure of the eye to topical steroids may also result in glaucoma or cataracts. Non-steroidal topical therapies used in the treatment of atopic dermatitis include the topical calcineurin inhibitors Elidel and Protopic, but these have boxed warnings for side effects that limit their use.

Patients who do not achieve sustained alleviation of symptoms with topical treatments are prescribed systemic steroids or other systemic immunosuppressive agents such as cyclosporine, a calcineurin inhibitor. While these are effective as temporary treatments of flare-ups, extended use has been associated with many potential side effects or adverse events. In fact, it is generally recommended that patients have no more than two rounds of systemic steroid treatment per year. Prednisone is an option; however, its long-term side effects make it unsuitable for chronic use and following discontinuation severe exacerbations of atopic dermatitis symptoms can occur. Cyclosporine is also not suitable for long-term use as it has been associated with renal toxicity, hirsutism, nausea, and lymphoma, and patients must discontinue use after one year. Furthermore, cyclosporine may not be used in patients with high blood pressure due to an increased risk of hypertension, which precludes its use in a large proportion of older patients. With a lack of safe and effective options, many patients with moderate-to-severe atopic dermatitis have serious, life-long consequences. Scarring may occur, and there is an elevated risk of depression and suicide.

In March 2017, the FDA approved Dupixent (dupilumab), an IL-4R antagonist biologic for the treatment of moderate-to-severe atopic dermatitis. Just as with psoriasis, Dupixent and other biologics in development have the potential to improve the treatment of atopic dermatitis for the more severe population, but we believe the safety profile of these drugs will limit their use in the larger population with mild-to-moderate disease and in children and adolescents. In December 2016, the FDA approved Eucrisa (crisaborole) as a topical treatment for mild-to-moderate atopic dermatitis. Eucrisa is a PDE4 inhibitor and acts on TNF-alpha, IFN-gamma, IL-12, IL-23 and other cytokines. It was studied in multiple clinical trials in atopic dermatitis and demonstrated adequate efficacy and a favorable safety profile. We expect that the global market for prescription atopic dermatitis drugs will grow significantly from its 2014 level of $3.6 billion driven by these recent approvals.

 

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Market Opportunity for SNA-125

We believe SNA-125 has the potential to be suitable for the chronic topical treatment of atopic dermatitis due to its dual mechanism of action (JAK3/TrkA) and the expectation of low systemic exposure seen in clinical studies to date utilizing our Topical by Design technology. If approved for atopic dermatitis with a profile on par with Eucrisa, we believe there is a significant market opportunity for SNA-125. If SNA-125 is able to demonstrate better efficacy than Eucrisa while maintaining a strong safety profile, we estimate that SNA-125 could capture a significantly larger share than Eucrisa, exceeding the current market expectations for that drug.

We also believe SNA-125 has the potential to be suitable for the chronic topical treatment of psoriasis and pruritus. If SNA-125 is approved with a primary indication in psoriasis in addition to pruritus, we believe that many physicians would prescribe SNA-125 as a first-line treatment for mild-to-moderate psoriasis patients. This profile would reinforce the importance of SNA-125 as an agent to help patients avoid the prolonged use of topical corticosteroids, as well as to delay the time before a patient is moved on to more costly and risky systemic therapy, or prevent the need for such patients to be moved onto systemic therapy altogether. Based on this profile, we believe that SNA-125 would achieve higher market penetration than SNA-120, if both are approved.

If approved, we anticipate that SNA-125 is likely to be priced in line with other branded topical medications like Eucrisa for atopic dermatitis and Taclonex, Dovenex and Tazorac for psoriasis. Branded topical pricing is well established and payors are supportive of cost-effective therapies that can address patient needs without having to resort to expensive biologics.

Planned Clinical Development

We are completing nonclinical work to enable clinical trials in atopic dermatitis and psoriasis in the first half of 2018. We intend to initiate our first-in-human studies outside the United States pursuant to Clinical Trial Applications in Canada and Germany. Subsequently we intend to file an IND for SNA-125 to support the first U.S. clinical study. For our proof-of-concept, or POC, study in atopic dermatitis, we plan to utilize the validated bilateral lesion assay, a randomized, double-blinded, intra-individual comparison, which can assess multiple concentrations and formulations and provides a clinical and molecular assessment of change compared to untreated or control plaque. In our psoriasis POC study, we plan to use the modified microplaque assay model, which is a validated, powerful technique with high negative predictive value. If these trials are successful, we plan to pursue further clinical development in one or both of these indications.

Nonclinical Development

We have conducted numerous in vitro and in vivo nonclinical studies to evaluate the pharmacokinetics, pharmacodynamics and toxicology of SNA-125. Our studies have shown strong inhibitory activity against JAK3 and TrkA, key drug targets involved in inflammatory skin diseases. Importantly, in nonclinical studies, SNA-125 was shown to have a favorable safety profile and minimal systemic exposure, potentially supporting its chronic topical administration. Additional profiling of SNA-125’s activity demonstrated anti-proliferative activity, anti-inflammatory activity and inhibition of neuronal signaling of itch in multiple nonclinical experiments, in the absence of toxicity.

We studied single dose topical administration of SNA-125 in rats and minipigs to demonstrate low systemic exposure and absorption. The results have shown that no or negligible amounts of SNA-125 are systemically absorbed through the dermal route. In repeat dose toxicology studies with topical administration, we again observed no systemic absorption or clinical signs of toxicity in ophthalmic, haematological and clinical chemistry examinations. To further understand the metabolism of SNA-125, we conducted pharmacokinetics studies in rodent and non-rodent species using intravenous administration. These studies demonstrated rapid system elimination, with an estimated half-life of approximately 25 minutes.

 

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Single and repeat dose dermal studies showed no evidence of clinical or behavioral toxicity, noteworthy histological or immunohistochemical findings, or systemic absorption. After repeated IV administration, no treatment-related mortality was observed, and mid-to-high dose tissue inflammation completely resolved.

Early-stage Pipeline

In addition to SNA-120 and SNA-125, we have developed additional NCEs which have shown favorable data in early nonclinical studies. If we continue to observe positive data indicating potential efficacy, we intend to advance these assets into preclinical and clinical development. While our primary focus is the development of drug candidates for dermatological conditions, there are several therapeutic areas for which we believe we can develop novel targeted drug candidates with minimal systemic exposure, by formulating therapeutics for topical delivery through other surfaces such as the intestinal tract, eye, or lung. Over time, we intend to advance additional compounds from our Topical by Design technology platform into clinical development.

Topical Photoparticle Therapy

Our Topical Photoparticle Therapy technology uses precisely engineered silver particles to absorb near infrared, or IR, laser light. This mechanism of action has the potential to address one of the key structures implicated in the pathogenesis of acne vulgaris, sebaceous glands, as well as unwanted hair, which in case of light or mixed pigmentation cannot be removed with lasers alone. SNA-001 is a ready-to-use topical suspension of ultra-efficient, near-infrared light absorbing silver particles. The particles are silica coated, nanoscale plates that are tuned, through variance of particle dimensions in manufacturing, to wavelengths of most of the currently installed base of dermatologic lasers, including 755 nm, 810 nm, and 1064 nm. SNA-001 is applied to the skin using mechanical vibration to drive the silver particles into the pilosebaceous unit, or PSU. When illuminated by laser light, the particles exhibit plasmonic resonance, whereby surface electrons oscillate at the frequency of the incident light and emit heat locally. The particles convert laser light energy into heat, facilitating local tissue injury through a process called selective photothermolysis. This effect is designed to cause injury to the sebaceous gland and hair follicle without damaging the adjacent skin, and therefore has the potential to be utilized for the topical treatment of acne and unwanted hair. SNA-001’s mechanism of action causes it to be regulated as a medical device; it is regulated as a 510(k) medical device by the FDA, and we expect to pursue clearance of one or more premarket notifications pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA, for SNA-001. Figure 10 below illustrates the process of selective photothermolysis of the sebaceous gland and hair follicle caused by SNA-001.

 

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Figure 10. Photoparticle Therapy with SNA-001 Causes Selective Photothermolysis of the Sebaceous Gland and Hair Follicle

 

LOGO

SNA-001 for the treatment of acne

The market for acne

Acne vulgaris is a common skin disease, especially among adolescents and young adults, and often is associated with physical and psychological morbidity. In the United States, acne is the most common skin disease, estimated by the American Academy of Dermatology to affect up to 50 million Americans annually. In 2016, acne accounted for approximately $2.8 billion of global pharmaceutical sales according to Global Data, and the non-prescription market for acne products is also large, reflecting a strong willingness of consumers to pay out-of-pocket. The disease ranges in severity from mild-to-severe cystic acne vulgaris and can result in permanent scarring, anxiety, depression and poor self-esteem. Even in cases of mild acne vulgaris, the social stigma associated with the disease often coincides with significant emotional distress and other psychological issues. Due to the frequency of recurrence or relapse and necessary treatment over a prolonged number of years, the American Academy of Dermatology considers acne vulgaris to be a chronic inflammatory disease.

Acne vulgaris results from the complex interplay of four major pathogenic factors:

 

    overproduction of oils, or sebum, by the sebaceous gland;

 

    abnormal keratinization in the follicle, narrowing the pores and obstructing the PSU;

 

    colonization by the anaerobic, lipophilic bacterium Propionibacterium acnes, or P. acnes; and

 

    release of pro-inflammatory mediators into the skin.

Limitations of current treatment options and our solution

The typical acne patient has moderate severity acne on the face and is prescribed topical medications for treatment. Current topical treatment options are limited with respect to effectiveness, patient compliance, and potential side effects. Topical retinoids, such as tretinoin, adapalene and tazarotene, target the abnormal proliferation of cells to stop the narrowing of the follicle and also inhibit the pro-inflammatory cascade that initiates lesion formation. Retinoids often show efficacy over prolonged treatment durations, but can lead to

 

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undesirable dryness, irritation and scaling. These undesirable effects contribute to a lack of patient compliance with daily use, further impairing efficacy. In non-facial acne, patients are often treated with systemic therapies due to greater severity and the inconvenience of applying topical therapies.

Patients that fail topical therapy have the potential to go on systemic therapy including oral antibiotics, isotretinoin and hormone therapy, but patient, parent, and physician concern about unwanted side effects remains high. Oral antibiotics are associated with systemic side effects, including gastrointestinal tract irritation, photosensitivity of skin, headache, dizziness, anemia, bone and joint pain, and nausea. Furthermore, widespread use and extended treatment periods of antibiotics for over 30 years has led to the emergence of the antibiotic resistance of P. acnes and, in turn, the virtual discontinuation of some drugs such as erythromycin from clinical use. Recent attention from the U.S. Centers for Disease Control and Prevention and the World Health Organization on the use of antibiotics and microbial resistance highlights the increasing need to curtail the overuse of antibiotics.

The oral retinoid isotretinoin, also known as Accutane, is the only approved drug shown to target the sebaceous gland, shrinking the size of the gland and significantly reducing sebum outflow. Notwithstanding its strong efficacy profile, use of isotretinoin is limited by its severe side effect profile, given that the drug is a known teratogen that can cause birth defects and may be associated with depression, psychosis and, in rare instances, suicide. Common side effects include dry skin, muscle aches, joint pains, and liver enzyme elevations. Therefore, its use has been reserved for the most severe form of the disease, and in 2009, the manufacturer of Accutane withdrew the branded product from the market. The method of action of isotretinoin and its high effectiveness has provided useful insights into the sebaceous gland as a key target, as it is the only drug with long-term maintenance of treatment effect after patients stop taking the drug. Figure 11 below illustrates the current paradigm for the treatment of acne.

 

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Figure 11. Current Acne Treatment Paradigm

 

LOGO

Procedural solutions have the potential to solve issues of patient compliance and provide safer alternatives to systemic therapy, as well as to supplement the efficacy of other ongoing therapies, but physicians are often dissatisfied with the outcomes from current treatments including laser or light based treatments. Systematic reviews of the published evidence have revealed limitations with many relevant studies, such as the lack of appropriate controls or short duration of post-treatment follow-up, preventing firm conclusions about efficacy and safety. Nonetheless, some individual studies have shown reductions in lesion counts and acne severity using such technologies. Laser therapy often requires high energy intensities (50-150 J/cm2) to sufficiently damage sebaceous glands which can cause off-target side effects including sensitivity to light, pain, inflammation, hyper/hypopigmentation, and permanent scarring.

We believe the use of topical SNA-001 in combination with laser may increase the efficiency of selective photothermolysis of the sebaceous gland, which only isotretinoin can currently target, leading to reduced local sebum production and fewer inflammatory lesions as well as improved local tolerability, while sparing patients from systemic drugs or ongoing application of ineffective topical treatments.

Clinical Development Program

Pivotal studies

We met with the FDA to discuss our plans to develop SNA-001 for the treatment of acne. We incorporated the FDA’s feedback regarding the design of our pivotal trials and confirmed that the applicable pathway to market for SNA-001 is via the 510(k) clearance process.

We are currently conducting multicenter, randomized, double-blind, split-face studies to evaluate SNA-001 in conjunction with laser for the treatment of moderate or severe facial acne. The split-face design means that each subject receives SNA-001 on one side of the face and vehicle, or sham control, on the other side of the face,

 

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and both sides of the face are treated with laser. The primary endpoint is the percentage change in inflammatory lesion counts from baseline to 12 weeks after the last of three weekly treatments. Three separate clinical trials, using nearly identical protocols but different laser wavelengths corresponding to three commonly used commercial lasers, 755 nm, 810 nm and 1064 nm, are each enrolling approximately 55 subjects.

Following these pivotal studies, patients will have the opportunity to participate in an additional 12-week follow-up study to evaluate the safety, effectiveness, and maintenance of the effect of SNA-001 used in conjunction with laser for the treatment of acne vulgaris.

Clinical feasibility studies

A prospective, evaluator-blinded, within subject controlled study of SNA-001 plus laser in subjects with back acne was undertaken using a split back design, where each subject receives active treatment on one side of the back and control treatment on the other. Subjects 18 years of age or older seeking laser treatment for moderate-to-severe back acne were eligible for this single center study. SNA-001 was applied topically to a defined area of the back, massaged into the skin using a mechanical vibration device, and excess suspension was wiped off the skin surface. The SNA-001 treatment area and a control area were treated with one to two passes of 810 nm diode laser at low or high peak power for four, once-weekly sessions. The primary endpoint was assessment of acne lesion count 12 weeks after the last treatment. AEs and expected local side effects, also known as local tolerabilities, including erythema and perifollicular edema, were assessed during treatment and follow-up. Pain occurring at the time of laser treatment was assessed using VAS.

An interim analysis was completed on 11 enrolled subjects (safety population), 10 of whom completed at least one follow-up visit (intent-to-treat, or ITT, population). At 12 weeks after the last treatment, there was a statistically significant reduction in mean total lesion count, or TLC, in both treatment areas (SNA-001 reduction of 60% (p <0.001) and control reduction of 59% (p = 0.003)); the difference between SNA-001 and control treatment was not statistically significant. Similar results were observed for inflammatory lesion count, or ILC. At 12 weeks after the last treatment, there was a statistically significant reduction in mean ILCs in both treatment areas (SNA-001 reduction of 61% (p=0.015) and control reduction of 62% (p=0.018). Figure 12 below sets forth the changes in total and inflammatory lesion counts with SNA-001 as compared to control in this interim analysis.

Figure 12. Reduction in Total and Inflammatory Lesion Counts with SNA-001 vs. Control in All Subjects (N=10)

 

 

LOGO

To understand the impact of high peak power on lesion counts, a subgroup of six subjects was analyzed that received at least one of four treatments with high power laser settings. In this subgroup, statistically significant

 

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reductions in both total and inflammatory lesion counts were observed for SNA-001 (reduction of 73% (p=0.004) for TLC and reduction of 76% (p=0.003) for ILC), but not for control (not statistically significant). Mean TLC and ILC at 12 weeks were lower for SNA-001 compared with control, but the differences were not statistically significant. Figure 13 below sets forth the changes in total and inflammatory lesion counts with SNA-001 as compared to control in the analysis of this high-power subgroup of six patients.

Figure 13. Reduction in Total and Inflammatory Lesion Counts with SNA-001 vs Control in High Power Subgroup (N=6)

 

 

LOGO

Safety and tolerability results

Based on the interim analysis, no treatment-related AEs were reported and no subjects discontinued the study due to an AE. One SAE of a staphylococcal infection of the left cheek was reported, but it was determined to be unrelated to treatment. Expected local tolerabilities occurred more often with SNA-001 than control. All cases were transient and resolved by 12 weeks after last treatment. Scarring events occurring with SNA-001 were associated with punch biopsies conducted during the study and were not associated with acne lesions or laser treatment. Figure 14 below sets forth the occurrence of expected local tolerabilities in this interim analysis of SNA-001.

Figure 14. Occurrence of Expected Local Tolerabilities in Back Acne Feasibility Study with SNA-001 (Safety Population)

 

Local Tolerability a   

SNA-001

(n/N)

  

Laser Only

(n/N)

Erythema

   11/11    9/11

Perifollicular edema

   9/11    3/11

Scarring b

   4/11    0/11

Hypopigmentation c

   3/11    1/11

Hyperpigmentation

   0/11    0/11

Blistering

   0/11    0/11

Infection

   0/11    0/11

 

a Occurring at any treatment or follow-up visit.
b Scarring events recorded on the case report forms were associated with the punch biopsies conducted within the treatment area and were not associated with acne lesions or laser treatment.
c Events were rated as trace or mild, and not observed at the 12 week follow-up visit in any subject.

 

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