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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to         

Commission file number: 001-36080
IVERIC bio, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
20-8185347
(I.R.S. Employer Identification No.)
 
 
 
One Penn Plaza, 35th Floor
New York, NY
(Address of principal executive offices)
 
10119
(Zip Code)
 
 
 
(212) 845-8200
(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
ISEE
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes    o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes    o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company x
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 pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    ý No
As of July 29, 2019 there were 41,562,695 shares of Common Stock, $0.001 par value per share, outstanding.






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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words "anticipate," "believe," "goals," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
the potential benefits of our business plan and strategy to develop our gene therapy and therapeutic product candidates and programs and pursue our collaborative gene therapy sponsored research programs;
our expectations related to our use of available cash;
our estimates regarding expenses, future revenues, capital requirements and needs for, and ability to obtain, additional financing;
the timing, costs, conduct and outcome of our ongoing and planned research and preclinical development activities, including statements regarding the timing of the initiation of and completion of these activities, and the costs to obtain and timing of receipt of results from, and the completion of, such activities;
the timing, costs, conduct and outcome of our ongoing clinical trials, including statements regarding the timing of the completion of such trials, and the costs to obtain and timing of receipt of initial results from, and the completion of, such trials;
our ability to establish and maintain arrangements and capabilities for the manufacture of our product candidates;
the timing of and our ability to obtain marketing approval of our product candidates, and the ability of our product candidates to meet existing or future regulatory standards;
our ability to in-license or acquire additional product candidates or technologies to treat retinal diseases;
the potential advantages of our product candidates and other technologies that we are pursuing, including the advantages and limitations of gene therapy, including use of minigenes, inhibition of the complement system and HtrA1, and other mechanisms of action with which we are pursuing development of our product candidates;
our estimates regarding the potential market opportunity for our product candidates;
our sales, marketing and distribution capabilities and strategy;
the rate and degree of potential market acceptance and clinical utility of our product candidates, if approved;
the potential receipt of revenues from future sales of our product candidates, if approved;
our intellectual property position;
the impact of existing and new governmental laws and regulations; and
our competitive position.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and our stockholders should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the "Risk Factors" section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-

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looking statements do not reflect the potential impact of any future acquisitions, mergers, licenses, dispositions, joint ventures or investments we may make.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our other periodic reports, completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
IVERIC bio, Inc.
Unaudited Consolidated Balance Sheets
(in thousands, except share and per share data)

 
June 30, 2019

December 31, 2018
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
106,889

 
$
131,201

Prepaid expenses and other current assets
1,937

 
2,086

Income tax receivable
1,765

 

Total current assets
110,591

 
133,287

Property and equipment, net
252

 
335

Right-of-use asset, net
989

 

Income tax receivable, non-current
1,765

 
3,529

Other assets
11

 
14

Total assets
$
113,608

 
$
137,165

Liabilities and Stockholders' Equity
 

 
 

Current liabilities
 

 
 

Accrued research and development expenses
$
7,645

 
$
7,337

Accounts payable and accrued expenses
3,241

 
5,869

Lease liability
989

 

Total current liabilities
11,875

 
13,206

Total liabilities
11,875

 
13,206

Stockholders' equity
 

 
 

Preferred stock—$0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding
$

 
$

Common stock—$0.001 par value, 200,000,000 shares authorized, 41,477,420 and 41,397,197 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
41

 
41

Additional paid-in capital
550,303

 
545,585

Accumulated deficit
(448,611
)
 
(421,667
)
Total stockholders' equity
101,733

 
123,959

Total liabilities and stockholders' equity
$
113,608

 
$
137,165

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

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IVERIC bio, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Operating expenses:
 

 
 

 
 
 
 

Research and development
$
10,009

 
$
8,516

 
$
17,694

 
$
16,202

General and administrative
5,198

 
6,332

 
10,679

 
11,977

Total operating expenses
15,207

 
14,848

 
28,373

 
28,179

Loss from operations
(15,207
)
 
(14,848
)
 
(28,373
)
 
(28,179
)
Interest income
617

 
602

 
1,287

 
1,075

Other income (expense)
151

 

 
151

 
(16
)
Loss before income tax provision (benefit)
(14,439
)
 
(14,246
)
 
(26,935
)
 
(27,120
)
Income tax provision (benefit)
4

 
(1,037
)
 
9

 
(838
)
Net loss
$
(14,443
)
 
$
(13,209
)
 
$
(26,944
)
 
$
(26,282
)
Comprehensive loss
$
(14,443
)
 
$
(13,209
)
 
$
(26,944
)
 
$
(26,282
)
Net loss per common share:
 

 
 

 
 
 
 
Basic and diluted
$
(0.35
)
 
$
(0.37
)
 
$
(0.65
)
 
$
(0.73
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
41,477

 
36,188

 
41,452

 
36,171

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


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IVERIC bio, Inc.
Unaudited Consolidated Statements of Stockholders' Equity
(in thousands)

 
Preferred Stock
 
Common Stock
 
Additional
paid-in
capital
 
Accumulated
Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at December 31, 2018

 
$

 
41,397

 
$
41

 
$
545,585

 
$
(421,667
)
 
$
123,959

Issuance of common stock under employee stock compensation plans

 

 
56

 

 
41

 

 
41

Share-based compensation

 

 

 

 
2,470

 

 
2,470

Net loss

 

 

 

 

 
(12,501
)
 
(12,501
)
Balance at March 31, 2019

 
$

 
41,453

 
$
41

 
$
548,096

 
$
(434,168
)
 
$
113,969

Issuance of common stock under employee stock compensation plans

 

 
24

 

 

 

 

Share-based compensation

 

 

 

 
2,207

 

 
2,207

Net loss

 

 

 

 

 
(14,443
)
 
(14,443
)
Balance at June 30, 2019

 
$

 
41,477

 
$
41

 
$
550,303

 
$
(448,611
)
 
$
101,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional
paid-in
capital
 
Accumulated
Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017

 
$

 
36,110

 
$
36

 
$
522,759

 
$
(484,754
)
 
$
38,041

Issuance of common stock under employee stock compensation plans

 

 
54

 

 
27

 

 
27

Share-based compensation

 

 

 

 
3,082

 

 
3,082

Net loss

 

 

 

 

 
(13,073
)
 
(13,073
)
Balance at March 31, 2018

 
$

 
36,164

 
$
36

 
$
525,868

 
$
(497,827
)
 
$
28,077

Issuance of common stock under employee stock compensation plans

 

 
24

 

 

 

 

Share-based compensation

 

 

 

 
2,662

 

 
2,662

Net loss

 

 

 

 

 
(13,209
)
 
(13,209
)
Balance at June 30, 2018

 
$

 
36,188

 
$
36

 
$
528,530

 
$
(511,036
)
 
$
17,530

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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IVERIC bio, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Operating Activities
 

 
 

Net loss
$
(26,944
)
 
$
(26,282
)
Adjustments to reconcile net loss to net cash used in operating activities
 

 
 

Depreciation and other expense
83

 
94

Gain on sale of property and equipment
(150
)
 

Deferred income taxes

 
233

Share-based compensation
4,677

 
5,744

Changes in operating assets and liabilities:
 

 
 

Income tax receivable
(1
)
 
1,387

Prepaid expense and other current assets
299

 
1,227

Other assets
3

 
(7
)
Accrued research and development expenses
308

 
153

Accounts payable and accrued expenses
(2,628
)
 
(3,557
)
Net cash used in operating activities
(24,353
)
 
(21,008
)
Investing Activities
 

 
 

Net cash provided by (used in) investing activities

 

Financing Activities
 

 
 

Proceeds from employee stock plan purchases
41

 
27

Net cash provided by financing activities
41

 
27

Net change in cash and cash equivalents
(24,312
)
 
(20,981
)
Cash and cash equivalents
 

 
 

Beginning of period
131,201

 
166,972

End of period
$
106,889

 
$
145,991

Supplemental disclosure of cash paid
 

 
 

Income tax refunds received
$

 
$
2,467


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

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IVERIC bio, Inc.
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data)
1. Business
Description of Business and Organization
IVERIC bio, Inc. (the “Company”), formerly Ophthotech Corporation, was incorporated on January 5, 2007, in Delaware. The Company is a science-driven biopharmaceutical company with a focus on discovering and developing novel gene therapy solutions to treat orphan inherited retinal diseases ("IRDs") with unmet medical needs. In April 2019, the Company changed its name from Ophthotech Corporation to IVERIC bio, Inc. to reflect the transition of its business to focus principally on gene therapies. The Company believes that gene therapy as a treatment modality, especially gene therapies using adeno-associated virus ("AAV") for gene delivery, holds tremendous promise for retinal diseases. The Company also continues to develop its therapeutic programs, including its ongoing clinical trials for its C5 complement inhibitor Zimura® (avacincaptad pegol) for an age-related retinal disease and for an orphan IRD.
The Company's gene therapy portfolio consists of several ongoing research and preclinical development programs that use AAV for gene delivery. These AAV gene therapy programs are targeting the following orphan IRDs:
rhodopsin-mediated autosomal dominant retinitis pigmentosa ("RHO-adRP"), which is characterized by progressive and severe bilateral loss of vision leading to blindness;
IRDs associated with mutations in the BEST1 gene, including Best vitelliform macular dystrophy ("Best disease"), which is generally characterized by bilateral egg yolk-like lesions in the central portion of the retina (the "macula") that, over time, progress to atrophy and loss of vision;
Leber congenital amaurosis type 10 ("LCA10"), which is characterized by severe bilateral loss of vision at or soon after birth;
autosomal recessive Stargardt disease, which is characterized by progressive damage to the macula and retina, leading to loss of vision in children and young adults; and
IRDs associated with mutations in the USH2A gene, which include Usher syndrome type 2A ("Usher 2A") and USH2A-associated nonsyndromatic autosomal recessive retinitis pigmentosa.
The Company's therapeutics portfolio consists of Zimura and its program of High temperature requirement A serine peptidase 1 protein ("HtrA1") inhibitors. The Company has Phase 2b clinical trials ongoing evaluating Zimura for the treatment of:
geographic atrophy ("GA"), which is a late-stage form of dry age-related macular degeneration ("AMD") characterized by retinal cell death and degeneration of tissue in the macula, and which may result in loss of vision; and
autosomal recessive Stargardt disease.
The Company previously also evaluated Zimura in combination with Lucentis® (ranibizumab), an anti-vascular endothelial growth factor ("anti-VEGF") agent, for the treatment of wet AMD, for which it completed a Phase 2a clinical trial during the fourth quarter of 2018. The Company does not currently have plans to develop Zimura further in wet AMD. The Company's HtrA1 inhibitor program, which it is developing for GA secondary to dry AMD and potentially other age-related retinal diseases, is in the preclinical stage of development.
The Company's business development efforts have resulted in the expansion of its research and development pipeline and the transition of the Company to focus principally on gene therapy. The Company initiated multiple gene therapy sponsored research programs with the University of Massachusetts Medical School ("UMMS") in February 2018 and initiated an additional gene therapy sponsored research program with UMMS for USH2A-related IRDs in July 2019. Additionally, the Company in-licensed its novel AAV gene therapy product candidate for the treatment of RHO-adRP ("IC-100") from the University of Florida Research Foundation ("UFRF") and the University of Pennsylvania ("Penn") in June 2018, in-licensed its novel AAV gene therapy product candidate for the treatment of BEST1-related IRDs, including Best disease ("IC-200") from Penn and UFRF in April 2019 and in-licensed its minigene sponsored research program for LCA10 from the University of Massachusetts in July 2019 (See "Note 10—Subsequent Event" for a description of this in-license transaction). The Company also acquired its HtrA1 inhibitor program through the acquisition of Inception 4, Inc. ("Inception 4") in October 2018.

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2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC") on February 28, 2019.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include all adjustments necessary for the fair presentation of the Company's financial position for the periods presented. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Segment and geographic information
        Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating and reporting segment.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company's Consolidated Balance Sheets and the amount of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, accounting for research and development costs, revenue recognition, accounting for share-based compensation and accounting for income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents. The carrying amounts reported in the Balance Sheets for cash and cash equivalents are valued at cost, which approximates their fair value.
As of June 30, 2019, the Company had cash and cash equivalents of approximately $106.9 million.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash in bank accounts, the balances of which generally exceed federally insured limits. The Company maintains its cash equivalents in investments in money market funds and, at times, in U.S. Treasury securities and investment-grade corporate debt securities with original maturities of 90 days or less.
Concentration of Suppliers
The Company currently relies exclusively upon a single third-party contract manufacturer for IC-100 and IC-200, and expects to rely on sole-source suppliers for certain starting materials to be used in the manufacture of such product candidates. The Company currently relies exclusively upon a single third-party manufacturer to provide supplies of the drug substance for Zimura on a purchase order basis. The Company also engages a single third-party manufacturer to provide fill/finish services for clinical supplies of Zimura. In addition, the Company currently relies upon a single third-party supplier to supply it with the polyethylene glycol reagent used to manufacture Zimura on a purchase order basis. Furthermore, the Company and its contract manufacturers currently rely upon sole-source suppliers of certain raw materials and other specialized components of production used in the manufacture and fill/finish of its product candidates. The Company currently relies upon a single third-party contract manufacturer to produce small quantities of the active pharmaceutical ingredient for its HtrA1 inhibitors for preclinical development purposes. If the Company’s third-party manufacturers or fill/finish service providers should become unavailable to the Company for any reason, including as a result of capacity constraints, financial difficulties or insolvency, the Company believes that there are a limited number of potential replacement manufacturers, and the Company likely would incur added costs and delays in identifying or qualifying such replacements.
Foreign Currency Translation
The Company considers the U.S. dollar to be its functional currency. Expenses denominated in foreign currencies are translated at the exchange rate on the date the expense is incurred. The effect of exchange rate fluctuations on translating

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foreign currency assets and liabilities into U.S. dollars is included in the Consolidated Statements of Operations and Comprehensive Loss. Foreign exchange transaction gains and losses are included in the results of operations and are not material in the Company's financial statements.
Financial Instruments
Cash equivalents and available for sale securities are reflected in the accompanying financial statements at fair value. The carrying amount of accounts payable and accrued expenses, including accrued research and development expenses, approximates fair value due to the short-term nature of those instruments.
Leases
The Company has leased its office space and has entered into various other agreements in conducting its business. At inception, the Company determines whether an agreement represents a lease and at commencement evaluates each lease agreement to determine whether the lease is an operating or financing lease. Some of the Company's lease agreements have contained renewal options, tenant improvement allowances, rent holidays and rent escalation clauses, although its remaining outstanding lease for its principal offices has no further options, allowances, holidays or clauses. As described below under "Recently Adopted Accounting Pronouncements," the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) as of January 1, 2019.
Pursuant to ASU 2016-02, all of the Company's leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASU 2016-02, the Company recorded an operating lease right-of-use asset and an operating lease liability on its Consolidated Balance Sheet. Right-of-use lease assets represent the Company's right to use the underlying asset for the lease term and the lease obligation represents the Company's commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit discount rate, the Company has used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The right-of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. For all office lease agreements the Company combines lease and nonlease components. Leases with an initial term of 12 months or less are not recorded on the Company's Consolidated Balance Sheet.
Prior to the adoption of ASU 2016-02, when the Company's lease agreements contained renewal options, tenant improvement allowances, rent holidays and rent escalation clauses, the Company recorded a deferred rent asset or liability equal to the difference between the rent expense and the future minimum lease payments due. The lease expense related to operating leases was recognized on a straight-line basis in the Company's Consolidated Statements of Operations over the term of each lease. In cases where the lessor granted the Company leasehold improvement allowances that reduced the Company's lease expense, the Company capitalized the improvements as incurred and recognized deferred rent, which was amortized over the shorter of the lease term or the expected useful life of the improvements.
Property and Equipment
Property and equipment, which consists mainly of clinical equipment, computers, software, other office equipment, and leasehold improvements, are carried at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the respective assets, generally three to ten years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset.
Research and Development
The Company's research and development expenses primarily consist of costs associated with the manufacturing, development and preclinical and clinical testing of its product candidates and costs associated with its collaborative gene therapy sponsored research programs. The Company's research and development expenses consist of:
external research and development expenses incurred under arrangements with third parties, such as academic research collaborators, contract research organizations ("CROs"), and contract development and manufacturing organizations ("CDMOs") and other vendors for the production of drug substance and drug product; and
employee-related expenses for employees dedicated to research and development activities, including salaries, benefits and share-based compensation expense.

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Research and development expenses also include costs of acquired product licenses, in-process research and development, and related technology rights where there is no alternative future use, costs of prototypes used in research and development, consultant fees and amounts paid to collaborative partners.
All research and development expenses are charged to operations as incurred in accordance with ASC 730, Research and Development.
Income Taxes
The Company utilizes the liability method of accounting for deferred income taxes, as set forth in ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company's policy is to record interest and penalties on uncertain tax positions as income tax expense.
Share-Based Compensation
The Company follows the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors, including employee stock options, restricted stock units (“RSUs”) and options granted to employees to purchase shares under the 2016 Employee Stock Purchase Plan (the “ESPP”). Share-based compensation expense is based on the grant date fair value estimated in accordance with the provisions of ASC 718 and is generally recognized as an expense over the requisite service period, net of estimated forfeitures. For grants containing performance-based vesting provisions, expense is recognized over the estimated achievement period only when the performance-based milestone is deemed probable of achievement. If performance-based milestones are later determined not to be probable of achievement, then all previously recorded stock-based compensation expense associated with such options will be reversed during the period in which the Company makes this determination.
Prior to January 1, 2019, share-based compensation awarded to non-employees was subject to revaluation over the vesting term of each award. Subsequent to the adoption of ASU 2018-07, Improvements to Non-Employee Share-Based Payment Accounting, the value of non-employee share-based compensation is measured on the date of grant, similar to share-based compensation granted to employees.
Stock Options
The Company estimates the fair value of stock options granted to employees and non-employee directors on the date of grant using the Black-Scholes option-pricing model. Due to the lack of trading history, the Company's computation of stock-price volatility is based on the volatility rates of comparable publicly held companies over a period equal to the expected term of the options granted by the Company. The Company's computation of expected term is determined using the "simplified" method, which is the midpoint between the vesting date and the end of the contractual term. The Company believes that it does not have sufficient reliable exercise data in order to justify the use of a method other than the "simplified" method of estimating the expected exercise term of employee stock option grants. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends to stockholders and has no current intentions to pay cash dividends. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield at the date of grant for a term equivalent to the expected term of the option.
The weighted-average assumptions used to estimate grant date fair value of stock options using the Black-Scholes option pricing model were as follows for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Expected common stock price volatility
88%
 
85%
 
87%
 
83%
Risk-free interest rate
2.15%-2.31%
 
2.83%-2.83%
 
2.15%-2.54%
 
2.39%-2.83%
Expected term of options (years)
5.3
 
5.3
 
5.6
 
5.6
Expected dividend yield
 
 
 
RSUs
The Company estimates the fair value of RSUs granted to employees using the closing market price of the Company's common stock on the date of grant.

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ESPP
In April 2016, the board of directors adopted the ESPP pursuant to which the Company may sell up to an aggregate of 1,000,000 shares of common stock. The ESPP was approved by the Company’s stockholders in June 2016. The ESPP is considered compensatory and the fair value of the discount and look back provision are estimated using the Black-Scholes option-pricing model and recognized over the six month withholding period prior to purchase.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Publicly-traded business entities should apply the amendments in ASU 2016-2 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all publicly-traded business entities and all nonpublicly-traded business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. On January 1, 2019 the Company adopted this guidance utilizing the simplified transition option that allows companies to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company elected to adopt the package of practical expedients permitted in Accounting Standards Codification Topic 842, or ASC 842. Accordingly, the Company continues to account for its existing operating leases as operating leases under the new guidance, without reassessing whether the contracts contain a lease under ASC 842 or whether classification of the operating leases would be different under ASC Topic 842.
As a result of the adoption, the Company recognized, as of the beginning of the period of adoption, right-of-use assets and lease liabilities of approximately $1.5 million, which represents the present value of its remaining lease payments using a weighted average estimated incremental borrowing rate of 6%, on its Consolidated Balance Sheet. The adoption of this standard did not have a material impact on the Company’s results of operations for the period ended June 30, 2019.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods. During the three months ended March 31, 2019, the Company adopted this guidance. The adoption did not have a material impact on its financial statements for the period ended and as of June 30, 2019.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes, the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

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In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808), which clarifies the interaction between the guidance for collaborative arrangements (Topic 808) and the new revenue recognition standard (Topic 606). For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures.
3. Net Loss Per Common Share
Basic and diluted net loss per common share is determined by dividing net loss by the weighted average common shares outstanding during the period. For the periods where there is a net loss, shares underlying stock options and RSUs have been excluded from the calculation of diluted net loss per common share because the effect of including such shares would be anti-dilutive. Therefore, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same. The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Basic and diluted net loss per common share calculation:
 

 
 

 
 
 
 
Net loss
$
(14,443
)
 
$
(13,209
)
 
$
(26,944
)
 
$
(26,282
)
Weighted average common shares outstanding - basic and dilutive
41,477

 
36,188

 
41,452

 
36,171

Net loss per share of common stock - basic and diluted
$
(0.35
)
 
$
(0.37
)
 
$
(0.65
)
 
$
(0.73
)
The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding for the periods presented, as the effect of including such shares would be anti-dilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock options outstanding
5,690

 
4,818

 
5,690

 
4,818

Restricted stock units
635

 
199

 
635

 
199

Total
6,325

 
5,017

 
6,325

 
5,017

4. Cash, Cash Equivalents and Available for Sale Securities
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at the date of purchase to be cash equivalents. As of June 30, 2019 and December 31, 2018, the Company had cash and cash equivalents of approximately $106.9 million and $131.2 million, respectively. Cash and cash equivalents included cash of $2.3 million at June 30, 2019 and $4.4 million at December 31, 2018. Cash and cash equivalents at June 30, 2019 and December 31, 2018 included $104.6 million and $126.8 million, respectively, of investments in money market funds and certain investment-grade corporate debt securities with original maturities of 90 days or less.
The Company considers securities with original maturities of greater than 90 days at the date of purchase to be available for sale securities. The Company held no available for sale securities at June 30, 2019 or at December 31, 2018, respectively.
The Company believes that its existing cash and cash equivalents as of June 30, 2019 will be sufficient to fund its operations and capital expenditure requirements as currently planned for at least the next 12 months.
5. Share-Based Compensation
Pursuant to the evergreen provisions of the Company's 2013 stock incentive plan (the "2013 Plan"), annual increases have resulted in the addition of an aggregate of approximately 8,554,000 additional shares to the 2013 Plan, including for 2019, an increase of approximately 1,656,000 shares, or approximately 4% of the total number of shares of the Company's common stock outstanding as of January 1, 2019. As of June 30, 2019, the Company had approximately 2,704,000 shares available for grant under the 2013 Plan.

12


Share-based compensation expense, net of estimated forfeitures, includes expenses related to stock options and RSUs granted to employees, non-employee directors and consultants, as well as options granted to employees to purchase shares under the ESPP. Stock-based compensation by award type was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock options
$
1,488

 
$
1,836

 
$
3,110

 
$
3,968

Restricted stock units
709

 
819

 
1,530

 
1,765

Employee stock purchase plan
10

 
7

 
37

 
11

Total
$
2,207

 
$
2,662

 
$
4,677

 
$
5,744

The Company allocated stock-based compensation expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
989

 
$
1,106

 
$
2,159

 
$
2,546

General and administrative
1,218

 
1,556

 
2,518

 
3,198

Total
$
2,207

 
$
2,662

 
$
4,677

 
$
5,744

Stock Options
A summary of the stock option activity, weighted average exercise prices, options outstanding, exercisable and expected to vest as of June 30, 2019 is as follows (in thousands except weighted average exercise price):
 
Number of Shares Underlying Options
 
Weighted
Average
Exercise
Price
Outstanding, December 31, 2018
5,903

 
$
13.72

Granted
137

 
$
1.35

Forfeited
(261
)
 
$
26.18

Expired
(89
)
 
$
12.72

Outstanding, June 30, 2019
5,690

 
$
12.89

Vested and exercisable, June 30, 2019
2,850

 
$
21.83

Vested and expected to vest, June 30, 2019
5,463

 
$
13.26

As of June 30, 2019, there were approximately $6.4 million of unrecognized compensation costs, net of estimated forfeitures, related to stock option awards grants, which are expected to be recognized over a remaining weighted average period of 1.8 years.

13


RSUs
The following table presents a summary of the Company's outstanding RSU awards granted as of June 30, 2019 (in thousands except weighted average grant-date fair value):
 
Restricted
Stock
Units
 
Weighted Average
Grant-Date
Fair Value
Outstanding, December 31, 2018
679

 
$
15.61

Awarded
10

 
$
1.38

Vested
(49
)
 
$
52.83

Forfeited
(5
)
 
$
38.98

Outstanding, June 30, 2019
635

 
$
12.40

Outstanding, Expected to vest
518

 
$
6.58

As of June 30, 2019, there were approximately $2.1 million of unrecognized compensation costs, net of estimated forfeitures, related to RSUs grants, which are expected to be recognized over a remaining weighted average period of 1.5 years.
ESPP
As of June 30, 2019, there were 920,707 shares available for future purchases under the ESPP. There were no shares of common stock issued under the ESPP during the three months ended June 30, 2019 and 2018. There were 31,522 shares of common stock issued under the ESPP during the six months ended June 30, 2019. Cash proceeds from ESPP purchases were $41 thousand during the six months ended June 30, 2019. There were 12,229 shares of common stock issued under the ESPP during the six months ended June 30, 2018. Cash proceeds from ESPP purchases were $27 thousand during the six months ended June 30, 2018.
6. Income Taxes    
For the three and six months ended June 30, 2019, the Company recorded a de minimis provision for income taxes. For the three and six months ended June 30, 2018, the Company recorded a benefit for income taxes of $1.0 million and $0.8 million, respectively. The benefit for income taxes recorded during the three months ended June 30, 2018 was to reflect the settlement of a local tax audit. The income tax benefit for the six months ended June 30, 2018 includes the provision for income taxes recorded by the Company for the three months ended March 31, 2018 to reflect the impact of sequestration on the Company's estimate of refundable AMT credits.
The Company will continue to evaluate its ability to realize its deferred tax assets on a quarterly basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development. Any additional changes to the valuation allowance recorded on deferred tax assets in the future would impact the Company’s income taxes.
7. Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company reviews investments on a periodic basis for other than temporary impairments. This review is subjective as it requires management to evaluate whether an event or change in circumstances has occurred in the period that may have a significant adverse effect on the fair value of the investment. The Company uses the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company classifies its investment-grade corporate debt securities within the fair value hierarchy as Level 2 assets, as it primarily utilizes quoted market prices or rates for similar instruments to value these securities.

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The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market. The Company's Level 1 assets consist of investments in money market funds and U.S. Treasury securities.
Level 2—inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. The Company's Level 2 assets may consist of investments in investment-grade corporate debt securities.
Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability. The Company does not hold any assets that are measured using Level 3 inputs.
The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2019:
 
Fair Value Measurement Using
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 

 
 

 
 

Investments in money market funds*
$
87,572

 
$

 
$

Investments in investment-grade corporate debt securities*
$

 
$
17,031

 
$

The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018:
 
Fair Value Measurement Using
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 

 
 

 
 

Investments in money market funds*
$
97,402

 
$

 
$

Investments in investment-grade corporate debt securities*
$

 
$
29,425

 
$

 
*
Investments in money market funds and investment-grade corporate debt securities with maturities less than 90 days are reflected in cash and cash equivalents in the accompanying Consolidated Balance Sheets.
No transfer of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three and six months ended June 30, 2019.
The Company held no available for sale securities at June 30, 2019 or at December 31, 2018.
8. Operating Leases
The Company leases office space located in New York, New York and Princeton, New Jersey under non-cancelable operating lease arrangements. The lease for the Company's New York office space expires at the end of June 2020, whereas the sublease for the Company's Princeton office space expires in March 2020. As of January 1, 2019, the Company recognized right-of-use assets and lease liabilities of approximately $1.5 million, which represents the present value of its remaining lease payments using a weighted average estimated incremental borrowing rate of 6%.
For the three and six months ended June 30, 2019, lease and rent expense was $0.3 million and $0.6 million. Cash paid from operating cash flows for amounts included in the measurement of lease liabilities was $0.3 million and $0.6 million for the three and six months ended June 30, 2019. At June 30, 2019, the Company's operating leases had a weighted average remaining lease term of 1.0 year.

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The following presents the maturity of the Company's operating lease liabilities as of June 30, 2019:
 
June 30, 2019
Remainder of 2019
$
520

2020
504

Total remaining obligation
1,024

Less imputed interest
(35
)
Present value of lease liabilities
$
989

9. Commitments and Contingencies
Zimura - Archemix Corp.
The Company is party to an agreement with Archemix Corp., or Archemix, under which the Company in-licensed rights in certain patents, patent applications and other intellectual property related to Zimura and pursuant to which the Company may be required to pay sublicense fees and make milestone payments (the "C5 License Agreement"). Under the C5 License Agreement, for each anti-C5 aptamer product that the Company may develop under the agreement, including Zimura, the Company is obligated to make payments to Archemix of up to an aggregate of $57.5 million if the Company achieves specified development, clinical and regulatory milestones, with $30.5 million of such payments relating to a first indication, $24.5 million of such payments relating to second and third indications and $2.5 million of such payments relating to sustained delivery applications. Under the C5 License Agreement, the Company is also obligated to make additional payments to Archemix of up to an aggregate of $22.5 million if the Company achieves specified commercial milestones based on net product sales of all anti-C5 products licensed under the agreement. The Company is also obligated to pay Archemix a double-digit percentage of specified non-royalty payments the Company may receive from any sublicensee of its rights under the C5 License Agreement. The Company is not obligated to pay Archemix a running royalty based on net product sales in connection with the C5 License Agreement.
IC-100 - University of Florida and the University of Pennsylvania
Under its exclusive license agreement with UFRF and Penn for rights to IC-100, the Company is obligated to make payments to UFRF, for the benefit of Penn and UFRF (together, the "Licensors"), of up to an aggregate of $23.5 million if the Company achieves specified clinical, marketing approval and reimbursement approval milestones with respect to a licensed product and up to an aggregate of an additional $70.0 million if the Company achieves specified commercial sales milestones with respect to a licensed product. The Company is also obligated to pay UFRF, for the benefit of the Licensors, a low single-digit percentage of net sales of licensed products. The Company is also obligated to pay UFRF, for the benefit of the Licensors, a double-digit percentage of specified non-royalty payments the Company may receive from any third-party sublicensee of the licensed patent rights. Further, if the Company receives a rare pediatric disease priority review voucher from the U.S. Food and Drug Administration ("FDA") in connection with obtaining marketing approval for a licensed product and the Company subsequently uses such priority review voucher in connection with a different product candidate, the Company will be obligated to pay UFRF, for the benefit of the Licensors, aggregate payments in the low double-digit millions of dollars based on certain approval and commercial sales milestones with respect to such other product candidate. In addition, if the Company sells such a priority review voucher to a third party, the Company will be obligated to pay UFRF, for the benefit of the Licensors, a low double-digit percentage of any consideration received from such third party in connection with such sale.
IC-200 - University of Pennsylvania and the University of Florida
Under its exclusive license agreement with Penn and UFRF for rights to IC-200, the Company is obligated to make payments to Penn, for the benefit of the Licensors, of up to an aggregate of $15.7 million if the Company achieves specified clinical, marketing approval and reimbursement approval milestones with respect to one licensed product and up to an aggregate of an additional $3.1 million if the Company achieves these same milestones with respect to a different licensed product. In addition, the Company is obligated to make payments to Penn, for the benefit of the Licensors, of up to an aggregate of $48.0 million if the Company achieves specified commercial sales milestones with respect to one licensed product and up to an aggregate of an additional $9.6 million if the Company achieves these same milestones with respect to a different licensed product. The Company is also obligated to pay Penn, for the benefit of the Licensors, a low single-digit percentage of net sales of licensed products. The Company is also obligated to pay Penn, for the benefit of the Licensors, a high single-digit to a mid-teen percentage of specified non-royalty payments the Company may receive from any third-party sublicensee of the licensed patent rights, with the applicable percentage based upon the stage of development of the sublicensed product at the time the Company enters into the sublicense. Further, if the Company receives a rare pediatric disease priority review voucher from the FDA in connection with obtaining marketing approval for a licensed product and the Company subsequently uses such priority

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review voucher in connection with a different product candidate outside the scope of the agreement, the Company will be obligated to pay Penn, for the benefit of the Licensors, aggregate payments in the low double-digit millions of dollars based on certain approval and commercial sales milestones with respect to such other product candidate. In addition, if the Company sells such a priority review voucher to a third party, the Company will be obligated to pay Penn, for the benefit of the Licensors, a high single-digit percentage of any consideration received from such third party in connection with such sale.
HtrA1 Inhibitors - Former Equityholders of Inception 4
Under the agreement and plan of merger pursuant to which the Company acquired Inception 4 (the "Inception 4 Merger Agreement"), the Company is obligated to make payments to the former equityholders of Inception 4 of up to an aggregate of $105 million, subject to the terms and conditions of the Inception 4 Merger Agreement, if the Company achieves certain specified clinical and regulatory milestones with respect to a product candidate from its HtrA1 inhibitor program, with $45 million of such potential payments relating to GA and $60 million of such potential payments relating to wet AMD. Under the Inception 4 Merger Agreement, the Company does not owe any commercial milestones or royalties based on net sales. The future milestone payments will be payable in the form of shares of the Company's common stock, calculated based on the price of its common stock over a five-trading day period preceding the achievement of the relevant milestone, unless and until the issuance of such shares would, together with all other shares issued in connection with the acquisition, exceed an overall maximum limit of approximately 7.2 million shares, which is equal to 19.9% of the number of issued and outstanding shares of the Company's common stock as of the close of business on the business day prior to the closing date of the Inception 4 acquisition, and will be payable in cash thereafter. The Inception 4 Merger Agreement also includes customary indemnification obligations to the former equityholders of Inception 4, including for breaches of the representations and warranties, covenants and agreements of the Company and its subsidiaries (other than Inception 4) in the Inception 4 Merger Agreement.
Employment Contracts
The Company also has letter agreements with certain employees that require the funding of a specific level of payments if certain events, such as a termination of employment in connection with a change in control or termination of employment by the employee for good reason or by the Company without cause, occur.
 Contract Service Providers
In addition, in the course of normal business operations, the Company has agreements with contract service providers to assist in the performance of the Company’s research and development and manufacturing activities. Expenditures to CROs and CDMOs represent significant costs in preclinical and clinical development. Subject to required notice periods and the Company’s obligations under binding purchase orders and any cancellation fees that the Company may be obligated to pay, the Company can elect to discontinue the work under these agreements at any time. 
Legal Proceedings
On January 11, 2017, a putative class action lawsuit was filed against the Company and certain of its current and former executive officers in the United States District Court for the Southern District of New York, captioned Frank Micholle v. Ophthotech Corporation, et al., No. 1:17-cv-00210. On March 9, 2017, a related putative class action lawsuit was filed against the Company and the same group of its current and former executive officers in the United States District Court for the Southern District of New York, captioned Wasson v. Ophthotech Corporation, et al., No. 1:17-cv-01758. These cases were consolidated on March 13, 2018. On June 4, 2018, the lead plaintiff filed a consolidated amended complaint (the “CAC”). The CAC purports to be brought on behalf of shareholders who purchased the Company’s common stock between March 2, 2015 and December 12, 2016. The CAC generally alleges that the Company and certain of its officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the results of the Company’s Phase 2b trial and the prospects of the Company’s Phase 3 trials for Fovista in combination with anti-VEGF agents for the treatment of wet AMD. The CAC seeks unspecified damages, attorneys’ fees, and other costs. The Company and individual defendants filed a motion to dismiss the CAC on July 27, 2018. That motion is fully briefed.
On February 7, 2018, a shareholder derivative action was filed against the members of the Company’s Board of Directors in the New York Supreme Court Commercial Division, captioned Cano v. Guyer, et al., No. 650601/2018. The complaint alleges that the defendants breached their fiduciary duties to the Company by adopting a compensation plan that overcompensates the non-employee members of the Company's board relative to boards of companies of comparable market capitalization and size. The complaint also alleges that the defendants were unjustly enriched as a result of the alleged conduct. The complaint purports to seek unspecified damages, on behalf of the Company, attorneys’ fees, and other costs, as well as an order directing the Company to reform and improve its corporate governance and internal procedures to comply with applicable laws. The Company filed a motion to dismiss this case on May 14, 2018. On June 4, 2018, the plaintiff filed an amended

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complaint. On June 25, 2018, the Company filed a renewed motion to dismiss this case. On December 3, 2018, the parties filed a stipulation of settlement that contemplates that the Company will adopt certain compensation-related governance reforms and does not obligate the defendants or the Company to pay any monetary damages. The court approved the settlement at a hearing on March 12, 2019. As part of the settlement, in April 2019 the Company paid $300,000 in fees and costs to plaintiff's counsel. As contemplated by the settlement, the Company's board of directors adopted certain compensation-related governance reforms, including a non-employee director compensation policy, which the Company's stockholders approved on May 15, 2019 at its 2019 annual meeting.
On August 31, 2018, a shareholder derivative action was filed against current and former members of the Company's Board of Directors and certain current and former officers of the Company in the United States District Court for the Southern District of New York, captioned Luis Pacheco v. David R. Guyer, et al., Case No. 1:18-cv-07999. The complaint, which is based substantially on the facts alleged in the CAC, alleges that the defendants breached their fiduciary duties to the Company and wasted the Company's corporate assets by failing to oversee the Company's business, and also alleges that the defendants were unjustly enriched as a result of the alleged conduct, including through receipt of bonuses, stock options and similar compensation from the Company, and through sales of the Company's stock between March 2, 2015 and December 12, 2016. The complaint purports to seek unspecified damages on the Company's behalf, attorneys’ fees, and other costs, as well as an order directing the Company to reform and improve its corporate governance and internal procedures to comply with applicable laws, including submitting certain proposed amendments to the Company's corporate charter, bylaws and corporate governance policies for vote by the Company's stockholders. On December 14, 2018, the Company filed a motion to dismiss the complaint. That motion is fully briefed.
On October 16, 2018, the Company’s board of directors received a shareholder demand to investigate and commence legal proceedings against certain members of the Company’s board of directors. The demand alleges facts that are substantially similar to the facts alleged in the CAC and the Pacheco complaint and asserts claims that are substantially similar to the claims asserted in the Pacheco complaint. On January 30, 2019, the Company’s board of directors received a second shareholder demand from a different shareholder to investigate and commence legal proceedings against certain current and former members of the Company’s board of directors based on allegations that are substantially similar to the allegations contained in the first demand letter.
The Company denies any and all allegations of wrongdoing and intends to vigorously defend against these lawsuits. The Company is unable, however, to predict the outcome of these matters at this time. Moreover, any conclusion of these matters in a manner adverse to the Company and for which it incurs substantial costs or damages not covered by the Company's directors’ and officers’ liability insurance would have a material adverse effect on its financial condition and business. In addition, the litigation could adversely impact the Company's reputation and divert management’s attention and resources from other priorities, including the execution of its business plan and strategies that are important to the Company's ability to grow its business, any of which could have a material adverse effect on the Company's business.
10. Subsequent Event
miniCEP290 License Agreement

On July 22, 2019, the Company entered into an Exclusive License Agreement (the “miniCEP290 License Agreement”) with the University of Massachusetts (“UMass”).  The Company entered into the miniCEP290 License Agreement by exercising its exclusive option rights under an option agreement and a sponsored research agreement that the Company previously entered into with UMass in February 2018. Under the miniCEP290 License Agreement, UMass granted the Company a worldwide, exclusive license under specified patent rights and specified biological materials and a non-exclusive license under specified know-how to make, have made, use, offer to sell, sell, have sold and import products for the treatment of diseases associated with mutations in the CEP290 gene, including LCA10. The Company may grant sublicenses of the licensed patent rights and know-how without the consent of UMass.

The Company has agreed to use diligent efforts to develop licensed products and to introduce such licensed products into the commercial market. Subject to obtaining marketing approval, the Company agreed to make any approved licensed product reasonably available to the public. In addition, the Company has agreed to meet specified development and regulatory milestones with respect to a licensed product by specified dates, as the same may be extended under the terms of the miniCEP290 License Agreement.


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Financial Terms

The Company has agreed to pay UMass a $0.4 million upfront license fee upon execution of the miniCEP290 License Agreement. In addition, the Company has agreed to issue to UMass 75,000 shares of common stock of the Company, par value $0.001 per share (“Common Stock”), promptly following execution of the miniCEP290 License Agreement pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended.

The Company has also agreed to pay UMass an annual license maintenance fee in the low double-digit thousands of dollars, which fee will be payable on an annual basis until the expiration of the royalty term for the licensed products. Furthermore, the Company has agreed to reimburse UMass for the costs and expenses of patent prosecution and maintenance related to the licensed patent rights.

The Company has further agreed to pay UMass up to an aggregate of $14.75 million in cash and issue up to 75,000 shares of Common Stock if the Company achieves specified clinical and regulatory milestones with respect to a licensed product. In addition, the Company has agreed to pay UMass up to an aggregate of $48.0 million if the Company achieves specified commercial sales milestones with respect to a licensed product.

The Company is also obligated to pay UMass royalties at a low single-digit percentage of net sales of licensed products. The Company's obligation to pay royalties under the miniCEP290 License Agreement will continue on a licensed product-by-licensed product and country-by-country basis until the later of: (a) the expiration of the last-to-expire licensed patent rights covering the sale of the applicable licensed product in the country of sale, or (b) 10 years from the first commercial sale of the applicable licensed product in the country of sale. Beginning with the calendar year following receipt of marketing approval for a licensed product, the Company is also obligated to pay certain minimum royalties, not to exceed an amount in the mid-double-digit thousands of dollars on an annual basis, which minimum royalties are creditable against the Company’s royalty obligation with respect to net sales of licensed products due in the year the minimum royalty is paid.

If the Company or any of its affiliates sublicenses any of the licensed patent rights or know-how to a third party, the Company will be obligated to pay UMass a high single-digit to a mid-tens percentage of the consideration received in exchange for such sublicense, with the applicable percentage based upon the stage of development of the licensed products at the time the Company or the applicable affiliate enters into the sublicense.

If the Company receives a rare pediatric disease priority review voucher (a “priority review voucher”) from the FDA in connection with obtaining marketing approval for a licensed product, and the Company subsequently uses such priority review voucher in connection with a different product candidate outside the scope of the miniCEP290 License Agreement, the Company will be obligated to pay UMass a low-tens percentage of the fair market value of the priority review voucher at the time of approval of such product candidate and a low-twenties percentage of the fair market value of the priority review voucher at the time of achievement of a specified commercial sales milestone for such other product candidate. In addition, if the Company sells such a priority review voucher to a third party, the Company will be obligated to pay UMass a low-thirties percentage of any consideration received from such third party in connection with such sale.

Term and Termination

The miniCEP290 License Agreement, unless earlier terminated by the Company or UMass, will expire upon the expiration of the Company's obligation to pay royalties to UMass on net sales of licensed products.  The Company may terminate the miniCEP290 License Agreement at any time for any reason upon prior written notice to UMass. The Company may also terminate the miniCEP290 License Agreement if UMass materially breaches the miniCEP290 License Agreement and does not cure such breach within a specified cure period.

UMass may terminate the miniCEP290 License Agreement if the Company materially breaches the miniCEP290 License Agreement and does not cure such breach within a specified cure period.

Following any termination of the miniCEP290 License Agreement prior to expiration of the term of the miniCEP290 License Agreement, all rights to the licensed patent rights and know-how that UMass granted to the Company will revert to UMass.

Other Provisions

The miniCEP290 License Agreement contains patent prosecution and maintenance, indemnification and dispute resolution provisions that are customary for agreements of this kind.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties and should be read together with the "Risk Factors" section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a science-driven biopharmaceutical company with a focus on discovering and developing novel gene therapy solutions to treat orphan inherited retinal diseases, or IRDs, with unmet medical needs. In April 2019, we changed our name from Ophthotech Corporation to IVERIC bio, Inc. to reflect the transition of our business to focus principally on gene therapies. We believe that gene therapy as a treatment modality, especially gene therapies using adeno-associated virus, or AAV, for gene delivery, holds tremendous promise for retinal diseases. We also continue to develop our therapeutic programs, including our ongoing clinical trials for our C5 complement inhibitor Zimura® (avacincaptad pegol) for an age-related retinal disease and for an orphan IRD. If data from either of our Zimura clinical trials are positive, we plan to seek partnering opportunities for further clinical development of Zimura.
Our team has significant drug development experience in retinal diseases, including designing and executing investigational new drug, or IND, -enabling studies and clinical trials, and we are continuing to build our internal and external capabilities, especially in the preclinical development, clinical development and manufacture of gene therapies. We also have deep relationships with global ophthalmology thought leaders, including those at a number of leading academic research institutions with which we have developed collaborative relationships, and an extensive network of ophthalmic clinical trial sites. We will seek to leverage these existing relationships as we prepare for potential clinical trials for our gene therapy product candidates. We believe that the combination of these factors provide us a competitive advantage in retinal drug development.
Our gene therapy portfolio consists of several ongoing research and preclinical development programs that use AAV for gene delivery. These AAV gene therapy programs are targeting the following orphan IRDs:
rhodopsin-mediated autosomal dominant retinitis pigmentosa, or RHO-adRP, which is characterized by progressive and severe bilateral loss of vision leading to blindness;
IRDs associated with mutations in the BEST1 gene, including Best vitelliform macular dystrophy, or Best disease, which is generally characterized by bilateral egg yolk-like lesions in the central portion of the retina, referred to as the macula, which, over time, progress to atrophy and loss of vision;
Leber congenital amaurosis type 10, or LCA10, which is characterized by severe bilateral loss of vision at or soon after birth;
autosomal recessive Stargardt disease, or STGD1, which is characterized by progressive damage to the macula and retina, leading to loss of vision in children and young adults; and
IRDs associated with mutations in the USH2A gene, which include Usher syndrome type 2A, or Usher 2A, and USH2A-associated nonsyndromatic autosomal recessive retinitis pigmentosa.
Our therapeutics portfolio consists of Zimura and our program of High temperature requirement A serine peptidase 1 protein, or HtrA1, inhibitors. We have Phase 2b clinical trials ongoing evaluating Zimura for the treatment of:
geographic atrophy, or GA, which is a late-stage form of dry age-related macular degeneration, or AMD, characterized by retinal cell death and degeneration of tissue in the macula, and which may result in loss of vision; and
autosomal recessive Stargardt disease.
We previously also evaluated Zimura in combination with Lucentis® (ranibizumab), an anti-vascular endothelial growth factor, or anti-VEGF, agent for the treatment of wet AMD, for which we completed a Phase 2a clinical trial, which we refer to as the OPH2007 trial, during the fourth quarter of 2018. We do not currently have plans to develop Zimura further in wet AMD. Our

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HtrA1 inhibitor program, which we are developing for GA secondary to dry AMD and potentially other age-related retinal diseases, is in the preclinical stage of development.
Gene Therapy Research and Development Programs
IC-100: Product Candidate for RHO-adRP
We are pursuing the preclinical development of IC-100, our novel AAV gene therapy product candidate for the treatment of RHO-adRP, to which we acquired exclusive development and commercialization rights through a June 2018 license agreement with the University of Florida Research Foundation, or UFRF, and the University of Pennsylvania, or Penn. We and Penn are conducting additional preclinical studies of IC-100 and a natural history study of RHO-adRP patients. In parallel, we have engaged a gene therapy contract development and manufacturing organization, or CDMO, as the manufacturer for preclinical and Phase 1/2 clinical supply of IC-100. Process development, manufacturing and other IND-enabling activities are ongoing. Based on current timelines and subject to regulatory review, we expect to initiate a Phase 1/2 clinical trial for IC-100 during the second half of 2020.
IC-200: Product Candidate for BEST1-Related IRDs
We are pursuing the preclinical development of IC-200, our novel AAV gene therapy product candidate for the treatment of BEST1-related IRDs, including Best disease, to which we acquired exclusive development and commercialization rights through an April 2019 license agreement with Penn and UFRF. We and Penn are conducting additional preclinical studies of IC-200 and natural history studies of patients with BEST1-related IRDs. In parallel, we have engaged a gene therapy CDMO as the manufacturer for pre-clinical and Phase 1/2 clinical supply of IC-200 and have commenced process development, manufacturing and other IND-enabling activities. Based on current timelines and subject to regulatory review, we expect to initiate a Phase 1/2 clinical trial for IC-200 during the first half of 2021.
Minigene Therapy Research Programs
AAV vectors are generally limited as a delivery vehicle by the size of their genetic cargo, which is restricted to approximately 4,700 base pairs of genetic code. The use of "minigenes" seeks to deliver a smaller but still functional form of a larger gene packaged into a standard-size AAV delivery vector. The predominant or standard, non-mutated form of a gene is referred to as the wildtype form, and the protein resulting from expression of the wildtype gene is referred to as wildtype protein. The goal of minigene therapy is to deliver a gene expressing a protein that, although different from the wildtype protein, is nonetheless functional for purposes of treating the associated disease.
We are funding multiple sponsored research programs at the University of Massachusetts Medical School, or UMMS, seeking to use a minigene approach to develop new gene therapies for orphan IRDs. We refer to each of these programs by reference to the gene of interest for which we are seeking to create a minigene therapy. We refer to these programs collectively as our collaborative gene therapy sponsored research programs. We receive research results from these programs as they become available. UMMS has granted us an option to obtain an exclusive license to any patents or patent applications that result from these programs.
miniCEP290 Program for LCA10
One of the minigene research programs, which we refer to as the miniCEP290 program, is targeting LCA10, which is associated with mutations in the CEP290 gene. The naturally occurring CEP290 gene is approximately 8,000 base pairs. In a 2018 publication in Human Gene Therapy, researchers at UMMS presented their findings that injection of a CEP290 minigene into a newborn mouse model for LCA10 resulted in rescue of photoreceptor cells, as evidenced by both anatomical and functional measures. The goal of the sponsored research was to create and evaluate other CEP290 minigene constructs in the mouse model and optimize the effect observed in that publication.
Encouraged by the results of the sponsored research we received to date, through which we have identified what we believe are multiple promising minigene constructs, we exercised our option and in July 2019 entered into a license agreement for exclusive development and commercialization rights to patent rights and know-how for this program. The sponsored research is ongoing and UMMS is continuing to test additional CEP290 minigene constructs. We plan to continue to advance our miniCEP290 program with the constructs that appear most promising with the goal of identifying a lead product candidate to advance into preclinical development and IND-enabling activities.
miniABCA4 Program for STGD1
Another of the minigene research programs, which we refer to as the miniABCA4 program, is targeting STGD1, which is associated with mutations in the ABCA4 gene. UMMS is constructing and evaluating several ABCA4 minigene constructs in both in vitro and in vivo experiments. We expect to receive results from the miniABCA4 program in 2020.

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miniUSH2A Program for USH2A-Related IRDs
In July 2019, we entered into a sponsored research agreement with UMMS for USH2A-related IRDs. We refer to this program as the miniUSH2A program. This program will employ the minigene approach for the USH2A gene, which encodes a protein called usherin. Usherin is believed to be important in the development and maintenance of cells in the retina and the inner ear. Usher 2A is an autosomal recessive genetic condition characterized by hearing loss from birth and progressive vision loss, due to retinitis pigmentosa, that begins in adolescence or adulthood. USH2A-associated nonsyndromatic autosomal recessive retinitis pigmentosa is a genetic condition that manifests as vision loss without associated hearing loss. The miniUSH2A program seeks to develop an AAV deliverable, mutation independent, minigene therapy option for the vision loss associated with USH2A mutations. There are currently no FDA- or European Medicines Agency, or EMA, approved therapies to treat Usher 2A or USH2A-associated nonsyndromatic autosomal recessive retinitis pigmentosa.
Therapeutic Development Programs
Although we are principally focused on gene therapies, we continue to believe therapeutics will serve an important role in drug development for retinal diseases, particularly as treatments with novel mechanisms of action are developed and brought to market and as the long-term effects of these treatments continue to be understood.
Zimura Clinical Programs
Zimura, our C5 complement inhibitor, is a chemically-synthesized, pegylated RNA aptamer. We currently have two clinical trials for Zimura ongoing. These clinical trials are designed to obtain data to guide potential future development efforts and are not intended to be pivotal studies. The following is a brief description of our ongoing trials and their current status:
OPH2003 (geographic atrophy (GA) secondary to dry AMD): an ongoing, randomized, double-masked, sham controlled, multi-center Phase 2b clinical trial evaluating the safety and efficacy of Zimura monotherapy in patients with GA secondary to dry AMD. We completed enrollment for this clinical trial in October 2018 with a total of 286 patients enrolled. We expect that initial, top-line data from this clinical trial will be available during the fourth quarter of 2019.
OPH2005 (autosomal recessive Stargardt disease (STGD1)): an ongoing, randomized, double-masked, sham controlled, multi-center Phase 2b clinical trial evaluating the safety and efficacy of Zimura monotherapy for the treatment of STGD1. We completed enrollment for this clinical trial in February 2019 with a total of 95 patients enrolled. We expect that initial, top-line data from this clinical trial will be available during the second half of 2020.
HtrA1 Inhibitor Program
We are pursuing the preclinical development of certain HtrA1 inhibitors, to which we acquired rights through our October 2018 acquisition of Inception 4, Inc., or Inception 4, for the treatment of GA secondary to dry AMD. Our HtrA1 inhibitor program includes a number of lead small molecule compounds that show high affinity and specificity for HtrA1 when tested, as well as a number of backup compounds. We are pursuing formulation development studies with the goal of identifying a formulation for intravitreal application in the eye. If we are successful in identifying and formulating a product candidate from this program, we plan to initiate IND-enabling activities for the selected product candidate. Based on current timelines and subject to successful completion of preclinical development, we are targeting submission of an IND to the U.S. Food and Drug Administration, or FDA, for a product candidate from this program by late 2020.
Research and Development Pipeline
We have summarized the current status of our ongoing research and development programs in the table below. We have given an IC number (IC-100 and IC-200) to our preclinical gene therapy product candidates. In the future, we intend to give an IC number to other gene therapy product candidates that advance to preclinical development from our collaborative gene therapy sponsored research programs or that we in-license or acquire, in each case, once a lead product candidate is identified for a particular program.

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https://cdn.kscope.io/c16219288ca54e1a4ef470a150885a8b-ivericbiopipelinechart72519k.jpg
Business Development Activities
Since early 2017, we have been pursuing a business development strategy to evaluate available technologies to treat ophthalmic diseases, particularly those in the back of the eye, and to explore opportunities to obtain rights to additional products and product candidates employing these technologies. As we evaluated numerous potential opportunities, we have come to believe that gene therapy is a promising treatment modality for retina diseases for which there are significant unmet medical needs. Our efforts have resulted in the expansion of our research and development pipeline and the transition of our company to focus principally on gene therapy. We expect to continue to evaluate, on a selective basis, opportunities to potentially obtain rights to additional gene therapy product candidates and technologies for retinal diseases. We intend to continue to focus on opportunities that present a compelling scientific rationale, have the potential to address an unmet medical need and present a meaningful commercial opportunity. To the extent feasible, we plan to target opportunities where we believe third-party funding for specific programs or technologies may be available.
Financial Matters
As of June 30, 2019, we had cash and cash equivalents of $106.9 million. We believe that our cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements as currently planned for at least the next 12 months. After taking into account our recent in-licensing transaction for our miniCEP290 program and sponsored research agreement for our miniUSH2A program, we reaffirm our estimate that year-end 2019 cash and cash equivalents will range between $80 million and $85 million. This estimate is based on our current business plan, including the continuation of our current research and development programs. This estimate does not reflect any additional expenditures, including associated development costs, in the event we in-license or acquire any new product candidates or commence any new sponsored research programs. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.
Financial Operations Overview
Revenue
As we have no products approved for sale, we do not expect to receive any revenue related to our product candidates until we obtain regulatory approval for and commercialize such products, or until we potentially enter into agreements with third parties for the development and commercialization of our product candidates. If our development efforts for any of our product candidates result in regulatory approval or if we enter into agreements with third parties, we may generate revenue from product sales or from such third parties.

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Research and Development Expenses
Our research and development expenses primarily consist of costs associated with the manufacturing, development, and preclinical and clinical testing of our product candidates and costs associated with our collaborative gene therapy sponsored research programs. Our research and development expenses consist of:
external research and development expenses incurred under arrangements with third parties, such as academic research collaborators, contract research organizations, or CROs, and CDMOs and other vendors for the production of drug substance and drug product; and
employee-related expenses for employees dedicated to research and development activities, including salaries, benefits and share-based compensation expense.
Research and development expenses also include costs of acquired product licenses, in-process research and development, and related technology rights where there is no alternative future use, costs of prototypes used in research and development, consultant fees and amounts paid to collaborative partners.
All research and development expenses are charged to operations as incurred in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 730, Research and Development, or ASC 730. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made. We do not currently utilize a formal time allocation system to capture expenses on a project-by-project basis because we record expenses by functional department. Accordingly, we do not allocate all research and development expenses to individual projects or product candidates, although we do allocate some portion of these expenses by project or product candidate, as shown below.
The following table summarizes our research and development expenses for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
 
2018
2019
 
2018
 
(in thousands)
Zimura
$
3,778

 
$
3,761

$
6,979

 
$
7,736

HtrA1
232

 

232

 

IC-100: RHO-adRP
1,777

 
914

2,625

 
914

IC-200: BEST1-related IRDs
1,138

 

1,283

 

Other gene therapy
191

 
490

439

 
490

Prior product candidate Fovista
16

 
35

29

 
64

Personnel-related
1,689

 
1,395

3,304

 
3,276

Share-based compensation
989

 
1,106

2,159

 
2,546

Other
199

 
815

644

 
1,176

 
$
10,009

 
$
8,516

$
17,694

 
$
16,202

We expect our research and development expenses to increase as we continue to pursue our research and development programs. Our research and development expenses may also increase if we in-license or acquire any new product candidates or commence any new sponsored research programs.
Although the future development of our product candidates is highly uncertain, we expect we will require substantial, additional funding in order to complete the activities necessary to develop and commercialize one or more of our product candidates. We expect the development of our product candidates will continue for at least the next several years. At this time, we cannot reasonably estimate the remaining costs necessary to complete development, to complete process development and manufacturing scale-up and validation activities and to potentially seek marketing approval with respect to our product candidates.
The successful development of our product candidates is subject to numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
the scope, rate of progress and costs of our research and development activities, including manufacturing activities;

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the potential benefits of our product candidates over other therapies;
preclinical development results and clinical trial results;
the terms and timing of regulatory approvals;
our ability to market, commercialize and achieve market acceptance for any of our product candidates; and
our ability to successfully file, prosecute, defend and enforce patent claims and other intellectual property rights, together with associated expenses.
A change in the outcome of any of these variables with respect to the development of our product candidates could mean a significant change in the costs and timing associated with the development of that product candidate.
Our costs may exceed our expectations due to unforeseen or other reasons. For example, our costs may exceed our expectations if we experience any unforeseen issue in our ongoing clinical trials, such as issues with the retention of enrolled patients or with the availability of drug supply, or in our preclinical development programs, such as if we experience issues with manufacturing or inability to develop formulations, or if we further expand the scope of our clinical trials, preclinical development programs or collaborative gene therapy sponsored research programs. Our costs may also exceed our expectations for other reasons, for example, if we are required by the FDA, the EMA, or regulatory authorities in other jurisdictions to perform clinical or nonclinical trials or other studies in addition to those we currently expect to conduct, if we experience issues with process development, establishing or scaling-up of manufacturing activities or activities to enable and qualify second source suppliers, or if we decide to increase preclinical and clinical research and development activities or build internal research capabilities or pursue internal research efforts. As a result, we may need or may seek to obtain additional funding for our continuing operations sooner or in greater amounts than expected.
See the “Liquidity and Capital Resources” section on page 29 of this Quarterly Report on Form 10-Q for more information regarding our current and future financial resources and our expectations regarding our research and development expenses and funding requirements.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, in our executive, legal, finance, business development, human resources, investor relations and information technology functions. Other general and administrative expenses include facility costs and professional fees for legal, including patent-related, services and expenses, consulting and accounting services, and travel expenses.
Interest Income
We currently have invested our cash and cash equivalents in money market funds and investment-grade corporate debt securities, which generate a nominal amount of interest income.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued research and development expenses, revenue recognition, share-based compensation and income taxes described in greater detail below. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Of those policies, we believe that the following accounting policies are the most critical to aid our stockholders in fully understanding and evaluating our financial condition and results of operations.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and

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estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses are related to expenses incurred with respect to academic research collaborators, CROs, CDMOs and other vendors in connection with research and development and manufacturing activities.
We base our expenses related to academic research collaborators, CROs and CDMOs on our estimates of the services received and efforts expended pursuant to quotations and contracts with such vendors that conduct research and development and manufacturing activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. 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 could result in us reporting amounts that are too high or too low in any particular period. There have been no material changes in estimates for the periods presented.
Share-Based Compensation
We account for all share-based compensation payments issued to employees, non-employee directors, and consultants by estimating the fair value of each equity award. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the date of grant, net of forfeitures. We recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to us on a straight-line basis. In accordance with authoritative guidance, we re-measure the fair value of consultant share-based awards as the awards vest, and recognize the resulting value, if any, as expense during the period the related services are rendered.
We apply the fair value recognition provisions of ASC 718, Compensation—Stock Compensation. Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. We recognize share-based compensation expense ratably over the requisite service period, which in most cases is the vesting period of the award. For grants containing performance-based vesting provisions, expense is recognized over the estimated achievement period only when the performance-based milestone is deemed probable of achievement. If performance-based milestones are later determined not to be probable of achievement, then all previously recorded stock-based compensation expense associated with such options will be reversed during the period in which we make this determination. Calculating the fair value of share-based awards requires us to make highly subjective assumptions.
Prior to January 1, 2019, share-based compensation awarded to non-employees was subject to revaluation over the vesting term of each award. Subsequent to the adoption of ASU 2018-07, Improvements to Non-Employee Share-Based Payment Accounting, the value of non-employee share-based compensation is measured on the date of grant, similar to share-based compensation granted to employees.
We use the Black-Scholes option pricing model to value our stock option awards and the options to purchase shares under our employee stock purchase plan. Use of this valuation methodology requires that we make assumptions as to: the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and the expected dividend yield of our common stock. As a recent public company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of the options. We calculate expected volatility based on reported data for similar publicly traded companies for which historical information is available and will continue to do so until the historical volatility of our common stock is sufficient to measure expected volatility for future option grants.
We use the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The weighted-average assumptions used to estimate grant date fair value of stock options using the Black-Scholes option pricing model were as follows for the three and six months ended

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June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Expected common stock price volatility
88%
 
85%
 
87%
 
83%
Risk-free interest rate
2.15%-2.31%
 
2.83%-2.83%
 
2.15%-2.54%
 
2.39%-2.83%
Expected term of options (years)
5.3
 
5.3
 
5.6
 
5.6
Expected dividend yield
 
 
 
We estimate the fair value of restricted stock units, or RSUs, granted to employees using the closing market price of our common stock on the date of grant.
We also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting forfeitures and record share-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised.
Share-based compensation expense for equity grants to employees, non-employee directors and consultants was $2.2 million and $2.6 million for the three months ended June 30, 2019 and 2018, respectively, net of expected forfeitures. Share-based compensation expense for equity grants to employees, non-employee directors and consultants was $4.7 million and $5.7 million for the six months ended June 30, 2019 and 2018, respectively, net of expected forfeitures. 
As of June 30, 2019, we had $8.5 million of total unrecognized share-based compensation expense, which we expect to recognize over a weighted-average remaining vesting period of approximately 1.7 years. We expect our share-based compensation expense for our equity awards to employees, non-employee directors and consultants to decrease in future periods as a result of a decrease in the fair value of our common stock.
For the three and six months ended June 30, 2019 and 2018, we allocated share-based compensation as follows:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
 
2018
2019
 
2018
 
(in thousands)
Research and development
$
989

 
$
1,106

$
2,159

 
$
2,546

General and administrative
1,218

 
1,556

2,518

 
3,198

Total
$
2,207

 
$
2,662

$
4,677

 
$
5,744

Income Taxes
For the three and six months ended June 30, 2019, we recorded a de minimis provision for income taxes. For the three and six months ended June 30, 2018, we recorded a benefit for income taxes of $1.0 million and $0.8 million, respectively. The benefit for income taxes recorded during the three months ended June 30, 2018 was to reflect the settlement of a local tax audit. The income tax benefit for the six months ended June 30, 2018 includes the provision for income taxes that we recorded for the three months ended March 31, 2018 to reflect the impact of sequestration on our estimate of refundable AMT credits.
The deferred tax assets associated with our losses incurred in 2018 and to date in 2019 have a full valuation allowance recorded against them due to our history of losses and the lack of other positive evidence to support future taxable income against which these losses could be applied. See Note 6 to our financial statements in Part I-Item 1 of this Quarterly Report on Form 10-Q for further information regarding our expectations with respect to our income tax provision.

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Results of Operations
Comparison of Three Month Periods Ended June 30, 2019 and 2018
 
Three months ended June 30,
 
 
 
2019
 
2018
 
Increase
(Decrease)
 
(in thousands)
 
 
Statements of Operations Data:
 

 
 

 
 

Operating expenses:
 

 
 

 
 

Research and development
$
10,009

 
$
8,516

 
$
1,493

General and administrative
5,198

 
6,332

 
(1,134
)
Total operating expenses
15,207

 
14,848

 
359

Loss from operations
(15,207
)
 
(14,848
)
 
359

Interest income
617

 
602

 
15

Other income (expense)
151

 

 
(151
)
Loss before income tax provision (benefit)
(14,439
)
 
(14,246
)
 
193

Income tax provision (benefit)
4

 
(1,037
)
 
(1,041
)
Net loss
$
(14,443
)
 
$
(13,209
)
 
$
1,234

Research and Development Expenses
Our research and development expenses were $10.0 million for the three months ended June 30, 2019, an increase of $1.5 million compared to $8.5 million for the three months ended June 30, 2018. The increase in research and development expenses for the three months ended June 30, 2019 was primarily due to a $1.7 million increase in costs resulting from the initiation and expansion of our gene therapy programs and a $0.2 million increase in costs resulting from the initiation of our HtrA1 inhibitor program. This increase was partially offset by a decrease in professional consulting costs. The costs for our Zimura programs were relatively unchanged during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 as a result of decreased clinical trial costs relating to the completion of the OPH2007 wet AMD trial during the fourth quarter of 2018, which were primarily offset by an increase in clinical trial costs related to increased patient enrollment in the OPH2003 dry AMD trial and the OPH2005 STGD1 trial.
General and Administrative Expenses
Our general and administrative expenses were $5.2 million for the three months ended June 30, 2019, a decrease of $1.1 million, compared to $6.3 million for the three months ended June 30, 2018. The decrease in general and administrative expenses for the three months ended June 30, 2019 was primarily due to a decrease in costs to support our operations and infrastructure.
Interest Income
Interest income for the three months ended June 30, 2019 was $0.6 million compared to interest income of $0.6 million for the three months ended June 30, 2018.
Income Tax Provision (Benefit)
For the three months ended June 30, 2019, we recorded a de minimis provision for income taxes. For the three months ended June 30, 2018, we recorded an income tax benefit of $1.0 million, which was primarily to reflect a settlement of a local tax audit.

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Comparison of Six Month Periods Ended June 30, 2019 and 2018
 
Six months ended June 30,
 
 
 
2019
 
2018
 
Increase
(Decrease)
 
(in thousands)
 
 
Statements of Operations Data:
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
$
17,694

 
$
16,202

 
$
1,492

General and administrative
10,679

 
11,977

 
(1,298
)
Total operating expenses
28,373

 
28,179

 
194

Loss from operations
(28,373
)
 
(28,179
)
 
194

Interest income
1,287

 
1,075

 
212

Other income (expense)
151

 
(16
)
 
(167
)
Loss before income tax provision (benefit)
(26,935
)
 
(27,120
)
 
(185
)
Income tax provision (benefit)
9

 
(838
)
 
(847
)
Net loss
$
(26,944
)
 
$
(26,282
)
 
$
662

Research and Development Expenses
Our research and development expenses were $17.7 million for the six months ended June 30, 2019, an increase of $1.5 million compared to $16.2 million for the six months ended June 30, 2018. The increase in research and development expenses for the six months ended June 30, 2019 was primarily due to a $2.9 million increase in costs resulting from the initiation and expansion of our gene therapy programs and a $0.2 million increase in costs resulting from the initiation of our HtrA1 inhibitor program. This increase was offset by a $0.8 million decrease in costs associated with our Zimura programs, a $0.4 million decrease in personnel expenses and a $0.5 million decrease in professional and consulting fees. The decreased costs for our Zimura programs included lower costs related to a decrease in Zimura manufacturing activities and lower clinical trial costs as a result of the completion of the OPH2007 wet AMD trial during the fourth quarter of 2018 and the completion of patient recruitment for our OPH2003 dry AMD trial during the fourth quarter of 2018 and the associated reduction in site initiation costs.
General and Administrative Expenses
Our general and administrative expenses were $10.7 million for the six months ended June 30, 2019, a decrease of $1.3 million, compared to $12.0 million for the six months ended June 30, 2018. The decrease in general and administrative expenses for the six months ended June 30, 2019 was primarily due to a decrease in costs to support our operations and infrastructure.
Interest Income
Interest income for the six months ended June 30, 2019 was $1.3 million compared to interest income of $1.1 million for the six months ended June 30, 2018. The increase in interest income was the result of an increase in interest rates and a change in the mix of our investment portfolio, which previously only included investments in money market funds and now includes investment in certain investment-grade corporate debt securities with original maturities of 90 days or less, partially offset by a decrease in cash balances available for investment.
Income Tax Provision (Benefit)
For the six months ended June 30, 2019, we recorded a de minimis provision for income taxes. For the six months ended June 30, 2018, we recorded an income taxes benefit of $0.8 million primarily to reflect a settlement of a local tax audit offset by a reduction in the amount of deferred tax assets that we expect will be realized in the future.
Liquidity and Capital Resources
Sources of Liquidity
Since inception, we have financed our operations primarily through private placements of our preferred stock, venture debt borrowings, funding we received under our prior Fovista royalty purchase and sale agreement with Novo Holdings A/S, our initial public offering of common stock, which we closed in September 2013, our follow-on public offering of common

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stock, which we closed in February 2014, funds we received under a prior licensing and commercialization agreement with Novartis Pharma, AG for Fovista, and the approximately $6.1 million in cash that we received in connection with our acquisition of Inception 4 in October 2018. We do not have any committed external source of funds.
We currently have an effective universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, to register for sale from time to time up to $150.0 million of common stock, preferred stock, debt securities, depositary shares, warrants and/or units in one or more registered offerings, of which $50.0 million may be offered, issued and sold under an “at-the-market” Sales Agreement, or the ATM Agreement, with Cowen and Company, LLC. We have not yet issued and sold any shares of our common stock under the ATM Agreement.
Cash Flows
As of June 30, 2019, we had cash and cash equivalents totaling $106.9 million and no debt. We currently have invested our cash and cash equivalents in money market funds and certain investment-grade corporate debt securities with original maturities of 90 days or less.
The following table shows a summary of our cash flows for the six months ended June 30, 2019 and 2018:
 
Six months ended June 30,
 
2019
 
2018
 
(in thousands)
Net cash (used in) provided by:
 
 
 
Operating Activities
$
(24,353
)
 
$
(21,008
)
Investing Activities

 

Financing Activities
41

 
27

Net change in cash and cash equivalents
$
(24,312
)
 
$
(20,981
)
Cash Flows from Operating Activities
Net cash used in operating activities in the six months ended June 30, 2019 related primarily to net cash used to fund our research and development activities for Zimura, IC-100 and IC-200 and our collaborative gene therapy sponsored research programs and to support our general and administrative operations. Net cash used in operating activities in the six months ended June 30, 2018 related primarily to net cash used to fund our research and development activities for Zimura and to support our general and administrative operations.
See "—Funding Requirements" below for a description of how we expect to use our cash for operating activities in future periods.
Cash Flows from Investing Activities
We had no net cash provided by investing activities for the six months ended June 30, 2019 and June 30, 2018.
Cash Flows from Financing Activities
Net cash provided by financing activities was $41 thousand for the six months ended June 30, 2019 and $27 thousand for the six months ended June 30, 2018 and related to purchases made under our employee stock purchase plan.
Funding Requirements
Our gene therapy product candidates IC-100 and IC-200 and our HtrA1 inhibitor program are each in preclinical development, Zimura is in clinical development, and we are funding collaborative gene therapy sponsored research programs that are ongoing. We expect our research and development expenses to increase as we pursue these programs as currently planned. We could also incur additional research and development expenses as we evaluate and potentially in-license or acquire, and undertake development of additional product candidates, including any promising product candidates that emerge from our collaborative gene therapy sponsored research programs. Furthermore, if we successfully develop and obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. We are party to agreements with UFRF and Penn with respect to IC-100 and IC-200, UMMS with respect to any potential product candidates from our miniCEP290 program, Archemix Corp. with respect to Zimura and the former equityholders of Inception 4 with respect to our HtrA1 inhibitor program, in each case, that impose significant milestone payment obligations on us in connection with our achievement of specified clinical, regulatory and commercial milestones with respect to these product candidates or programs, as well as certain royalties on net

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sales with respect to IC-100, IC-200 and any product candidates we choose to develop from our miniCEP290 program. It is likely that any future in-licensing or acquisition agreements that we enter into with respect to additional product candidates or technologies would include similar obligations.
We expect that we will continue to incur significant expenses as we:
continue the development of IC-100 and IC-200 and pursue our collaborative gene therapy sponsored research programs;
continue the clinical development of Zimura;
continue the preclinical development of our HtrA1 inhibitor program;
in-license or acquire the rights to, and pursue the development of, other product candidates or technologies;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, manufacturing, quality control, quality assurance and scientific personnel, especially as we increase our internal gene therapy capabilities;
seek marketing approval for any product candidates that successfully complete clinical trials;
expand our outsourced manufacturing activities or establish commercial operations or sales, marketing and distribution capabilities, if we receive, or expect to receive, marketing approval for any of our product candidates; and
expand our general and administrative functions to support our future growth.
As of June 30, 2019, we had cash and cash equivalents of $106.9 million. We believe that our cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements as currently planned for at least the next 12 months. After taking into account our recent in-licensing transaction for our miniCEP290 program and sponsored research agreement for our miniUSH2A program, we reaffirm our estimate that year-end 2019 cash and cash equivalents will range between $80 million and $85 million. This estimate is based on our current business plan, including the continuation of our current research and development programs. This estimate does not reflect any additional expenditures, including associated development costs, in the event we in-license or acquire any new product candidates or commence any new sponsored research programs. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.
Although the future development of our product candidates is highly uncertain, we expect we will require substantial, additional funding in order to complete the activities necessary to develop and commercialize one or more of our product candidates. We expect the development of our product candidates will continue for at least the next several years. At this time, we cannot reasonably estimate the remaining costs necessary to complete development, to complete process development and manufacturing scale-up and validation activities and to potentially seek marketing approval with respect to our product candidates.
Our future capital requirements will depend on many factors, including:
the scope, progress, costs and results of our efforts to develop IC-100 and IC-200, including activities to establish manufacturing capabilities and preclinical testing to enable us to file INDs for these product candidates;
the scope, progress, costs and results from our collaborative gene therapy sponsored research programs, including costs related to the in-license and future development of any promising product candidates and technologies that emerge from these programs;
the scope, progress, costs and results of our ongoing Zimura clinical programs, as well as our ability to secure external funding for any additional clinical trials we may undertake to obtain data sufficient to seek marketing approval for Zimura in any indication;
the scope, progress, costs and results of our efforts to develop our HtrA1 inhibitor program, including formulation development and other preclinical development activities;
the costs, progress and timing of process development, manufacturing scale-up and validation activities and stability studies associated with our product candidates;

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the extent to which we in-license or acquire rights to, and undertake research or development of, additional product candidates or technologies;
our ability to establish collaborations on favorable terms, if at all;
the costs, timing and outcome of regulatory filings and reviews of our product candidates;
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending intellectual property-related claims;
the timing, scope and cost of commercialization activities for any of our product candidates if we receive, or expect to receive, marketing approval for a product candidate; and
subject to receipt of marketing approval, net revenue received from commercial sales of any of our product candidates, after milestone payments and royalty payments that we would be obligated to make.
We do not have any committed external source of funds. Our ability to raise adequate additional financing when needed, and on terms acceptable to us, will depend on many factors. These factors include investors' perceptions of the potential success of our ongoing business, including the development of our product candidates and other programs, and the potential future growth of our business. Additionally, these factors include general market conditions that also affect other companies. These factors may make raising capital difficult, and may result in us accepting terms that are unfavorable to us, especially if we are in need of financing at the particular time. The size of our company and our status as a company listed on The Nasdaq Stock Market, or Nasdaq, may also limit our ability to raise financing. For example, our ability to raise adequate financing through a public offering may be limited by market conditions and SEC rules based on our current market capitalization. Nasdaq listing rules also generally limit the number of shares we may issue in a private placement to a number less than 20% of the number of shares of our common stock outstanding immediately prior to the transaction, unless we issue such shares at a premium, which investors may be unwilling to accept, or unless we obtain shareholder approval, which can be expensive and time-consuming and can add risk to our ability to complete the financing transaction. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate the development of our product candidates, our collaborative gene therapy sponsored research programs, or our future commercialization efforts.
Until such time, if ever, when we can generate substantial product revenues, we may need or may seek to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that 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, our existing stockholders' ownership interests would be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect our existing stockholders' rights as common stockholders. The dilutive effect of future capital raises may be substantial, depending on the price of our common stock at the time of such capital raise, with a lower stock price translating to greater dilution for existing stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, we may issue equity securities as consideration for business development transactions, which may also dilute our existing stockholders' ownership interests.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, products or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Our need for additional financing may continue even if we are able to successfully develop one or more of our product candidates. Our future commercial revenues, if any, will be derived from sales of such product candidates, which may not be available for at least several years following completion of successful product development, if at all. In addition, if approved, our product candidates may not achieve commercial success. Even if those products are successful and we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Under most, if not all, of the foregoing circumstances, we may need to obtain substantial additional financing to achieve our business objectives.

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Recent Developments - miniCEP290 License Agreement
On July 22, 2019, we entered into an Exclusive License Agreement, which we refer to as the miniCEP290 License Agreement, with the University of Massachusetts, or UMass.  We entered into the miniCEP290 License Agreement by exercising our exclusive option rights under an option agreement and a sponsored research agreement that we previously entered into with UMass in February 2018. Under the miniCEP290 License Agreement, UMass granted us a worldwide, exclusive license under specified patent rights and specified biological materials and a non-exclusive license under specified know-how to make, have made, use, offer to sell, sell, have sold and import products for the treatment of diseases associated with mutations in the CEP290 gene, including LCA10. We may grant sublicenses of the licensed patent rights and know-how without the consent of UMass.

We have agreed to use diligent efforts to develop licensed products and to introduce such licensed products into the commercial market. Subject to obtaining marketing approval, we agreed to make any approved licensed product reasonably available to the public. In addition, we have agreed to meet specified development and regulatory milestones with respect to a licensed product by specified dates, as the same may be extended under the terms of the miniCEP290 License Agreement.

Financial Terms

We have agreed to pay UMass a $400,000 upfront license fee upon execution of the miniCEP290 License Agreement. In addition, we have agreed to issue to UMass 75,000 shares of our common stock, par value $0.001 per share promptly following execution of the miniCEP290 License Agreement pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended.

We have also agreed to pay UMass an annual license maintenance fee in the low double-digit thousands of dollars, which fee will be payable on an annual basis until the expiration of the royalty term for the licensed products. Furthermore, we have agreed to reimburse UMass for the costs and expenses of patent prosecution and maintenance related to the licensed patent rights.

We have further agreed to pay UMass up to an aggregate of $14.75 million in cash and issue up to 75,000 shares of our common stock if we achieve specified clinical and regulatory milestones with respect to a licensed product. In addition, we have agreed to pay UMass up to an aggregate of $48.0 million if we achieve specified commercial sales milestones with respect to a licensed product.

We are also obligated to pay UMass royalties at a low single-digit percentage of net sales of licensed products. Our obligation to pay royalties under the miniCEP290 License Agreement will continue on a licensed product-by-licensed product and country-by-country basis until the later of: (a) the expiration of the last-to-expire licensed patent rights covering the sale of the applicable licensed product in the country of sale, or (b) 10 years from the first commercial sale of the applicable licensed product in the country of sale. Beginning with the calendar year following receipt of marketing approval for a licensed product, we are also obligated to pay certain minimum royalties, not to exceed an amount in the mid-double-digit thousands of dollars on an annual basis, which minimum royalties are creditable against our royalty obligation with respect to net sales of licensed products due in the year the minimum royalty is paid.

If we or any of our affiliates sublicenses any of the licensed patent rights or know-how to a third party, we will be obligated to pay UMass a high single-digit to a mid-tens percentage of the consideration received in exchange for such sublicense, with the applicable percentage based upon the stage of development of the licensed products at the time we or the applicable affiliate enters into the sublicense.

If we receive a rare pediatric disease priority review voucher, or a priority review voucher, from the FDA in connection with obtaining marketing approval for a licensed product, and we subsequently use such priority review voucher in connection with a different product candidate outside the scope of the miniCEP290 License Agreement, we will be obligated to pay UMass a low-tens percentage of the fair market value of the priority review voucher at the time of approval of such product candidate and a low-twenties percentage of the fair market value of the priority review voucher at the time of achievement of a specified commercial sales milestone for such other product candidate. In addition, if we sell such a priority review voucher to a third party, we will be obligated to pay UMass a low-thirties percentage of any consideration received from such third party in connection with such sale.


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Term and Termination

The miniCEP290 License Agreement, unless earlier terminated by us or UMass, will expire upon the expiration of our obligation to pay royalties to UMass on net sales of licensed products.  We may terminate the miniCEP290 License Agreement at any time for any reason upon prior written notice to UMass. We may also terminate the miniCEP290 License Agreement if UMass materially breaches the miniCEP290 License Agreement and does not cure such breach within a specified cure period.

UMass may terminate the miniCEP290 License Agreement if we materially breach the miniCEP290 License Agreement and do not cure such breach within a specified cure period.

Following any termination of the miniCEP290 License Agreement prior to expiration of the term of the miniCEP290 License Agreement, all rights to the licensed patent rights and know-how that UMass granted to us will revert to UMass.

Other Provisions

The miniCEP290 License Agreement contains patent prosecution and maintenance, indemnification and dispute resolution provisions that are customary for agreements of this kind.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of June 30, 2019:
 
Payments Due by Period
 
Total
 
Less than
1 year
 
1 - 3 years
 
3 - 5 years
 
More than
5 years
 
(in thousands)
Sponsored Research (1)
$
1,876

 
$
1,113

 
$
763

 
$

 
$

Operating Leases (2)
1,024

 
1,024

 

 

 

Total (3)
$
2,900

 
$
2,137

 
$
763

 
$

 
$

 
(1)
The table above includes our contracted obligations under our sponsored research agreements. Because we entered into the sponsored research agreement for our miniUSH2A program after June 30, 2019, the above table does not reflect contractual obligations under that agreement.
(2)
The table above includes our continuing rent obligations through June 2020, which is when our lease at One Penn Plaza is currently scheduled to expire.
(3)
This table does not include:
any milestone payments which may become payable to third parties under license or acquisition agreements as the timing and likelihood of such payments are not known with certainty;
any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known;
anticipated expenditures under supply agreements for periods for which we are not yet bound under binding purchase orders; or
contracts that are entered into in the ordinary course of business that are not material in the aggregate in any period presented above.
In addition to the amounts set forth in the table above, we may be required, under the miniCEP290 License Agreement and the other agreements under which we acquired rights to our product candidates, to make milestone payments and/or pay royalties. Payments for any potential product candidates that we may develop under the miniCEP290 License Agreement are described above. Payments for IC-100, IC-200, Zimura and our HtrA1 program are described in "Note 9—Commitments and Contingencies" in our unaudited consolidated financial statements appearing elsewhere in this Quarterly Report.
We also have letter agreements with certain employees that require the funding of a specific level of payments if certain events, such as a termination of employment in connection with a change in control or termination of employment by the employee for good reason or by us without cause, occur. For a description of these obligations, see our definitive proxy

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statement on Schedule 14A for our 2019 annual meeting of stockholders, as filed with the SEC on April 18, 2019.
In addition, in the course of normal business operations, we have agreements with contract service providers to assist in the performance of our research and development and manufacturing activities. Expenditures to CROs and CDMOs represent significant costs in preclinical and clinical development. Subject to required notice periods and our obligations under binding purchase orders and any cancellation fees that we may be obligated to pay, we can elect to discontinue the work under these agreements at any time. We may also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and even long-term commitments of cash.
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 Securities and Exchange Commission rules.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to changes in interest rates. We had cash and cash equivalents of $106.9 million as of June 30, 2019, consisting of cash and investments in money market funds and certain investment-grade corporate debt securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because a significant portion of our investments are in short-term securities. Due to the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.
We contract with CROs and certain other vendors to perform services outside of the United States. We may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the U.S. dollar are recorded based on exchange rates at the time such transactions arise. As of June 30, 2019, substantially all of our total liabilities were denominated in the U.S. dollar.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of June 30, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1.    Legal Proceedings
On January 11, 2017, a putative class action lawsuit was filed against us and certain of our current and former executive officers in the United States District Court for the Southern District of New York, captioned Frank Micholle v. Ophthotech Corporation, et al., No. 1:17-cv-00210. On March 9, 2017, a related putative class action lawsuit was filed against us and the same group of our current and former executive officers in the United States District Court for the Southern District of New York, captioned Wasson v. Ophthotech Corporation, et al., No. 1:17-cv-01758. These cases were consolidated on March 13, 2018. On June 4, 2018, the lead plaintiff filed a consolidated amended complaint, the CAC. The CAC purports to be brought on behalf of shareholders who purchased our common stock between March 2, 2015 and December 12, 2016. The CAC generally alleges that we and certain of our officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the results of our Phase 2b trial and the prospects of our Phase 3 trials for Fovista in combination with anti-VEGF agents for the treatment of wet AMD. The CAC seeks unspecified damages, attorneys' fees, and other costs. We and the individual defendants filed a motion to dismiss the CAC on July 27, 2018. That motion is fully briefed.
On February 7, 2018, a shareholder derivative action was filed against the members of our board of directors in the New York Supreme Court Commercial Division, captioned Cano v. Guyer, et al., No. 650601/2018. The complaint alleges that the defendants breached their fiduciary duties to our company by adopting a compensation plan that overcompensates the non-employee members of our board relative to boards of companies of comparable market capitalization and size. The complaint also alleges that the defendants were unjustly enriched as a result of the alleged conduct. The complaint purports to seek unspecified damages on our behalf, attorneys’ fees, and other costs, as well as an order directing us to reform and improve our corporate governance and internal procedures to comply with applicable laws. We filed a motion to dismiss this case on May 14, 2018. On June 4, 2018, the plaintiff filed an amended complaint. On June 25, 2018, we filed a renewed motion to dismiss this case. On December 3, 2018, the parties filed a stipulation of settlement that contemplates that we will adopt certain compensation-related governance reforms and does not obligate the defendants or us to pay any monetary damages. The court approved the settlement at a hearing on March 12, 2019. As part of the settlement, in April 2019 we paid $300,000 in fees and costs to plaintiff's counsel. As contemplated by the settlement, our board adopted certain compensation-related governance reforms, including a non-employee director compensation policy, which our stockholders approved on May 15, 2019 at our 2019 annual meeting.
On August 31, 2018, a shareholder derivative action was filed against current and former members of our board of directors and certain of our current and former officers in the United States District Court for the Southern District of New York, captioned Luis Pacheco v. David R. Guyer, et al., Case No. 1:18-cv-07999. The complaint, which is based substantially on the facts alleged in the CAC, alleges that the defendants breached their fiduciary duties to our company and wasted our corporate assets by failing to oversee our business, and also alleges that the defendants were unjustly enriched as a result of the alleged conduct, including through receipt of bonuses, stock options and similar compensation from us, and through sales of our stock between March 2, 2015 and December 12, 2016. The complaint purports to seek unspecified damages on our behalf, attorneys’ fees, and other costs, as well as an order directing us to reform and improve our corporate governance and internal procedures to comply with applicable laws, including submitting certain proposed amendments to our corporate charter, bylaws and corporate governance policies for vote by our stockholders. On December 14, 2018, we filed a motion to dismiss the complaint. That motion is fully briefed.
On October 16, 2018, our board of directors received a shareholder demand to investigate and commence legal proceedings against certain members of our board of directors. The demand alleges facts that are substantially similar to the facts alleged in the CAC and the Pacheco complaint and asserts claims that are substantially similar to the claims asserted in the Pacheco complaint. On January 30, 2019, our board of directors received a second shareholder demand from a different shareholder to investigate and commence legal proceedings against certain current and former members of our board of directors based on allegations that are substantially similar to the allegations contained in the first demand letter.
We deny any and all allegations of wrongdoing and intend to vigorously defend against these lawsuits. We are unable, however, to predict the outcome of these matters at this time. Moreover, any conclusion of these matters in a manner adverse to us and for which we incur substantial costs or damages not covered by our directors’ and officers’ liability insurance would have a material adverse effect on our financial condition and business. In addition, the litigation could adversely impact our reputation and divert management’s attention and resources from other priorities, including the execution of our business plan and strategies that are important to our ability to grow our business, any of which could have a material adverse effect on our business.

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Item 1A.    Risk Factors
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 1 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.
Risks Related to Our Business Plan, Financial Position and Need for Additional Capital
We are a development-stage company without any commercial products. The value of our company, therefore, is highly dependent on the success of our research and development efforts and the amount of our available cash. Our research and development programs, which are focused on novel therapies and technologies, carry significant scientific and other risks. If any of these programs are not successful, the value of your investment may decline.
We are a development-stage company without any approved products. Our growth prospects and the future value of our company are highly dependent on the progress of our research and development programs, including our preclinical development programs for IC-100 and IC-200, our collaborative gene therapy sponsored research programs, our ongoing clinical trials for Zimura and our ongoing preclinical development program for our HtrA1 inhibitors. Drug development is a highly uncertain undertaking and carries significant scientific and other risks.
We may encounter unforeseen difficulties, complications, delays, expenses and other known and unknown factors. We may never be successful in developing or commercializing any of our product candidates or other programs. There is a high rate of failure in pharmaceutical research and development. Even if we have promising preclinical or clinical candidates, their development could fail at any time. Our failure could be due to unexpected scientific, safety or efficacy issues with our product candidates and other programs, invalid hypotheses regarding the molecular targets and mechanisms of action we choose to pursue or unexpected delays in our research and development programs resulting from applying the wrong criteria or experimental systems and procedures to our programs or lack of experience, with the possible result that none of our product candidates or other programs result in the development of marketable products. We have not yet demonstrated our ability to successfully complete the development of a pharmaceutical product, including completion of large-scale, pivotal clinical trials with safety and efficacy data sufficient to obtain marketing approval or activities necessary to apply for and obtain marketing approval, including the qualification of a commercial manufacturer through a pre-approval inspection with regulatory authorities. If successful in developing and obtaining marketing approval of one of our product candidates, we would need to transition from a company with a product development focus to a company capable of supporting commercial activities. We may not be successful in such a transition, as our company has never conducted the sales, marketing and distribution activities necessary for successful product commercialization.
Because the value of our company is largely based on the prospects for our research and development programs and their potential to result in therapies capable of achieving marketing approval and generating future revenues, any failure, delay or setback for these programs will likely have a negative impact on the value of your investment. For example, we expect to receive initial top-line data from OPH2003, our ongoing Phase 2b clinical trial of Zimura for the treatment of GA secondary to dry AMD, during the fourth quarter of 2019. If such data are negative or do not support further development of Zimura in GA, or if we are to cease development of Zimura in STGD1 as a result of such data or for other reasons, the value of our common stock could be negatively impacted. In addition, because a number of our product candidates are in an early, preclinical stage, even if we are successful in advancing the research and development of those product candidates, the value of our common stock may not rise in a meaningful way, which could affect our ability to raise additional finances. As we continue to invest in these research and development programs to generate data to support further development, the amount of our available cash will continue to decline until such time as we raise additional finances.
We have a history of significant operating losses. We expect to continue to incur losses until such time, if ever, that we successfully commercialize our product candidates and may never achieve or maintain profitability.
Since inception, we have experienced significant cash outflows in funding our operations. To date, we have not generated any revenues from commercial product sales and have financed our operations primarily through private placements of our preferred stock, venture debt borrowings, funds received under our prior Fovista royalty purchase and sale agreement with Novo Holdings A/S, our initial public offering, which we closed in September 2013, our follow-on public offering, which we closed in February 2014, funds we received under our prior Fovista licensing and commercialization agreement with Novartis Pharma, AG, and funds we received in connection with our acquisition of Inception 4 in October 2018. As of June 30,

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2019, we had an accumulated deficit of $448.6 million. Our net loss was $26.9 million for the six months ended June 30, 2019 and we expect to continue to incur significant operating losses for the foreseeable future. 
Our gene therapy product candidates IC-100 and IC-200 and our HtrA1 inhibitor program are each in preclinical development, Zimura is in clinical development, and we are funding collaborative gene therapy sponsored research programs that are ongoing. We expect our research and development expenses to increase as we pursue these programs as currently planned. We could also incur additional research and development expenses as we evaluate and potentially in-license or acquire, and undertake development of additional product candidates, including any promising product candidates that emerge from our collaborative gene therapy sponsored research programs. Furthermore, if we successfully develop and obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. We are party to agreements with UFRF and Penn with respect to IC-100 and IC-200, UMMS with respect to any potential product candidates from our miniCEP290 program, Archemix Corp. with respect to Zimura and the former equityholders of Inception 4 with respect to our HtrA1 inhibitor program, in each case, that impose significant milestone payment obligations on us in connection with our achievement of specified clinical, regulatory and commercial milestones with respect to these product candidates or programs, as well as certain royalties on net sales with respect to IC-100, IC-200 and any product candidates we choose to develop from our miniCEP290 program. It is likely that any future in-licensing or acquisition agreements that we enter into with respect to additional product candidates or technologies would include similar obligations.    
We expect that we will continue to incur significant expenses as we:
continue the development of IC-100 and IC-200 and pursue our collaborative gene therapy sponsored research programs;
continue the clinical development of Zimura;
continue the preclinical development of our HtrA1 inhibitor program;
in-license or acquire the rights to, and pursue the development of, other product candidates or technologies;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, manufacturing, quality control, quality assurance and scientific personnel, especially as we increase our internal gene therapy capabilities;
seek marketing approval for any product candidates that successfully complete clinical trials;
expand our outsourced manufacturing activities or establish commercial operations or sales, marketing and distribution capabilities, if we receive, or expect to receive, marketing approval for any of our product candidates; and
expand our general and administrative functions to support our future growth.
Our ability to become and remain profitable depends on our ability to generate revenue in excess of our expenses. Our ability to generate revenues from product sales is dependent on our obtaining marketing approval for and commercializing our product candidates or any product candidates we may in-license or acquire. We may be unsuccessful in our efforts to develop and commercialize product candidates or in our efforts to in-license or acquire additional product candidates. Even if we succeed in developing and commercializing one or more of our product candidates, we may never achieve sufficient sales revenue to achieve or maintain profitability. See “—Risks Related to Product Development and Commercialization” for a further discussion of the risks we face in successfully developing and commercializing our product candidates and achieving profitability.
We expect we will require substantial, additional funding in order to complete the activities necessary to develop and commercialize one or more of our product candidates. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts. We may require additional funding beyond what we currently expect.
As of June 30, 2019, we had cash and cash equivalents of $106.9 million. We believe that our cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements as currently planned for at least the next 12 months. After taking into account our recent in-licensing transaction for our miniCEP290 program and sponsored research agreement for our miniUSH2A program, we reaffirm our estimate that year-end 2019 cash and cash equivalents will range between $80 million and $85 million. This estimate is based on our current business plan, including the continuation of our current research and development programs. This estimate does not reflect any additional expenditures, including

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associated development costs, in the event we in-license or acquire any new product candidates or commence any new sponsored research programs. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.
Although the future development of our product candidates is highly uncertain, we expect we will require substantial, additional funding in order to complete the activities necessary to develop and commercialize one or more of our product candidates. We expect the development of our product candidates will continue for at least the next several years. At this time, we cannot reasonably estimate the remaining costs necessary to complete development, to complete process development and manufacturing scale-up and validation activities and to potentially seek marketing approval with respect to our product candidates.
Our future capital requirements will depend on many factors, including:
the scope, progress, costs and results of our efforts to develop IC-100 and IC-200, including activities to establish manufacturing capabilities and preclinical testing to enable us to file INDs for these product candidates;
the scope, progress, costs and results from our collaborative gene therapy sponsored research programs, including costs related to the in-license and future development of any promising product candidates and technologies that emerge from these programs;
the scope, progress, costs and results of our ongoing Zimura clinical programs, as well as our ability to secure external funding for any additional clinical trials we may undertake to obtain data sufficient to seek marketing approval for Zimura in any indication;
the scope, progress, costs and results of our efforts to develop our HtrA1 inhibitor program, including formulation development and other preclinical development activities;
the costs, progress and timing of process development, manufacturing scale-up and validation activities and stability studies associated with our product candidates;
the extent to which we in-license or acquire rights to, and undertake research or development of, additional product candidates or technologies;
our ability to establish collaborations on favorable terms, if at all;
the costs, timing and outcome of regulatory filings and reviews of our product candidates;
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending intellectual property-related claims;
the timing, scope and cost of commercialization activities for any of our product candidates if we receive, or expect to receive, marketing approval for a product candidate; and
subject to receipt of marketing approval, net revenue received from commercial sales of any of our product candidates, after milestone payments and royalty payments that we would be obligated to make.
We do not have any committed external source of funds. Our ability to raise adequate additional financing when needed, and on terms acceptable to us, will depend on many factors. These factors include investors' perceptions of the potential success of our ongoing business, including the development of our product candidates and other programs, and the potential future growth of our business. Additionally, these factors include general market conditions that also affect other companies. These factors may make raising capital difficult, and may result in us accepting terms that are unfavorable to us, especially if we are in need of financing at the particular time. The size of our company and our status as a company listed on The Nasdaq Stock Market, or Nasdaq, may also limit our ability to raise financing. For example, our ability to raise adequate financing through a public offering may be limited by market conditions and SEC rules based on our current market capitalization. Nasdaq listing rules also generally limit the number of shares we may issue in a private placement to a number less than 20% of the number of shares of our common stock outstanding immediately prior to the transaction, unless we issue such shares at a premium, which investors may be unwilling to accept, or unless we obtain shareholder approval, which can be expensive and time-consuming and can add risk to our ability to complete the financing transaction. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate the development of our product candidates, our collaborative gene therapy sponsored research programs, or our future commercialization efforts.
In addition, we may require additional funding beyond what we currently expect due to unforeseen or other reasons. For example, our costs may exceed our expectations if we experience any unforeseen issue in our ongoing clinical trials, such as issues with the retention of enrolled patients or the availability of drug supply, or in our preclinical development programs,

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such as inability to develop formulations or if we experience issues with manufacturing, or if we further expand the scope of our clinical trials, preclinical development programs or collaborative gene therapy sponsored research programs. Our costs may also exceed our expectations for other reasons, for example, if we are required by the FDA, the EMA or regulatory authorities in other jurisdictions to perform clinical or nonclinical trials or other studies in addition to those we currently expect to conduct, if we experience issues with process development, establishing or scaling-up of manufacturing activities or activities to enable and qualify second source suppliers, or if we decide to increase preclinical and clinical research and development activities or build internal research capabilities or pursue internal research efforts. As a result, we may need or may seek to obtain additional funding for our continuing operations sooner or in greater amounts than expected.
Our need for additional financing may continue even if we are able to successfully develop one or more of our product candidates. Our future commercial revenues, if any, will be derived from sales of such product candidates, which may not be available for at least several years following completion of successful product development, if at all. In addition, if approved, our product candidates may not achieve commercial success. Even if those products are successful and we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Under most, if not all, of the foregoing circumstances, we may need to obtain substantial additional financing to achieve our business objectives.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, when we can generate substantial product revenues, we may need or may seek to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that 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, our existing stockholders' ownership interests would be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect our existing stockholders' rights as common stockholders. The dilutive effect of future capital raises may be substantial, depending on the price of our common stock at the time of such capital raise, with a lower stock price translating to greater dilution for existing stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
In addition, we may issue equity securities as consideration for business development transactions, which may also dilute our existing stockholders' ownership interests. For example, under the Inception 4 Merger Agreement pursuant to which we acquired Inception 4 and our HtrA1 inhibitor program, we issued an aggregate of 5,174,727 shares of our common stock as up-front consideration to the former equityholders of Inception 4. The Inception 4 Merger Agreement also requires us to make payments to the former equityholders of Inception 4 upon the achievement of certain clinical and regulatory milestones, subject to the terms and conditions set forth in the Inception 4 Merger Agreement. Those milestone payments will be in the form of shares of our common stock, calculated based on the price of our common stock over a five-trading day period preceding the achievement of the relevant milestone, unless and until the issuance of such shares would, together with all other shares issued under the Inception 4 Merger Agreement, exceed an overall maximum limit of approximately 7.2 million shares, which is equal to 19.9% of the number of issued and outstanding shares of our common stock as of the close of business on the business day prior to the closing date of our acquisition of Inception 4, and will be payable in cash thereafter. In July 2019, we also issued 75,000 shares of our common stock to UMMS as partial upfront consideration for the in-license of our miniCEP290 program, and are obligated to issue up to 75,000 additional shares to UMMS upon the achievement of certain regulatory milestones.
In August 2018, we entered into an agreement with Cowen and Company, LLC, or Cowen, as agent, pursuant to which we may offer and sell shares of our common stock for aggregate gross sale proceeds of up to $50.0 million from time to time through Cowen under an “at-the-market” offering program, subject to the terms and conditions described in the agreement and SEC rules and regulations.  We have not yet issued and sold any shares of common stock under our “at-the-market” offering program.  If we make sales under our “at-the-market” offering program, the sales could dilute our stockholders, reduce the trading price of our common stock or impede our ability to raise future capital.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, products or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

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Our strategy of obtaining additional rights to gene therapy product candidates or technologies for the treatment of retinal diseases may not be successful.
An element of our strategy has been to expand our pipeline through potentially in-licensing or acquiring the rights to products, product candidates or technologies that would complement our strategic goals. Since early 2018, we have completed multiple acquisition, in-license, exclusive option and sponsored research arrangements. As we have transitioned our strategy to focus principally on gene therapy opportunities, we have decided to focus our business development efforts on obtaining rights to additional gene therapy product candidates and technologies, which we will continue to evaluate on a selective basis. Because we expect generally that we will not engage directly in internal early stage research and drug discovery efforts, the future growth of our business beyond our current product portfolio will depend on our ability to obtain those rights to additional gene therapy product candidates, including any promising product candidates that may emerge from our collaborative gene therapy sponsored research programs. We may also continue to consider other alternatives, including mergers or other transactions involving our company as a whole or other collaboration transactions, including, if data from either of our Zimura clinical trials are positive, partnering opportunities for further clinical development of Zimura. Our business development efforts may fail to result in our acquiring rights to additional gene therapy product candidates or technologies, or may result in our consummating transactions with which you do not agree.
We may be unable to in-license or acquire the rights to any such gene therapy product candidates or technologies from third parties for several reasons. The success of this strategy depends partly upon our ability to identify, select and acquire or in-license promising product candidates and technologies, which is especially difficult for gene therapies. There are currently a limited number of available gene therapy product candidates or technologies for the retina and the competition for those assets is intense. Although we are planning to target opportunities where we believe third-party funding for specific programs or technologies may be available, funding may not in fact be available for any number of reasons. The process of proposing, negotiating and implementing a license or acquisition of a product candidate is lengthy and complex. For potential product candidates or technologies to which we have entered into option agreements or sponsored research agreements where we have option rights, those agreements generally do not have fixed economic or other key terms for definitive agreements, and we may not obtain favorable terms if and when we choose to exercise our option to acquire or in-license any promising product candidates or technologies.
The in-licensing and acquisition of pharmaceutical products, especially in gene therapy, is an area characterized by intense competition, and a number of companies (both more established and early stage biotechnology companies) are also pursuing strategies to in-license or acquire product candidates or technologies that we may consider attractive. More established companies may have a competitive advantage over us due to their size, cash resources and greater research, preclinical or clinical development or commercialization capabilities, while earlier stage companies may be more aggressive or have a higher risk tolerance. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to in-license or acquire the rights to the relevant product candidate or technology on terms that would allow us to make an appropriate return on our investment. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts or we may incorrectly judge the value of an acquired or in-licensed product candidate or technology.
Further, any product candidate that we acquire or in-license would most likely require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate would not be shown to be sufficiently safe and effective for approval by regulatory authorities.
If we are unable to successfully obtain rights to suitable product candidates or technologies, our business, financial condition and prospects for growth could suffer. In addition, acquisitions and in-licensing arrangements for product candidates and technologies are inherently risky, and ultimately, if we do not complete an announced acquisition or license transaction or integrate an acquired or licensed product candidate or technology successfully and in a timely manner, we may not realize the benefits of the acquisition or license to the extent anticipated and the perception of the effectiveness of our management team and our company may suffer in the marketplace. In addition, even if we are able to successfully identify, negotiate and execute one or more transactions to acquire or in-license new product candidates or technologies, our expenses and short-term costs may increase materially and adversely affect our liquidity.
In addition, acquisitions and in-licenses may entail numerous operational, financial and legal risks, including:
exposure to known and unknown liabilities, including possible intellectual property infringement claims, violations of laws, tax liabilities and commercial disputes;
incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;

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higher than expected acquisition and integration costs;
difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel;
inability to maintain uniform standards, controls, procedures and policies;
restructuring charges related to eliminating redundancies or disposing of assets as part of any such combination;
large write-offs and difficulties in assessing the relative percentages of in-process research and development expense that can be immediately written off as compare to the amount that must be amortized over the appropriate life of the asset;
increased amortization expenses or, in the event that we write-down the value of acquired assets, impairment losses;
impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership;
inability to retain personnel, key customers, distributors, vendors and other business partners integral to an in-licensed or acquired product candidate or technology;
potential failure of the due diligence process to identify significant problems, liabilities or other shortcomings or challenges of an acquired or licensed product candidate or technology, including, without limitation, problems, liabilities or other shortcomings or challenges with respect to intellectual property, product quality, revenue recognition or other accounting practices, partner disputes or issues and other legal and financial contingencies and known and unknown liabilities; and
entry into therapeutic modalities, indications or markets in which we have no or limited direct prior development or commercial experience and where competitors in such markets have stronger market positions.
We and certain of our current and former board members and executive officers have been named as defendants in lawsuits that could result in substantial costs and divert management’s attention.
We and certain of our current and former executive officers have been named as defendants in a purported consolidated putative class action lawsuit initiated in 2017 that generally alleges that we and certain of our officers violated Sections 10(b) and/or 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the results of our Phase 2b trial and the prospects of our Phase 3 trials for Fovista in combination with anti-VEGF agents for the treatment of wet AMD. Certain current and former members of our board of directors and current and former officers have also been named as defendants in a shareholder derivative action initiated in August 2018, which generally alleges that the defendants breached their fiduciary duties to our company by failing to oversee our business during the period of the Phase 2b and Phase 3 clinical trials of Fovista. These complaints seek equitable and/or injunctive relief, unspecified damages, attorneys’ fees, and other costs. We and the defendants deny any and all allegations of wrongdoing and intend to vigorously defend against these lawsuits. We are unable, however, to predict the outcome of these matters at this time. Moreover, any conclusion of these matters in a manner adverse to us and for which we incur substantial costs or damages not covered by our directors’ and officers’ liability insurance would have a material adverse effect on our financial condition and business. In addition, the litigation could adversely impact our reputation and divert management and our board of directors’ attention and resources from other priorities, including the execution of our business plan and strategies that are important to our ability to grow our business, any of which could have a material adverse effect on our business. Additional lawsuits may be filed.
The comprehensive tax reform bill passed in December 2017 could adversely affect our business and financial condition.
In December 2017, United States President Donald J. Trump signed into law new legislation that significantly revised the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. The United States Department of Treasury and

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the Internal Revenue Service are continuing to issue new guidance and interpretations of various provisions of the new tax law. In addition, various states have responded in different ways to the new federal tax law. The impact of this new tax law on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Risks Related to Product Development and Commercialization
Companies in our industry face a wide range of challenging activities, each of which entails separate, and in many cases substantial, risk.
The long-term success of our company, and our ability to become profitable as a biopharmaceutical company, will require us to be successful in a range of challenging activities, including:
designing, conducting and successfully completing preclinical research and development activities, including preclinical efficacy and IND-enabling studies, for our product candidates or product candidates we are interested in in-licensing or acquiring, including those that we may evaluate as part of our collaborative gene therapy sponsored research programs;
making arrangements with third-party manufacturers and providers of starting materials for our product candidates, and having those manufacturers successfully develop manufacturing processes for drug substance and drug product and provide adequate amounts of drug product for preclinical and clinical activities in accordance with our expectations and regulatory requirements;
designing, conducting and completing clinical trials for our product candidates;
obtaining favorable results from required clinical trials, including for each ophthalmic product candidate, favorable results from two adequate and well-controlled pivotal clinical trials in the relevant indication;
applying for and receiving marketing approvals from applicable regulatory authorities for the marketing and sale of our product candidates;
making arrangements with third-party manufacturers for scale-up and commercial manufacturing, receiving regulatory approval of our manufacturing processes and our third-party manufacturers’ facilities and ensuring adequate supply of drug product and starting materials used for the manufacture of drug product;
establishing sales, marketing and distribution capabilities, either internally or through collaborations or other arrangements, to effectively market and sell our product candidates, if and when approved;
achieving acceptance of the product candidate, if and when approved, by patients, the medical community and third-party payors;
if our product candidates are approved, obtaining from governmental and third-party payors adequate coverage and reimbursement for our product candidates and, to the extent applicable, associated injection procedures conducted by treating physicians;
effectively competing with other therapies, including the existing standard of care, and other forms of drug delivery;
maintaining a continued acceptable safety profile of the product candidate during development and following approval;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity, including under the Orphan Drug Act and the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act, or FDCA, if we choose to seek such protections for any of our product candidates;
protecting and enforcing our rights in our intellectual property portfolio; and
complying with all applicable regulatory requirements, including FDA Good Laboratory Practices, or GLP, FDA Good Clinical Practices, or GCP, current Good Manufacturing Practices, or cGMP, and standards, rules and regulations governing promotional and other marketing activities.
Each of these activities has associated risks, many of which are detailed below and throughout this “Risk Factors” section. We may never succeed in these activities and, even if we do, may never generate revenues from product sales that are significant enough to achieve commercial success and profitability. Our failure to be commercially successful and profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our

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research and development efforts, diversify our product offerings or continue our operations. A decrease in the value of our company would also cause our stockholders to lose all or part of their investment.
Drug development is a highly uncertain undertaking. Our research and development efforts may not be successful or may be delayed for any number of reasons, in which case potential marketing approval or commercialization of our product candidates could be prevented or delayed.
Before obtaining approval from regulatory authorities for the sale of any product candidate, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Prior to initiating clinical trials, a sponsor must complete extensive preclinical testing of a product candidate, including, in most cases, preclinical efficacy experiments as well as IND-enabling toxicology studies. Drug research, including the gene therapy research we are sponsoring with UMMS, may never yield a product candidate for preclinical or clinical development. Early stage and later stage research experiments and preclinical studies may fail at any point for any number of reasons, and even if completed, may be time-consuming and expensive. As a result of these risks, a potentially promising product candidate may never be tested in humans.
Once it commences, clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. For example, our pivotal Phase 3 Fovista program for the treatment of wet AMD failed to produce positive safety and efficacy data that support the use of Fovista in wet AMD, despite the results from preclinical testing and earlier clinical trials of Fovista. Furthermore, our Phase 2a OPH2007 trial of Zimura in wet AMD did not replicate the results of our Phase 1/2a OPH2000 trial, following which we decided not to proceed with further development of Zimura in wet AMD. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.
We may experience numerous unforeseen events during drug development that could delay or prevent our ability to receive marketing approval or commercialize our product candidates. These risks include, but are not limited to, the following:
we may not be able to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation of clinical studies for any preclinical product candidates that we are developing or may wish to in-license or acquire; 
regulators or institutional review boards may not agree with our study design, including our selection of endpoints, or may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective contract research organizations or clinical trial sites, especially in cases where we are working with contract research organizations or clinical trial sites we have not worked with previously;
our contract research organizations, clinical trial sites, contract manufacturers, providers of starting materials and packagers and analytical testing service providers may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
we, through our clinical trial sites, may not be able to locate and enroll a sufficient number of eligible patients to participate in our clinical trials as required by the FDA or similar regulatory authorities outside the United States, especially in our clinical trials for orphan or other rare diseases;
we may decide, or regulators or institutional review boards may require us, to suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements, including GCPs, or a finding that the participants are being exposed to unacceptable health risks;
as there are no therapies approved for many of the indications we are seeking to treat, in either the United States or the European Union, the regulatory pathway for product candidates in those indications, including the selection of the primary efficacy endpoint for a pivotal clinical trial, is highly uncertain;
there may be changes in regulatory requirements and guidance or we may have changes in trial design that require amending or submitting new clinical trial protocols;
there may be changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;

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we may decide, or regulators may require us, to conduct additional clinical trials beyond those we currently contemplate or to abandon product development programs;
the number of patients required for clinical trials of our product candidates to demonstrate statistically significant results 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. These risks may be heightened for clinical trials in orphan diseases, for which the natural history of the disease is less understood, making it more difficult to predict the drug effect required to adequately demonstrate efficacy, and because there are fewer affected individuals available to participate in clinical trials;
the cost of clinical trials of our product candidates may be greater than we anticipate;
we or our contract manufacturers may be unable to develop a viable manufacturing process for any product candidates that we are developing; and
the supply or quality of our product candidates or other materials necessary to conduct preclinical development and clinical trials of our product candidates or other research activities may be insufficient or inadequate or we may face delays in the manufacture and supply of our product candidates as a result of a decision to transfer manufacturing between contract manufacturers or on account of interruptions in our supply chain, including in relation to the procurement of starting materials, such as plasmids used for the manufacture of our gene therapy product candidates, and the packaging and distribution or import/export of materials and products.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we 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:
be delayed in obtaining marketing approval for our product candidates;
not obtain marketing approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use limitations, distribution restrictions or safety warnings, including boxed warnings;
be subject to additional post-marketing testing requirements; or
have the product removed from the market after obtaining marketing approval.
Despite our current development plans and ongoing efforts, we may not complete any of our ongoing or planned clinical trials for our product candidates. The timing of the completion of, and the availability of results from, clinical trials is difficult to predict. We do not know whether clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Furthermore, our development plans may change based on feedback we may receive from regulatory authorities throughout the development process. If we experience delays in manufacturing, testing or marketing approvals, our product development costs would increase. Significant clinical trial delays also could allow our competitors to bring products to market before we do, impair our ability to successfully commercialize our product candidates, including by shortening any periods during which we may have the exclusive right to commercialize our product candidates, and may otherwise harm our business and results of operations.
Gene therapy is an emerging field of drug development that poses many scientific and other risks. We have only limited prior experience in gene therapy research and manufacturing and no prior experience in gene therapy clinical development. Our lack of experience may limit our ability to be successful or may delay our development efforts.
Gene therapy is an emerging field of drug development with only two gene replacement therapies having received FDA approval to date. Our gene therapy research and development programs, which we decided to undertake based on a review of a limited set of preclinical data, are still at an early stage. Even with promising preclinical data, there remains several areas of drug development risk, including translational science, manufacturing materials and processes, safety concerns, regulatory pathway and clinical trial design and execution, which pose particular uncertainty for our programs given the relatively limited development history of, and our limited prior experience with, gene therapies. Furthermore, the medical community's understanding of the genetic causes of many diseases continues to evolve and further research may change the medical community's views on what therapies and approaches are most effective for addressing certain diseases.

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For example, while there are more than 200 known mutations to the BEST1 gene, the different types of mutations and their association with various BEST1-related IRDs are still not well-understood. Our product candidate for these diseases, IC-200, may only be effective in treating retinal diseases associated with certain mutations in the BEST1 gene and not other mutations. Additionally, we decided to in-license and pursue the development of IC-200 based on results observed in an autosomal recessive canine disease model. A majority of humans with BEST1-related IRDs, however, have the autosomal dominant form of the disease, commonly referred to as Best disease. If we choose to develop IC-200 for this patient population, using a construct previously studied in an autosomal recessive canine disease model, this approach may ultimately prove ineffective.
For our miniCEP290 program and other minigene programs, we are sponsoring research using a novel approach that is largely untested and presents various scientific and regulatory risks. To date, all the data generated for our miniCEP290 program are in a newborn mouse model for LCA10, and we do not know whether the effect we observed with these minigenes in mice will be replicated in humans. Furthermore, minigenes result in the expression of a protein that differs from the naturally occurring protein. The protein expressed by the minigene may have physiological effects, including toxic effects, that are not yet known. Because of the novelty of minigenes, the medical community's and regulators' receptiveness to this approach remains unknown. Our sponsored research may not fully elucidate all of the physiological risks associated with a particular minigene and the associated expressed protein. For these and other reasons, promising minigene candidates that emerge from our sponsored research programs with UMMS may not succeed in later stage preclinical and clinical development.
We have particularly focused on adeno-associated virus, or AAV, gene therapy, as AAV vectors are relatively specific to retinal cells and their safety profile in humans is relatively well-documented as compared to other delivery vehicles and gene therapy technologies currently in development. However, AAV has a number of drawbacks, including its small packaging capacity (an AAV vector can hold only up to approximately 4,700 base pairs of DNA, whereas the genes that are associated with a number of diseases, such as LCA10, Stargardt disease and Usher 2A, exceed that size). Although AAV is the most commonly used vector in ocular gene therapy today, it may prove to pose safety risks that we are not aware of and other vector forms, such as retroviral or lentiviral and non-viral based vectors, or gene editing approaches, may prove to be safer and more effective.
Although we believe gene therapy is a promising area for retinal drug development, our gene therapy research and development experience is limited to only a few personnel hired to supervise our outside service providers. In pursuing this new technology, we have begun to establish our own gene therapy technical capabilities, but we will need to continue to build those capabilities by either hiring internally or seeking assistance from outside service providers. We believe that gene therapy is an area of significant investment by biotechnology and pharmaceutical companies and that there may be a scarcity of talent available to us in these areas. If we are not able to expand our gene therapy capabilities, we may not be able to develop in the way we intend or desire, IC-100, IC-200 or any promising product candidates that emerge from our miniCEP290 program or our other collaborative gene therapy sponsored research programs, which would limit our prospects for future growth.
For a further discussion of the risks associated with the manufacturing of gene therapy products, see the risk factor herein entitled "The manufacture of gene therapy products is complex with a number of scientific and technical risks, some of which are common to the manufacture of drugs and biologics and others are unique to the manufacture of gene therapies. We have limited experience with gene therapy manufacturing and are dependent on our third-party contract manufacturers and sole source suppliers".
Our development of Zimura is based on a novel mechanism of action that is unproven and poses a number of scientific and other risks, and we may not be successful in developing Zimura in the indications we are pursuing. Our ongoing and any future clinical trials for Zimura may not provide sufficient safety and efficacy data to support future development efforts or seeking and obtaining marketing approval.
We are targeting GA, an advanced form of dry AMD, and STGD1 with Zimura. The causes of AMD are not completely understood. In addition to advanced age, there are environmental and genetic risk factors that contribute to the development of AMD including ocular pigmentation, dietary factors, a positive family history for AMD, high blood pressure and smoking. Although we believe there is a scientific rationale for pursuing the development of inhibitors for selective molecular targets, including complement C5, as potential pharmaceutical treatments for AMD, this approach may not prove successful for treating AMD in a clinically meaningful way. Similarly, although there is non-clinical scientific literature supporting the potential use of inhibitors of the complement system for the treatment of STGD1, this approach may not prove clinically successful as well.
Zimura is designed to inhibit complement C5. There are no FDA or EMA approved products that utilize C5 inhibition as a mechanism of action to treat GA or STGD1, and this mechanism of action may not prove safe and effective for these diseases. Moreover, the failure of prior clinical trials evaluating complement inhibition in GA, including a competitor's two Phase 3 clinical trials evaluating an investigational anti-complement factor D antibody administered via intravitreal injections, a

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second competitor's Phase 2 clinical trial evaluating an investigational anti-C5 antibody administered via intravitreal injections and a third competitor's Phase 2 clinical trial evaluating an anti-C5 antibody administered systemically, may call into question the hypothesis underlying the use of a complement inhibitor as a method for treating GA.
We have only very limited data from a small, uncontrolled clinical trial regarding the safety and efficacy of Zimura as a monotherapy for the treatment of GA, and we have no human clinical data regarding the safety and efficacy of Zimura as a treatment for STGD1. Our prior Zimura trials were not powered to demonstrate the efficacy of Zimura therapy with statistical significance. Our ongoing and any future clinical trials for Zimura that we or a potential future partner may undertake may fail to demonstrate sufficient safety or efficacy to justify further development or to ultimately seek or obtain marketing approval. Any negative results from our ongoing or any future clinical trials for Zimura, including from our OPH2003 trial for which we expect initial top-line data to be available during the fourth quarter of 2019, could adversely affect our business and the value of your investment in our company.
The statistical analysis of a clinical trial outcome is primarily determined based on three factors: variability in the measured endpoint among the patient population, the magnitude of the drug effect observed in relation to that variability and the number of patients from whom data is collected in the clinical trial. Given that we have limited data regarding the effect of Zimura in GA, we determined the size of the OPH2003 trial in GA based on our best estimates of the size of trial required to demonstrate a potential clinical benefit for Zimura. This estimate incorporates our assumptions regarding the potential performance of Zimura in this indication based in part on available third-party clinical trial data and our statistical analysis of this data, as well as our assumptions regarding the number of patients that will continue to participate in the trial and from whom we will be able to collect data through the 12-month timepoint. In addition, although we initially determined the size of the OPH2005 trial in STGD1 based on the number of patients with STGD1 that we believed could potentially be enrolled within a reasonable period of time, we decided to cease patient enrollment during the first quarter of 2019 in light of the 18-month endpoint and our goal of providing initial top-line data from this trial by the end of 2020. As STGD1 is an orphan indication, to our knowledge there is only very limited natural history data currently available regarding the variability for our planned primary efficacy endpoint in the STGD1 patient population we enrolled in this trial. Moreover, because both GA and Stargardt disease are degenerative diseases, and in many cases, the rate of degeneration is slow, and because we are seeking to slow the progression of degeneration with Zimura, and not necessarily to reverse prior degeneration or restore visual function, patients participating in our trials may not perceive a benefit from continuing to participate and therefore may drop out of the trial. Although we and the investigators participating in our trials and their staff take efforts to encourage continued patient participation, the drop-out rate for our Zimura trials may exceed our expectations. A higher than expected drop-out rate would reduce the number of patients from whom data is available for analyzing the primary endpoint for these trials. Given the information above, these trials could be underpowered to demonstrate a potential clinical benefit for Zimura in these indications.
Furthermore, our ongoing Zimura clinical trials are evaluating Zimura dosing levels and regimens that we have studied previously only in a small number of patients, and this approach may increase the risk that patients in our ongoing trials experience adverse events and/or serious adverse events (either ocular, systemic or both) that we have not observed or at rates that we have not observed in prior trials. Although we did not observe adverse events or serious adverse events attributable to the drug product in our recently completed OPH2007 trial, previously unobserved adverse events and/or serious adverse events may manifest in our current Zimura clinical trials. For a further discussion of the safety risks in our trials, see the risk factor herein entitled "If serious adverse or unacceptable side effects are identified during the development of our product candidates, we may need to abandon or limit our development of such product candidates."
Our development of our HtrA1 inhibitor program is also based on a novel mechanism of action that is unproven and poses a number of scientific and other risks. We may not be able to successfully formulate a product candidate from our HtrA1 inhibitors.
Our HtrA1 inhibitor program is in preclinical development. There are no FDA or EMA approved products that utilize HtrA1 inhibition as a mechanism of action for treating ophthalmic diseases, including GA and other age-related retinal diseases for which we may develop our HtrA1 inhibitor program, and this mechanism of action may not prove safe and effective for these diseases. We made the decision to acquire this program based on our interpretation of the scientific literature and rationale for this potential target that suggest an association between HtrA1 and the risk for AMD, as well as a limited set of preclinical data generated by Inception 4 prior to the acquisition. We note, however, the HtrA1 gene is in the same region of the 10q26 chromosome as the age-related maculopathy susceptibility 2, or ARMS2, gene. The ARMS2 and HtrA1 genes are linked, and variants in, or expression of, the ARMS2 gene may also be associated with the risk for AMD. The risk for AMD associated with ARMS2 may ultimately prove to be greater than the risk associated with HtrA1. In addition, even though genetic and histologic findings correlate HtrA1 with AMD, the development and progression of AMD may not be affected by HtrA1. Our assumption that targeting inhibition of HtrA1 as a method of treating AMD may be incorrect, which would likely adversely affect the value of our HtrA1 inhibitor program and its continued development.

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Before we can commence IND-enabling studies for our HtrA1 inhibitor program, we need to conduct pre-formulation and formulation studies with our lead compounds in this program to determine whether we can formulate a product candidate for intravitreal administration that is safe to advance into preclinical studies and, depending on the outcome of such studies, into clinical trials. As part of this work, we need to determine which inactive formulation components should be used in the preparation of the product candidate, and derive a preparation that includes an adequate amount of drug substance with the necessary inactive ingredients to achieve the desired safety profile for intravitreal injection into the eye while providing for sufficient pharmacological activity. Formulation development is inherently uncertain, and it is possible we may not be able to formulate any of our lead compounds into a preparation that is safe to advance into preclinical studies or clinical trials in the eye or that provides sufficient pharmacological activity, which would hinder our ability to pursue development of this program. Formulation development can be time-consuming and our anticipated timelines for the development of this program may be delayed.
If serious adverse or unacceptable side effects are identified during the development of our product candidates, we may need to abandon or limit our development of such product candidates.
If any of our product candidates are associated with serious adverse events or undesirable side effects in preclinical studies or clinical trials or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause side effects that prevented further development of the compound.
In particular, we have limited data regarding the safety, tolerability and efficacy of Zimura administered for the treatment of GA and no data regarding the safety, tolerability and efficacy of Zimura administered for the treatment of STGD1. In our completed clinical trials for Zimura, we have observed only a single adverse event, mild subcapsular cataract, from our OPH2000 trial, assessed to be drug-related by participating investigators. We have no human data regarding IC-100, IC-200 or any of our HtrA1 inhibitors.
Our clinical trials for Zimura involve dosing regimens that we have not studied extensively, which may increase the risk that patients in these trials experience adverse events and/or serious adverse events (either ocular, systemic or both) that we have not observed or at rates that we have not observed in prior trials. In addition, our clinical trials for Zimura involve multiple intravitreal injections over an extended period of time and, as such, may involve risks regarding multiple and chronic intravitreal injections. For these reasons, there may be, among others, an increase in the rates of intraocular infections, or endophthalmitis, intraocular pressure, glaucoma, retinal tears, cataracts, retinal detachment, intraocular inflammation, retinal and/or choroidal circulation compromise, or hospitalizations in patients who receive Zimura. Because we currently have only one product candidate in clinical development, it is possible that a safety issue in any of our ongoing clinical trials for Zimura could impact all of our then-ongoing clinical trials.
As HtrA1 inhibition is a novel treatment approach for treating ocular disease, this treatment modality may present potentially unknown safety risks when tested in clinical trials that could not have been anticipated based on preclinical toxicology studies. In addition, if we are successful in formulating an HtrA1 product candidate, we intend to administer the product candidate by intravitreal injection, which poses the same safety risks outlined above with respect to intravitreal injections of Zimura.
In addition, there are several known safety risks specific to gene therapy, including inflammation resulting from a patient's immune response to the administration of viral vectors and the potential for toxicity as a result of chronic exposure to the expressed protein. Managing a host body's immune response to introduced viral vectors has been and remains a challenge for gene therapies. For AAV gene therapy, "vector shedding," or the dispersal of AAV vectors away from the target tissue to other parts of the body, which can trigger a more serious and extensive immune response, is a known safety issue. Although subretinal injection, which is the method often used to administer ocular gene therapies, helps to control vector shedding beyond the eye, subretinal injection is a surgical procedure that requires significant skill and training for the administering surgeon and involves its own risks separate from the gene therapy vectors, including the risk of retinal detachment. In order to avoid accelerating damage to a subject's retina, subretinal injection for RHO-adRP patients in particular must be conducted under extremely low light levels using infrared technology, further complicating the surgical procedure. The margin for error with subretinal injections is extremely low and there are a limited number of retinal surgeons with experience in performing subretinal injections in the eye. In the event that we progress into clinical development with IC-100, IC-200 or any other gene therapy product candidate we may in-license or acquire, we may experience delays or other challenges for our gene therapy development programs as a result of safety issues. For example, in order to generate useful clinical data for any of those gene therapy clinical trials, a retinal surgeon must repeat the same subretinal injection process multiple times and with consistency.
In addition to the currently known safety risks, there may be unknown risks to human health from gene therapies. Because gene therapy involves the introduction of concentrated quantities of AAV, as well as the introduction of persistent

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foreign genetic material into the human body, any safety risks may not manifest until much later, if at all. Gene therapies have only recently been used in the treatment of human diseases and the scientific and medical understandings of safety or other risks to humans continue to evolve. The safety profile of minigenes and their associated proteins in humans remains largely unknown. If gene therapies prove to be unsafe for humans, we likely will need to curtail or eliminate our gene therapy development programs or gene therapy products in development or commercialization, if any.
We do not have any internal manufacturing capabilities and use third parties to manufacture our product candidates on a contract or purchase order basis. Manufacturing issues, including technical or quality issues or issues with scaling up and building our capabilities for later-stage clinical manufacturing or for commercial manufacturing, may arise that could cause delays in our development programs or increase costs. We may experience delays in regulatory approval of our product candidates if we or our contract manufacturers do not satisfy applicable manufacturing regulatory requirements.
We do not have internal manufacturing facilities and use or plan to use outside contract manufacturers to manufacture IC-100, IC-200, Zimura, our HtrA1 inhibitors and any other product candidates that we may acquire or in-license. We have a limited number of personnel hired to supervise these outside vendors. Manufacturing for these product candidates could be complicated or present novel technical challenges. Problems with the manufacturing process, even minor deviations from the established process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory. We may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.
In addition, in order to manufacture and supply any of our product candidates for later-stage clinical trials or on a commercial scale in the future, we will need to increase our manufacturing personnel and bolster our quality control and quality assurance capabilities. We may encounter problems hiring and retaining scientific and manufacturing personnel needed to oversee our manufacturing process, which could result in delays in our production or difficulties in maintaining compliance with applicable regulatory requirements. As we or any manufacturer we engage scales up manufacturing of any product candidate, we may encounter unexpected issues relating to the manufacturing processes or the quality, purity or stability of the product, and we may be required to refine or alter our manufacturing processes to address these issues. Resolving these issues could result in significant delays and may result in significantly increased costs. If we underestimate the demand for an approved product, given the long lead times required to manufacture or obtain regulatory approvals for our products, we could potentially face commercial drug product supply shortages. If we experience significant delays or other obstacles in producing any approved product at commercial scale, our ability to market and sell any approved products may be adversely affected and our business could suffer.
The manufacturing processes and the facilities of our third-party manufacturers are subject to inspection and approval by the FDA, referred to as a pre-approval inspection, before we can commence the commercial sale of any approved product candidate, and thereafter on an ongoing basis. Our third-party drug substance manufacturer for Zimura has undergone only two pre-approval inspections by the FDA, and has not yet gone through a pre-approval inspection for Zimura. Failure by our third-party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA approval regimen with respect to our product candidates may result in delays in the approval of our applications for marketing approval, as well as regulatory actions such as the issuance of FDA Form 483 notices of observations, warning letters or injunctions or the loss of operating licenses. If any of our third-party manufacturers are found to have delayed, denied, limited or refused a drug inspection, our drug substance or drug product could be deemed adulterated. Based on the severity of the regulatory action, our clinical or commercial supply of drug substance or drug product could be interrupted or limited, which could have a material adverse effect on our business.
Any problems in our manufacturing process or our third-party contract manufacturers’ facilities could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit our access to additional attractive development programs. Problems in our manufacturing process or facilities also could restrict our ability to meet market demand for our products.
For a further discussion of the risks associated with our reliance on third-party manufacturers, see the risk factor herein entitled, "We contract with third parties for the manufacture of and for providing starting materials for our product candidates for preclinical development activities and clinical trials and expect to continue to do so in the future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products, which could delay, prevent or impair our development or commercialization efforts."

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The manufacture of gene therapy products is complex with a number of scientific and technical risks, some of which are common to the manufacture of drugs and biologics and others of which are unique to the manufacture of gene therapies. We have limited experience with gene therapy manufacturing and are dependent on our third-party contract manufacturers and sole source suppliers.
Gene therapy drug products are complex and difficult to manufacture. We believe that the high demand for clinical gene therapy material and a scarcity of potential contract manufacturers may cause long lead times for establishing manufacturing capabilities for gene therapy drug development activities. Even after a manufacturer is engaged, any problems that arise during manufacturing process development may result in unanticipated delays to our timelines, including delays attributable to securing additional manufacturing slots. There may also be long lead times to manufacture or procure starting materials such as plasmids and cell lines, especially for high-quality starting materials that are cGMP compliant. In particular, plasmids, cell lines and other starting materials for gene therapy manufacture are usually sole sourced, as there are a limited number of qualified suppliers. The progress of our gene therapy programs is highly dependent on these suppliers providing us or our contract manufacturers with the necessary starting materials that meet our requirements in a timely manner. A failure to procure or a shortage of necessary starting materials likely would delay our manufacturing and development timelines.
A number of factors common to the manufacturing of biologics and drugs could also cause production issues or interruptions for gene therapies, including raw material or starting material variability in terms of quality, cell line viability, productivity or stability issues, shortages of any kind, shipping, distribution and supply chain failures, growth media contamination, equipment malfunctions, facility contamination, labor problems, natural disasters, disruption in utility services, terrorist activities, or acts of god that are beyond our or our contract manufacturer's control. It is often the case that early stage process development is conducted with materials that are not manufactured using cGMP starting materials, techniques or processes and which are not subject to the same level of analysis that would be required for clinical grade material. We may encounter difficulties in translating the manufacturing processes used to produce research grade materials to cGMP compliant processes, and any changes in the manufacturing process may affect the safety and efficacy profile of our product candidates. In particular, we and our contract manufacturers are developing our own manufacturing processes, which differ from those originally used by our university collaborators, for example, by using different starting materials. We may not be able to successfully translate the manufacturing process and our manufactured materials may not match the safety and efficacy profile of those used by the universities.
An important part of manufacturing drug products is performing analytical testing. Analytical testing of gene therapies involves tests that are more numerous, more complex in scope and take a longer time to develop and to conduct as compared to traditional drugs. We and our contract manufacturers need to expend considerable time and resources to develop assays and other analytical tests for our gene therapy product candidates. Some assays need to be outsourced to specialized testing laboratories. Even when assays are developed, they need to be further tested, qualified and validated, which may take substantial time and resources. Because of the lagging nature of analytical testing, we may proceed with additional manufacturing and other development activities without having first fully characterized our manufactured materials. If the results of the testing fail to meet our expectations, we may need to delay or repeat certain manufacturing and development activities.
In addition, because manufacturing for early stage research is often done under different conditions, using different starting materials and on a smaller scale than what is required for manufacturing for clinical supplies, we may face challenges in adapting the manufacturing processes that were used by our licensors and other academic collaborators and scaling up these processes as necessary to support supply for clinical trials. In order to progress the development of IC-100, IC-200 or any other gene therapy product candidate we may in-license or acquire, we will need to devote significant time and financial resources to establishing manufacturing processes that are sufficient for IND-enabling preclinical toxicology studies as well as clinical supplies. If we are not able to establish gene therapy manufacturing or related processes in a manner required for further development of our gene therapy product candidates, our development plans may be delayed or stalled and our business may be materially harmed.
Our experience manufacturing Zimura is limited. We and our third-party contract manufacturers have not scaled up or validated the manufacturing process for Zimura for later-stage clinical or commercial manufacturing. We are only in the early stages of establishing manufacturing capabilities for our HtrA1 inhibitor program.
We currently use a single third-party manufacturer, Agilent Technologies, to supply us with the chemically synthesized drug substance for Zimura and a different, single third-party manufacturer, Ajinomoto Bio-Pharma Services, to provide fill/finish services for Zimura. In order to obtain and maintain regulatory approval for Zimura, our third-party manufacturers will be required to consistently produce the drug substance used in Zimura in commercial quantities and of specified quality and to execute fill/finish services on a repeated basis and document their ability to do so. If the third-party manufacturers are unable to satisfy this requirement, our business would be materially and adversely affected. To date, we have not yet scaled up the

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manufacturing process for Zimura beyond the scale used for developmental clinical batches, nor have we validated the manufacturing process.
Some of the standards of the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use, which establishes basic guidelines and standards for drug development in the United States, the European Union, Japan and certain other countries, do not apply to oligonucleotides, including aptamers. As a result, there are no established generally accepted manufacturing or quality standards for the production of Zimura. The lack of uniform manufacturing and quality standards among regulatory agencies may delay regulatory approval of Zimura.
For our HtrA1 inhibitor program, we have engaged a CDMO to produce small quantities of the active pharmaceutical ingredient, or API, of our HtrA1 inhibitors for preclinical development purposes. The time and efforts required for us to fully establish manufacturing capabilities for our HtrA1 inhibitor program may delay or impair our ability to develop this program in accordance with our expected timelines.
We face substantial competition, which may result in others developing or commercializing products before or more successfully than we do.
The development and commercialization of new drug products is highly competitive. We face competition with respect to our product candidates from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies, as well as generic and biosimilar companies, worldwide. There are a number of pharmaceutical and biotechnology companies that are currently developing product candidates for the treatment of RHO-adRP, LCA10, Stargardt disease, USH2A-related IRDs and GA, and there is at least one biotechnology company that is currently developing a product candidate for the treatment of BEST1-related IRDs. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. We also will face similar competition with respect to any product candidates that we may seek to develop or commercialize in the future. In particular, many companies are pursuing gene therapy approaches for orphan and age-related retinal diseases.
Our commercial opportunity could be reduced or eliminated if one or more of our competitors develop and commercialize products that are more effective, safer, have fewer or less severe side effects, are more convenient to use or are less expensive than our product candidates. For example, the method of administration of Zimura, intravitreal injection, is commonly used to administer ophthalmic drugs for the treatment of severe diseases and is generally accepted by patients facing the prospect of severe visual loss or blindness. A therapy that offers a less invasive method of administration, however, might have a competitive advantage over one administered by intravitreal injection, depending on the relative safety of the other method of administration.
Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the relevant market. Furthermore, our ability to compete may be affected in many cases by insurers or other third-party payors, particularly Medicare, seeking to encourage the use of less expensive or more convenient products.
In the case of orphan diseases such as the IRDs for which we are researching and developing potential treatments, should we be successful in development, our commercialization efforts may rely on non-patent market exclusivity periods under the Orphan Drug Act and the Hatch-Waxman Act. The Orphan Drug Act only provides exclusivity periods for the specific drug granted orphan drug designation for a specific indication. In addition, there are limited circumstances under each of the Orphan Drug Act and the Hatch-Waxman Act that could result in our loss of data and marketing exclusivity, which could allow a competitor to enter the market. Failure to maintain either data or market exclusivity period could have a material adverse effect on our ability to commercialize our product candidates.
Many of our competitors have significantly greater financial and human resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient enrollment for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our development programs.
Based on publicly available information, we are aware of the following research and development programs that may be competitive with programs we are pursuing. Other competitive programs may exist of which we are not aware.

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Competitive considerations for RHO-adRP:
There are a number of products in preclinical research by third parties to treat RHO-adRP. We are aware that multiple academic institutions have early stage gene therapy development programs in RHO-adRP. In addition, prior to its acquisition by Biogen Inc., Nightstar Therapeutics plc had a preclinical AAV gene therapy program in RHO-adRP. ProQR Therapeutics N.V. is developing an early stage RNA-based therapeutic for RHO-adRP. Editas Medicine, Inc. is also exploring a potential program in this disease.
Competitive considerations for BEST1-related IRDs:
We are aware that, prior to its acquisition by Biogen, Nightstar Therapeutics plc had a preclinical AAV gene therapy program for one or more BEST1-related IRDs.
Competitive considerations for LCA10:
We are aware that Editas Medicine has a CRISPR gene editing program for LCA10, an IND for which was submitted in late 2018, ProQR Therapeutics N.V. is developing an RNA-based therapeutic for LCA10 that is currently in clinical development, Generation Bio Co. has a preclinical program that utilizes ceDNA technology to target LCA10 and Oxford Biomedica plc is developing a lentiviral gene therapy program for LCA10 that is in preclinical development. In addition, several academic institutions have preclinical programs in LCA10.
Competitive considerations for Stargardt disease:
There are a number of products in preclinical research and clinical development by third parties to treat Stargardt disease. We are aware that Sanofi, Acucela Inc., Alkeus Pharmaceuticals, Inc., Lin BioScience, Inc., Nightstar Therapeutics plc (prior to its acquisition by Biogen), ProQR Therapeutics N.V., Spark Therapeutics and Generation Bio Co. each have research or development programs in Stargardt disease. Three of these programs, Acucela, Alkeus and Lin BioScience, are exploring the use of oral therapeutics, while Sanofi, with technology provided by Oxford BioMedica plc, Nightstar and Spark are each using a gene therapy approach and ProQR is using an RNA based approach. Acucela’s product candidate is in Phase 3 development while Alkeus’s and Sanofi’s product candidates are each in Phase 2 development. Spark's program is in the research phase. In addition, several academic organizations have early stage programs in Stargardt disease.
Competitive considerations for USH2A-related IRDs:
There are a number of products in preclinical research and clinical development by third parties to treat USH2A-related IRDs. We are aware that ProQR Therapeutics N.V. is pursuing two RNA based approaches for different mutations causing Usher 2A, one of which is currently in Phase 1/2 clinical development and the other of which is in preclinical development. We are also aware that Editas Medicine, Inc. and Odylia Therapeutics are exploring potential programs in USH2A-related IRDs.
Competitive considerations for Dry AMD and GA:
There are a number of products in preclinical research and clinical development by third parties to treat dry AMD, including several that are in development for GA secondary to dry AMD. In general, these product candidates can be categorized based on their proposed mechanisms of action. The mechanisms of action for these product candidates include inflammation suppression, such as complement system inhibitors and corticosteroids, visual cycle modulators, antioxidants and neuroprotectants, cell and gene therapies and vascular perfusion enhancers. We are aware that Apellis Pharmaceuticals, Inc., Roche AG, Novartis AG and MorphoSys AG, Hemera Biosciences, Inc., Gyroscope Therapeutics, Achillion Pharmaceuticals, Inc., and Catalyst Biosciences, Inc. each have complement inhibitors in development for dry AMD. We believe that the most advanced of these programs is Apellis's pegylated, synthetic peptide targeting complement protein C3. Following positive Phase 2 results for its C3 complement inhibitor product candidate, Apellis announced in September 2018 that it had dosed the first patient in a Phase 3 program for this product candidate. If Apellis's Phase 3 program for its C3 complement inhibitor product candidate is successful, it is likely that Apellis may obtain marketing approval for its product candidate in advance of when we could reasonably expect marketing approval for Zimura in GA or a product candidate from our HtrA1 inhibitor program in GA, if at all. Moreover, we are aware that several other companies have announced development programs for the treatment of dry AMD or GA targeting different mechanisms of action outside of the complement system.

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If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, we may not be successful in commercializing any of our product candidates that we develop if and when any such product candidate is approved.
As a company, we have no experience in the sale, marketing or distribution of pharmaceutical products. We currently do not have any sales, marketing or distribution infrastructure. To achieve commercial success for any approved product, we must either develop a sales, marketing and distribution organization or outsource those functions to third parties. We expect that our commercial strategy for any of our product candidates, including whether to retain commercial rights and market and sell the product candidate ourselves or to utilize collaboration, distribution or other marketing arrangements with third parties, would be determined based on a variety of factors, including the size and nature of the patient population, the disease area, the particular indications for which the product candidate is approved, the territories in which the product candidate may be marketed and the commercial potential for such product candidate. Our gene therapy programs are currently being developed for orphan IRDs with a limited number of affected individuals. In contrast, we are developing Zimura and our HtrA1 inhibitor program for GA secondary to dry AMD, which is a condition affecting a relatively large number of individuals. If any of our product candidates are approved, the size and nature of the affected patient population will be an important factor in our commercial strategy. In addition, our commercial strategy would vary depending on whether the disease is typically treated by general ophthalmology practitioners, specialists, such as retinal specialists, or sub-specialists, such as retinal specialists with particular expertise in IRDs.
There are risks involved with establishing our own sales, marketing and distribution capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to adequate numbers of physicians who may prescribe our products;
the lack of complementary products to be offered by our sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues and our profitability, if any, are likely to be lower than if we were to market, sell and distribute ourselves any products that we develop. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we would not be successful in commercializing our product candidates.
Even if any of our product candidates receives marketing approval, such product candidate may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for any of our products and product candidates may be smaller than we estimate.
The degree of market acceptance of any product candidate that we are developing or we may develop, if approved for commercial sale, will depend on a number of factors, including:
efficacy and potential advantages compared to alternative treatments, including the existing standard of care;
any restrictions in the label on the use of our products in combination with other medications or with certain devices;
any restrictions in the label on the use of our products by a subgroup of patients;
restrictions in the label imposing a waiting period in between intravitreal or subretinal injections;
our and any commercialization partner’s ability to offer our products at competitive prices;

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availability of governmental and third-party payor coverage and adequate reimbursement;
increasing reimbursement pressures on treating physicians due to the formation of accountable care organizations and the shift away from traditional fee-for-service reimbursement models to reimbursement based on quality of care and patient outcomes;
willingness of the target patient population to try new therapies and of physicians to prescribe these therapies, particularly in light of the existing available standard of care or to the extent our product candidates require invasive procedures for administration, such as subretinal surgery;
prevalence and severity of any side effects or perceived safety concerns, especially for new therapeutic modalities such as gene therapy; and
whether competing products or other alternatives are more convenient or easier to administer, including whether co-formulated alternatives, alternatives that can be co-administered in a single syringe or alternatives that offer a less invasive method of administration than intravitreal injection or subretinal injection come to market.
For each of our Zimura trials where patients will receive multiple intravitreal injections on the same day, we have provided for a delay in the second intravitreal injection to minimize the risk of an unacceptable increase in intraocular pressure as a result of the volume of the multiple injections. In addition, certain of the Zimura dosing regimens we are evaluating require injections more frequently than once per month. If Zimura receives marketing approval for a particular indication and the approved label requires a waiting period between injections administered on the same day or a dosing regimen that requires multiple office visits per month, the potential market opportunity for Zimura may be limited to the extent that physicians and patients find such a waiting period or dosing regimen unacceptable.
In addition, the potential market opportunity for any product candidate is difficult to estimate precisely. Our estimates of the potential market opportunity for our product candidates include several key assumptions based on our expectations of the safety and effectiveness of the relevant product candidate, our industry knowledge, industry publications, market response to Spark Therapeutics's Luxturna®, Novartis AG's Zolgensma® and anti-VEGF agents currently approved for treatment of wet AMD, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions and any of these assumptions could prove to be inaccurate, and the actual market for such product candidates could be smaller than our estimates of our potential market opportunity.
There are several factors that could contribute to the actual number of patients who receive an approved therapy being less than our current estimate of the potentially addressable market. With respect to our programs for orphan diseases, our understanding of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. These estimates may prove to be incorrect and new studies may reduce the estimated incidence or prevalence of these diseases. Further, the severity of the progression of a disease up to the time of treatment, especially in certain degenerative conditions such as IRDs, likely will diminish the therapeutic benefit conferred by a gene therapy due to irreversible cell death. Certain patients’ immune systems and prior exposure to the virus used to deliver a gene therapy might inhibit the successful delivery of certain gene therapy products to the target tissue, thereby limiting eligibility for treatment or limiting treatment outcomes. If the number of patients that may benefit from the treatments we are seeking to develop is lower than we expect, our business, financial condition, results of operations and prospects may be adversely affected.
Even if we are able to commercialize any of the product candidates that we may develop, the product may become subject to unfavorable pricing regulations, pricing dynamics, third-party reimbursement practices or healthcare reform initiatives, which would harm our business.
The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country.  Health care reform, including increasing scrutiny of drug prices, is an issue of intense political focus, particularly in the United States. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals or in ways that could alter the mechanism by which pharmaceutical prices are negotiated or otherwise determined.  Many countries outside the United States require approval of the sale price of a drug before it can be marketed, and to apply for and obtain such an approval in certain countries, we or a commercialization partner may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control or negotiation even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our or any commercialization partner’s commercial launch of the product, possibly for lengthy time periods, which would negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more

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product candidates, even if our product candidates obtain marketing approval and are widely accepted and prescribed or used by physicians.
In addition, even in countries where pharmaceuticals are not subject to strict pricing regulations through a governmental review and approval process, we may nonetheless face an unfavorable pricing environment as a result of political pressure or market dynamics. Because there are only two FDA-approved gene replacement therapy products, one of which began commercial sales in 2018 and the other of which was only recently launched in the United States, the pricing environment for gene therapies is in the very early stages of its development. Gene therapies are generally intended to be one-time treatments or, at a minimum, to provide a benefit over an extended period lasting several years. If we are successful in obtaining marketing approval for any of our gene therapy product candidates, we will need to convince third-party payors of the value that our gene therapy product offers. Third-party payors may be unwilling to accept substantial upfront costs for a therapy where the benefits may not be realized or are realized over a period of years during which the patient may no longer be enrolled in the payor's plan. Although payors and manufacturers may be incentivized to agree to outcomes-based payment structures for gene therapies, where manufacturers provide rebates or a portion of the contract price is forgiven if an efficacy or durability threshold is not met for an individual patient, market dynamics in the United States currently do not facilitate these types of outcome-based payments, in particular because of rules that require that government payors, such as Medicaid, receive the “best price” for a drug, regardless of outcome. The perceived high cost for pharmaceutical products to treat orphan diseases, where manufacturers seek to recoup development costs and earn a profit for a therapy intended to treat a relatively small patient population, may attract increased political and public scrutiny. Moreover, if we obtain marketing approval for a product candidate, such as Zimura, in more than one indication, including, for example in an orphan indication such as STGD1 and a non-orphan indication such as GA secondary to dry AMD, such a product candidate likely would only be sold at one price in any given country, regardless of the indications for which it is prescribed. This dynamic may result in our charging a price that does not generate profits in each indication for which the product is approved.
Our ability and the ability of any commercialization partner to commercialize a product candidate successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A major trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors, particularly Medicare, have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications and encouraging the substitution of lower cost or generic products. Pricing pressures recently experienced by the pharmaceutical industry may be further exacerbated by legislative and policy changes under consideration by the Trump Administration and many states.  For example, the Trump Administration, through the Center for Medicare & Medicaid Service, or CMS, announced in late 2018 an advance notice of proposed rulemaking describing a potential mandatory reference pricing model for Medicare Part B drugs under which the prices paid for these drugs will be adjusted in relation to an international pricing index that includes prevailing prices from other countries with strict price controls.  CMS is considering issuing a proposed rule that would describe the model in more detail, with the goal of starting the model in spring 2020.  The Trump Administration has also expressed an interest in authorizing and/or directing CMS or other agencies of the U.S. government to negotiate prices for drugs covered by Medicare directly with pharmaceutical companies.  If this were to occur, especially for AMD drugs where a large portion of the patient population is over the age of 65 and is therefore covered by Medicare, there could be significant downward pressure on prices charged, not only for patients covered by Medicare, but also for patients covered by private insurers who may follow the government’s lead on price. Moreover, increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for pharmaceutical products. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize or any commercialization partner commercializes on our behalf, and, even if these are available, the level of reimbursement may not be satisfactory.
Reimbursement may affect the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. We or any commercialization partner may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies that may be on the market. If coverage and adequate reimbursement are not available or reimbursement is available only at limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.
There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary

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according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States, a policy that President Trump and certain members of the U.S. Congress have expressed interest in pursuing. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our and any commercialization partner’s inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
For a further discussion of health care reform and other political factors affecting drug prices, see the risk factor herein entitled "Current and future legislation and regulations may increase the difficulty and cost for us and any future collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we or they may charge for such products, when and if approved."
Ethical, legal and social issues related to genetic testing may reduce demand for any gene therapy product candidates we develop and for which we seek marketing approval.
We anticipate that prior to receiving certain gene therapies, including as part of a clinical trial, patients would be required to undergo genetic testing. Genetic testing has raised concerns regarding the appropriate utilization and the confidentiality of information provided by genetic testing. Genetic tests for assessing a person’s likelihood of developing a chronic disease have focused public attention on the need to protect the privacy of genetic information. For example, concerns have been expressed that insurance carriers and employers may use these tests to discriminate on the basis of genetic information, resulting in barriers to the acceptance of genetic tests by consumers. This dynamic could lead to governmental authorities restricting genetic testing or calling for limits on or regulating the use of genetic testing, particularly for diseases for which there is no known cure. Any of these scenarios could decrease the pool of patients willing to participate in a clinical trial for a gene therapy and the demand for a gene therapy once it is approved.
Product liability lawsuits against us or any future commercialization partner could divert resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop or in-license.
We face an inherent risk of product liability exposure related to the testing of any product candidate that we develop in human clinical trials, and we and any future commercialization partner will face an even greater risk if we commercially sell any products that we develop. If we become subject to or otherwise cannot successfully defend ourselves against claims that our product candidates or our products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
decreased demand for any product candidates or products that we may develop or in-license;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigation;
substantial monetary awards to trial participants or patients;
loss of revenue;
reduced time and attention of our management to pursue our business strategy; and
the inability to commercialize any products that we may develop or in-license.
We currently hold $10.0 million in product liability insurance coverage in the aggregate, with a per incident limit of $10.0 million, which may not be adequate to cover all liabilities that we may incur. We will need to increase our insurance coverage when and if we begin commercializing an approved product. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. In addition, if a commercialization or collaboration partner were to become subject to product liability claims or were unable to successfully defend themselves against such claims, any such commercialization or collaboration partners could be more likely to terminate such relationship with us and therefore substantially limit the commercial potential of our products.

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Risks Related to Our Dependence on Third Parties
We contract with third parties for the manufacture of and for providing starting materials for our product candidates for preclinical development activities and clinical trials and expect to continue to do so in the future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products, which could delay, prevent or impair our development or commercialization efforts.
We do not currently own or operate manufacturing facilities for the production of clinical or commercial quantities of any of our product candidates and have a limited number of personnel hired to supervise outside contract manufacturers. We currently rely upon and expect to continue to rely upon third-party contract manufacturers to manufacture preclinical and clinical supplies of product candidates we are developing or may develop and commercial supplies of products if and when approved for marketing by applicable regulatory authorities. Furthermore, we and our contract manufacturers currently rely upon, and for the foreseeable future expect to continue to rely upon, sole-source suppliers of certain raw materials, plasmids and other specialized components of production used in the manufacture and fill/finish of our product candidates.
We have engaged a gene therapy CDMO for preclinical and Phase 1/2 clinical supply of IC-100 and IC-200. For our HtrA1 inhibitor program, we have engaged a CDMO to produce small quantities of the API for our HtrA1 inhibitors for preclinical development purposes.
We currently rely exclusively upon, and purchase on a purchase order basis, a single third-party manufacturer to provide Zimura drug substance and a different single third-party manufacturer to provide fill/finish services for Zimura. We do not currently have any contractual commitments for the supply of Zimura drug substance. We also do not currently have arrangements in place for redundant supply or a second source for drug substance for Zimura or a second source for fill/finish services for Zimura. We purchase the polyethylene glycol, or PEG, reagent used to modify the chemically synthesized aptamer in Zimura on a purchase order basis from a single third-party supplier. We do not currently have any contractual commitments for supply of the PEG reagent we use for Zimura. The prices for manufacturing activities that are not yet contractually committed may vary substantially over time and adversely affect our financial results.
Our current and anticipated future dependence upon others for the manufacture of the product candidates that we are developing or may develop may adversely affect our business plan and future growth. For example, any performance failure or differing priorities on the part of our existing or future manufacturers could delay preclinical or clinical development or marketing approval of our product candidates. Our dependence on third party manufacturers may limit our ability to commercialize on a timely and competitive basis any products that receive marketing approval.
If any of our third-party manufacturers, fill/finish providers or sole-source suppliers fail to fulfill our purchase orders, or if any of these manufacturers or suppliers should become unavailable to us for any reason, including as a result of capacity constraints, differing priorities, regulatory compliance issues, financial difficulties or insolvency, we believe that there are a limited number of potential replacement manufacturers or sole source suppliers, and we likely would incur added costs and delays in identifying or qualifying such replacements. We may be unable to establish agreements with such replacement manufacturers, fill/finish providers or sole-source suppliers or to do so on acceptable terms.
In addition, to the extent that we or our third party manufacturers rely on materials that are sourced outside the United States, our supplier relationships could be interrupted due to international supply disruptions, including those caused by geopolitical and other issues. For example, trade disputes, trade negotiations or the imposition of tariffs between the United States and its trading partners could cause delays or disruptions in our supply of starting materials for our product candidates.
Reliance on third-party manufacturers entails additional risks, including:
our product candidates may compete with other product candidates and products for access to a limited number of suitable manufacturing facilities that operate under cGMP conditions;
reliance on the third party for regulatory compliance, quality assurance and quality control;
the possible breach of the manufacturing agreement by the third party;
the possible misappropriation of our proprietary information, including our trade secrets and know-how; and