S-4
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As filed with the Securities and Exchange Commission on December 20, 2018

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ARSANIS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2836   27-3181608

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

890 Winter Street, Suite 230

Waltham, MA 02451

(781) 819-5704

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

 

 

Michael P. Gray

President and Chief Executive Officer, Chief Financial Officer

Arsanis, Inc.

890 Winter Street, Suite 230

Waltham, MA 02451

(781) 819-5704

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

 

 

Copies to:

 

Jay E. Bothwick, Esq.

Cynthia T. Mazareas, Esq.

Mhairi C. Immermann, Esq.

Wilmer Cutler Pickering

Hale and Dorr LLP

60 State Street

Boston, MA 02109

(617) 526-6000

 

John J. Cheney, Esq.

Daniel T. Kajunski, Esq.

John P. Condon, Esq.

Mintz, Levin, Cohn, Ferris,

Glovsky and Popeo, P.C.

One Financial Center

Boston, MA 02111

(617) 542-6000

 

 

Approximate date of commencement of proposed sale of the securities to the public:

As soon as practicable after the effectiveness of this registration statement and the satisfaction or

waiver of all other conditions under the Merger Agreement described herein.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box.  ☐

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13(e)-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Security Being Registered

 

Amount

to be

Registered(2)

 

Proposed

Maximum
Offering Price

Per Share

 

Proposed

Maximum

Aggregate

Offering Price(3)

  Amount of
Registration Fee(4)

Common stock, par value $0.001 per share(1)

  35,478,594   N/A   $19,485.57   $3.00

 

 

(1)

Includes rights to acquire common stock or preferred stock under any shareholder rights plan in effect from time to time, if applicable, under the terms of any such plan.

(2)

Relates to shares of common stock, $0.001 par value per share, of Arsanis, Inc., a Delaware corporation, or Arsanis, issuable to holders of common stock, $0.001 par value per share, preferred stock, par value $0.001 per share, and options, warrants and other direct and indirect rights to acquire common stock and/or preferred stock of X4 Pharmaceuticals, Inc., a Delaware corporation, or X4, in the proposed merger of Artemis AC Corp., a Delaware corporation and a wholly owned subsidiary of Arsanis, with and into X4. The amount of Arsanis common stock to be registered is based on the estimated number of shares of Arsanis common stock that could be issued pursuant to the merger assuming the application of an exchange ratio at the closing of the merger that results in the greatest number of shares of Arsanis common stock being issued (before taking into account the effect of any potential reverse stock split of Arsanis common stock).

(3)

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f) of the Securities Act of 1933, as amended. X4 is a private company, no market exists for its securities, and X4 has an accumulated capital deficit. Therefore, the proposed maximum aggregate offering price is one-third of the aggregate par value of the X4 securities expected to be exchanged in the proposed merger.

(4)

This fee has been calculated pursuant to Section 6(b) of the Securities Act of 1933, as amended, and has been rounded up to $3.00.

 

 

 

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

 

 

 


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The information in this proxy statement/prospectus/information statement is not complete and may be changed. Arsanis may not sell its securities pursuant to the proposed transaction until the Registration Statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus/information statement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated December 20, 2018

 

LOGO   LOGO

PROPOSED MERGER

YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Arsanis, Inc. and X4 Pharmaceuticals, Inc.:

Arsanis, Inc. (“Arsanis”) and X4 Pharmaceuticals, Inc. (“X4”) have entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”), pursuant to which a wholly owned subsidiary of Arsanis will merge with and into X4, with X4 continuing as a wholly owned subsidiary of Arsanis and the surviving corporation of the merger (the “Merger”). Arsanis and X4 believe that the Merger will result in a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases.

At the effective time of the Merger (the “Effective Time”), each share of X4’s common stock, par value $0.001 per share (“X4 Common Stock”), outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section of this proxy statement/prospectus/information statement titled “The Merger—Appraisal Rights and Dissenters’ Rights”) will be converted into the right to receive shares of Arsanis’s common stock, par value $0.001 per share (“Arsanis Common Stock”), based on an exchange ratio set forth in the Merger Agreement (the “Common Stock Exchange Ratio”), which Common Stock Exchange Ratio was initially estimated (as of the date of the execution of the Merger Agreement) to be 0.5948 shares and is currently estimated to be                  shares of Arsanis Common Stock for each share of X4 Common Stock and is subject to change to account for, among other things, Arsanis’s net cash as of the business day prior to the closing of the Merger (the “Closing”). Each share of X4’s preferred stock, par value $0.001 per share (“X4 Preferred Stock” and, together with X4 Common Stock, “X4 Capital Stock”), outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section of this proxy statement/prospectus/information statement titled “The Merger—Appraisal Rights and Dissenters’ Rights”) will be converted into the right to receive Arsanis Common Stock based on an exchange ratio set forth in the Merger Agreement (the “Preferred Stock Exchange Ratio” and, together with the Common Stock Exchange Ratio, the “Exchange Ratios”), which Preferred Stock Exchange Ratio is equal to the Common Stock Exchange Ratio multiplied by the number of shares of X4 Common Stock into which each share of X4 Preferred Stock is convertible immediately prior to the Closing. Arsanis will assume outstanding and unexercised options and warrants to purchase shares of X4 Capital Stock, which will be converted into options or warrants to purchase shares of Arsanis Common Stock, with the number of shares of Arsanis Common Stock subject to such option or warrant and the exercise price being appropriately adjusted to reflect the applicable Exchange Ratio. Existing Arsanis stockholders (“Arsanis Stockholders”) will continue to own and hold their existing shares of Arsanis Common Stock and existing Arsanis optionholders (“Arsanis Optionholders”) will continue to hold their existing options to acquire shares of Arsanis Common Stock (“Arsanis Options”).

As of the date of the execution of the Merger Agreement, it was estimated that immediately after the consummation of the Merger, based on the sample Common Stock Exchange Ratio and Preferred Stock Exchange Ratio of 0.5948 set forth below, current holders of X4 Capital Stock (“X4 Stockholders”), holders of options or warrants to acquire X4 Capital Stock (“X4 Optionholders” and “X4 Warrantholders,” respectively) and other persons holding securities and other rights directly or indirectly convertible, exercisable or exchangeable for X4 Capital Stock (collectively with the X4 Stockholders, X4 Optionholders and X4 Warrantholders, “X4 Securityholders”) would own approximately 70% of the Fully Diluted Closing Arsanis Common Stock (as defined below), and Arsanis Stockholders, Arsanis Optionholders and other persons holding securities and other rights directly or indirectly convertible, exercisable


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or exchangeable for Arsanis Common Stock (collectively with the Arsanis Stockholders and Arsanis Optionholders, “Arsanis Securityholders”) (excluding for this purpose certain out-of-the-money Arsanis Options and warrants to purchase Arsanis Common Stock (“Arsanis Warrants”)) would own approximately 30% of the Fully Diluted Closing Arsanis Common Stock, subject to adjustment of the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio as set forth in the Merger Agreement. “Fully Diluted Closing Arsanis Common Stock” as used herein means (x) Arsanis Outstanding Shares (i.e., the “Public Company Outstanding Shares” as defined in the Merger Agreement, which figure includes restricted stock and options for approximately 800,000 shares of Arsanis Common Stock currently outstanding) plus (y) X4 Outstanding Shares (i.e., the “Merger Partner Outstanding Shares” as defined in the Merger Agreement, which figure includes all then outstanding X4 options and warrants (whether or not exercisable)). The initial estimate of the Common Stock Exchange Ratio set forth below assumed the following:

 

   

Arsanis would have $20.0 million in net cash on the business day immediately prior to the Closing,

 

   

Arsanis outstanding shares and options as of the Closing would be equal to 15,116,966 (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options), and

 

   

X4 shares as of the Closing on a fully diluted and as-converted basis would be equal to 58,456,701.

The Exchange Ratios are calculated using a formula intended to allocate a percentage of the combined organization to existing X4 Securityholders. Based on the assumptions described above, the Common Stock Exchange Ratio would have been equal to approximately 0.5948 shares of Arsanis Common Stock for each share of X4 Common Stock, which Common Stock Exchange Ratio is subject to change based on changes in Arsanis’s net cash balance on the business day prior to the Closing and the capitalization of Arsanis or X4 immediately prior to the Closing (and as a result, Arsanis Securityholders and X4 Securityholders could own more or less of the combined organization). The Preferred Stock Exchange Ratio is equal to the Common Stock Exchange Ratio multiplied by the number of shares of X4 Common Stock into which each share of X4 Preferred Stock is convertible immediately prior to the Effective Time. Arsanis currently estimates, assuming for this purpose a closing date of                 , 2019, that (i) it will have approximately $        million in net cash on the business day prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing will be equal to             (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) the X4 shares as of the Closing on a fully diluted and as-converted basis will be equal to             . Accordingly, it is currently estimated that the Common Stock Exchange Ratio at Closing will be approximately                and, because each share of X4 Preferred Stock is convertible into one share of X4 Common Stock, the Preferred Stock Exchange Ratio is expected to be equal to the Common Stock Exchange Ratio. Based solely on such Common Stock Exchange Ratio and Preferred Stock Exchange Ratio, at Closing: (a) X4 Securityholders as of immediately prior to the Merger will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, (b) Arsanis Securityholders as of immediately prior to the Merger (excluding for this purpose certain out-of-the-money Arsanis Options and Arsanis Warrants) will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, and (c) the shares available for issuance under Arsanis’s 2017 Equity Incentive Plan (the “Arsanis 2017 Plan”) and all stock option plans or other stock or equity-related plans of X4 (collectively, the “X4 Plan”) as of immediately prior to the Merger will represent approximately     % of the Fully Diluted Closing Arsanis Common Stock, in each case, subject to adjustment of the Exchange Ratios as set forth in the Merger Agreement and described herein.

As of the date of this proxy statement/prospectus/information statement, shares of Arsanis Common Stock are listed on the Nasdaq Global Market under the symbol “ASNS.” Arsanis expects to file an initial listing application with the Nasdaq Global Market pursuant to Nasdaq’s rules for companies conducting a business combination that results in a change of control. After completion of the Merger, Arsanis expects to be renamed “X4 Pharmaceuticals, Inc.” and expects its common stock to trade on the Nasdaq Global Market under the symbol “XFOR.” On December 19, 2018, the closing sale price of Arsanis Common Stock on the Nasdaq Global Market was $3.27 per share.

 

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Arsanis is holding a special meeting of stockholders (the “Special Meeting”) in order to obtain the stockholder approvals necessary to complete the Merger and related matters. At the Special Meeting, which will be held at                a.m., local time, on                 , 2019, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, 02109, unless postponed or adjourned to a later date, Arsanis will ask its stockholders to:

 

  1.

adopt the Merger Agreement, thereby approving the Merger and the issuance of Arsanis Common Stock pursuant to the Merger Agreement;

 

  2.

approve an amendment to Arsanis’s restated certificate of incorporation effecting a reverse stock split of Arsanis Common Stock at a ratio mutually agreed to between Arsanis and X4 in the range of one new share for every four (4) to eight (8) shares outstanding (or any number in between) (the “Reverse Stock Split”);

 

  3.

approve an amendment to Arsanis’s restated certificate of incorporation changing Arsanis’s corporate name from “Arsanis, Inc.” to “X4 Pharmaceuticals, Inc.”;

 

  4.

consider and vote upon an adjournment of the Special Meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3; and

 

  5.

consider such other business as may properly come before the stockholders at the Special Meeting or any adjournment or postponement thereof.

As described in the accompanying proxy statement/prospectus/information statement, certain of X4’s stockholders who in the aggregate own approximately 11% of the outstanding shares of X4 Capital Stock on an as converted to X4 Common Stock basis, and certain Arsanis Stockholders who in the aggregate own approximately 48% of the outstanding shares of Arsanis Common Stock, are parties to support agreements with Arsanis and X4, respectively, whereby such stockholders have agreed to vote in favor of the adoption or approval of the Merger Agreement, as applicable, and the approval of the transactions contemplated therein, including the Merger and the issuance of Arsanis Common Stock in the Merger pursuant to the Merger Agreement, respectively, subject to the terms of the support agreements. In addition, following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the U.S. Securities and Exchange Commission and pursuant to the conditions of the Merger Agreement, X4 has agreed to solicit from X4 Stockholders (and X4 Stockholders who are party to the support agreements have agreed to execute) an action by written consent of X4 Stockholders, referred to herein as the written consent, adopting the Merger Agreement, thereby approving the Merger and related transactions.

After careful consideration, the respective boards of directors of Arsanis and X4 have (i) determined that the transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of Arsanis or X4, as applicable, and their respective stockholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated thereby and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that its respective stockholders vote to adopt or approve, as applicable, the Merger Agreement and, therefore, approve the transactions contemplated therein. Arsanis’s board of directors recommends that its stockholders vote “FOR” the proposals described in this proxy statement/prospectus/information statement, and X4’s board of directors recommends that its stockholders sign and return to X4 the written consent indicating their approval of the Merger and adoption of the Merger Agreement and related transactions.

More information about Arsanis, X4 and the proposed transaction is contained in this proxy statement/prospectus/information statement. Arsanis and X4 urge you to read this proxy statement/prospectus/information statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE SECTION TITLED “RISK FACTORS” IN THIS PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT.

 

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Arsanis and X4 are excited about the opportunities the Merger brings to both Arsanis’s and X4’s respective stockholders and thank you for your consideration and continued support.

 

Michael P. Gray

President and Chief Executive Officer,

Chief Financial Officer

Arsanis, Inc.

  

Paula Ragan, Ph.D.

President and Chief Executive Officer

X4 Pharmaceuticals, Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus/information statement. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus/information statement is dated                     , 2019, and is first being mailed to Arsanis’s and X4’s respective stockholders on or about                     , 2019.

 

- 4 -


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LOGO

 

890 Winter Street, Suite 230

Waltham, MA 02451

(781) 819-5704

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON                     , 2019

Dear Stockholders of Arsanis:

On behalf of the board of directors of Arsanis, Inc., a Delaware corporation (“Arsanis”), we are pleased to deliver this proxy statement/prospectus/information statement for the proposed merger between Arsanis and X4 Pharmaceuticals, Inc., a Delaware corporation (“X4”), pursuant to which Artemis AC Corp., a Delaware corporation and a wholly owned subsidiary of Arsanis (“Merger Sub”), will merge with and into X4, with X4 continuing as a wholly owned subsidiary of Arsanis and the surviving corporation of the merger (the “Merger”). The special meeting of stockholders of Arsanis (the “Special Meeting”) will be held on                     , 2019, at                a.m., local time, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, 02109, for the following purposes:

 

  1.

To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of November 26, 2018, by and among Arsanis, Merger Sub and X4, as amended on December 20, 2018, a copy of which is attached as Annex A to this proxy statement/prospectus/information statement (the “Merger Agreement”), and the transactions contemplated thereby, including the Merger and the issuance of shares of Arsanis’s common stock to X4’s stockholders pursuant to the terms of the Merger Agreement.

 

  2.

To approve an amendment to the restated certificate of incorporation of Arsanis to effect a reverse stock split (the “Reverse Stock Split”) of Arsanis’s common stock, at a ratio mutually agreed to by Arsanis and X4 in the range of one new share for every four (4) to eight (8) shares outstanding (or any number in between), in the form attached as Annex D to this proxy statement/prospectus/information statement.

 

  3.

To approve an amendment to the restated certificate of incorporation of Arsanis to change the corporate name of Arsanis from “Arsanis, Inc.” to “X4 Pharmaceuticals, Inc.” in the form attached as Annex E to this proxy statement/prospectus/information statement.

 

  4.

To consider and vote upon an adjournment of the Special Meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3.

 

  5.

To transact such other business as may properly come before the stockholders at the Special Meeting or any adjournment or postponement thereof.

Arsanis’s board of directors has fixed                     , 2019, as the record date (the “Record Date”) for the determination of stockholders entitled to notice of, and to vote at, the Special Meeting and any adjournment or postponement thereof. Only holders of record of shares of Arsanis’s common stock at the close of business on the Record Date are entitled to notice of, and to vote at, the Special Meeting. At the close of business on the Record Date, there were                  shares of Arsanis’s common stock outstanding and entitled to vote.

Your vote is important. The affirmative vote of holders of shares of Arsanis’s stock having a majority in voting power of the votes cast by the holders of all of the shares of Arsanis’s stock present or represented at the Special Meeting and voting affirmatively or negatively on the matter is required for


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approval of Proposal Nos. 1 and 4. The affirmative vote of the holders of a majority of shares of Arsanis’s common stock outstanding on the Record Date for the Special Meeting and entitled to vote is required for approval of Proposal Nos. 2 and 3. The approval of Proposal No. 1 is a closing condition of the Merger. Therefore, the Merger cannot be consummated without the approval of Proposal No. 1. Proposal No. 3 is conditioned upon the consummation of the Merger. If the Merger is not completed, Proposal No. 3 will not be implemented, and Arsanis’s name will not be changed. If the Merger is completed, but Arsanis’s stockholders do not approve Proposal No. 3, Proposal No. 3 will not be implemented. Proposal No. 2, regarding the Reverse Stock Split, is not conditioned upon the consummation of the Merger, and as such the Reverse Stock Split may be implemented by Arsanis’s board of directors even if the Merger does not take place. Even if you plan to attend the Special Meeting in person, Arsanis requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Special Meeting if you are unable to attend.

By Order of Arsanis’s board of directors,

Michael P. Gray

President and Chief Executive Officer, Chief Financial Officer

Arsanis, Inc.

Waltham, Massachusetts

                    , 2019

ARSANIS’S BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, ARSANIS AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. ARSANIS’S BOARD OF DIRECTORS RECOMMENDS THAT ARSANIS STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.

REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement incorporates important business and financial information about Arsanis that is not included in or delivered with this document. You may obtain this information without charge through the Securities and Exchange Commission (“SEC”) website (www.sec.gov) or upon your written or oral request by contacting Arsanis’s Investor Relations department at Arsanis, Inc., 890 Winter Street, Suite 230, Waltham, MA 02451 or by calling (781) 819-5704.

To ensure timely delivery of these documents, any request should be made no later than                     , 2019, to receive them before the Special Meeting.

For additional details about where you can find information about Arsanis, please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1  

PROSPECTUS SUMMARY

     11  

The Companies

     11  

The Merger

     12  

Reasons for the Merger

     14  

Opinion of the Arsanis Financial Advisor as of November 26, 2018

     15  

Overview of the Merger Agreement

     16  

Support Agreements

     18  

Management Following the Merger

     19  

Interests of Certain Directors, Officers and Affiliates of Arsanis and X4

     19  

Material U.S. Federal Income Tax Consequences of the Merger

     19  

Risk Factors

     20  

Regulatory Approvals

     21  

Nasdaq Global Market Listing

     21  

Anticipated Accounting Treatment

     22  

Appraisal Rights and Dissenters’ Rights

     22  

Comparison of Stockholder Rights

     22  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

     23  

Selected Historical Consolidated Financial Data of Arsanis

     23  

Selected Historical Consolidated Financial Data of X4

     25  

Selected Unaudited Pro Forma Combined Financial Data of Arsanis and X4

     27  

Comparative Historical and Unaudited Pro Forma Per Share Data

     29  

MARKET PRICE AND DIVIDEND INFORMATION

     30  

Arsanis Common Stock

     30  

Dividends

     30  

RISK FACTORS

     31  

Risks Related to the Merger

     31  

Risks Related to the Proposed Reverse Stock Split

     36  

Risks Related to Arsanis

     36  

Risks Related to the Proposed Merger with X4

     36  

Risks Related to X4

     84  

Risks Related to the Combined Organization

     123  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     132  

THE SPECIAL MEETING OF ARSANIS STOCKHOLDERS

     135  

Date, Time and Place

     135  

Purposes of the Special Meeting

     135  

Recommendation of the Arsanis Board of Directors

     135  

Record Date and Voting Power

     136  

Voting and Revocation of Proxies

     136  

Required Vote

     137  

Solicitation of Proxies

     138  

Other Matters

     138  

 

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THE MERGER

     139  

Background of the Merger

     139  

Arsanis Reasons for the Merger

     148  

X4 Reasons for the Merger

     151  

Opinion of the Arsanis Financial Advisor as of November 26, 2018

     153  

Interests of the Arsanis Directors and Executive Officers in the Merger

     162  

Arsanis Employee Benefit Plans

     173  

Interests of the X4 Directors and Executive Officers in the Merger

     177  

Limitations of Liability and Indemnification

     179  

Form of the Merger

     180  

Merger Consideration and Adjustment

     180  

Determination of Arsanis’s Net Cash

     183  

Procedures for Exchanging X4 Stock Certificates

     184  

Effective Time of the Merger

     185  

Regulatory Approvals

     185  

Tax Treatment of the Merger

     185  

Material U.S. Federal Income Tax Consequences of the Merger

     186  

Nasdaq Global Market Listing

     188  

Anticipated Accounting Treatment

     188  

Appraisal Rights and Dissenters’ Rights

     189  

THE MERGER AGREEMENT

     193  

Structure

     193  

Completion and Effectiveness of the Merger

     193  

Merger Consideration

     193  

Treatment of Arsanis Options and Restricted Arsanis Common Stock

     194  

Treatment of X4 Options

     194  

Treatment of X4 Warrants

     194  

Procedures for Exchanging X4 Stock Certificates

     195  

Fractional Shares

     195  

Representations and Warranties

     195  

Covenants; Conduct of Business Pending the Merger

     199  

No Solicitation

     202  

Disclosure Documents

     204  

Stockholder Approvals

     205  

Indemnification of Officers and Directors

     206  

Additional Agreements

     207  

Nasdaq Stock Market Listing

     207  

Directors and Officers of Arsanis Following the Merger

     207  

Conditions to Completion of the Merger

     208  

Termination

     211  

Termination Fee

     213  

Amendment

     214  

Expenses

     214  

AGREEMENTS RELATED TO THE MERGER

     215  

MATTERS BEING SUBMITTED TO A VOTE OF ARSANIS STOCKHOLDERS

     216  

PROPOSAL NO. 1:
APPROVAL OF THE MERGER AND THE ISSUANCE OF COMMON STOCK IN THE MERGER

     216  

 

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PROPOSAL NO. 2:
APPROVAL OF AN AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF ARSANIS EFFECTING THE REVERSE STOCK SPLIT

     218  

PROPOSAL NO. 3:
APPROVAL OF AN AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF ARSANIS EFFECTING THE ARSANIS NAME CHANGE

     225  

PROPOSAL NO. 4:
APPROVAL OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING

     226  

ARSANIS BUSINESS

     227  

X4 BUSINESS

     261  

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

     296  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT THE MARKET RISK OF ARSANIS

     321  

X4 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     322  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT THE MARKET RISK OF X4

     345  

MANAGEMENT FOLLOWING THE MERGER

     346  

RELATED PARTY TRANSACTIONS OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED ORGANIZATION

     360  

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     365  

DESCRIPTION OF ARSANIS CAPITAL STOCK

     377  

COMPARISON OF RIGHTS OF HOLDERS OF ARSANIS STOCK AND X4 STOCK

     382  

PRINCIPAL STOCKHOLDERS OF ARSANIS

     396  

PRINCIPAL STOCKHOLDERS OF X4

     400  

PRINCIPAL STOCKHOLDERS OF THE COMBINED ORGANIZATION

     402  

LEGAL MATTERS

     405  

EXPERTS

     405  

WHERE YOU CAN FIND MORE INFORMATION

     405  

OTHER MATTERS

     406  

Section 16(a) Beneficial Ownership Reporting Compliance

     406  

Stockholder Proposals

     406  

Stockholder Communications with the Arsanis Board of Directors

     406  

Householding of Proxy Materials

     406  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

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     Page  

ANNEX A – AGREEMENT AND PLAN OF MERGER

     A-1  

ANNEX B – OPINION OF LEERINK PARTNERS LLC

     B-1  

ANNEX C – SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

     C-1  

ANNEX D – CERTIFICATE OF AMENDMENT FOR THE REVERSE STOCK SPLIT

     D-1  

ANNEX E – CERTIFICATE OF AMENDMENT FOR ARSANIS NAME CHANGE

     E-1  

PART II: INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT

     II-1  

Item 20. Indemnification of Officers and Directors

     II-1  

Item 21. Exhibits and Financial Statement Schedules

     II-4  

Item 22. Undertakings

     II-4  

EXHIBIT INDEX

  

SIGNATURES

  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split described in Proposal No. 2, beginning on page 218 in this proxy statement/prospectus/information statement (the “Reverse Stock Split”).

The following section provides answers to frequently asked questions about the Merger. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

Q:    What is the Merger?

A:    Arsanis, Inc. (“Arsanis”) and X4 Pharmaceuticals, Inc. (“X4”) have entered into an Agreement and Plan of Merger, dated as of November 26, 2018, as amended by the First Amendment to Agreement and Plan of Merger dated as of December 20, 2018 (the “Merger Agreement”). The Merger Agreement contains the terms and conditions of the proposed business combination of Arsanis and X4. Under the Merger Agreement, Artemis AC Corp., a wholly owned subsidiary of Arsanis (“Merger Sub”), will merge with and into X4, with X4 continuing as a wholly owned subsidiary of Arsanis and the surviving corporation of the merger (the “Merger”).

At the effective time of the Merger (the “Effective Time”), each share of X4’s common stock, par value $0.001 per share (“X4 Common Stock”), outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section of this proxy statement/prospectus/information statement titled The Merger—Appraisal Rights and Dissenters Rights) will be converted into the right to receive shares of Arsanis’s common stock, par value $0.001 per share (“Arsanis Common Stock”), based on an exchange ratio set forth in the Merger Agreement (the “Common Stock Exchange Ratio”), which Common Stock Exchange Ratio was initially estimated (as of the date of the execution of the Merger Agreement) to be 0.5948 shares and is currently estimated to be                  shares of Arsanis Common Stock for each share of X4 Common Stock and is subject to change to account for, among other things, Arsanis’s net cash as of the business day prior to the closing of the Merger (the “Closing”). Each share of X4’s preferred stock, par value $0.001 per share (“X4 Preferred Stock” and, together with X4 Common Stock, “X4 Capital Stock”), outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section of this proxy statement/prospectus/information statement titled The Merger—Appraisal Rights and Dissenters Rights) will be converted into the right to receive Arsanis Common Stock based on an exchange ratio set forth in the Merger Agreement (the “Preferred Stock Exchange Ratio” and, together with the Common Stock Exchange Ratio, the “Exchange Ratios”). The Preferred Stock Exchange Ratio is equal to the Common Stock Exchange Ratio multiplied by the number of shares of X4 Common Stock into which each share of X4 Preferred Stock is convertible immediately prior to the Closing. The provisions for calculating the Exchange Ratios assume a pre-transaction valuation of $115.0 million for X4’s business and $50.0 million for Arsanis’s business. In the case of Arsanis, the pre-transaction valuation is subject to downward or upward adjustment to the extent Arsanis’s net cash balance as of the business day prior to the Closing is above or below $20.0 million. In addition, Arsanis will assume (i) the outstanding warrants of X4 (“X4 Warrants”), (ii) the outstanding stock option awards of X4 (“X4 Options”), and (iii) each stock option plan or other stock or equity-related plans of X4, each of which will be adjusted to reflect the Exchange Ratios. The Exchange Ratios are also based on the relative capitalizations of Arsanis and X4, which, in the case of X4, includes all then outstanding X4 Options and X4 Warrants (whether or not exercisable) and, in the case of Arsanis, includes restricted stock and options for approximately 800,000 shares of Arsanis Common Stock currently outstanding. Because, among other things, the number of shares of Arsanis Common Stock issuable to X4’s stockholders is determined based on Arsanis’s net cash balance on the business day prior to the Closing and the capitalization of X4 and Arsanis at the Closing, Arsanis securityholders cannot be certain of the exact number

 

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of shares that will be issued to X4’s stockholders when Arsanis’s stockholders vote on the proposals at the special meeting of Arsanis Stockholders (the “Special Meeting”). The Exchange Ratios referenced herein are estimates only and the final Exchange Ratios will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement.

As of the date of the execution of the Merger Agreement, it was estimated that as a result of the Merger and based solely on the sample Common Stock Exchange Ratio and Preferred Stock Exchange Ratio of 0.5948 set forth above, current holders of X4 Capital Stock (the “X4 Stockholders”) and holders of X4 Options and X4 Warrants (“X4 Optionholders” and “X4 Warrantholders,” respectively) and other persons holding securities and rights directly or indirectly convertible, exercisable or exchangeable for X4 Common Stock (collectively with the X4 Stockholders, X4 Optionholders and X4 Warrantholders, “X4 Securityholders”) would own, or hold rights to acquire, in the aggregate approximately 70% of the Fully Diluted Closing Arsanis Common Stock (as defined below). Current Arsanis Stockholders, holders of options to acquire Arsanis Common Stock (“Arsanis Optionholders”) and other persons holding securities and rights directly or indirectly convertible, exercisable or exchangeable for Arsanis Common Stock (collectively, “Arsanis Securityholders”) (excluding for this purpose certain out-of-the-money Arsanis Options and Arsanis Warrants) would own in the aggregate approximately 30% of the Fully Diluted Closing Arsanis Common Stock, in each case, following the Effective Time and subject to adjustment of the Exchange Ratios. After the consummation of the Merger, and assuming Arsanis Stockholders approve Proposal No. 3, Arsanis will change its corporate name to “X4 Pharmaceuticals, Inc.” as required by the Merger Agreement (the “Arsanis Name Change”).

Q:    What will happen to Arsanis if, for any reason, the Merger does not close?

A:    If, for any reason, the Merger does not close, the board of directors of Arsanis (the “Arsanis Board of Directors”) may elect to, among other things, attempt to complete another strategic transaction like the Merger, attempt to sell or otherwise dispose of the various assets of Arsanis or continue to operate the business of Arsanis, including the development of ASN500. If the Arsanis Board of Directors decides to dissolve and liquidate Arsanis’s assets, Arsanis would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims. This would be a lengthy and uncertain process, and there can be no assurances as to the amount or timing of available cash, if any, that would be left to distribute to Arsanis Stockholders after paying the debts and other obligations of Arsanis and setting aside funds for reserves.

If Arsanis were to continue its business, Arsanis’s management would need to allocate substantial capital resources to the development of ASN500, which is in preclinical development, and also identify, acquire and develop other products or product candidates. In addition, as of November 30, 2018, the Arsanis workforce was comprised of 25 employees, eight of whom are involved in general and administrative roles. Arsanis plans to further reduce its workforce by 10 employees in the coming weeks. Arsanis has ceased clinical development of ASN100, and its sole development program is ASN500. If the Arsanis Board of Directors decides to reestablish Arsanis’s business and/or pursue development of ASN500 or other products or product candidates, Arsanis will need to rebuild its senior management team and hire managerial and other personnel to lead and staff all of its necessary functions, especially its research, development and commercialization areas.

Q:    Why are the two companies proposing to merge?

A:    X4 and Arsanis believe that the Merger will result in a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases. For a discussion of Arsanis’s and X4’s reasons for the Merger, please see the section titled “The Merger—Arsanis Reasons for the Merger” and “The Merger—X4 Reasons for the Merger” in this proxy statement/prospectus/information statement.

Q:    Why am I receiving this proxy statement/prospectus/information statement?

A:    You are receiving this proxy statement/prospectus/information statement because you have been identified as an Arsanis Stockholder or an X4 Stockholder as of the applicable Record Date, and you are entitled,

 

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as applicable, to (i) vote at the Special Meeting to approve the Merger Agreement and the transactions contemplated thereby, including the Merger and the issuance of shares of Arsanis Common Stock pursuant to the Merger Agreement, or (ii) sign and return the X4 written consent to adopt the Merger Agreement and approve the transactions contemplated thereby, including the Merger. This document serves as:

 

   

a proxy statement of Arsanis used to solicit proxies for the Special Meeting;

 

   

a prospectus of Arsanis used to offer shares of Arsanis Common Stock in exchange for shares of X4 Capital Stock in the Merger and issuable upon exercise of options and/or warrants to acquire X4 Capital Stock, as applicable; and

 

   

an information statement of X4 used to solicit the written consent of X4 Stockholders for the adoption of the Merger Agreement and the approval of the Merger and related transactions.

Q:    What is required to consummate the Merger?

A:    To consummate the Merger, Arsanis Stockholders must adopt the Merger Agreement, thereby approving the Merger and the issuance of Arsanis Common Stock pursuant to the Merger Agreement (Proposal No. 1), and X4 Stockholders must adopt the Merger Agreement, thereby approving the Merger and the other transactions contemplated by the Merger Agreement.

The approval of the Merger and the issuance of Arsanis Common Stock pursuant to the Merger Agreement by the Arsanis Stockholders, and the approval of the vote to adjourn the Special Meeting, if necessary, to solicit additional proxies, requires the affirmative vote of holders of shares of Arsanis’s stock having a majority in voting power of the votes cast by the holders of all of the shares of Arsanis’s stock present or represented at the Special Meeting and voting affirmatively or negatively on the matter. The approval of the amendments to the restated certificate of incorporation of Arsanis to effect the Reverse Stock Split and the Arsanis Name Change require the affirmative vote of the holders of a majority of the shares of Arsanis Common Stock outstanding on                     , 2019 (the “Record Date”) and entitled to vote.

Proposal No. 3 is conditioned upon the consummation of the Merger. If the Merger is not completed, Proposal No. 3 will not be implemented, and Arsanis’s name will not be changed. Proposal No. 2, regarding the Reverse Stock Split, is not conditioned upon the consummation of the Merger, and as such the Reverse Stock Split may be implemented by the Arsanis Board of Directors even if the Merger does not take place.

The presence, in person or represented by proxy, at the Special Meeting of the holders of a majority in voting power of the shares of Arsanis Common Stock issued and outstanding and entitled to vote at the Special Meeting is necessary to constitute a quorum at the Special Meeting.

Abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the Special Meeting.

Votes will be counted by the inspector of election appointed for the Special Meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes. Abstentions and broker non-votes will not be considered votes cast by the holders of all the shares of Arsanis Common Stock present in person or by proxy at the Special Meeting and voting affirmatively or negatively, and will therefore not have any effect with respect to Proposal Nos. 1 or 4. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” Proposal Nos. 2 and 3.

The adoption of the Merger Agreement and the approval of the Merger and related transactions by the X4 Stockholders requires the affirmative vote (or written consent) of (a) the holders of a majority of the votes of the outstanding shares of X4 Capital Stock on an as converted to X4 Common Stock basis and (b) the holders of a majority of the voting power of the outstanding shares of X4 Preferred Stock voting together as a single class on an as converted to X4 Common Stock basis. In addition to the requirement of obtaining such stockholder approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

 

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As of November 30, 2018, certain X4 Stockholders who in the aggregate own approximately 11% of the outstanding shares of X4 Capital Stock on an as converted to X4 Common Stock basis, and certain Arsanis Stockholders who in the aggregate own approximately 48% of the outstanding shares of Arsanis Common Stock, are parties to support agreements with Arsanis and X4, respectively, whereby such stockholders have agreed to vote their shares in favor of the approval or adoption, as applicable, of the Merger Agreement and the transactions contemplated therein, including the Merger and the issuance of Arsanis Common Stock to X4 Stockholders pursuant to the Merger Agreement, subject to the terms of the support agreements. In addition, following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the U.S. Securities and Exchange Commission (the “SEC”) and pursuant to the conditions of the Merger Agreement and the support agreements, X4 has agreed to solicit from the X4 Stockholders (and X4 Stockholders who are party to the support agreements have agreed to execute) written consents approving the Merger and related transactions.

For a more complete description of the closing conditions under the Merger Agreement, Arsanis urges you to read the section titled “The Merger Agreement—Conditions to Completion of the Merger” in this proxy statement/prospectus/information statement.

Q:    What will X4 Securityholders receive in the Merger?

A:    As of the date of the execution of the Merger Agreement, it was estimated that immediately after the consummation of the Merger, based on the sample Common Stock Exchange Ratio and Preferred Stock Exchange Ratio of 0.5948 set forth below, existing X4 Securityholders would own approximately 70% of the Fully Diluted Closing Arsanis Common Stock (as defined below), subject to adjustment of the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio as set forth in the Merger Agreement.

Following the Closing, X4 Optionholders will have their X4 Options converted into options to purchase shares of Arsanis Common Stock, with the number of shares of Arsanis Common Stock subject to such option and the exercise price being appropriately adjusted to reflect the Common Stock Exchange Ratio determined in accordance with the Merger Agreement, and X4 Warrantholders will have their X4 Warrants converted into warrants to purchase shares of Arsanis Common Stock, with the number of shares of Arsanis Common Stock subject to such warrants and the exercise price being appropriately adjusted to reflect the Common Stock Exchange Ratio or the Preferred Stock Exchange Ratio, as the case may be, determined in accordance with the Merger Agreement. The initial estimate of the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio set forth above assumed that (i) Arsanis would have $20.0 million in net cash on the business day immediately prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing would be equal to 15,116,966 (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) X4 shares as of the Closing would be equal to 58,456,701 (on a fully diluted, as-converted basis).

The Exchange Ratios are calculated using a formula intended to allocate a percentage of the combined organization to existing X4 Securityholders. Based on the assumptions described above, the Common Stock Exchange Ratio would have been equal to approximately 0.5948 shares of Arsanis Common Stock for each share of X4 Common Stock, which Common Stock Exchange Ratio is subject to change based on changes in Arsanis’s net cash balance on the business day prior to the Closing and the capitalization of Arsanis or X4 immediately prior to the Closing (and as a result, Arsanis Securityholders and X4 Securityholders could own more or less of the combined organization). The Preferred Stock Exchange Ratio is equal to the Common Stock Exchange Ratio multiplied by the number of shares of X4 Common Stock into which each share of X4 Preferred Stock is convertible immediately prior to the Effective Time. Arsanis currently estimates, assuming for this purpose a closing date of                     , 2019, that (i) it will have approximately $         million in net cash on the business day prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing will be equal to              (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) the shares of X4 Common Stock as of the Closing on a fully diluted and as-converted basis will be equal

 

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to             . Accordingly, it is currently estimated that the Common Stock Exchange Ratio at Closing will be approximately                  and, because each share of X4 Preferred Stock is convertible into one share of X4 Common Stock, the Preferred Stock Exchange Ratio is expected to be equal to the Common Stock Exchange Ratio. Based solely on such Common Stock Exchange Ratio and Preferred Stock Exchange Ratio, at Closing: (a) X4 Securityholders as of immediately prior to the Merger will own approximately     % of the Fully Diluted Closing Arsanis Common Stock (as defined below), (b) the Arsanis Securityholders as of immediately prior to the Merger (excluding for this purpose certain out-of-the-money Arsanis Options and Arsanis Warrants) will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, and (c) the shares available for issuance under Arsanis’s 2017 Equity Incentive Plan (the “Arsanis 2017 Plan”) and all stock option plans or other stock or equity-related plans of X4 (collectively, the “X4 Plan”) as of immediately prior to the Merger will represent approximately     % of the Fully Diluted Closing Arsanis Common Stock, in each case, subject to adjustment of the Exchange Ratios as set forth in the Merger Agreement and described herein. “Fully Diluted Closing Arsanis Common Stock” as used herein means (x) Arsanis Outstanding Shares (i.e., the “Public Company Outstanding Shares” as defined in the Merger Agreement, which figure includes restricted stock and options for approximately 800,000 shares of Arsanis Common Stock currently outstanding) plus (y) X4 Outstanding Shares (i.e., the “Merger Partner Outstanding Shares” as defined in the Merger Agreement, which figure includes all then outstanding X4 options and warrants (whether or not exercisable)).

For a more complete description of what X4 Stockholders, X4 Optionholders and X4 Warrantholders will receive in the Merger, please see the sections titled “The Merger Agreement—Merger Consideration” in this proxy statement/prospectus/information statement.

Q:    Who will be the directors of Arsanis following the Merger?

A:    Following the consummation of the Merger, the size of the Arsanis Board of Directors will be decreased to a total of seven directors. Pursuant to the terms of the Merger Agreement, the Arsanis Board of Directors will be reconstituted such that five of the initial post-Closing directors will be designated by X4, and two initial post-Closing directors will be designated by Arsanis. It is anticipated that, following the Closing, the Arsanis Board of Directors will be constituted as follows:

 

Name

  

Current Principal Affiliation

René Russo, Pharm.D., BCPS

   Arsanis, Inc., Director

David McGirr

   Arsanis, Inc., Director

Michael S. Wyzga

   X4 Pharmaceuticals, Inc., Chairman and Director

Paula Ragan, Ph.D.

   X4 Pharmaceuticals, Inc., President, Chief Executive Officer and Director
   X4 Pharmaceuticals, Inc., Director
   X4 Pharmaceuticals, Inc., Director
   X4 Pharmaceuticals, Inc., Director

Q:    Who will be the executive officers of Arsanis immediately following the Merger?

A:    Immediately following the consummation of the Merger, the executive management team of Arsanis is expected to be composed solely of the members of X4’s executive management team prior to the Merger, as follows:

 

Name

  

Title

Paula Ragan, Ph.D.

   President and Chief Executive Officer

Adam S. Mostafa

   Chief Financial Officer

 

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Q:    What are the material U.S. federal income tax consequences of the Reverse Stock Split?

A:    The proposed Reverse Stock Split should constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a U.S. Holder (as defined in the section of this proxy statement/prospectus/information statement titled “Matters Being Submitted to a Vote of Arsanis Stockholders—Proposal No. 2: Approval of an Amendment to the Restated Certificate of Incorporation of Arsanis Effecting the Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split”) of Arsanis Common Stock generally should not recognize gain or loss upon the Reverse Stock Split, except with respect to cash received in lieu of a fractional share of Arsanis Common Stock, as discussed in the section of this proxy statement/prospectus/information statement titled “Matters Being Submitted to a Vote of Arsanis Stockholders—Proposal No. 2: Approval of an Amendment to the Restated Certificate of Incorporation of Arsanis Effecting the Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split.” A U.S. Holder’s aggregate adjusted tax basis in the shares of Arsanis Common Stock received pursuant to the proposed Reverse Stock Split should equal the aggregate adjusted tax basis of the shares of the Arsanis Common Stock surrendered (excluding any portion of such basis that is allocated to any fractional share of Arsanis Common Stock), and such U.S. Holder’s holding period in the shares of Arsanis Common Stock received should include the holding period in the shares of Arsanis Common Stock surrendered. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Arsanis Common Stock surrendered to the shares of Arsanis Common Stock received in a recapitalization pursuant to the proposed Reverse Stock Split. U.S. Holders of shares of Arsanis Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares. For more information, please see the section of this proxy statement/prospectus/information statement titled “Matters Being Submitted to a Vote of Arsanis Stockholders—Proposal No. 2: Approval of an Amendment to the Restated Certificate of Incorporation of Arsanis Effecting the Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split.”

Q:    What are the material U.S. federal income tax consequences of the Merger?

A:    Arsanis and X4 intend the Merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement. Assuming the Merger constitutes a “reorganization,” subject to the limitations and qualifications described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement, X4 Stockholders generally should not recognize gain or loss for U.S. federal income tax purposes on the receipt of shares of Arsanis Common Stock issued in connection with the Merger (other than in respect of cash received in lieu of fractional shares). Each X4 Stockholder who receives cash in lieu of a fractional share of Arsanis Common Stock should generally recognize capital gain or loss in an amount equal to the difference between the amount of cash received in lieu of such fractional share and the stockholder’s tax basis allocable to such fractional share.

If the Merger is not treated as a “reorganization” under Section 368(a) of the Code, then, subject to the limitations and qualifications described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement, each X4 Stockholder will generally recognize capital gain or loss, for U.S. federal income tax purposes, on the receipt of shares of Arsanis Common Stock issued to such X4 Stockholder and on any cash received in lieu of fractional shares in connection with the Merger. The tax consequences to each X4 Stockholder will depend on that stockholder’s particular circumstances. Each X4 Stockholder should consult with his, her or its tax advisor for a full understanding of the tax consequences of the Merger to that stockholder.

Q:    As an Arsanis Stockholder, how does the Arsanis Board of Directors recommend that I vote?

A:    After careful consideration, the Arsanis Board of Directors recommends that Arsanis Stockholders vote “FOR” all of the proposals.

 

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Q:    As an X4 Stockholder, how does the X4 Board of Directors recommend that I vote?

A:    After careful consideration, the board of directors of X4 (the “X4 Board of Directors”) recommends that X4 Stockholders execute the written consent to adopt the Merger Agreement and approve the Merger and the transactions contemplated therein, substantially in accordance with the terms of the Merger Agreement and the other agreements contemplated by the Merger Agreement.

Q:    What risks should I consider in deciding whether to vote in favor of the Merger or to execute and return the written consent, as applicable?

A:    You should carefully review the section of this proxy statement/prospectus/information statement titled “Risk Factors,” which sets forth certain risks and uncertainties related to the Merger, risks and uncertainties to which the combined organization’s business will be subject, and risks and uncertainties to which each of Arsanis and X4, as independent companies, are subject.

Q:    Who can vote at the Special Meeting?

A:    Only Arsanis Stockholders of record at the close of business on the Record Date,                     , 2019, will be entitled to vote at the Special Meeting. As of the Record Date, there were                  shares of Arsanis Common Stock outstanding and entitled to vote.

Stockholder of Record: Shares Registered in Your Name

If, at the close of business on the Record Date, your shares of Arsanis Common Stock were registered directly in your name with Arsanis’s transfer agent, Computershare Trust Company, N.A., then you are an Arsanis Stockholder of record. As an Arsanis Stockholder of record, you may vote in person at the Special Meeting or vote by proxy. Whether or not you plan to attend the Special Meeting, please vote as soon as possible by completing and returning the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.

Beneficial Owner: Shares Registered in the Name of a Broker or Bank

If, at the close of business on the Record Date, your shares of Arsanis Common Stock were not held in your name, but rather in an account at a brokerage firm, bank, dealer or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Special Meeting. As a beneficial owner, you have the right to direct your broker or other agent how to vote the shares in your account. You are also invited to attend the Special Meeting. However, because you are not the stockholder of record, you may not vote your shares in person at the Special Meeting unless you request and obtain a valid legal proxy from your broker or other agent, giving you the right to vote the shares at the meeting.

Q:    How many votes do I have?

A:    On each matter to be voted upon, you have one vote for each share of Arsanis Common Stock you own as of the Record Date.

Q:    What is the quorum requirement?

A:    A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if stockholders holding at least a majority in voting power of the shares of Arsanis Common Stock issued and outstanding and entitled to vote at the Special Meeting, present in person or represented by proxy, are present at

 

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the Special Meeting. On                     , 2019, the Record Date, there were                  shares of Arsanis Common Stock outstanding and entitled to vote. Accordingly, Arsanis expects that the holders of at least                  shares of Arsanis Common Stock must be present at the Special Meeting for a quorum to exist. Your shares of Arsanis Common Stock will be counted toward the quorum at the Special Meeting only if you attend the Special Meeting in person or are represented at the Special Meeting by proxy.

Abstentions and broker non-votes (as described below) will be counted towards the quorum requirement but will not be counted as votes cast. If there is no quorum, the holders of a majority of shares present in person or represented by proxy at the Special Meeting may adjourn the Special Meeting to another date.

Q:    What are “broker non-votes”?

A:    If you hold shares beneficially in street name and do not provide your broker or other agent with voting instructions, your shares may constitute “broker non-votes.” Broker non-votes occur on a matter when banks, brokers and other nominees are not permitted to vote on certain non-discretionary matters without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-routine” matters. All of the proposals to be acted on at the Special Meeting, except for Proposal No. 2 regarding the Reverse Stock Split, are anticipated to be non-routine matters. Broker non-votes will be counted toward the vote total for Proposal Nos. 2 and 3 and will have the same effect as a vote “AGAINST” such proposals. Broker non-votes will not, however, be considered votes cast by the holders of all of the shares of Arsanis Common Stock present in person or by proxy at the Special Meeting and voting affirmatively or negatively and will therefore not have any effect with respect to Proposal Nos. 1 or 4.

Q:    When do you expect the Merger to be consummated?

A:    Arsanis and X4 anticipate that the Merger will occur sometime soon after the Arsanis Special Meeting to be held on                     , 2019, but the companies cannot predict the exact timing. For more information, please see the section titled “The Merger Agreement—Conditions to Completion of the Merger” in this proxy statement/prospectus/information statement.

Q:    What do I need to do now?

A:    Arsanis and X4 urge you to read this proxy statement/prospectus/information statement carefully, including its annexes, and to consider how the Merger affects you.

If you are an Arsanis Stockholder of record, you may provide your proxy instructions in accordance with the instructions provided. If you are an X4 Stockholder, you may execute and return your written consent to X4 in accordance with the instructions provided.

Q:    How do I vote?

A:    If you are the “record holder” of your shares, meaning that your shares are registered in your name in the records of Arsanis’s transfer agent, Computershare Trust Company, N.A., you may vote your shares at the meeting in person or by proxy as follows:

1.    Over the Internet: To vote over the Internet, please go to the following website: www.proxyvote.com and follow the instructions at that site for submitting your proxy electronically. If you vote over the Internet, you do not need to complete and mail your proxy card or vote your proxy by telephone. You must specify how you want your shares voted or your Internet vote cannot be completed, and you will receive an error message. You must submit your Internet proxy before 11:59 p.m., Eastern Standard Time, on                     , 2019, the day before the Special Meeting, for your proxy to be valid and your vote to count.

 

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2.    By Telephone: To vote by telephone, please call 1-800-690-6903, and follow the instructions provided on the proxy card. If you vote by telephone, you do not need to complete and mail your proxy card or vote your proxy over the Internet. You must specify how you want your shares voted and confirm your vote at the end of the call or your telephone vote cannot be completed. You must submit your telephonic proxy before 11:59 p.m., Eastern Standard Time, on                     , 2019, the day before the Special Meeting, for your proxy to be valid and your vote to count.

3.    By Mail: To vote by mail, you must mark, sign and date the proxy card and then mail the proxy card in accordance with the instructions on the proxy card. If you vote by mail, you do not need to vote your proxy over the Internet or by telephone. Broadridge must receive the proxy card not later than                     , 2019, the day before the Special Meeting, for your proxy to be valid and your vote to count. If you return your proxy card but do not specify how you want your shares voted on any particular matter, they will be voted in accordance with the recommendations of the Arsanis Board of Directors.

4.    In Person at the Meeting: If you attend the Special Meeting, you may deliver your completed proxy card in person or you may vote by completing a ballot, which Arsanis will provide to you at the meeting.

If your shares are held in “street name,” meaning they are held for your account by an intermediary, such as a broker, then you are deemed to be the beneficial owner of your shares and the broker that actually holds the shares for you is the record holder and is required to vote the shares it holds on your behalf according to your instructions. The proxy materials, as well as voting and revocation instructions, should have been forwarded to you by the broker that holds your shares. In order to vote your shares, you will need to follow the instructions that your broker provides you. Many brokers solicit voting instructions over the Internet or by telephone.

Regardless of whether your shares are held in street name, you are welcome to attend the meeting. You may not vote shares held in street name in person at the meeting, however, unless you obtain a legal proxy, executed in your favor, from the holder of record (i.e., your broker). A legal proxy is not the form of proxy included with this proxy statement.

Q:    What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

A:    If you are an Arsanis Stockholder, the failure to return your proxy card or otherwise provide proxy instructions will reduce the aggregate number of votes required to approve Proposal Nos. 1 and 4 and will have the same effect as a vote “AGAINST” Proposal Nos. 2 and 3.

Q:    When and where is the Special Meeting of Arsanis Stockholders?

A:    The Arsanis Special Meeting will be held at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, 02109, at                  a.m., local time, on                     , 2019. Subject to space availability, all Arsanis Stockholders as of the Record Date, or their duly appointed proxies, may attend the Arsanis Special Meeting. Since seating is limited, admission to the Arsanis Special Meeting will be on a first-come, first-served basis. Registration and seating will begin at                  a.m., local time.

Q:    If my Arsanis shares are held in “street name” by my broker, will my broker vote my shares for me?

A:    Unless your broker has discretionary authority to vote on certain matters, your broker will not be able to vote your shares of Arsanis Common Stock without instructions from you. Brokers are not expected to have discretionary authority to vote for any of the proposals, except for Proposal No. 2 regarding the Reverse Stock Split. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.

 

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Q:    May I change my vote after I have submitted a proxy or provided proxy instructions?

A:    If your shares are registered directly in your name, you may revoke your proxy and change your vote at any time before the vote is taken at the Special Meeting. To do so, you must do one of the following:

 

  1.

Vote over the Internet or by telephone as instructed above. Only your latest Internet or telephone vote is counted.

 

  2.

Sign and return a new proxy card. Only your latest dated and timely received proxy card will be counted.

 

  3.

Attend the Special Meeting and vote in person as instructed above. Attending the Special Meeting will not alone revoke your Internet vote, telephone vote or proxy card submitted by mail, as the case may be.

 

  4.

Give Arsanis’s corporate secretary written notice before or at the meeting that you want to revoke your proxy.

If your shares are held in “street name,” you may submit new voting instructions by contacting your broker or other nominee. You may also vote in person at the Special Meeting if you obtain a legal proxy as described in the answer above.

Q:    Who is paying for this proxy solicitation?

A:    Arsanis and X4 will share equally the cost of printing and filing this proxy statement/prospectus/information statement and the proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Arsanis Common Stock for the forwarding of solicitation materials to the beneficial owners of Arsanis Common Stock. Arsanis will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

Q:    Who can help answer my questions?

A:    If you are an Arsanis Stockholder and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the Merger, including the procedures for voting your shares, you should contact:

Arsanis, Inc.

890 Winter Street, Suite 230

Waltham, MA 02451

(781) 819-5704

Attn: Investor Relations

If you are an X4 Stockholder, and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the Merger, including the procedures for voting your shares, you should contact:

X4 Pharmaceuticals, Inc.

955 Massachusetts Avenue, 4th Floor

Cambridge, MA 02139

Attn: Chief Financial Officer

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the Merger, the proposals being considered at the Special Meeting and X4 Stockholder actions that are the subject of the written consent, you should read this entire proxy statement/prospectus/information statement carefully, including the Merger Agreement, attached as Annex A, the opinion of Leerink Partners LLC attached as Annex B, and the other annexes to which you are referred herein. For more information, please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

The Companies

Arsanis, Inc.

890 Winter Street, Suite 230

Waltham, MA 02451

(781) 819-5704

Arsanis is a clinical-stage biopharmaceutical company focused on applying monoclonal antibody, or mAb, immunotherapies to address serious infectious diseases. Arsanis possesses a deep understanding of the pathogenesis of infection, paired with access to what Arsanis believes to be some of the most advanced mAb discovery techniques and platforms available today.

Arsanis’s operations to date have been limited to organizing and staffing its company, business planning, raising capital, obtaining funding from government entities and non-government organizations, developing and securing its technology, identifying potential product candidates, undertaking preclinical studies and clinical trials of its most advanced product candidates and entering into licensing and funding agreements. To date, Arsanis has not generated any revenue from any sources, including from product sales.

On June 28, 2018, Arsanis announced the discontinuation of its Phase 2 clinical trial of ASN100 for the prevention of S. aureus pneumonia in high-risk, mechanically ventilated patients following the completion of a planned interim analysis of unblinded trial data for 118 patients by an independent data review committee. On August 10, 2018, the Arsanis Board of Directors approved a reduction in workforce to reduce operating costs and better align its workforce with the needs of its business following the discontinuation of the clinical development of ASN100. As part of this reduction in workforce, Arsanis has eliminated 19 positions across the company, representing approximately 44% of Arsanis’s workforce.

On November 26, 2018, Arsanis entered into the Merger Agreement with X4, pursuant to which X4 will become a wholly owned subsidiary of Arsanis, and each outstanding share of X4 Common Stock and X4 Preferred Stock will be converted into the right to receive shares of Arsanis Common Stock as set forth in the Merger Agreement.

X4 Pharmaceuticals, Inc.

955 Massachusetts Avenue, 4th Floor

Cambridge, MA 02139

(857) 529-8300

X4 is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases. X4’s pipeline is comprised of first-in-class, oral, small molecule antagonists of chemokine receptor CXCR4, which have the potential to treat a



 

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broad range of rare diseases, including primary immunodeficiencies, or PIs, and cancer. PIs are a group of more than 250 rare, chronic disorders in which flaws in the immune system cause increased susceptibility to infections and, in some cases, increased risk of cancers. Within this broad disease classification, a number of PIs are attributed to the improper trafficking of immune cells related to the CXCR4 receptor and its ligand CXCL12.

X4P-001, X4’s lead product candidate, has completed an open-label, dose escalation Phase 2 trial in patients with Warts, Hypogammaglobulinemia, Infections, and Myelokathexis, or WHIM, syndrome. X4 plans to initiate a Phase 3 pivotal trial of X4P-001 in patients with WHIM syndrome in the first half of 2019 and to report top-line data from this trial in mid-2021. In addition to X4’s initial focus on WHIM syndrome, X4 believes that the biological rationale and available data on X4P-001 support potential therapeutic benefits across a broad range of PIs, including severe congenital neutropenia, or SCN, and certain lymphomas, such as Waldenström macroglobulinemia, or WM. X4 plans to initiate a Phase 1/2 trial of X4P-001 in SCN and a Phase 1/2 trial of X4P-001 in WM in the first half of 2019, with data expected for each trial in the first half of 2020. X4 is also currently conducting the Phase 2a portion of an open-label Phase 1/2 trial of X4P-001 in clear cell renal cell carcinoma, or ccRCC, in combination with axitinib, and intends to enter into a strategic partnership for future development and potential commercialization of X4P-001 in ccRCC. X4 is also developing X4P-002, a CXCR4 antagonist that has unique properties that X4 believes will enable it to penetrate the blood-brain barrier and provide appropriate therapeutic exposures to treat brain cancers, including glioblastoma multiforme. X4 is also developing X4P-003, a next generation molecule designed to have an enhanced pharmacokinetic profile relative to X4P-001, potentially enabling improved patient compliance and ease of use to better serve patients suffering from chronic rare diseases. X4 plans to submit investigational new drug applications, or INDs, for X4P-002 and X4P-003 in the second half of 2019 and subsequently initiate a Phase 1b trial for X4P-002 and a Phase 1b trial for X4P-003, with initial data expected for each trial in the second half of 2020.

Artemis AC Corp.

Artemis AC Corp. is a wholly owned subsidiary of Arsanis and was formed solely for the purposes of carrying out the Merger.

The Merger (see page 139)

If the Merger is completed, Merger Sub will merge with and into X4, with X4 continuing as a wholly owned subsidiary of Arsanis and the surviving corporation of the Merger.

At the Effective Time, each share of X4 Common Stock outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section of this proxy statement/prospectus/information statement titled The Merger—Appraisal Rights and Dissenters Rights) will be converted into the right to receive shares of Arsanis Common Stock based on the Common Stock Exchange Ratio. The Common Stock Exchange Ratio was initially estimated (as of the date of the execution of the Merger Agreement) to be 0.5948 shares and is currently estimated to be                  shares of Arsanis Common Stock for each share of X4 Common Stock and is subject to change to account for, among other things, Arsanis’s net cash as of the business day prior to the Closing. Each share of X4 Preferred Stock outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section of this proxy statement/prospectus/information statement titled The Merger—Appraisal Rights and Dissenters Rights) will be converted into the right to receive Arsanis Common Stock based on the Preferred Stock Exchange Ratio. Because each share of X4 Preferred Stock is convertible into one share of X4 Common Stock, the Preferred Stock Exchange Ratio is expected to be equal to the Common Stock Exchange Ratio. The final Common Stock Exchange Ratio and Preferred Stock Exchange



 

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Ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement.

As of the date of the execution of the Merger Agreement, it was estimated that immediately after the consummation of the Merger, based solely on the sample Common Stock Exchange Ratio and Preferred Stock Exchange Ratio of 0.5948 set forth above, existing X4 Securityholders would own approximately 70% of the Fully Diluted Closing Arsanis Common Stock, subject to adjustment of the Exchange Ratios as set forth in the Merger Agreement.

Following the Closing, X4 Optionholders will have their X4 Options converted into options to purchase shares of Arsanis Common Stock, with the number of shares of Arsanis Common Stock subject to such option and the exercise price being appropriately adjusted to reflect the Common Stock Exchange Ratio determined in accordance with the Merger Agreement. X4 Warrantholders will have their X4 Warrants converted into warrants to purchase shares of Arsanis Common Stock, with the number of shares of Arsanis Common Stock subject to such warrants and the exercise price being appropriately adjusted to reflect the Common Stock Exchange Ratio and/or Preferred Stock Exchange Ratio, as the case may be, determined in accordance with the Merger Agreement. The initial estimate of the Exchange Ratios set forth above assumed (i) that Arsanis would have $20.0 million in net cash on the business day immediately prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing would be equal to 15,116,966 (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) X4 shares as of the Closing would be equal to 58,456,701 (on a fully diluted, as-converted basis).

The Exchange Ratios are calculated using a formula intended to allocate a percentage of the combined organization to existing X4 Securityholders and are subject to change based on changes in Arsanis’s net cash balance on the business day prior to the Closing and the capitalization of Arsanis or X4 immediately prior to the Closing. The provisions for calculating the Common Stock Exchange Ratio assume a pre-transaction valuation of $115.0 million for X4’s business and $50.0 million for Arsanis’s business. In the case of Arsanis, the pre-transaction valuation is subject to downward or upward adjustment to the extent Arsanis’s net cash balance as of the business day prior to the Closing is above or below $20.0 million. Arsanis currently estimates, assuming for this purpose a closing date of                     , 2019, that (i) it will have approximately $         million in net cash on the business day prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing will be equal to              (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) the X4 shares as of the Closing on a fully diluted and as-converted basis will be equal to             . Accordingly, it is currently estimated that the Common Stock Exchange Ratio at Closing will be approximately                  and, because each share of X4 Preferred Stock is convertible into one share of X4 Common Stock, the Preferred Stock Exchange Ratio is expected to be equal to the Common Stock Exchange Ratio. Based solely on such Common Stock Exchange Ratio and Preferred Stock Exchange Ratio, at Closing: (a) X4 Securityholders as of immediately prior to the Merger will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, (b) Arsanis Securityholders as of immediately prior to the Merger (excluding for this purpose certain out-of- the-money Arsanis Options and Arsanis Warrants) will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, and (c) the shares available for issuance under the Arsanis 2017 Plan and the X4 Plan as of immediately prior to the Merger will represent approximately     % of the Fully Diluted Closing Arsanis Common Stock, in each case, subject to adjustment of the Exchange Ratios as set forth in the Merger Agreement and described herein.

For a more complete description of the Merger and the Exchange Ratios please see the section titled “The Merger Agreement” in this proxy statement/prospectus/information statement.

The Closing will occur no later than the second business day after the last of the conditions to the Merger has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the Closing, but



 

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subject to the satisfaction or waiver of each such conditions), or at such other time as Arsanis and X4 agree. Arsanis and X4 anticipate that the consummation of the Merger will occur in the first quarter of 2019. However, because the Merger is subject to a number of conditions, neither Arsanis nor X4 can predict exactly when the Closing will occur or if it will occur at all. After completion of the Merger, assuming that Arsanis receives the required stockholder approval of Proposal No. 3, Arsanis will be renamed “X4 Pharmaceuticals, Inc.”

Reasons for the Merger

Arsanis and X4 believe that the combined organization will have the following potential advantages:

 

   

Clinical Stage Biopharmaceutical Company Focused on Providing Medical Benefits. Following the Merger, the combined organization will be a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases. X4’s lead product candidate, X4P-001, has completed a Phase 2 trial in patients with Warts, Hypogammaglobulinemia, Infections, and Myelokathexis, or WHIM, syndrome. X4 plans to initiate a global Phase 3 pivotal trial of X4P-001 in patients with WHIM syndrome in the first half of 2019 and report top-line data from this trial in mid-2021. Beyond WHIM syndrome, X4 plans to initiate a Phase 1/2 trial of X4P-001 in another primary immunodeficiency, severe congenital neutropenia, and a Phase 1/2 trial of X4P-001 in Waldenström macroglobulinemia in the first half of 2019, with data expected from each trial in the first half of 2020. In addition, the combined organization is expected to leverage Arsanis’s established laboratory capabilities at its facility in Vienna, Austria.

 

   

Management Team. It is expected that the combined organization will be led by the experienced senior management from X4 and a board of directors with representation from each of Arsanis and X4.

 

   

Potential Access to Capital. In addition to the combined organization’s expected net cash position following the closing of the Merger, it is expected that the combined organization will be able to take advantage of the potential benefits resulting from the combination of the Arsanis public company structure with the X4 business to raise additional capital necessary to fund the operation of the combined organization and to implement its near-term business plans.

Each of the boards of directors of Arsanis and X4 also considered other reasons for the Merger, as described herein. For example, the Arsanis Board of Directors considered, among other things:

 

   

the process undertaken by the Arsanis Board of Directors through Leerink Partners in connection with pursuing a strategic transaction and the terms and conditions of all the transactions that had been proposed, including that the equity value assigned to Arsanis in the Merger with X4 was as favorable as any other proposal received;

 

   

the Arsanis Board of Directors’ consideration of the valuation and business prospects of all the potential strategic transaction candidates. After considering the comprehensive diligence review that Arsanis management had completed of eight other prospective transaction candidates, the Arsanis Board of Directors concluded that the transaction with X4 would create a publicly traded company with the highest likelihood for creating increased value for the Arsanis Stockholders of any of the proposals that the board had received;

 

   

that X4’s portfolio of CXCR4 antagonists focused on rare diseases may provide new medical benefits for patients and returns for investors;

 

   

that the combined organization is expected to possess the ability to obtain sufficient financial resources to allow the management team to focus on the continued development and anticipated commercialization of X4’s product candidates for rare diseases, and in particular on X4P-001, X4’s lead product candidate expected to enter a Phase 3 clinical trial in WHIM syndrome in the first half of 2019; and



 

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that given the ownership position of the Arsanis Stockholders following the transaction, the Merger would provide existing Arsanis Stockholders a significant opportunity to participate in the potential growth of the combined organization following the Merger.

In addition, the X4 Board of Directors approved the Merger based on a number of factors, including the following:

 

   

the process undertaken by the X4 Board of Directors and management to ascertain actionable alternatives, including partnering transactions and including possibly the sale of the company and whether this was an appropriate juncture, in light of the progress achieved and additional challenges faced by X4, to undertake such a process;

 

   

the possible alternatives to the Merger, the range of possible benefits to the X4 Stockholders of such alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives;

 

   

the financial condition, historical results of operations and business and strategic objectives of X4, as well as the risks involved in achieving those objectives;

 

   

the amount and form of consideration to be received by the X4 Stockholders in the Merger pursuant to the Merger Agreement taking into account the relative interests of the various classes of stock of X4 and the contractual rights afforded to holders of the X4 Preferred Stock (including as to whether any alternatives to the Merger would reasonably likely be achievable and derive more value across such classes of stock);

 

   

the expectation that the Merger will be treated as a tax-deferred reorganization for U.S. federal income tax purposes; and

 

   

the proposed timing of the interim period between the signing of the Merger Agreement and the expected Closing and whether it is advisable to proceed given current economic, industry and market conditions.

Opinion of the Arsanis Financial Advisor as of November 26, 2018 (see page 153)

Arsanis retained Leerink Partners as its financial advisor in connection with the Merger and the other transactions contemplated by the Merger Agreement. In connection with this engagement, Arsanis requested that Leerink Partners evaluate the fairness, from a financial point of view, to Arsanis of the Common Stock Exchange Ratio proposed to be paid by Arsanis pursuant to the terms of the Merger Agreement. On November 26, 2018, Leerink Partners rendered to the Arsanis Board of Directors its oral opinion, which was subsequently confirmed by delivery of a written opinion dated November 26, 2018, that, as of such date and based upon and subject to the assumptions made and limitations upon the review undertaken by Leerink Partners in preparing its opinion, the Common Stock Exchange Ratio to be paid by Arsanis pursuant to the terms of the Merger Agreement was fair, from a financial point of view, to Arsanis.

The full text of the Leerink Partners written opinion, dated November 26, 2018, which describes the assumptions made and limitations upon the review undertaken by Leerink Partners in preparing its opinion, is attached to this proxy statement/prospectus/information statement as Annex B and is incorporated by reference in its entirety into this proxy statement/prospectus/information statement. Leerink Partners’ financial advisory services and opinion were provided for the information and assistance of the Arsanis Board of Directors (in their capacity as directors and not in any other capacity) in connection with and for purposes of its consideration of the Merger and the other transactions contemplated by the Merger Agreement and the Leerink Partners opinion addressed only the fairness, from a financial point of view, as of the date thereof, to Arsanis of the Common Stock Exchange Ratio to be paid by Arsanis pursuant to the terms of the Merger Agreement. The Leerink Partners opinion did not address any other term or aspect of the Merger Agreement or the transactions



 

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contemplated thereby and does not constitute a recommendation to any stockholder of Arsanis as to whether or how such holder should vote with respect to the Merger or otherwise act with respect to the Merger and the other transactions contemplated by the Merger Agreement or any other matter.

Overview of the Merger Agreement

Merger Consideration (see page 193)

At the Effective Time, each outstanding share of X4 Common Stock and X4 Preferred Stock will be converted into the right to receive a number of shares of Arsanis Common Stock equal to the Common Stock Exchange Ratio and the Preferred Stock Exchange Ratio, respectively.

The Merger Agreement does not provide for an adjustment to the total number of shares of Arsanis Common Stock that X4 Stockholders will be entitled to receive for changes in the market price of Arsanis Common Stock. Accordingly, the market value of the shares of Arsanis Common Stock issued pursuant to the Merger will depend on the market value of the shares of Arsanis Common Stock at the time the Merger closes, and could vary significantly from the market value on the date of this proxy statement/prospectus/information statement.

Treatment of X4 Options (see page 194)

Pursuant to the Merger Agreement, at the Effective Time, each X4 Option that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, will be assumed by Arsanis and will become an option to purchase solely that number of shares of Arsanis Common Stock equal to the product obtained by multiplying (i) the number of shares of X4 Common Stock that were subject to such X4 Option immediately prior to the Effective Time by (ii) the Common Stock Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Arsanis Common Stock. The per share exercise price for Arsanis Common Stock issuable upon exercise of each X4 Option assumed by Arsanis shall be determined by dividing (a) the per share exercise price of X4 Common Stock subject to such X4 Option, as in effect immediately prior to the Effective Time, by (b) the Common Stock Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent. Any restriction on the exercise of any X4 Option assumed by Arsanis will continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such X4 Option shall otherwise remain unchanged. The assumed X4 Options will continue to be governed by the X4 Plan under which the options were granted. At the Effective Time, Arsanis will assume the X4 Plan such that stock options and other equity-based awards may be issued with respect to the shares available for grant thereunder as of immediately prior to the Effective Time (subject to appropriate adjustment for the Common Stock Exchange Ratio) in respect of Arsanis Common Stock. Such equity-based awards may be issued under the X4 Plan or an Arsanis stock plan.

Treatment of X4 Warrants (see page 194)

Pursuant to the Merger Agreement, at the Effective Time, each X4 Warrant that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, will be converted into and become a warrant to purchase (and Arsanis shall assume each such X4 Warrant in accordance with its terms) solely that number of shares of Arsanis Common Stock equal to the product obtained by multiplying (i) the number of shares of X4 Common Stock or X4 Preferred Stock, as the case may be, that were subject to such X4 Warrant immediately prior to the Effective Time by (ii) the Common Stock Exchange Ratio or Preferred Stock Exchange Ratio, as the case may be, and rounding the resulting number down to the nearest whole number of shares of Arsanis Common Stock. The per share exercise price for Arsanis Common Stock issuable upon exercise of each X4 Warrant assumed by Arsanis shall be determined by dividing (a) the per share exercise price of X4 Common



 

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Stock or X4 Preferred Stock, as the case may be, subject to such X4 Warrant, as in effect immediately prior to the Effective Time, by (b) the Common Stock Exchange Ratio or Preferred Stock Exchange Ratio, as the case may be, and rounding the resulting exercise price up to the nearest whole cent. Any restriction on the exercise of any X4 Warrant assumed by Arsanis will continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such X4 Warrant shall otherwise remain unchanged.

Treatment of Arsanis Options and Restricted Arsanis Common Stock (see page 194)

Each option to purchase shares of Arsanis Common Stock that is outstanding immediately prior to the Effective Time, whether vested or unvested, will survive the Closing and remain outstanding in accordance with its terms. The number of shares of Arsanis Common Stock underlying such options and the exercise prices for such options will be appropriately adjusted to reflect the proposed Reverse Stock Split. Certain of the Arsanis stock options will become vested in full upon the Closing. The outstanding shares of restricted Arsanis Common Stock will become vested in full upon the Closing, with the number of such shares of restricted Arsanis Common Stock being appropriately adjusted to reflect the proposed Reverse Stock Split.

Conditions to Completion of the Merger (see page 208)

To consummate the Merger, Arsanis Stockholders must approve the Merger Agreement and the transactions contemplated thereby, including the Merger and the issuance of shares of Arsanis Common Stock to X4 Stockholders in the Merger. Additionally, X4 Stockholders must adopt the Merger Agreement thereby approving the Merger and the other transactions contemplated by the Merger Agreement. In addition to obtaining such stockholder approvals and obtaining appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

No Solicitation (see page 202)

Each of Arsanis and X4 have agreed that, except as described below, each of X4, Arsanis and their respective subsidiaries shall not, and each of X4 and Arsanis shall use reasonable best efforts to cause their respective directors, officers, members, employees, agents, attorneys, consultants, contractors, accountants, financial advisors and other authorized representatives not to, directly or indirectly:

 

   

solicit, seek or initiate or knowingly take any action to facilitate or encourage any offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal (as defined in the section titled “The Merger Agreement” in this proxy statement/prospectus/information statement), or engage, participate in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any nonpublic information to any person in connection with any inquiries, proposals or offers that constitute or could reasonably be expected to lead to, an Acquisition Proposal;

 

   

enter into, continue or otherwise participate or engage in any discussions or negotiations regarding any Acquisition Proposal, or furnish to any person any non-public information or afford any person other than Arsanis or X4, as applicable, access to such party’s property, books or records (except pursuant to a request by a governmental entity) in connection with any offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal;

 

   

take any action to make the provisions of any takeover statute inapplicable to any transactions contemplated by an Acquisition Proposal; or

 

   

publicly propose to do any of the foregoing.

However, prior to the approval of the proposals relating to the Merger set forth in this proxy statement/prospectus/information statement at the Special Meeting of the Arsanis Stockholders or by written consent of X4



 

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Stockholders (unless, in either case, the Merger Agreement is earlier terminated), as the case may be, subject to compliance with certain obligations set forth in the Merger Agreement, either Arsanis or X4 may furnish nonpublic information to and engage in discussions or negotiations with any third party that makes an unsolicited bona fide written competing proposal (as described in the Merger Agreement) that its board of directors in good faith, after consultation with its outside legal counsel and financial advisors, has determined constitutes or could reasonably be expected to lead to a superior competing proposal, only if:

 

   

such party receives from such third party an executed confidentiality agreement the terms of which are not less restrictive to the third party than those contained in the confidentiality agreement between Arsanis and X4;

 

   

such party has not materially breached the no solicitation provisions of the Merger Agreement; and

 

   

the board of directors of Arsanis or X4, as the case may be, determines that taking such actions would be required to prevent a breach of the fiduciary duties of the board of directors under applicable laws.

Termination (see page 211)

Either Arsanis or X4 can terminate the Merger Agreement under certain circumstances, which would prevent the Merger from being consummated.

Termination Fee (see page 213)

The Merger Agreement contains certain termination rights for both Arsanis and X4. Upon termination of the Merger Agreement under specified circumstances, Arsanis may be required to pay X4 a termination fee of $600,000 or reimburse X4’s expenses up to a maximum of $175,000. Upon termination of the Merger Agreement under specified circumstances, X4 may be required to pay Arsanis a termination fee of $600,000 or reimburse Arsanis’s expenses up to a maximum of $175,000.

Support Agreements (see page 215)

Certain X4 Stockholders are party to support agreements with Arsanis and X4 pursuant to which, among other things, each of these stockholders agreed, solely in his, her or its capacity as an X4 Stockholder, to vote all of his, her or its shares of X4 Capital Stock in favor of the adoption of the Merger Agreement and the approval of the Merger and against any Acquisition Proposal. Following the effectiveness of the registration statement of which this proxy statement/prospectus/information statement is a part, X4 has agreed to solicit from the X4 Stockholders, and the X4 Stockholders who are party to the support agreements have agreed to execute, written consents providing for adoption of the Merger Agreement and the approval of the Merger. The support agreements place restrictions on the transfer of the shares of Arsanis and X4 Capital Stock held by the respective signatories until the earlier of (i) the termination of the Merger Agreement pursuant to the terms thereof and (ii) the date which is 180 calendar days following the Closing. The support agreements also include covenants prohibiting solicitation of competing proposals. As of November 30, 2018, the X4 Stockholders that are party to support agreements with Arsanis owned approximately 11% of the outstanding shares of X4 Capital Stock on an as converted to X4 Common Stock basis.

Certain Arsanis Stockholders are party to support agreements with X4 pursuant to which, among other things, each of these stockholders agreed, solely in his, her or its capacity as an Arsanis Stockholder, to vote all of his, her or its shares of Arsanis Common Stock in favor of issuance of shares of Arsanis Common Stock in connection with the Merger and approval of the Merger Agreement. The support agreements place restrictions on the transfer of the shares of Arsanis capital stock held by the respective signatories until the earlier of (i) the termination of the Merger Agreement pursuant to the terms thereof and (ii) the date which is 180 calendar days



 

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following the Closing. The support agreements also include covenants prohibiting solicitation of competing proposals. As of November 30, 2018, Arsanis Stockholders that are party to support agreements beneficially owned in the aggregate approximately 48% of the outstanding shares of Arsanis Common Stock.

The support agreements are discussed in greater detail in the section titled “Agreements Related to the Merger—Support Agreements” in this proxy statement/prospectus/information statement.

Management Following the Merger (see page 346)

Effective as of the Effective Time of the Merger, Arsanis’s officers are expected to include:

 

Name

  

Title

Paula Ragan, Ph.D.    President and Chief Executive Officer
Adam S. Mostafa    Chief Financial Officer

Interests of Certain Directors, Officers and Affiliates of Arsanis and X4 (see pages 162 and 177)

In considering the recommendation of the Arsanis Board of Directors with respect to issuing shares of Arsanis Common Stock pursuant to the Merger Agreement and the other matters to be acted upon by Arsanis Stockholders at the Special Meeting, Arsanis Stockholders should be aware that certain members of the Arsanis Board of Directors and executive officers of Arsanis have interests in the Merger that may be different from, or in addition to, interests they have as Arsanis Stockholders. For example, Arsanis has entered into certain employment agreements with its current executive officers that may result in the receipt by such executive officers of cash severance payments and other benefits with a total value of approximately $3.2 million (collectively, not individually, and excluding the value of any accelerated vesting of Arsanis equity awards) and the accelerated vesting of Arsanis equity awards held by those officers, based on data available as of November 30, 2018 and assuming a covered termination of employment of each executive officer’s employment as of such date.

As of November 30, 2018, the directors and executive officers of Arsanis beneficially owned, in the aggregate, approximately 55.5% of the outstanding shares of Arsanis Common Stock. Certain funds affiliated with Arsanis’s directors and one director have entered into support agreements in connection with the Merger. The support agreements are discussed in greater detail in the section titled “Agreements Related to the Merger—Support Agreements” in this proxy statement/prospectus/information statement.

In considering the recommendation of the X4 Board of Directors with respect to approving the Merger and related transactions, X4 Stockholders should be aware that certain members of the X4 Board of Directors and certain executive officers of X4 have interests in the Merger that may be different from, or in addition to, interests they have as X4 Stockholders. For example, X4’s executive officers have options, subject to vesting, to purchase shares of X4 Common Stock, which will convert into options to purchase a number of shares of Arsanis Common Stock determined by the Common Stock Exchange Ratio, rounding any resulting fractional shares down to the nearest whole share; certain of X4’s directors and executive officers are expected to become directors and executive officers of the combined organization upon the Closing; and all of X4’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. For more information, please see the section titled “The Merger—Interests of the X4 Directors and Executive Officers in the Merger.

Material U.S. Federal Income Tax Consequences of the Merger (see page 186)

As discussed in detail in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement, Arsanis and X4 intend the Merger to



 

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qualify as a “reorganization” within the meaning of Section 368(a) of the Code. In general, and subject to the qualifications and limitations set forth in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement, if the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to a U.S. holder of X4 Capital Stock should be as follows:

 

   

a U.S. holder of X4 Capital Stock will not recognize gain or loss upon the exchange of X4 Capital Stock for Arsanis Common Stock pursuant to the Merger, except to the extent of cash received in lieu of a fractional share of Arsanis Common Stock as described below;

 

   

a U.S. holder of X4 Capital Stock who receives cash in lieu of a fractional share of Arsanis Common Stock in the Merger will recognize capital gain or loss in an amount equal to the difference between the amount of cash received in lieu of a fractional share and the stockholder’s tax basis allocable to the fractional share;

 

   

a U.S. holder of X4 Capital Stock’s aggregate tax basis for the shares of Arsanis Common Stock received in the Merger will equal the stockholder’s aggregate tax basis in the shares of X4 Capital Stock surrendered in the Merger reduced by the amount of basis allocable to any fractional shares of Arsanis Common Stock; and

 

   

the holding period of the shares of Arsanis Common Stock received by a U.S. holder of X4 Capital Stock in the Merger will include the holding period of the shares of X4 Capital Stock surrendered in exchange therefor.

If the Merger is not treated as a “reorganization” within the meaning of Section 368(a) of the Code, then each U.S. holder of X4 Capital Stock generally will be treated as exchanging its shares of X4 Capital Stock in a fully taxable transaction in exchange for shares of Arsanis Common Stock. U.S. holders of X4 Capital Stock will generally recognize capital gain or loss in such exchange equal to the amount that such holder’s adjusted tax basis in the shares of X4 Capital Stock surrendered is less or more than the fair market value of the shares of Arsanis Common Stock (and cash in lieu of a fractional share) received in exchange therefor. Determining the actual tax consequences of the Merger to you may be complex and will depend on the facts of your own situation. You should consult your tax advisors to fully understand the tax consequences to you of the Merger, including estate, gift, state, local, other U.S. federal and non-U.S. tax consequences of the Merger.

Risk Factors (see page 31)

Both Arsanis and X4 are subject to various risks associated with their businesses and their industries. In addition, the Merger poses a number of risks to each company and its respective stockholders, including the possibility that the Merger may not be completed and the following risks:

 

   

the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio are not adjustable based on the market price of Arsanis Common Stock, so the merger consideration at Closing may have a greater or lesser value than the market price at the time the Merger Agreement was signed;

 

   

Arsanis’s net cash may be less than $20.0 million at the Closing, which would result in Arsanis Stockholders owning a smaller percentage of the combined organization and could even result in the termination of the Merger Agreement;

 

   

failure to complete the Merger may result in Arsanis or X4 or both companies paying a termination fee or expenses to the other company, which could harm the per share price of Arsanis Common Stock and future business and operations of each company;

 

   

the Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes;



 

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some Arsanis and X4 officers and directors have interests in the Merger that are different from those considered by stockholders of Arsanis and X4, which may influence such officers and directors to support or approve the Merger without regard to stockholder interests;

 

   

the market price of Arsanis Common Stock following the Merger may decline as a result of the Merger;

 

   

Arsanis Stockholders and X4 Stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger;

 

   

Arsanis Stockholders and X4 Stockholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined organization following the completion of the Merger as compared to their current ownership and voting interests in the respective companies;

 

   

during the pendency of the Merger, Arsanis and X4 may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses;

 

   

certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement;

 

   

because the lack of a public market for X4 Capital Stock makes it difficult to evaluate the value of X4 Capital Stock, the X4 Stockholders may receive shares of Arsanis Common Stock in the Merger that have a value that is less than, or greater than, the fair market value of X4 Capital Stock;

 

   

if the conditions to the Merger are not met, the Merger will not occur;

 

   

the Merger may fail to qualify as a “reorganization” for U.S. federal income tax purposes, resulting in recognition of taxable gain or loss by X4 Stockholders in respect of their X4 Capital Stock; and

 

   

the combined organization may become involved in securities class action litigation that could divert management’s attention and harm the combined organization’s business and insurance coverage may not be sufficient to cover all costs and damages.

These risks and other risks are discussed in greater detail under the section titled “Risk Factors” in this proxy statement/prospectus/information statement. Arsanis and X4 both encourage you to read and consider all of these risks carefully.

Regulatory Approvals (see page 185)

In the United States, Arsanis must comply with applicable federal and state securities laws and the rules and regulations of the Nasdaq Stock Market LLC (“Nasdaq”) in connection with the issuance of shares of Arsanis Common Stock and the filing of this proxy statement/prospectus/information statement with the SEC.

Nasdaq Global Market Listing (see page 188)

Prior to consummation of the Merger, Arsanis will file an initial listing application with the Nasdaq Global Market pursuant to Nasdaq’s rules for companies conducting a business combination that results in a change of control. If such application is accepted, Arsanis anticipates that shares of Arsanis Common Stock will be listed on the Nasdaq Global Market following the Closing under Arsanis’s new name, “X4 Pharmaceuticals, Inc.,” with the trading symbol “XFOR.”



 

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Anticipated Accounting Treatment (see page 188)

Because X4 has been determined to be the accounting acquirer in the Merger, but not the legal acquirer, the Merger will be treated by X4 as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). For accounting purposes, X4 is considered to be acquiring Arsanis in the Merger.

As a result, upon consummation of the Merger, (1) the historical financial statements of X4 will become the historical financial statements of the combined organization and (2) X4 will record the business combination in its financial statements and will apply the acquisition method to account for the acquired assets and assumed liabilities of Arsanis as of the closing date of the transaction. Applying the acquisition method includes recording the identifiable assets acquired and liabilities assumed at their fair values, and recording goodwill for the excess of the purchase price over the aggregate fair value of the identifiable assets acquired and liabilities assumed.

Appraisal Rights and Dissenters’ Rights (see page 189)

Holders of shares of Arsanis Common Stock are not entitled to appraisal rights in connection with the Merger. X4 Stockholders are entitled to appraisal rights in connection with the Merger under Delaware law. For more information about such rights, see the provisions of Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”) attached hereto as Annex C, and the section titled “The Merger—Appraisal Rights and Dissenters’ Rights” in this proxy statement/prospectus/information statement. For more information about the Special Meeting, see the section titled “The Special Meeting of Arsanis Stockholders” in this proxy statement/prospectus/information statement.

Comparison of Rights of Holders of Arsanis Stock and X4 Stock (see page 382)

Both Arsanis and X4 are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the Merger is completed, X4 Stockholders will become Arsanis Stockholders, and their rights will be governed by the DGCL and the restated certificate of incorporation and amended and restated bylaws of Arsanis. The rights of Arsanis Stockholders contained in the restated certificate of incorporation and amended and restated bylaws of Arsanis differ from the rights of X4 Stockholders under the amended and restated certificate of incorporation and bylaws of X4, as more fully described under the section titled “Comparison of Rights of Holders of Arsanis Stock and X4 Stock” in this proxy statement/prospectus/information statement.



 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following tables present summary historical financial data for Arsanis and X4, summary unaudited pro forma combined financial data for Arsanis and X4, and comparative historical and unaudited pro forma per share data for Arsanis and X4. The following information does not give effect to the proposed Reverse Stock Split.

Selected Historical Consolidated Financial Data of Arsanis

The following tables summarize Arsanis’s consolidated financial data. The consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 have been derived from Arsanis’s audited consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. The consolidated statement of operations data for the nine months ended September 30, 2018 and 2017 and the consolidated balance sheet data as of September 30, 2018 have been derived from Arsanis’s unaudited condensed consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. The unaudited condensed consolidated financial statements of Arsanis have been prepared on the same basis as the audited consolidated financial statements of Arsanis. In the opinion of Arsanis’s management, the unaudited condensed consolidated interim financial data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. You should read the following selected consolidated financial data together with “Arsanis Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Arsanis’s consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus/information statement. Arsanis’s historical results are not necessarily indicative of results that should be expected in any future period.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2017     2016     2015     2018     2017  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

       

Operating expenses:

         

Research and development

  $ 28,128     $ 17,831     $ 12,706     $ 26,635     $ 18,898  

General and administrative

    8,005       6,515       2,119       9,778       5,629  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    36,133       24,346       14,825       36,413       24,527  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (36,133     (24,346     (14,825     (36,413     (24,527
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Grant and incentive income

    3,868       2,390       2,155       2,977       3,180  

Interest expense

    (2,079     (2,515     (472     (785     (1,806

Interest income

    214       —         —         637       90  

Change in fair value of warrant liability

    (31     39       1       —         16  

Change in fair value of derivative liability

    762       1,388       —         —         762  

Loss on extinguishment of debt

    (462     (35     —         —         (462

Other income (expense), net

    (16     104       (77     (79     57  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    2,256       1,371       1,607       2,750       1,837  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (33,877     (22,975     (13,218     (33,663     (22,690

Accretion of redeemable convertible preferred stock to redemption value

    (44     (25     (19     —         (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (33,921   $ (23,000   $ (13,237   $ (33,663   $ (22,726
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

  $ (16.45   $ (44.79   $ (26.02   $ (2.35   $ (44.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic and diluted

    2,061,845       513,527       508,659       14,304,721       513,900  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     December 31,     September 30,
2018
 
     2017      2016  
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 76,793      $ 3,035     $ 40,753  

Restricted cash

     355        394       594  

Working capital (deficit)(1)

     68,850        (6,344     36,081  

Total assets

     81,254        7,604       45,901  

Loans payable, including current portion, net of discount

     12,236        12,426       10,735  

Redeemable convertible preferred stock classified outside of stockholders’ equity (deficit)

     —          39,838       —    

Total stockholders’ equity (deficit)

     58,707        (56,562     27,897  

 

(1)

Working capital (deficit) is defined as current assets less current liabilities.    

 

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Selected Historical Consolidated Financial Data of X4

The following tables summarize X4’s consolidated financial data. The consolidated statement of operations data for the years ended December 31, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2017 and 2016 have been derived from X4’s audited consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. The consolidated statement of operations data for the nine months ended September 30, 2018 and 2017 and the consolidated balance sheet data as of September 30, 2018 have been derived from X4’s unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. The unaudited consolidated financial statements of X4 have been prepared on the same basis as the audited consolidated financial statements of X4. In the opinion of X4’s management, the unaudited consolidated interim financial data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. You should read the following selected consolidated financial data together with “X4 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and X4’s consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus/information statement. X4’s historical results are not necessarily indicative of results that should be expected in any future period.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2017     2016     2018     2017  
     (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

      

Operating expenses:

        

Research and development

   $ 17,066     $ 13,098     $ 15,657     $ 13,316  

General and administrative

     5,181       4,789       5,374       3,931  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,247       17,887       21,031       17,247  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,247     (17,887     (21,031     (17,247
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     64       27       187       40  

Interest expense

     (490     (53     (484     (301

Change in fair value of preferred stock warrant liability

     1,360       48       (264     1,292  

Change in fair value of derivative liability

     (94     —         (411     (79

Loss on preferred stock repurchase liability

     (587     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     253       22       (972     952  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (21,994     (17,865     (22,003     (16,295

Accruing dividends on Series A convertible preferred stock

     (3,000     (3,008     (2,244     (2,244

Adjustment to accumulated deficit in connection with repurchase of Series Seed convertible preferred stock

     —         —         (22     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (24,994   $ (20,873   $ (24,269   $ (18,539
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

   $ (5.19   $ (4.38   $ (5.03   $ (3.85
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic and diluted

     4,818,327       4,765,234       4,825,802       4,818,110  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     December 31,     September 30,
2018
 
     2017     2016  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 26,684     $ 15,160     $ 9,840  

Restricted cash

     364       155       364  

Working capital(1)

     22,632       13,640       5,165  

Total assets

     28,876       17,348       11,324  

Long-term debt, including accretion and current portion

     6,048       —         4,628  

Convertible preferred stock classified outside of stockholders’ deficit

     60,903       34,307       64,675  

Redeemable common stock classified outside of stockholders’ deficit

     734       734       734  

Total stockholders’ deficit

     (44,545     (23,052     (66,092

 

(1)

Working capital is defined as current assets less current liabilities.    

 

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Selected Unaudited Pro Forma Combined Financial Data of Arsanis and X4

The following selected unaudited pro forma combined financial data presents the pro forma financial position and results of operations of the combined organization based on the historical consolidated financial statements of Arsanis and X4, after giving effect to the Merger. The unaudited pro forma combined balance sheet data as of September 30, 2018 gives effect to the Merger as if it took place on September 30, 2018. The unaudited pro forma combined statement of operations data for the year ended December 31, 2017 and the nine months ended September 30, 2018 gives effect to the Merger as if it took place on January 1, 2017. In the unaudited pro forma combined financial data, the Merger has been accounted for as a business combination, with X4 being the accounting acquirer.

The allocation of purchase consideration reflected in the unaudited pro forma combined financial data is preliminary and will be adjusted based on the fair value of purchase consideration on the closing date of the Merger and upon completion of the final valuations of the fair value of the assets acquired and liabilities assumed of Arsanis on the closing date of the Merger. Although X4 management believes that the fair values assigned to the assets to be acquired and liabilities to be assumed reflected in the unaudited pro forma combined financial data are based on reasonable estimates and assumptions using currently available data, the results of the final allocation could be materially different from the preliminary allocation.

The unaudited pro forma combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X. Accordingly, the historical consolidated financial data of Arsanis and X4 has been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results of operations of the combined organization. In addition, the pro forma adjustments reflecting the completion of the Merger are based upon the application of the acquisition method of accounting in accordance with GAAP and upon the assumptions set forth in the unaudited pro forma combined financial statements included elsewhere in this proxy statement/prospectus/information statement.

The unaudited pro forma combined financial data is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been combined during the periods presented.

 

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The following selected unaudited pro forma combined financial data have been derived from and should be read in conjunction with the section titled “Unaudited Pro Forma Combined Financial Statements” in this proxy statement/prospectus/information statement, Arsanis’s consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus/information statement, X4’s consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus/information statement, the sections of this proxy statement/prospectus/information statement titled “Arsanis Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “X4 Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other information contained in this proxy statement/prospectus/information statement.

 

     Pro Forma  
     Year Ended
December 31, 2017
    Nine Months Ended
September 30, 2018
 
     (in thousands, except share and per share data)  

Combined Statement of Operations Data:

    

Operating expenses:

    

Research and development

   $ 45,194     $ 42,292  

General and administrative

     13,186       15,152  
  

 

 

   

 

 

 

Total operating expenses

     58,380       57,444  
  

 

 

   

 

 

 

Loss from operations

     (58,380     (57,444
  

 

 

   

 

 

 

Other income (expense):

    

Grant and incentive income

     3,868       2,977  

Interest income

     278       824  

Interest expense

     (2,552     (1,256

Change in fair value of preferred stock warrant liability

     (31     —    

Change in fair value of derivative liability

     762       —    

Loss on extinguishment of debt

     (462     —    

Other income (expense), net

     (16     (79
  

 

 

   

 

 

 

Total other income (expense), net

     1,847       2,466  
  

 

 

   

 

 

 

Net loss

     (56,533     (54,978

Accretion of redeemable convertible preferred stock to redemption value

     (44     —    
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (56,577   $ (54,978
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

   $ (2.90   $ (1.39
  

 

 

   

 

 

 

Weighted average common shares outstanding—basic and diluted

     19,487,046       39,558,309  
  

 

 

   

 

 

 

 

     Pro Forma
As of
September 30, 2018
 
     (in thousands)  

Combined Balance Sheet Data:

  

Cash and cash equivalents

   $ 50,593  

Restricted cash

     958  

Working capital(1)

     29,695  

Total assets

     95,117  

Loans payable, including current portion

     15,436  

Total stockholders’ equity

     55,163  

 

(1)

Working capital is defined as current assets less current liabilities.

 

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Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects the historical per share information for Arsanis and X4 and the unaudited pro forma per share information of the combined organization as if Arsanis and X4 had been combined as of or for the periods presented.

The pro forma amounts in the tables below have been derived from the unaudited pro forma combined financial information included in the section titled “Unaudited Pro Forma Combined Financial Statements” of this proxy statement/prospectus/information statement. The pro forma amounts are presented for illustrative purposes only and are not necessarily indicative of what the financial position, results of operations or per share information of the combined organization would have been had Arsanis and X4 been combined as of or for the periods presented.

You should read the tables below in conjunction with the consolidated financial statements and the related notes of Arsanis included elsewhere in this proxy statement/prospectus/information statement and the consolidated financial statements and the related notes of X4 included elsewhere in this proxy statement/prospectus/information statement.

 

     As of or for the
Year Ended
December 31, 2017
    As of or for the
Nine Months Ended
September 30, 2018
 

Arsanis

    

Book value per share—historical(1)

   $ 4.11     $ 1.95  

Basic and diluted net loss per share—historical

   $ (16.45   $ (2.35

Cash dividends declared per share—historical

   $ —       $ —    

X4

    

Book value per share—historical(1)

   $ (9.24   $ (13.68

Basic and diluted net loss per share—historical

   $ (5.19   $ (5.03

Cash dividends declared per share—historical

   $ —       $ —    

Unaudited Pro Forma Combined

    

Book value per share—pro forma(2)

     N/A     $ 1.34  

Basic and diluted net loss per share—pro forma

   $ (2.90   $ (1.39

Cash dividends declared per share—pro forma

   $ —       $ —    

X4 Unaudited Pro Forma Equivalent Data per Share(3)

    

Book value per share—pro forma

     N/A     $ 0.80  

Basic and diluted net loss per share—pro forma

   $ (1.73   $ (0.83

Cash dividends declared per share—pro forma

   $ —       $ —    

 

(1)

Historical book value per share is calculated by taking total stockholders’ equity divided by total outstanding common shares.

(2)

Combined pro forma book value per share is calculated by taking pro forma combined total stockholders’ equity divided by pro forma combined total outstanding common shares.

(3)

X4 Unaudited Pro Forma Equivalent Data per share is calculated by applying the assumed Common Stock Exchange Ratio of 0.5948 to the unaudited pro forma combined per share data.

 

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MARKET PRICE AND DIVIDEND INFORMATION

The Arsanis Common Stock is currently listed on the Nasdaq Global Market under the symbol “ASNS.” The following table presents the range of high and low per share sales prices for the Arsanis Common Stock as reported on the Nasdaq Global Market for each of the periods set forth below. X4 is a private company and the X4 Common Stock and X4 Preferred Stock are not publicly traded. These per share sales prices do not give effect to the proposed Reverse Stock Split.

Arsanis Common Stock

 

     High      Low  

Year Ended December 31, 2017

     

Fourth Quarter (from November 16, 2017)

   $ 19.73      $ 10.40  

Year Ended December 31, 2018

     

First Quarter

   $ 28.69      $ 11.37  

Second Quarter

   $ 26.58      $ 3.55  

Third Quarter

   $ 4.19      $ 1.56  

Fourth Quarter (through November 30, 2018)

   $ 4.91      $ 1.15  

The closing price of the Arsanis Common Stock on November 30, 2018, as reported on the Nasdaq Global Market, was $3.89 per share.

Because the market price of the Arsanis Common Stock is subject to fluctuation, the market value of the shares of the Arsanis Common Stock that X4 Stockholders will be entitled to receive in the Merger may increase or decrease.

Assuming approval of Proposal Nos. 1, 2 and 3 and successful application for initial listing with the Nasdaq Global Market, following the consummation of the Merger, the Arsanis Common Stock will trade on the Nasdaq Global Market under Arsanis’s new name, “X4 Pharmaceuticals, Inc.,” and new trading symbol “XFOR.”

As of                 , 2019, the Record Date for the Special Meeting, there were approximately                 holders of record of the Arsanis Common Stock. As of                 , X4 had                 holders of record of X4 Common Stock and                  holders of record of X4 Preferred Stock. For detailed information regarding the beneficial ownership of certain Arsanis Stockholders upon consummation of the Merger, see the section titled “Principal Stockholders of the Combined Organization” in this proxy statement/prospectus/information statement.

Dividends

Arsanis has never declared or paid any cash dividends on the Arsanis Common Stock and does not anticipate paying cash dividends on the Arsanis Common Stock for the foreseeable future. Notwithstanding the foregoing, any determination to pay cash dividends subsequent to the Merger will be at the discretion of the combined organization’s then-current board of directors and will depend upon a number of factors, including the combined organization’s results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the then-current board of directors deems relevant. X4 has never paid or declared any cash dividends on the X4 Capital Stock. If the Merger does not occur, X4 does not anticipate paying any cash dividends on the X4 Capital Stock in the foreseeable future, and X4 intends to retain all available funds and any future earnings to fund the development and expansion of its business. In addition, X4 is prohibited from declaring or paying any cash dividends under its existing loan and security agreement with Hercules Capital, Inc. Any future determination to pay dividends will be at the discretion of the X4 Board of Directors and will depend upon a number of factors, including its results of operations, financial condition, future prospects, contractual restrictions, and restrictions imposed by applicable laws and other factors the X4 Board of Directors deems relevant.

 

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RISK FACTORS

The combined organization will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below and those described in the section of this proxy statement/prospectus/information statement titled “Cautionary Statement Concerning Forward-Looking Statements” before deciding how to vote your shares of stock. You should also read and consider the other information in this proxy statement/prospectus/information statement. Please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Risks Related to the Merger

The Common Stock Exchange Ratio and Preferred Stock Exchange Ratio are not adjustable based on the market price of Arsanis Common Stock, so the Merger Consideration at Closing may have a greater or lesser value than the market price at the time the Merger Agreement was signed.

The Merger Agreement has set the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio formula for X4 Capital Stock, and the Exchange Ratios are adjustable upward or downward based on Arsanis’s net cash a business day prior to the Closing, changes in the outstanding X4 Capital Stock, X4 Options and X4 Warrants and changes in the outstanding Arsanis Common Stock and Arsanis Options, including in connection with the proposed Reverse Stock Split as described in the section titled The Merger—Merger Consideration and Adjustment in this proxy statement/prospectus/information statement. Any changes in the market price of Arsanis Common Stock before the completion of the Merger will not affect the number of shares that X4 Stockholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger, the market price of Arsanis Common Stock declines from the market price on the date of the Merger Agreement, then X4 Stockholders could receive merger consideration with substantially lower value. Similarly, if before the completion of the Merger, the market price of Arsanis Common Stock increases from the market price on the date of the Merger Agreement, then X4 Stockholders could receive merger consideration with substantially more value for their shares of X4 Capital Stock than the parties had foreseen in the establishment of the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio. The Merger Agreement does not include a price-based termination right. Because the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio do not adjust as a result of changes in the value of Arsanis Common Stock, for each one percentage point that the market value of Arsanis Common Stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration issued to X4 Stockholders.

Arsanis’s net cash may be less than $20.0 million at the Closing, which would result in Arsanis Stockholders owning a smaller percentage of the combined organization and could even result in the termination of the Merger Agreement.

For purposes of the Merger Agreement, net cash is subject to certain reductions, including, without limitation, accounts payable, accrued expenses (except those related to the Merger), current liabilities payable in cash, unpaid expenses related to the Merger and certain other unpaid obligations, including outstanding lease obligations. In the event the amount of Arsanis’s net cash is smaller or such reductions are greater than anticipated, Arsanis Stockholders could hold a significantly smaller portion of the combined organization.

Failure to complete the Merger may result in either Arsanis or X4 or both companies paying a termination fee or expenses to the other party, which could harm the price of Arsanis Common Stock and the future business and operations of each company.

If the Merger is not completed, Arsanis and X4 are subject to the following risks:

 

   

if the Merger Agreement is terminated under certain circumstances, Arsanis may be required to pay X4 a termination fee of $600,000 or reimburse X4’s expenses up to a maximum of $175,000;

 

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if the Merger Agreement is terminated in certain specified circumstances, X4 may be required to pay Arsanis a termination fee of $600,000 or reimburse Arsanis’s expenses up to a maximum of $175,000;

 

   

the price of Arsanis Common Stock may decline; and

 

   

substantial costs related to the Merger, such as legal and accounting fees, must be paid even if the Merger is not completed.

In addition, if the Merger Agreement is terminated and the Arsanis Board of Directors or the X4 Board of Directors determines to seek another business combination, there can be no assurance that either Arsanis or X4 will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Merger.

The Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes.

In general, either Arsanis or X4 can refuse to complete the Merger if there is a material adverse change affecting the other party between the date of the Merger Agreement and the Closing. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be said to have a material adverse effect on the other party, including:

 

   

changes due to the transactions contemplated by the Merger Agreement, including the Merger, or the announcement or pendency thereof;

 

   

changes in prevailing economic or market conditions in the United States or any other jurisdiction in which such entity has substantial business operations (except to the extent those changes have a disproportionate effect on such party and its subsidiaries relative to the other participants in the industry or industries in which such party and its subsidiaries operate);

 

   

changes or events affecting the industry or industries in which such party and its subsidiaries operate generally or compete (except to the extent those changes or events have a disproportionate effect on such party and its subsidiaries relative to the other participants in the industry or industries in which such party and its subsidiaries operate);

 

   

changes in generally accepted accounting principles or requirements (except to the extent those changes have a disproportionate effect on such party and its subsidiaries relative to the other participants in the industry or industries in which such party and its subsidiaries operate);

 

   

changes in laws, rules or regulations of general applicability or interpretations thereof by any governmental authority (except to the extent those changes have a disproportionate effect on such party and its subsidiaries relative to the other participants in the industry or industries in which such party and its subsidiaries operate);

 

   

any natural disaster or any outbreak of major hostilities in which the United States is involved or any act of terrorism within the United States or directed against its facilities or citizens wherever located or any governmental response to any of the foregoing (except to the extent those changes or events have a disproportionate effect on such party and its subsidiaries relative to the other participants in the industry or industries in which such party and its subsidiaries operate); or

 

   

any failure by such party to meet any internal guidance, budgets, plans, projections or forecasts of its revenues, earnings or other financial performance or results of operations (but not the underlying cause of such failure, unless such failure would otherwise be excepted).

If adverse changes occur and Arsanis and X4 still complete the Merger, the price of Arsanis Common Stock may suffer. This in turn may reduce the value of the Merger to the Arsanis Stockholders, the X4 Stockholders or both.

 

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Some Arsanis and X4 officers and directors have interests in the Merger that are different from yours, which may influence such officers and directors to support or approve the Merger without regard to your interests.

Certain officers and directors of Arsanis and X4 participate in arrangements that provide them with interests in the Merger that are different from yours, including, among others, the continued service as an officer or director of the combined organization, severance benefits, retention benefits, the acceleration of equity award vesting, continued indemnification and the potential ability to sell an increased number of shares of common stock of the combined organization in accordance with Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). For example, Arsanis has entered into certain employment, retention, and severance benefits agreements with certain of its executive officers that may result in the receipt by such executive officers of cash severance or retention payments and other benefits with a total value of approximately $3.2 million (collectively, not individually, and excluding the value of any accelerated vesting of equity awards) and the acceleration of equity awards held by those officers, including options to purchase shares of Arsanis Common Stock and Arsanis restricted stock awards, based on data available as of November 30, 2018 and assuming a covered termination of employment of each executive officer’s employment as of such date. The Closing will also result in the acceleration of vesting of a portion of the equity awards, including options to purchase approximately 802,052 shares of Arsanis Common Stock held by the Arsanis executive officers and directors and 250,000 shares of restricted Arsanis Common Stock held by Mr. Gray, whether or not there is a covered termination of such officer’s employment. For more information concerning the treatment of Arsanis options in connection with the Merger, see the section titled The Merger Agreement—Treatment of Arsanis Options and Restricted Arsanis Common Stock in this proxy statement/prospectus/information statement. In addition, certain of X4’s directors and executive officers have options, subject to vesting, to purchase shares of X4 Common Stock which, at the Closing, shall be converted into and become options to purchase shares of Arsanis Common Stock; certain of X4’s directors and executive officers are expected to become directors and executive officers of Arsanis upon the Closing; and all of X4’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. These interests, among others, may influence the officers and directors of Arsanis and X4 to support or approve the Merger. For more information concerning the interests of Arsanis and X4 executive officers and directors, see the sections titled “The Merger—Interests of the Arsanis Directors and Executive Officers in the Merger” and “The Merger—Interests of the X4 Directors and Executive Officers in the Merger” in this proxy statement/prospectus/information statement.

The market price of Arsanis Common Stock following the Merger may decline as a result of the Merger.

The market price of Arsanis Common Stock may decline as a result of the Merger for a number of reasons if:

 

   

investors react negatively to the prospects of the combined organization’s business and prospects from the Merger;

 

   

the effect of the Merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

   

the combined organization does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts.

Arsanis Stockholders and X4 Stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger.

If the combined organization is unable to realize the full strategic and financial benefits currently anticipated from the Merger, Arsanis Stockholders and X4 Stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.

 

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Arsanis Stockholders and X4 Stockholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined organization following the completion of the Merger as compared to their current ownership and voting interests in the respective companies.

After the completion of the Merger, the current Arsanis Stockholders and X4 Stockholders will own a smaller percentage of the combined organization than their ownership of their respective companies prior to the Merger. As of the date of the execution of the Merger Agreement, it was estimated that as a result of the Merger and based solely on the sample Common Stock Exchange Ratio and Preferred Stock Exchange Ratio of 0.5948, current X4 Securityholders would own, or hold rights to acquire, in the aggregate approximately 70% of the Fully Diluted Closing Arsanis Common Stock and current Arsanis Securityholders (excluding for this purpose certain out-of-the-money Arsanis Options and Arsanis Warrants) would own in the aggregate approximately 30% of the Fully Diluted Closing Arsanis Common Stock and, in each case, following the Effective Time and subject to adjustment of the Exchange Ratios. The initial estimate of the Common Stock Exchange Ratio and Preferred Stock Exchange Ratio set forth above assumed (i) that Arsanis would have $20.0 million in net cash on the business day immediately prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing would be equal to 15,116,966 (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) X4 shares as of the Closing would be equal to 58,456,701 (on a fully diluted, as-converted basis).

The Exchange Ratios are calculated using a formula intended to allocate a percentage of the combined organization to existing X4 Securityholders and are subject to change based on changes in Arsanis’s net cash balance on the business day prior to the Closing and the capitalization of Arsanis or X4 immediately prior to the Closing. The provisions for calculating the Common Stock Exchange Ratio assume a pre-transaction valuation of $115.0 million for X4’s business and $50.0 million for Arsanis’s business. In the case of Arsanis, the pre-transaction valuation is subject to downward or upward adjustment to the extent Arsanis’s net cash balance as of the business day prior to the Closing is above or below $20.0 million. Arsanis currently estimates, assuming for this purpose a closing date of                 , 2019, that (i) it will have approximately $        million in net cash on the business day prior to the Closing, (ii) Arsanis outstanding shares and options as of the Closing will be equal to             (on a pre-reverse stock split basis and excluding for this purpose certain out-of-the-money Arsanis Options) and (iii) X4’s outstanding shares as of the Closing on a fully diluted and as-converted basis will be equal to             . Accordingly, it is currently estimated that the Common Stock Exchange Ratio at Closing will be approximately                and, because each share of X4 Preferred Stock is convertible into one share of X4 Common Stock, the Preferred Stock Exchange Ratio is expected to be equal to the Common Stock Exchange Ratio. Based solely on such Common Stock Exchange Ratio and Preferred Stock Exchange Ratio, at Closing: (a) X4 Securityholders as of immediately prior to the Merger will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, (b) the Arsanis Securityholders as of immediately prior to the Merger (excluding for this purpose certain out-of-the-money Arsanis Options and Arsanis Warrants) will own approximately     % of the Fully Diluted Closing Arsanis Common Stock, and (c) the shares available for issuance under the Arsanis 2017 Plan and the X4 Plan as of immediately prior to the Merger will represent approximately     % of the Fully Diluted Closing Arsanis Common Stock, in each case, subject to adjustment of the Exchange Ratios as set forth in the Merger Agreement and described herein.

During the pendency of the Merger, Arsanis and X4 may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

Covenants in the Merger Agreement impede the ability of Arsanis and X4 to make acquisitions, subject to certain exceptions relating to fiduciary duties, as set forth below, or to complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the

 

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ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties, as set forth below. Any such transactions could be favorable to such party’s stockholders.

Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit each of Arsanis and X4 from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to be inconsistent with the board’s fiduciary duties. Moreover, even if a party receives what the party’s board of directors determines is a superior proposal, the Merger Agreement does not permit either party to terminate the Merger Agreement to enter into a superior proposal.

Because the lack of a public market for X4 Capital Stock makes it difficult to evaluate the value of X4 Capital Stock, the X4 Stockholders may receive shares of Arsanis Common Stock in the Merger that have a value that is less than, or greater than, the fair market value of X4 Capital Stock.

The outstanding X4 Capital Stock is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of X4 Capital Stock. Because the percentage of Arsanis equity to be issued to X4 Stockholders was determined based on negotiations between the parties, it is possible that the value of the Arsanis Common Stock to be received by X4 Stockholders will be less than the fair market value of X4 Capital Stock, or Arsanis may pay more than the aggregate fair market value of X4 Capital Stock.

If the conditions of the Merger are not met, the Merger will not occur.

Even if the Merger is approved by Arsanis Stockholders and X4 Stockholders, specified conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the Merger Agreement and described in the section titled “The Merger Agreement—Conditions to Completion of the Merger” in this proxy statement/prospectus/information statement. Arsanis and X4 cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger will not occur or will be delayed, and Arsanis and X4 each may lose some or all of the intended benefits of the Merger.

The Merger may fail to qualify as a “reorganization” for U.S. federal income tax purposes, resulting in recognition of taxable gain or loss by X4 Stockholders in respect of their X4 Capital Stock.

Arsanis and X4 intend for the Merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, as described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement. In the event that the Merger does not qualify as a “reorganization,” the Merger would result in taxable gain or loss for each X4 Stockholder, with the amount of such gain or loss determined by the amount that each X4 Stockholder’s adjusted tax basis in the X4 Capital Stock surrendered is less or more than the fair market value of the Arsanis Common Stock and any cash in lieu of a fractional share received in exchange therefor. Each holder of X4 Capital Stock is urged to consult with his, her or its own tax advisor with respect to the tax consequences of the Merger.

The combined organization may become involved in securities class action litigation that could divert management’s attention and harm the combined organization’s business and insurance coverage may not be sufficient to cover all costs and damages.

In the past, securities class action or shareholder derivative litigation often follows certain significant business transactions, such as the sale of a business division or announcement of a Merger. The combined organization may become involved in this type of litigation in the future. Litigation is often expensive and diverts management’s attention and resources, which could adversely affect the combined organization’s business.

 

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Risks Related to the Proposed Reverse Stock Split

The proposed Reverse Stock Split may not increase the combined organization’s stock price over the long-term.

The principal purpose of the proposed Reverse Stock Split is to increase the per-share market price of Arsanis Common Stock so that the combined organization might meet the initial listing requirements for the Nasdaq Global Market, which, among other things, requires a $4.00 bid price. It cannot be assured, however, that the proposed Reverse Stock Split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of Arsanis Common Stock will proportionally increase the market price of Arsanis Common Stock, it cannot be assured that the proposed Reverse Stock Split will result in any permanent or sustained increase in the market price of Arsanis Common Stock, which is dependent upon many factors, including the combined organization’s business and financial performance, general market conditions and prospects for future success. Thus, while the stock price of the combined organization might meet the initial listing requirements for the Nasdaq Global Market, it cannot be assured that it will continue to do so.

The proposed Reverse Stock Split may decrease the liquidity of the combined organization’s common stock.

Although the Arsanis Board of Directors believes that the anticipated increase in the market price of the combined organization’s common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the proposed Reverse Stock Split. The reduction in the number of outstanding shares may lead to reduced trading, a smaller number of market makers for Arsanis Common Stock and limitations on the combined organization’s ability to raise additional capital.

The proposed Reverse Stock Split may lead to a decrease in the combined organization’s overall market capitalization.

If the market price of the combined organization’s common stock declines after the proposed Reverse Stock Split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the proposed Reverse Stock Split. A reverse stock split may be viewed negatively by the market and, consequently, can lead to a decrease in the combined organization’s overall market capitalization. If the per share market price does not increase in proportion to the proposed Reverse Stock Split ratio, then the value of the combined organization, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Arsanis Common Stock will remain the same after the proposed Reverse Stock Split is effected, or that the proposed Reverse Stock Split will not have an adverse effect on the stock price of Arsanis Common due to the reduced number of shares outstanding after the proposed Reverse Stock Split.

Risks Related to Arsanis

Risks Related to the Proposed Merger with X4

If Arsanis does not successfully consummate the Merger with X4 or another strategic transaction, the Arsanis Board of Directors may decide to pursue a dissolution and liquidation of Arsanis. In such an event, the amount of cash available for distribution to Arsanis Stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities, as to which Arsanis can give you no assurance.

There can be no assurance that the Merger will be completed. If the Merger is not completed, the Arsanis Board of Directors may decide to pursue a dissolution and liquidation of Arsanis. In such an event, the amount of

 

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cash available for distribution to Arsanis Stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as Arsanis funds its operations while pursuing the Merger. In addition, if the Arsanis Board of Directors were to approve and recommend, and the Arsanis Stockholders were to approve, a dissolution and liquidation of Arsanis, Arsanis would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to stockholders. Arsanis’s commitments and contingent liabilities may include (i) obligations under its employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of Arsanis; (ii) litigation against Arsanis, and other various claims and legal actions arising in the ordinary course of business; and (iii) non-cancelable facility lease obligations. As a result of this requirement, a portion of Arsanis’s assets would need to be reserved pending the resolution of such obligations.

In addition, Arsanis may be subject to litigation or other claims related to a dissolution and liquidation of Arsanis. If a dissolution and liquidation were to be pursued, the Arsanis Board of Directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Arsanis Common Stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Arsanis. A liquidation would be a lengthy and uncertain process with no assurance of any value ever being returned to the Arsanis Stockholders.

Arsanis is substantially dependent on its remaining employees to facilitate the consummation of the Merger.

Arsanis’s ability to successfully complete the Merger, or if the Merger is not completed, another potential strategic transaction, depends in large part on Arsanis’s ability to retain key management, finance and certain others of its remaining personnel. Despite Arsanis’s efforts to retain these employees, one or more may terminate their employment with Arsanis on short notice. The loss of the services of any of these key employees could potentially harm Arsanis’s ability to evaluate and pursue strategic alternatives, as well as fulfill Arsanis’s reporting obligations as a public company.

The issuance of shares of Arsanis Common Stock to X4 Stockholders in the Merger will dilute substantially the voting power of Arsanis’s current stockholders.

If the Merger is completed, each outstanding share of X4 Capital Stock will be converted into the right to receive a number of shares of Arsanis Common Stock equal to the Exchange Ratios determined pursuant to the Merger Agreement. Immediately following the Merger, Arsanis Securityholders (excluding for this purpose certain out-of-the-money Arsanis Options and Arsanis Warrants) are expected to own approximately 30% of the outstanding capital stock of the combined organization on a fully diluted basis, and X4 Securityholders are expected to own approximately 70% of the outstanding capital stock of the combined organization on a fully diluted basis. Accordingly, the issuance of shares of Arsanis Common Stock to X4 Stockholders in the Merger will reduce significantly the relative voting power of each share of Arsanis Common Stock held by current Arsanis Stockholders. Consequently, Arsanis Stockholders as a group will have significantly less influence over the management and policies of the combined organization after the Merger than prior to the Merger.

If the combined organization after the Merger is unable to realize the strategic and financial benefits currently anticipated from the Merger, the Arsanis Stockholders will have experienced substantial dilution of their ownership interests without receiving the expected commensurate benefit, or receiving only part of the commensurate benefit to the extent the combined organization is able to realize only part of the expected strategic and financial benefits currently anticipated from the Merger.

 

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The pendency of the Merger could have an adverse effect on the trading price of Arsanis Common Stock and Arsanis’s business, financial condition, results of operations or business prospects.

While there have been no significant adverse effects to date, the pendency of the Merger could disrupt Arsanis’s businesses in the following ways, including:

 

   

the attention of Arsanis’s management may be directed toward the Closing and related matters and may be diverted from the day-to-day business operations; and

 

   

third parties may seek to terminate or renegotiate their relationships with Arsanis as a result of the Merger, whether pursuant to the terms of their existing agreements with Arsanis or otherwise.

 

   

Should they occur, any of these matters could adversely affect the trading price of Arsanis Common Stock or harm Arsanis’s financial condition, results of operations or business prospects.

There is no assurance that the Merger will be completed in a timely manner or at all. If the Merger is not consummated, Arsanis’s business could suffer materially and its stock price could decline.

The Closing is subject to a number of closing conditions, including the approval by Arsanis’s stockholders of the issuance of shares of Arsanis Common Stock pursuant to the Merger Agreement and other customary closing conditions. If the conditions are not satisfied or waived, the Merger will not occur or will be delayed.

If the Merger is not consummated, Arsanis may be subject to a number of material risks, and Arsanis’s business and stock price could be adversely affected, as follows:

 

   

Arsanis has incurred and expects to continue to incur significant expenses related to the Merger even if the Merger is not consummated;

 

   

Arsanis could be obligated to pay X4 a termination fee of up to $600,000 under certain circumstances pursuant to the Merger Agreement;

 

   

the market price of Arsanis Common Stock may decline to the extent that the current market price reflects a market assumption that the Merger will be completed; and

 

   

Arsanis may not be able to pursue an alternate merger or other strategic transaction if the Merger with X4 is not completed.

Risks Related to Arsanis’s Financial Position and Need for Additional Capital

Arsanis is a clinical stage biopharmaceutical company with a limited operating history. Arsanis has incurred significant losses since inception. Arsanis expects to incur losses for at least the next several years and may never achieve or maintain profitability.

Since inception, Arsanis has incurred significant net losses. Arsanis’s net loss was $33.7 million and $22.7 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, Arsanis had an accumulated deficit of $125.9 million. Arsanis has funded operations to date primarily with proceeds from its initial public offering and concurrent private placement, the sale of preferred stock, convertible debt financings, borrowings under a loan agreement, proceeds received from governmental loans and grants and proceeds received under a non-governmental grant. To date, Arsanis has devoted substantially all of its resources to building its business to support discovery, research and development activities for its programs.

Arsanis has devoted a significant portion of its financial resources and efforts to the development of ASN100. On June 28, 2018, Arsanis announced that the data review committee, or DRC, for its ASN100 Phase 2 clinical trial recommended that trial enrollment be discontinued based on the DRC’s conclusion that the trial was not likely to meet its primary end-point upon completion. Based on the DRC recommendation, Arsanis decided to discontinue the Phase 2 clinical trial of ASN100 and has taken steps to notify health authorities and clinical

 

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investigators participating in the trial. Arsanis has ceased further clinical development of ASN100. Arsanis’s determination as to its next steps will necessarily impact the amount of expenses it incurs and the size of its operating losses for the foreseeable future.

Arsanis expects to continue to incur significant expenses and operating losses for the foreseeable future. The net losses Arsanis incurs may fluctuate significantly from quarter to quarter.

To become and remain profitable, Arsanis or any current or potential future collaborators must develop and eventually commercialize at least one product candidate with significant market potential. This will require that Arsanis or its collaborators be successful in a range of challenging activities, including completing preclinical studies and clinical trials of one or more product candidates, obtaining marketing approval for one or more these product candidates, manufacturing, marketing and selling those products for which Arsanis or its collaborators may obtain marketing approval and satisfying any post-marketing requirements. Arsanis or its collaborators may never succeed in any or all of these activities and, even if Arsanis or its collaborators do succeed, Arsanis or its collaborators may never generate revenue that is significant or large enough to achieve profitability. If Arsanis does achieve profitability, Arsanis may not be able to sustain or increase profitability on a quarterly or annual basis. Arsanis’s failure to become and remain profitable would decrease the value of the company and could impair its ability to raise capital, maintain research and development efforts, expand its business or continue operations. A decline in the value of the company also could cause you to lose all or part of your investment.

Arsanis’s limited operating history may make it difficult for you to evaluate the success of its business to date and to assess its future viability.

Arsanis’s operations to date have been limited to organizing and staffing its company, business planning, raising capital, obtaining funding from government entities and non-government organizations, developing and securing its technology, identifying potential product candidates, undertaking preclinical studies and clinical trials of its most advanced product candidates and entering into licensing and funding agreements. Arsanis has not yet demonstrated the ability to initiate or complete later-stage clinical trials of any product candidates, obtain marketing approvals, manufacture a commercial-scale product or conduct sales and marketing activities necessary for successful commercialization. Consequently, any evaluation of its business to date or predictions about its future success or viability may not be as accurate as they could be if Arsanis had a longer operating history.

The discontinuation of Arsanis’s clinical development of ASN100 has required Arsanis to reevaluate its future development plans for any product candidates and programs and has significantly decreased the likelihood that Arsanis will commercialize any product candidates in the near term. Arsanis may never be successful in developing or commercializing any product candidates.

Arsanis will need to raise substantial additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force Arsanis to delay, reduce or eliminate certain of its product development efforts or other operations.

Pending the planned consummation of the Merger Agreement, Arsanis plans to explore potential outlicensing opportunities for ASN100, continue the development of its ASN500 program as well as support its collaborators across Arsanis’s ongoing ASN200 and ASN300 programs, both of which were outlicensed to subsidiaries of Bravos Biosciences, LLC during the first half of 2018. Arsanis will need substantial additional funds to support its planned operations. In the absence of additional funding or business development activities, Arsanis believes that its existing cash and cash equivalents will enable Arsanis to fund its operating expenses, capital expenditure requirements and debt service payments through the fourth quarter of 2020 based on its current operating plans, which do not include material ASN100 expenses beyond the fourth quarter of 2018.

Arsanis’s estimate as to how long Arsanis expects its existing cash and cash equivalents to be able to continue to fund its operations is based on assumptions that may prove to be wrong, and Arsanis could use its

 

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available capital resources sooner than it currently expects. Further, Arsanis’s current changing circumstances, some of which may be beyond its control, could cause Arsanis to consume capital significantly faster than it currently anticipates. Arsanis’s future funding requirements, both short-term and long-term, will depend on many factors, including, but not limited to:

 

   

Arsanis’s ability to successfully consummate the Merger or any other strategic transaction;

 

   

the scope, progress, results and costs of researching and developing Arsanis’s ASN500 program and any product candidates, and conducting preclinical studies and clinical trials;

 

   

the costs, timing and outcome of regulatory review of any product candidates;

 

   

the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any product candidates for which Arsanis receives marketing approval;

 

   

the costs of manufacturing commercial-grade products and necessary inventory to support commercial launch;

 

   

the ability to receive additional non-dilutive funding, including grants from organizations and foundations;

 

   

the revenue, if any, received from commercial sale of Arsanis’s products, should any product candidates receive marketing approval;

 

   

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing Arsanis’s intellectual property rights and defending intellectual property-related claims;

 

   

Arsanis’s ability to establish and maintain collaborations on favorable terms, if at all;

 

   

the extent to which Arsanis acquires or in-licenses other product candidates and technologies; and

 

   

the timing, receipt and amount of sales of, or milestone payments related to or royalties on, Arsanis’s current or future product candidates, if any.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and Arsanis may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, Arsanis’s product candidates, if any are approved, may not achieve commercial success. Arsanis’s product revenue, if any, and any commercial milestones or royalty payments under its collaboration agreements will be derived from or based on sales of products that may not be commercially available for many years, if at all. Accordingly, Arsanis will need to continue to rely on additional financing to achieve its business objectives.

Raising additional capital may cause dilution to Arsanis Stockholders, restrict its operations or require Arsanis to relinquish rights to technologies or product candidates.

Until such time, if ever, as Arsanis can generate substantial product revenue, Arsanis expects to finance its cash needs through a combination of public or private equity offerings, debt financings, government funding, grants, collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties. Any additional fundraising efforts may divert Arsanis’s management from their day-to-day activities, which may adversely affect Arsanis’s ability to develop and commercialize product candidates. Arsanis cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to Arsanis, if at all. To the extent that Arsanis raises additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Arsanis’s issuance of additional securities, whether equity or debt, or the possibility of such issuance, may cause the market price of its common stock to decline, and Arsanis’s stockholders may not agree with its financing plans or the terms of such financings. Debt financing and preferred equity financing, if available, may involve agreements that include

 

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restrictive covenants that limit Arsanis’s ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, additional debt financing would result in increased fixed payment obligations.

If Arsanis raises funds through government funding, collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties, Arsanis may have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to Arsanis.

Arsanis’s failure to raise capital as and when needed would have a negative impact on its financial condition and Arsanis’s ability to pursue its business strategy, and Arsanis could be forced to delay, reduce or eliminate certain research and development programs or any future commercialization efforts.

Arsanis’s existing and any future indebtedness could adversely affect Arsanis’s ability to operate its business.

Under Arsanis’s loans from Österreichische Forschungsförderungsgesellschaft GmbH, or FFG, principal amounts outstanding totaled $9.9 million as of September 30, 2018. Arsanis is required to pay interest on its loans from FFG semi-annually, with payment of principal due at the maturity dates of the loans, which range from 2020 to 2023.

Arsanis may be required to return all or a portion of the FFG loans and/or grants if Arsanis does not comply with the terms of the related FFG funding agreements and related guidelines, including specified requirements as to continued operations with respect to certain locations and funded projects. To date, FFG has not requested the return of any amounts received by Arsanis under the funding agreements.

Arsanis could in the future incur additional indebtedness beyond its borrowings from FFG.

Arsanis’s outstanding indebtedness, combined with other financial obligations and contractual commitments, including any additional future indebtedness beyond its borrowings from FFG, could have significant adverse consequences, including:

 

   

requiring Arsanis to dedicate a portion of its cash and cash equivalents resources to the payment of interest and principal, and prepayment and repayment fees and penalties, thereby reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;

 

   

subjecting Arsanis to restrictive covenants that may reduce its ability to take certain corporate actions or obtain further debt or equity financing;

 

   

limiting Arsanis’s flexibility in planning for, or reacting to, changes in its business and the industry in which Arsanis competes;

 

   

placing Arsanis at a competitive disadvantage compared to its competitors that have less debt or better debt servicing options; and

 

   

increasing Arsanis’s vulnerability to adverse changes in general economic, industry and market conditions.

Arsanis may not have sufficient funds, and may be unable to arrange for additional financing, to pay the amounts due under its existing debt. Failure to make payments or comply with other covenants under Arsanis’s existing debt instruments could result in an event of default and acceleration of amounts due. While Arsanis currently has sufficient resources to pay its existing debt in the event that repayment was accelerated under the existing FFG loans, that may not be the case in the future.

 

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Risks Related to the Development of Product Candidates

Arsanis’s business to date has been almost entirely dependent on the success of ASN100, which was recently discontinued following failure to achieve the primary end-point in its Phase 2 clinical trial.

On June 28, 2018, Arsanis announced that the DRC for its ASN100 Phase 2 clinical trial recommended that trial enrollment be discontinued based on the DRC’s conclusion that the trial was not likely to meet its primary end-point upon completion. Based on the DRC recommendation, Arsanis has discontinued the Phase 2 clinical trial of ASN100 and has taken steps to notify health authorities and clinical investigators participating in the trial. During the fourth quarter of 2018, Arsanis completed its analysis of the complete dataset from the trial and has ceased further clinical development of ASN100.

In light of the discontinuation of the Phase 2 clinical trial of ASN100, Arsanis’s future business, prospects, financial position and operating results could be significantly different than those in historical periods or projected by management. Because of the significant uncertainty regarding future plans, Arsanis is not able to accurately predict the impact of a potential change in its existing business strategy.

Arsanis’s approach to the discovery and development of product candidates based on its targeted mAbs is unproven, and Arsanis does not know whether it will be able to successfully develop any products.

Arsanis is focused on the discovery, development and commercialization of monoclonal antibody, or mAb, immunotherapies to address serious infectious diseases. Arsanis has not yet succeeded and may not succeed in demonstrating efficacy and safety for any product candidates, including those that Arsanis is directly developing and those being developed under collaboration with subsidiaries of Bravos Bioscience, LLC, in future clinical trials or in obtaining marketing approval thereafter.

In addition, Arsanis has never had a product candidate receive approval from the U.S. Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, or other regulatory authority. The regulatory review process may be more expensive or take longer for Arsanis’s product candidates than Arsanis expects, and Arsanis may be required to conduct additional studies and/or trials beyond those anticipated. If it takes Arsanis longer to develop and/or obtain regulatory approval for product candidates than expected, such delays could materially and adversely affect its business, financial condition, results of operations and prospects.

Preclinical drug development is uncertain. Arsanis’s preclinical programs, such as its ASN500 program, may experience delays or may never advance to clinical trials, which would adversely affect Arsanis’s ability to obtain regulatory approvals or commercialize any product candidates on a timely basis or at all, which would have an adverse effect on its business.

Arsanis is continuing to develop its ASN500 program, which is currently in preclinical development. Arsanis has outlicensed two preclinical product candidates, ASN200 and ASN300, to subsidiaries of Bravos Biosciences, LLC during the first half of 2018.

In order to obtain FDA approval to market a new biological product Arsanis must demonstrate proof of safety, purity and potency or efficacy in humans. To meet these requirements, Arsanis will have to conduct adequate and well-controlled clinical trials. Before Arsanis can commence clinical trials for a product candidate, Arsanis must complete extensive preclinical testing and studies that support its planned Investigational New Drug application, or IND, in the United States. Arsanis cannot be certain of the timely completion or outcome of its preclinical testing and studies and cannot predict if the FDA will accept Arsanis’s proposed clinical programs or if the outcome of its preclinical testing and studies will ultimately support the further development of these product candidates. As a result, Arsanis cannot be sure that Arsanis will be able to submit INDs or similar applications for its preclinical programs on the timelines Arsanis expects, if at all, and Arsanis cannot be sure that submission of INDs or similar applications will result in the FDA or other regulatory authorities allowing clinical trials to begin.

 

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Conducting preclinical testing is a lengthy, time-consuming and expensive process. The length of time may vary substantially according to the type, complexity, novelty and intended use of the product candidate, and often can be several years or more per product candidate. Delays associated with product candidates for which Arsanis is directly conducting preclinical testing and studies may cause Arsanis to incur additional operating expenses. Moreover, Arsanis may continue to be affected by delays associated with the preclinical testing and studies of certain product candidates conducted by its potential partners over which Arsanis has no control. The commencement and rate of completion of preclinical studies and clinical trials for a product candidate may be delayed by many factors, including, for example:

 

   

inability to generate sufficient preclinical or other in vivo or in vitro data to support the initiation of clinical studies;

 

   

delays in reaching a consensus with regulatory agencies on study design; and

 

   

the FDA not allowing Arsanis to rely on previous findings of safety and efficacy for other similar but approved products and published scientific literature.

Moreover, even if clinical trials do begin for any product candidates, Arsanis’s development efforts may not be successful, and clinical trials that Arsanis conducts or that third parties conduct on its behalf may not demonstrate sufficient safety, purity and potency or efficacy to obtain the requisite regulatory approvals for any of Arsanis’s product candidates or product candidates employing its technology. Even if Arsanis obtains positive results from preclinical studies or initial clinical trials, Arsanis may not achieve the same success in future trials.

Any future clinical trials of Arsanis’s product candidates may not be successful. If Arsanis or its collaborators are unable to commercialize any product candidates or if Arsanis experiences significant delays in doing so, its business could be substantially harmed.

Arsanis currently has no products approved for sale and historically has invested a significant portion of its efforts and financial resources in the development of ASN100, which Arsanis has ceased developing. Arsanis is continuing to develop its ASN500 program, which is currently in preclinical development. The success of any product candidates Arsanis may develop will depend on several factors, including the following:

 

   

initiation and successful enrollment and completion of clinical trials;

 

   

a safety, tolerability and efficacy profile that is satisfactory to the FDA, EMA or other regulatory authorities for marketing approval;

 

   

timely receipt of marketing approvals from applicable regulatory authorities;

 

   

the extent of any required post-marketing approval commitments to applicable regulatory authorities;

 

   

establishment and maintenance of arrangements with third-party manufacturers for both clinical and any future commercial manufacturing;

 

   

adequate ongoing availability of raw materials and drug product for clinical development and any commercial sales;

 

   

obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

   

protection of Arsanis’s rights in its intellectual property portfolio;

 

   

successful launch of commercial sales following any marketing approval;

 

   

a continued acceptable safety profile following any marketing approval;

 

   

commercial acceptance by the patient community, the medical community and third-party payors;

 

   

the performance of Arsanis’s future collaborators, if any; and

 

   

Arsanis’s ability to compete with other therapies.

 

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Many of these factors are beyond Arsanis’s control, including clinical development, the regulatory review process, potential threats to its intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborator. If Arsanis is unable to develop, receive marketing approval for and successfully commercialize any product candidates, on its own or with any future collaborator, or experience delays as a result of any of these factors or otherwise, Arsanis’s business could be substantially harmed.

Clinical drug development is a lengthy and expensive process with uncertain timelines and uncertain outcomes. If clinical trials of any product candidates are prolonged or delayed, Arsanis or its collaborators may be unable to obtain required regulatory approvals, and therefore will be unable to commercialize Arsanis’s product candidates on a timely basis or at all, which will adversely affect its business.

Before obtaining marketing approval from regulatory authorities for the sale of any product candidates, Arsanis or its collaborators must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates. Clinical testing is expensive, time-consuming, difficult to design and implement and uncertain as to outcome. Arsanis cannot guarantee that clinical trials will be conducted as planned, completed on schedule, if at all, or yield positive results.

A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:

 

   

delays in reaching a consensus with regulatory authorities or collaborators on trial design;

 

   

delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;

 

   

delays in opening clinical trial sites or obtaining required institutional review board or independent ethics committee approval at each clinical trial site;

 

   

delays in recruiting suitable subjects to participate in clinical trials;

 

   

imposition of a clinical hold by regulatory authorities, including as a result of a serious adverse event or after an inspection of Arsanis’s clinical trial operations or trial sites;

 

   

failure by Arsanis, any CROs Arsanis engages, clinical investigators, its collaborators or any other third parties to adhere to clinical trial requirements;

 

   

failure to perform in accordance with good clinical practices, or GCP, or applicable regulatory requirements in the European Union, the United States, or in other countries;

 

   

delays in the testing, validation, manufacturing and delivery of Arsanis’s product candidates to the clinical sites, including delays by third parties with whom Arsanis has contracted to perform certain of those functions;

 

   

delays or failures in demonstrating the comparability of product manufactured at one facility or with one process to product manufactured at another facility or with another process, including clinical trials to demonstrate such comparability;

 

   

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

 

   

clinical trial sites or subjects dropping out of a trial;

 

   

selection of clinical endpoints that require prolonged periods of clinical observation or analysis of the resulting data;

 

   

occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits;

 

   

occurrence of serious adverse events in trials of the same class of agents conducted by other sponsors; and

 

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changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

Any inability to successfully complete preclinical and clinical development could result in additional costs to Arsanis or impair its ability to generate revenue from product sales, regulatory and commercialization milestones and royalties. In addition, if Arsanis or its collaborators make manufacturing or formulation changes to any product candidates, Arsanis may need to conduct additional trials to bridge its modified product candidates to earlier versions. Clinical trial delays also could shorten any periods during which Arsanis may have the exclusive right to commercialize its product candidates or allow its competitors to bring products to market before Arsanis does, which could impair Arsanis’s ability to successfully commercialize its product candidates and may harm its business, financial condition, results of operations and prospects.

Arsanis could encounter delays if a clinical trial is suspended or terminated by Arsanis, by the institutional review boards of the institutions in which such trials are being conducted or ethics committees, by the DRC or Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other foreign regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or Arsanis’s clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, including those relating to the class of products to which Arsanis’s product candidate belongs. In June 2018, Arsanis discontinued its Phase 2 clinical trial of ASN100, based on the results of a planned interim analysis of unblinded trial data conducted by the DRC. The DRC determined that the trial was futile, meaning that it was not likely to meet its primary end-point upon completion, and recommended that trial enrollment be discontinued. During the fourth quarter of 2018, Arsanis completed its analysis of the complete dataset from the trial and has ceased further clinical development of ASN100.

Any of these occurrences may harm Arsanis’s business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of Arsanis’s product candidates or result in the development of its product candidates being stopped early.

Success in preclinical studies or early clinical trials may not be indicative of results obtained in later trials.

Results from preclinical studies or previous clinical trials are not necessarily predictive of future clinical trial results, and interim results of a clinical trial are not necessarily indicative of final results. Any product candidates Arsanis develops may fail to show the desired safety and efficacy in clinical development despite demonstrating positive results in preclinical studies or having successfully advanced through initial clinical trials.

There can be no assurance that the success Arsanis achieved in preclinical studies and early clinical trials ultimately will result in success in potential future clinical trials of product candidates. For example, Arsanis has ceased clinical development of ASN100 after the DRC for its ASN100 Phase 2 clinical trial recommended that trial enrollment be discontinued based on the DRC’s conclusion that the trial was not likely to meet its primary end-point upon completion.

There is a high failure rate for drugs and biologic products proceeding through clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical studies and earlier-stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, Arsanis may experience regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of its product candidate development. Any such delays could materially and adversely affect Arsanis’s business, financial condition, results of operations and prospects.

 

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Arsanis may find it difficult to enroll and dose patients in clinical trials, which could delay or prevent its collaborators and Arsanis from proceeding with clinical trials of any product candidates.

Identifying and qualifying patients to participate in any future clinical trials of any product candidates is critical to Arsanis’s success. The timing of any future clinical trials will depend on Arsanis’s ability to recruit patients to participate as well as to subsequently dose these patients and complete required follow-up periods. In addition, Arsanis may experience enrollment delays related to increased or unforeseen regulatory, legal and logistical requirements at certain clinical trial sites outside of the United States. These delays could be caused by regulatory reviews by non-U.S. regulatory authorities and contractual discussions with individual clinical trial sites, for example. Any delays in enrolling and/or dosing patients in any future clinical trials could result in increased costs, delays in advancing any product candidates, delays in testing the effectiveness of such product candidates or termination of the clinical trials altogether.

Arsanis may not be able to identify, recruit, enroll and dose a sufficient number of patients, or those with required or desired characteristics, to complete any future clinical trials in a timely manner. Subject enrollment and trial completion is affected by a number of factors, including:

 

   

coordination between Arsanis, CROs and any future collaborators in its efforts to enroll and administer the clinical trial;

 

   

size of the patient population and process for identifying patients;

 

   

design of the trial protocol;

 

   

eligibility and exclusion criteria;

 

   

perceived risks and benefits of the product candidate under study;

 

   

availability of competing commercially available therapies and other competing drug candidates’ clinical trials;

 

   

time of year in which the trial is initiated or conducted;

 

   

variations in the seasonal incidence of the target indication;

 

   

severity of the disease under investigation;

 

   

ability to obtain and maintain subject consent;

 

   

ability to enroll and treat patients in a timely manner;

 

   

risk that enrolled subjects will drop out before completion of the trial;

 

   

patient referral practices of physicians; and

 

   

ability to monitor subjects adequately during and after treatment.

Arsanis may conduct clinical trials for product candidates at sites outside the United States. The FDA may not accept data from trials conducted in such locations and the conduct of trials outside the United States could subject Arsanis to additional delays and expense.

Arsanis may in the future conduct one or more clinical trials with one or more trial sites that are located outside the United States.

Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of these data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with GCP. The FDA must be able to validate the data from the trial through an onsite inspection if necessary. The trial population must also have a similar profile to the U.S. population, and the data must be applicable to the U.S. population and U.S.

 

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medical practice in ways that the FDA deems clinically meaningful, except to the extent the disease being studied does not typically occur in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance that the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from any trial that Arsanis conducts outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt Arsanis’s development of any future product candidates.

In addition, the conduct of clinical trials outside the United States could have a significant adverse impact on Arsanis. Risks inherent in conducting international clinical trials include:

 

   

clinical practice patterns and standards of care that vary widely among countries;

 

   

non-U.S. regulatory authority requirements that could restrict or limit Arsanis’s ability to conduct clinical trials;

 

   

administrative burdens of conducting clinical trials under multiple non-U.S. regulatory authority schema;

 

   

foreign exchange fluctuations; and

 

   

diminished protection of intellectual property in some countries.

Arsanis or its collaborators may fail to demonstrate safety and efficacy of any product candidates to the satisfaction of applicable regulatory authorities.

If the results of any clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with any product candidates, Arsanis may:

 

   

be delayed in obtaining marketing approval for its product candidates, if 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 or distribution restrictions or safety warnings;

 

   

be subject to changes in the way the product is administered;

 

   

be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;

 

   

have regulatory authorities withdraw, or suspend, their approval of the product or impose restrictions on its distribution in the form of a risk evaluation and mitigation strategy;

 

   

be subject to the addition of labeling statements, such as contraindications or warnings, including a black box warning;

 

   

be sued; or

 

   

experience damage to Arsanis’s reputation.

If serious adverse or undesirable side effects are identified during the development of any product candidate, Arsanis or its collaborators may need to abandon or limit development of that product candidate.

If any product candidates are associated with undesirable side effects or have characteristics that are unexpected, Arsanis 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 or raise other safety issues that delayed or prevented further development of the compound.

 

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If Arsanis or its collaborators elect or are forced to suspend or terminate any clinical trial of any product candidates, the commercial prospects of such product candidates will be harmed and Arsanis’s ability to generate product revenue from such product candidates will be delayed or eliminated. Any of these occurrences could materially harm its business, financial condition, results of operations and prospects.

The manufacture of biologic products is complex and manufacturers often encounter difficulties in production. If Arsanis or any of its third-party manufacturers encounter any loss of Arsanis’s master cell banks or if any of its third-party manufacturers encounter other difficulties, Arsanis’s ability to provide any product candidates for clinical trials or products, if approved, to patients could be delayed or halted.

The manufacture of biologic products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Arsanis and its collaborators and third-party manufacturers must comply with current good manufacturing practices, or cGMP, regulations and guidelines for the manufacturing of biologics used in clinical trials and, if approved, marketed products. Manufacturers of biotechnology products often encounter difficulties in production, particularly in scaling up and validating initial production. Furthermore, if microbial, viral or other contaminations are discovered in any product candidates or in the manufacturing facilities in which such product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Delays in raw materials availability and supply may also extend the period of time required to develop any product candidates.

All of Arsanis’s mAbs are manufactured by starting with cells that are stored in a cell bank. Arsanis has one master cell bank for each antibody manufactured in accordance with cGMP and multiple working cell banks and believes it would have adequate backup should any cell bank be lost in a catastrophic event. However, it is possible that Arsanis or its third-party manufacturers could lose multiple cell banks and have manufacturing severely impacted by the need to replace the cell banks. Arsanis cannot assure you that any stability or other issues relating to the manufacture of any product candidates or products will not occur in the future. Any delay or interruption in the supply of clinical trial supplies could delay the completion of planned clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require Arsanis to commence new clinical trials at additional expense or terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing of product candidates or products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls or other interruptions in the supply of product candidates or products. Arsanis may also have to take inventory write-offs and incur other charges and expenses for product candidates or products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or difficulties faced at any level of Arsanis’s supply chain could adversely affect its business and delay or impede the development and commercialization of any product candidates or products and could have an adverse effect on Arsanis’s business, prospects, financial condition and results of operations.

If the market opportunities for any product candidates are smaller than Arsanis believes they are, even assuming approval of a drug candidate, Arsanis’s business may suffer.

Arsanis’s projections of both the number of people who are affected by disease within its target indications, as well as the subset of these people who have the potential to benefit from treatment with any product candidates Arsanis may develop, are based on its beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, healthcare utilization databases and market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be lower than expected. Likewise, the potentially addressable patient population for each of Arsanis’s product candidates may be limited or may not be amenable to treatment with its product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect Arsanis’s results of operations and business.

 

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Arsanis faces substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than Arsanis does.

The biotechnology and pharmaceutical industries are characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. Arsanis faces substantial competition from many different sources, including large and specialty pharmaceutical and biotechnology companies, academic research institutions, government agencies and public and private research institutions.

If approved for the prevention of respiratory syncytial virus, or RSV, infection, products from Arsanis’s ASN500 program would compete with palivizumab, which is marketed by MedImmune as Synagis, the only approved therapy in this indication. Any ASN500 products may also compete with other mAb product candidates currently in clinical development in this indication, including MedImmune’s MEDI8897, which is in Phase 2 clinical development and Merck’s MK-1654, which is in Phase 1 clinical development.

Many of Arsanis’s potential competitors, alone or with their strategic partners, have substantially greater financial, technical and other resources, such as larger research and development, clinical, marketing and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of competitors. Arsanis’s commercial opportunity could be reduced or eliminated if competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that Arsanis may develop. Competitors also may obtain FDA or other regulatory approval for their products more rapidly or earlier than Arsanis may obtain approval for its products, which could result in Arsanis’s competitors establishing a strong market position before Arsanis is able to enter the market. Additionally, technologies developed by Arsanis’s competitors may render its potential product candidates uneconomical or obsolete, and Arsanis may not be successful in marketing its product candidates against competitors. In addition, the availability of Arsanis’s competitors’ products could limit the demand and the prices Arsanis is able to charge for any products that Arsanis may develop and commercialize.

Risks Related to Dependence on Third Parties

Arsanis may enter into collaborations with third parties to develop product candidates. If these collaborations are not successful, Arsanis’s business could be adversely affected.

As part of its strategy, Arsanis intends to seek to enter into collaborations with third parties for one or more of its programs or product candidates. For example, Arsanis outlicensed its preclinical-stage ASN200 and ASN300 programs to subsidiaries of Bravos Biosciences, LLC during the first half of 2018. Arsanis’s likely collaborators for any such collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. If Arsanis enters into any such arrangements with any third parties, Arsanis will likely have limited control over the amount and timing of resources that its collaborators dedicate to the development or commercialization of Arsanis’s product candidates. Arsanis’s ability to generate revenue from these arrangements will depend on its collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

Any collaborations Arsanis enters into in the future, may pose several risks, including the following:

 

   

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

 

   

collaborators may not perform their obligations as expected;

 

   

the clinical trials conducted as part of these collaborations may not be successful;

 

   

collaborators may not pursue development and/or commercialization of any product candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;

 

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

 

   

Arsanis may not have access to, or may be restricted from disclosing, certain information regarding product candidates being developed or commercialized under a collaboration and, consequently, may have limited ability to inform its stockholders about the status of such product candidates;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with Arsanis’s product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than Arsanis’s products candidates;

 

   

product candidates developed in collaboration with Arsanis may be viewed by any collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of Arsanis’s product candidates;

 

   

a collaborator with marketing and distribution rights to one or more of Arsanis’s product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of any such product candidate;

 

   

disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development of any product candidates, may cause delays or termination of the research, development or commercialization of such product candidates, may lead to additional responsibilities for Arsanis with respect to such product candidates or may result in litigation or arbitration, any of which would be time-consuming and expensive;

 

   

collaborators may not properly maintain or defend Arsanis’s intellectual property rights or may use Arsanis’s proprietary information in such a way as to invite litigation that could jeopardize or invalidate Arsanis’s intellectual property or proprietary information or expose Arsanis to potential litigation;

 

   

disputes may arise with respect to the ownership of intellectual property developed pursuant to Arsanis’s collaborations;

 

   

collaborators may infringe the intellectual property rights of third parties, which may expose Arsanis to litigation and potential liability; and

 

   

collaborations may be terminated for the convenience of the collaborator and, if terminated, Arsanis could be required to raise additional capital to pursue further development or commercialization of the applicable product candidates.

If Arsanis’s collaborations do not result in the successful development and commercialization of products, or if one of Arsanis’s collaborators terminates its agreement with Arsanis, Arsanis may not receive any future research funding or milestone or royalty payments under the collaboration. If Arsanis does not receive the funding it expects under these agreements, Arsanis’s development of product candidates could be delayed and Arsanis may need additional resources to develop its product candidates.

In addition, if any future collaborator terminates its agreement with Arsanis, Arsanis may find it more difficult to attract new collaborators and the perception of Arsanis in the business and financial communities could be adversely affected. All of the risks relating to product development, regulatory approval and commercialization described in this Quarterly Report on Form 10-Q also apply to the activities of any future collaborators.

 

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If Arsanis is not able to establish additional collaborations on commercially reasonable terms, Arsanis may have to alter its development and commercialization plans.

Arsanis may seek additional collaborations to advance the development of product candidates. Arsanis faces significant competition in seeking appropriate collaborators. Whether Arsanis reaches a definitive agreement for a collaboration will depend, among other things, upon its assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA, EMA or other regulatory authorities, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to Arsanis’s ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, the terms of any existing collaboration agreements, and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with Arsanis for its product candidate.

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

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

Arsanis expects to rely on third parties to conduct any future clinical trials and currently relies on third parties for some aspects of its research and preclinical studies, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, research or testing.

Arsanis does not expect to independently conduct any future clinical trials of any product candidates. Arsanis expects to rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct any future clinical trials. In addition, Arsanis currently relies and expects to continue to rely on third parties to conduct some aspects of its research and preclinical studies. Any of these third parties may terminate their engagements with Arsanis, some in the event of an uncured material breach and some at any time for convenience. If any of its relationships with these third parties terminate, Arsanis may not be able to enter into arrangements with alternative third parties or to do so on commercially reasonable terms. Switching or adding additional third parties involves additional cost and requires management’s time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, delays may occur in Arsanis’s product development activities. Although Arsanis seeks to carefully manage its relationships with third parties, Arsanis could encounter similar challenges or delays in the future and these challenges or delays could have a material adverse impact on its business, financial condition and prospects.

Arsanis’s reliance on third parties for research and development activities will reduce its control over these activities but will not relieve Arsanis of its responsibilities. For example, Arsanis is responsible for ensuring that each of its studies is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and reliance on third parties does not relieve Arsanis of its responsibility to comply with any

 

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such requirements and standards. Arsanis and these third parties are required to comply with GCP, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable regulatory authorities for all of its products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If Arsanis or any of its third parties fail to comply with applicable GCPs, the clinical data generated in Arsanis’s clinical trials may be deemed unreliable and the FDA, the EMA, or comparable regulatory authorities may require Arsanis to perform additional clinical trials before approving its marketing applications. Arsanis cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of its clinical trials comply with GCP regulations. In addition, Arsanis’s clinical trials must be conducted with product produced under cGMP regulations. Arsanis’s failure to comply with these regulations may require Arsanis to repeat clinical trials, which would delay the regulatory approval process. Arsanis also is required to register ongoing clinical trials and post the results of completed clinical trials on a U.S. government-sponsored database, clinicaltrials.gov, within certain timeframes. Similar requirements are applicable outside the United States. Failure to comply can result in fines, adverse publicity and civil and criminal sanctions.

Furthermore, third parties on whom Arsanis relies may also have relationships with other entities, some of which may be Arsanis’s competitors. In addition, these third parties are not Arsanis’s employees, and except for remedies available to Arsanis under its agreements with such third parties, Arsanis cannot control whether or not they devote sufficient time and resources to its clinical, non-clinical and preclinical programs. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Arsanis’s clinical protocols, regulatory requirements or for other reasons, Arsanis’s clinical trials may be extended, delayed or terminated and Arsanis may not be able to obtain, or may be delayed in obtaining, marketing approvals for its product candidates and will not be able to, or may be delayed in efforts to, successfully commercialize its products. As a result, Arsanis’s results of operations and the commercial prospects for its products would be harmed, costs could increase and ability to generate revenue could be delayed.

Arsanis’s reliance on third parties to manufacture product candidates will increase the risk that Arsanis will not have sufficient quantities of product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair its development or commercialization efforts.

Arsanis does not, and does not plan to, own or operate manufacturing facilities for the production of clinical or commercial supplies of any product candidates. Arsanis has limited personnel with experience in drug manufacturing and lack the resources and the capabilities to manufacture any product candidates on a clinical or commercial scale. Arsanis currently relies on third parties for supply of product candidates, and its strategy is to outsource all manufacturing of any product candidates and products to third parties.

In order to conduct any future clinical trials of any product candidates, Arsanis will need to have them manufactured in potentially large quantities. Arsanis’s third-party manufacturers may be unable to successfully increase the manufacturing capacity for any product candidates in a timely or cost-effective manner, or at all. In addition, quality issues may arise during scale-up activities and at any other time. For example, ongoing data on the stability of product candidates may shorten the expiry of such product candidates and lead to clinical trial material supply shortages in any future clinical trials, and potentially clinical trial delays. If these third-party manufacturers are unable to successfully scale up the manufacture of a product candidate in sufficient quality and quantity, the development, testing and clinical trials of that product candidate may be delayed or infeasible, and regulatory approval or commercial launch of that product candidate may be delayed or not obtained, which could significantly harm Arsanis’s business.

Arsanis’s use of new third-party manufacturers increases the risk of delays in production or insufficient supplies of product candidates as Arsanis transfers its manufacturing technology to these manufacturers and as they gain experience manufacturing Arsanis’s product candidates.

 

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Even after a third-party manufacturer has gained significant experience in manufacturing certain product candidates or even if Arsanis believes it has succeeded in optimizing the manufacturing process, there can be no assurance that such manufacturer will produce sufficient quantities of such product candidates in a timely manner or continuously over time, or at all.

Arsanis does not currently have any agreements with third-party manufacturers for the long-term commercial supply of any product candidates. In the future, Arsanis may be unable to enter into agreements with third-party manufacturers for commercial supplies of product candidates, or may be unable to do so on acceptable terms. Even if Arsanis is able to establish and maintain arrangements with third-party manufacturers, reliance on third-party manufacturers entails risks, including:

 

   

reliance on the third party for regulatory compliance and quality assurance;

 

   

the possible breach of the manufacturing agreement by the third party;

 

   

the possible misappropriation of Arsanis’s proprietary information, including trade secrets and know-how; and

 

   

the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for Arsanis.

Third-party manufacturers may not be able to comply with cGMP requirements or similar regulatory requirements outside the United States. Arsanis’s failure, or the failure of its third-party manufacturers, to comply with applicable requirements could result in sanctions being imposed on Arsanis, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and/or criminal prosecutions, any of which could significantly and adversely affect supplies of product candidates.

Any product candidates and products that Arsanis develops may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP requirements particularly for the development of mAbs, and that might be capable of manufacturing for Arsanis.

If the third parties that Arsanis engages to supply any materials or manufacture product for its preclinical tests and clinical trials should cease to continue to do so for any reason, Arsanis likely would experience delays in advancing these tests and trials while Arsanis identifies and qualifies replacement suppliers or manufacturers and Arsanis may be unable to obtain replacement supplies on favorable terms. In addition, if Arsanis is not able to obtain adequate supplies of its product candidates or the substances used to manufacture them, it will be more difficult for Arsanis to develop such product candidates and compete effectively.

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

Arsanis’s agreements with Adimab, LLC raise the potential for conflicts of interest.

Arsanis has entered into two agreements with Adimab, LLC, or Adimab, under which Arsanis was granted exclusive options to obtain ownership or exclusive worldwide licenses under specified patents relating to the development and commercialization of monoclonal antibodies. These agreements are important to Arsanis’s business and Arsanis has exercised certain of these options to a number of antibodies. Dr. Tillman U. Gerngross, the chairman of the Arsanis Board of Directors, is the Chief Executive Officer of Adimab. If there is a dispute between Arsanis and Adimab, Dr. Gerngross would have a conflict of interest because he simultaneously has a financial interest in and owes a fiduciary duty to both Adimab and Arsanis.

 

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Risks Related to the Commercialization of Product Candidates

If Arsanis or its collaborators are unable to establish sales, medical affairs and marketing capabilities or enter into agreements with third parties to market and sell product candidates, Arsanis may be unable to generate any product revenue.

Arsanis does not currently have a sales and marketing organization and has never commercialized a product. To successfully commercialize any products that may result from Arsanis’s development programs such as its ASN500 program Arsanis will need to develop these capabilities, either on its own or with others. The establishment and development of Arsanis’s own commercial and medical science liaison teams or the engagement of a contract sales force to discuss any products Arsanis may develop will be expensive and time-consuming and could delay any product launch. Moreover, Arsanis cannot be certain that Arsanis will be able to successfully develop this capability. Arsanis may seek to enter into collaborations with entities regarding product candidates to utilize their established marketing and distribution capabilities, but Arsanis may be unable to enter into such agreements on favorable terms, if at all. If any future collaborators do not commit sufficient resources to commercialize Arsanis’s products, or Arsanis is unable to develop the necessary capabilities on its own, Arsanis will be unable to generate sufficient product revenue to sustain its business. Arsanis competes with many well-funded and profitable pharmaceutical and biotechnology companies that currently have extensive and experienced medical affairs, marketing and sales operations to recruit, hire, train and retain marketing and sales personnel. Arsanis also faces competition in its search for third parties to assist with the sales and marketing efforts of product candidates. Without an internal team or the support of a third party to perform marketing, sales and medical affairs functions, Arsanis may be unable to compete successfully against these more established companies.

The hospital formulary approval, insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate hospital formulary approval, insurance coverage and reimbursement for its products, if approved, could limit Arsanis’s ability to market those products and decrease its ability to generate product revenue.

Arsanis expects that hospital formulary approval, insurance coverage and reimbursement of its products, if approved, by hospital, government and other third-party payors will be essential for most patients to be able to access these treatments. Accordingly, sales of any product candidates, if approved, will depend substantially on the extent to which the costs of such product candidates will be paid by hospitals, health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors. Hospital formulary approval, insurance coverage and reimbursement by other third-party payors may depend upon several factors, including the third-party payor’s determination that use of a product is:

 

   

a necessary and covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient population;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

Obtaining hospital formulary approval, insurance coverage and reimbursement for a product from third-party payors is a time-consuming and costly process that will require Arsanis to provide to the hospitals and payors supporting scientific, clinical and cost-effectiveness data. Arsanis may not be able to provide data sufficient to gain acceptance with respect to hospital formulary approval, insurance coverage and reimbursement. If hospital formulary approval, insurance coverage and reimbursement are not available, or are available only at limited levels, Arsanis may not be able to successfully commercialize any product candidates.

There is significant uncertainty related to hospital formulary approval, insurance coverage and reimbursement of newly approved products. In the United States, third-party payors, including government

 

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payors such as the Medicare and Medicaid programs, play an important role in determining the extent to which new drugs and biologics will be covered and reimbursed. It is difficult to predict what third-party payors will decide with respect to the insurance coverage and reimbursement for product candidates.

Outside the United States, international operations generally are subject to extensive government price controls and other market regulations, and an increasing emphasis on cost-containment initiatives in the European Union, Canada and other countries may put pricing pressure on Arsanis. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. In general, the prices of medicines under such systems are substantially lower than in the United States. Other countries may use different methods to keep the cost of medical products artificially low. Foreign price controls or other changes in pricing regulation could restrict the amount that Arsanis is able to charge for product candidates. Accordingly, in markets outside the United States, the reimbursement for Arsanis’s products may be reduced compared with the United States and may be insufficient to generate commercially reasonable product revenue.

Moreover, increasing efforts by hospital, government and other third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for product candidates. Arsanis expects to experience pricing pressures in connection with the sale of any product candidates due to the trend toward reducing hospital costs, managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes.

The commercial success of any product candidates will depend upon its degree of market acceptance by physicians, patients, hospitals, third-party payors and others in the medical community.

Even with the requisite approvals from the FDA in the United States, EMA in the European Union and other regulatory authorities internationally, the commercial success of product candidates, if approved, will significantly depend on the acceptance of physicians, hospitals and healthcare payors of product candidates as medically necessary, cost-effective and safe. Any product that Arsanis commercializes may not gain acceptance by physicians, hospitals, healthcare payors and others in the medical community. If these commercialized products do not achieve an adequate level of acceptance, Arsanis may not generate significant product revenue and may not become profitable. The degree of market acceptance of any product candidates, if approved for commercial sale, will depend on several factors, including:

 

   

the efficacy and safety of such product candidates as demonstrated in clinical trials;

 

   

the potential and perceived advantages of Arsanis’s product candidates over other treatments;

 

   

the cost effectiveness of treatment relative to alternative treatments;

 

   

the clinical indications for which the product candidate is approved by the FDA, the EMA or other regulatory body;

 

   

the willingness of physicians to prescribe new therapies over the existing standard of care and future new therapies;

 

   

the prevalence and severity of any side effects;

 

   

product labeling or product insert requirements of the FDA, EMA or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling, including any black box warning;

 

   

relative convenience and ease of administration;

 

   

Arsanis’s ability to educate the medical community and third-party payors about the benefit of its product candidates;

 

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the strength of marketing and distribution support;

 

   

the timing of market introduction of competitive products;

 

   

publicity concerning Arsanis’s products or competing products and treatments; and

 

   

sufficient third-party payor insurance coverage and reimbursement.

Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after it is launched.

If Arsanis obtains approval to commercialize any product candidates outside of the United States, a variety of risks associated with international operations could materially adversely affect its business.

Arsanis expects that it will be subject to additional risks in commercializing any product candidates outside the United States, including:

 

   

different regulatory requirements for approval of drugs and biologics in foreign countries;

 

   

reduced protection for intellectual property rights;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons, floods and fires.

Risks Related to Arsanis’s Business Operations

Arsanis is substantially dependent on its remaining employees to facilitate the consummation of a strategic transaction.

In August 2018, Arsanis undertook a reduction in workforce to reduce its workforce by approximately 44%. Arsanis expects to further reduce its remaining workforce, which consisted of 25 employees as of November 30, 2018, by approximately an additional 10 positions, or 40% of its current workforce, at various dates prior to the planned Merger. Arsanis’s ability to successfully complete a strategic transaction depends in large part on its ability to retain certain of its remaining personnel. Despite Arsanis’s efforts to retain these employees, one or more may terminate their employment with Arsanis on short notice. The loss of the services of any of these employees could potentially harm Arsanis’s ability to consummate the Merger, to run Arsanis’s day-to-day operations, as well as fulfill Arsanis’s reporting obligations as a public company.

Arsanis may experience difficulties in managing reductions in force.

Effecting its ongoing and planned reductions in workforce has, and is expected to continue to, place significant strains on management, Arsanis’s employees and its operational, financial and other resources. Furthermore, reductions in force involve certain additional costs, including severance and benefits payments to terminated employees, and Arsanis may also incur liabilities from early termination or assignment of contracts,

 

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potential litigation or other effects from such reduction in workforce. Such effects from the reduction in workforce could have a material adverse effect on Arsanis’s ability to execute on its business plan. There can be no assurance that Arsanis will be successful in implementing its reduction in workforce.

Product liability lawsuits against Arsanis could cause Arsanis to incur substantial liabilities and could limit commercialization of any product candidates that Arsanis may develop.

Arsanis faces an inherent risk of product liability exposure related to the testing of product candidates in clinical trials and may face an even greater risk if Arsanis commercializes any products that it may develop. If Arsanis cannot successfully defend itself against claims that its product candidates caused injuries, Arsanis could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any product candidates that Arsanis may develop;

 

   

loss of revenue;

 

   

substantial monetary awards to trial participants or patients;

 

   

significant time and costs to defend the related litigation;

 

   

withdrawal of clinical trial participants;

 

   

the inability to commercialize any product candidates that Arsanis may develop; and

 

   

injury to Arsanis’s reputation and significant negative media attention.

Arsanis’s insurance coverage may not be adequate to cover all liabilities that Arsanis may incur. Arsanis anticipates that it will need to increase its insurance coverage each time Arsanis commences a clinical trial and if Arsanis successfully commercializes any product candidate. Insurance coverage is increasingly expensive. Arsanis may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

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

Arsanis’s internal computer systems and those of any collaborators, contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While Arsanis has not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in Arsanis’s operations, it could result in a material disruption of Arsanis’s development programs and its business operations, whether due to a loss of its trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in Arsanis’s regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, Arsanis’s data or applications, or inappropriate disclosure of confidential or proprietary information, Arsanis could incur liability, its competitive position could be harmed and the further development and commercialization of its product candidates could be delayed.

Arsanis’s employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

Arsanis is exposed to the risk of fraud or other misconduct by its employees, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to:

 

   

comply with FDA regulations or the regulations applicable in the European Union and other jurisdictions;

 

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provide accurate information to the FDA, the EMA and other regulatory authorities;

 

   

comply with healthcare fraud and abuse laws and regulations in the United States and abroad;

 

   

comply with the U.S. Foreign Corrupt Practices Act, or FCPA, or other anti-corruption laws and regulations;

 

   

report financial information or data accurately; or

 

   

disclose unauthorized activities to Arsanis.

In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations regulate a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Other forms of misconduct could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA, EMA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to Arsanis’s reputation. Arsanis has adopted a code of conduct and implemented other internal controls applicable to all of its employees, but it is not always possible to identify and deter employee misconduct, and the precautions Arsanis takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Arsanis from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against Arsanis, and Arsanis is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.

The United Kingdom’s “Brexit” vote in favor of withdrawing from the European Union could adversely impact operations, make it more difficult for Arsanis to do business in Europe and impose additional regulatory costs and challenges in securing approval of its candidate products.

On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as “Brexit.” Thereafter, on March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the United Kingdom from the European Union will take effect either on the effective date of the withdrawal agreement or, in the absence of agreement, two years after the United Kingdom provided its notice of withdrawal.

It appears likely that this withdrawal will involve a process of lengthy negotiations between the United Kingdom and European Union member states to determine the future terms of the United Kingdom’s relationship with the European Union. This could lead to a period of considerable uncertainty and volatility, particularly in relation to United Kingdom financial and banking markets. Weakening of economic conditions or economic uncertainties tend to harm Arsanis’s business, and if such conditions emerge in the U.K. or in the rest of Europe, it may have a material adverse effect on operations and sales.

Currency exchange rates in the pound sterling and the euro with respect to each other and the U.S. dollar have already been adversely affected by Brexit and that may continue to be the case. In addition, depending on the terms of Brexit, the United Kingdom could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers which could make doing business in Europe more difficult.

Arsanis may also face new and additional regulatory costs and challenges from Brexit that could have a material adverse effect on operations. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the referendum could materially impact the regulatory regime with respect to the approval of Arsanis’s product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit

 

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or otherwise, would prevent Arsanis from commercializing product candidates in the United Kingdom and/or the European Union and restrict its ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, Arsanis may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for its product candidates, which could significantly and materially harm Arsanis’s business.

Arsanis might not be able to utilize a significant portion of net operating loss carryforwards and research and development tax credit carryforwards.

As of December 31, 2017, Arsanis had U.S. federal and state net operating loss carryforwards of $24.2 million and $20.4 million, respectively, which begin to expire in 2031 and 2036, respectively. In addition, as of December 31, 2017, Arsanis had foreign net operating loss carryforwards of $56.3 million, which do not expire. As of December 31, 2017, Arsanis also had U.S. federal and state research and development tax credit carryforwards of $0.3 million and $0.1 million, respectively, which begin to expire in 2032 and 2031, respectively. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset Arsanis’s future income tax liabilities. In addition, under Section 382 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Arsanis has not determined if it has experienced Section 382 ownership changes in the past and if a portion of net operating loss and tax credit carryforwards are subject to an annual limitation under Section 382. It is likely that the Merger will constitute an “ownership change” for purposes of Section 382 and that, therefore, Arsanis’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. In addition, Arsanis may experience ownership changes in the future as a result of subsequent changes in stock ownership, some of which may be outside of its control. If Arsanis determines that an ownership change has occurred and its ability to use historical net operating loss and tax credit carryforwards is materially limited, it would harm Arsanis’s future operating results by effectively increasing future tax obligations.

The recently passed comprehensive tax reform bill could adversely affect Arsanis’s business and financial condition.

On December 22, 2017, President Trump signed into law new legislation that significantly revised the Code. 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 income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, reduction of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and Arsanis’s business and financial condition could be adversely affected. In addition, it is uncertain how various states will respond to the newly enacted federal tax law. The impact of this tax reform on holders of Arsanis Common Stock is also uncertain and could be adverse. Arsanis urges its stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding its common stock.

Arsanis’s effective tax rate may fluctuate, and Arsanis may incur obligations in tax jurisdictions in excess of accrued amounts.

Arsanis is subject to taxation in numerous U.S. states and territories. As a result, Arsanis’s effective tax rate is derived from a combination of applicable tax rates in the various places that it operates. In preparing its

 

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financial statements, Arsanis estimates the amount of tax that will become payable in each of such places. Nevertheless, Arsanis’s effective tax rate may be different than experienced in the past due to numerous factors, including passage of the newly enacted federal income tax law, the consummation of the Merger, changes in the mix of profitability from state to state, the results of examinations and audits of tax filings, inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause Arsanis to experience an effective tax rate significantly different from previous periods or current expectations and may result in tax obligations in excess of amounts accrued in Arsanis’s financial statements.

Risks Related to Arsanis’s Intellectual Property

If Arsanis is unable to obtain and maintain patent protection for its products and technology, or if the scope of the patent protection obtained is not sufficiently broad or robust, its competitors could develop and commercialize products and technology similar or identical to Arsanis’s, and Arsanis’s ability to successfully commercialize products and technology may be adversely affected.

Arsanis’s success depends, in part, on its ability to obtain and maintain patent protection in the United States and other countries with respect to product candidates and technology. Arsanis and its licensors have sought, and intend to seek, to protect its proprietary position by filing patent applications in the United States and abroad related to product candidates and technology that are important to its business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has, in recent years, been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of patent rights are highly uncertain. Arsanis’s pending and future patent applications may not result in patents being issued which protect its technology or product candidates or which effectively prevent others from commercializing competitive technologies and product candidates. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, Arsanis cannot be certain that Arsanis or its licensors were the first to file a patent application relating to any particular aspect of a product candidate. Furthermore, if third parties have filed such patent applications, an interference proceeding in the United States can be initiated by such third party, or by the United States Patent and Trademark Office, or USPTO, itself, to determine who was the first to invent any of the subject matter covered by the patent claims of its applications.

The patent prosecution process is expensive, time-consuming and complex, and Arsanis may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that Arsanis will fail to identify patentable aspects of its research and development output before it is too late to obtain patent protection.

Periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and/or applications will be due to be paid to the USPTO, and various government patent agencies outside of the United States over the lifetime of Arsanis’s licensed patents and/or applications and any patent rights Arsanis owns or may own in the future. Arsanis relies, in part, on outside counsel or licensing partners to pay these fees due to the USPTO and to non-U.S. patent agencies. The USPTO and various non-U.S. government patent agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process. Arsanis employs reputable law firms and other professionals to help Arsanis comply and is also dependent on licensors to take the necessary action to comply with these requirements with respect to its licensed intellectual property. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market and this circumstance could have a material adverse effect on Arsanis’s business.

Filing, prosecuting and enforcing patents on product candidates in all countries throughout the world would be prohibitively expensive, and Arsanis’s intellectual property rights in some countries outside the United States

 

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could be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, Arsanis may not be able to prevent third parties from infringing its patents in all countries outside the United States, or from selling or importing products that infringe its patents in and into the United States or other jurisdictions. Competitors may use Arsanis’s technologies in jurisdictions where Arsanis has not obtained patent protection to develop its own products and, further, may export otherwise infringing products to territories where Arsanis has patent protection, but enforcement is not as strong as that in the United States. These products may compete with Arsanis’s products and patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Even if the patent applications Arsanis licenses or owns do issue as patents, they may not issue in a form that will provide any meaningful protection, prevent competitors or other third parties from competing with Arsanis or otherwise provide any competitive advantage. Arsanis’s competitors or other third parties may be able to circumvent its patents by developing similar or alternative technologies or products in a non-infringing manner. For example, there can be no assurance that Arsanis’s issued patents contain and pending applications will contain, if granted, claims of sufficient breadth to cover all antibodies alleged to be biosimilar versions of product candidates.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and Arsanis’s patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit Arsanis’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of technology and product candidates. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Arsanis’s intellectual property may not provide sufficient rights to exclude others from commercializing similar or identical products.

Changes in patent law could diminish the value of patents in general, thereby impairing Arsanis’s ability to protect product candidates.

As is the case with other biotechnology and pharmaceutical companies, Arsanis’s success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity, and obtaining and enforcing biopharmaceutical patents is costly, time consuming and inherently uncertain. The U.S. Supreme Court has ruled on several patent cases in recent years, and these decisions have narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Arsanis’s and its licensors’ ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on future decisions by the U.S. Congress, the federal courts and the USPTO, as well as similar bodies in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that may weaken Arsanis’s and its licensors’ ability to obtain new patents or to enforce existing patents and patents Arsanis and its licensors or any collaborators may obtain in the future.

Patent reform legislation enacted in the United States in 2011 could increase the uncertainties and costs surrounding the prosecution of Arsanis’s and its licensors’ patent applications and the enforcement or defense of Arsanis’s or its licensors’ issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation and switch the U.S. patent system from a “first to invent” system to a “first inventor to file” system. The USPTO has developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in

 

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particular, the first inventor to file provisions, became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of Arsanis’s business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of Arsanis’s or its licensors’ patent applications and the enforcement or defense of Arsanis’s or its licensors’ issued patents, all of which could have a material adverse effect on Arsanis’s business and financial condition.

Arsanis’s rights to develop and commercialize product candidates are subject, in part, to the terms and conditions of licenses granted to Arsanis by others, and, if Arsanis fails to comply with its obligations under these arrangements, Arsanis could lose such intellectual property rights or owe damages to the licensor of such intellectual property.

Arsanis is a party to several intellectual property license and option agreements, including agreements with the Bill & Melinda Gates Foundation, or the Gates Foundation, and Adimab, that are important to its business, and may need to obtain additional licenses from others to advance research or allow commercialization of any product candidates that Arsanis may develop. These and other licenses may not provide exclusive rights to use such intellectual property and technology in all relevant fields of use and in all territories in which Arsanis may wish to develop or commercialize technology and product candidates in the future. It is possible that Arsanis may be unable to obtain additional licenses at a reasonable cost or on reasonable terms, if at all. As a result, Arsanis may not be able to prevent competitors from developing and commercializing competitive products in territories included in all of its licenses. In that event, Arsanis may be required to expend significant time and resources to redesign its product candidates or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If unable to do so, Arsanis may be unable to develop or commercialize the affected product candidates, which could harm its business significantly.

Arsanis’s existing license agreements impose, and Arsanis expects that future license agreements will impose, various diligence, development and commercialization timelines, milestone payments, royalties and other obligations. If Arsanis fails to comply with its obligations under these agreements, or Arsanis is subject to a bankruptcy, the licensor may have the right to terminate the license, in which event Arsanis would not be able to market products covered by the license.

For example, Arsanis has entered into two agreements with Adimab under which Arsanis was granted exclusive options to obtain ownership or exclusive worldwide licenses under specified patents relating to the development and commercialization of monoclonal antibodies, and Arsanis has exercised certain of those options to a number of antibodies. Arsanis’s agreements with Adimab impose specified diligence, milestone payment, royalty, asset transfer payment, acquisition payment, prosecution, insurance and other obligations. If Arsanis fails to comply with its obligations under the licenses, Adimab may have the right to terminate the license agreements, in which event Arsanis might not be able to market, and may be required to transfer to Adimab its rights in, any product that is covered by the Adimab agreements, including ASN100. Termination of the license agreements may also result in Arsanis having to negotiate a new or reinstated license with less favorable terms, which would have a material adverse impact on its business. Further, under Arsanis’s agreements with Adimab, under certain circumstances, Adimab is permitted to transfer to third parties antibody libraries that may include antibodies that Arsanis has licensed from Adimab, as well as certain information regarding certain attributes of such antibodies.

In Arsanis’s existing license agreements, and Arsanis expects in future agreements, patent prosecution of its licensed technology is in certain cases controlled solely by the licensor, and Arsanis is in certain cases required to reimburse the licensor for their costs of patent prosecution. If Arsanis’s licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property Arsanis licenses from them, Arsanis could lose rights to the intellectual property or exclusivity with respect to those rights, and its competitors could market competing products covered by the intellectual property. Further, in each of Arsanis’s license agreements Arsanis is responsible for bringing any actions against any third party for infringing the patents licensed. Certain of Arsanis’s license agreements also require Arsanis to meet development thresholds to maintain the license,

 

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including establishing a set timeline for developing and commercializing products and minimum yearly diligence obligations in developing and commercializing the product. Disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

   

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

 

   

the extent to which Arsanis’s technology and processes infringe the intellectual property of the licensor that is not subject to the licensing agreement;

 

   

the sublicensing of patent and other rights under any collaborative development relationships;

 

   

Arsanis’s diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

   

the inventorship or ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Arsanis’s licensors and Arsanis and its partners; and

 

   

the priority of invention of patented technology.

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

In addition, the agreements under which Arsanis currently licenses intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what Arsanis believes to be the scope of its rights to the relevant intellectual property or technology, or increase what Arsanis believes to be its financial or other obligations under the relevant agreement, either of which could have a material adverse effect on its business, financial condition, results of operations and prospects.

The exercise by the Gates Foundation of its licenses to certain of Arsanis’s intellectual property and its development and commercialization of products that Arsanis is also developing and commercializing could have an adverse impact on its market position.

In April 2017, Arsanis entered into a letter agreement with the Gates Foundation. In connection with the letter agreement, the Gates Foundation purchased $8.0 million of shares of Arsanis’s Series D convertible preferred stock, and Arsanis committed to use the proceeds from the investment by the Gates Foundation solely to advance the development of a specified antibody program, which involves the monoclonal antibodies ASN-1, ASN-2 and ASN-3 and its product candidate ASN100. Arsanis agreed to grant to the Gates Foundation three non-exclusive, sublicensable licenses to research, develop, manufacture, seek regulatory approval for and commercialize antibodies that Arsanis or its research contractors discover in specified areas of global health that the Gates Foundation has identified as underinvested or disproportionately impacting poor and vulnerable populations, including ASN100, for the treatment of neonatal sepsis caused by S. aureus. Two of these non-exclusive licenses will only be granted upon request from the Gates Foundation, and the third, although it has already been granted, would only be exercisable by the Gates Foundation upon certain “trigger events,” as described further in the agreement.

In February 2017, Arsanis entered into a grant agreement with the Gates Foundation, which was amended and restated in August 2018. In connection with the grant agreement, the Gates Foundation granted Arsanis certain funds, which Arsanis is obligated to use to conduct preclinical development of monoclonal antibodies for the prevention of RSV infection in newborns, which Arsanis refers to as the RSV project.

In August 2018, Arsanis entered into a second grant agreement with the Gates Foundation pursuant to which the Gates Foundation granted Arsanis up to $1.1 million to conduct preclinical development activities for the RSV project that were not included in the February 2017 grant agreement, as amended and restated in August

 

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2018. In connection with the grant agreements, Arsanis has granted the Gates Foundation a non-exclusive, sublicensable license to research and develop, manufacture, seek regulatory approval for and commercialize antibodies developed under the agreements for the benefit of people in developing countries.

The exercise by the Gates Foundation of any of its non-exclusive licenses to certain of Arsanis’s intellectual property (or its right to obtain such licenses), and its development and commercialization of product candidates and products that Arsanis is also developing and commercializing, could have an adverse impact on Arsanis’s market position.

Arsanis may become involved in lawsuits to protect or enforce its intellectual property, which could be expensive, time consuming and unsuccessful.

Competitors may infringe Arsanis’s patents or the patents of its licensing partners, or Arsanis may be required to defend against claims of infringement. To counter infringement or unauthorized use claims or to defend against claims of infringement can be expensive and time consuming. Even if resolved in Arsanis’s favor, litigation or other legal proceedings relating to intellectual property claims may cause Arsanis to incur significant expenses and could distract technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of Arsanis Common Stock. Such litigation or proceedings could substantially increase operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Arsanis may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of Arsanis’s competitors may be able to sustain the costs of such litigation or proceedings more effectively than Arsanis could because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on Arsanis’s ability to compete in the marketplace.

In addition, many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property, particularly those relating to biotechnology products, which could make it difficult for Arsanis to stop the infringement of its patents or marketing of competing products in violation of Arsanis’s proprietary rights generally. Proceedings to enforce Arsanis’s patent rights in foreign jurisdictions could result in substantial costs and divert efforts and attention from other aspects of its business, could put Arsanis’s patents at risk of being invalidated or interpreted narrowly and its patent applications at risk of not issuing and could provoke third parties to assert claims against Arsanis. Arsanis may not prevail in any lawsuits that Arsanis initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Arsanis’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Arsanis owns, develops or licenses.

Issued patents covering any product candidates Arsanis develops could be found invalid or unenforceable if challenged in court. Arsanis may not be able to protect its trade secrets in court.

If one of Arsanis’s licensing partners or Arsanis initiates legal proceedings against a third party to enforce a patent covering one of its product candidates, the defendant could counterclaim that the patent covering Arsanis’s product candidate is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description or non-enablement. In addition, patent validity challenges may, under certain circumstances, be based upon non-statutory obviousness-type double patenting, which, if successful, could result in a finding that the claims are invalid for obviousness-type double patenting or the loss of patent term, including a patent term adjustment

 

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granted by the USPTO, if a terminal disclaimer is filed to obviate a finding of obviousness-type double patenting. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions. Such proceedings could result in the revocation or cancellation of or amendment to Arsanis’s patents in such a way that they no longer cover its product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, Arsanis cannot be certain that there is no invalidating prior art of which the patent examiner and Arsanis or its licensing partners were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, Arsanis could lose at least part, and perhaps all, of the patent protection on one or more of its product candidates. Such a loss of patent protection could have a material adverse impact on Arsanis’s business.

In addition to the protection afforded by patents, Arsanis relies on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that Arsanis elects not to patent, processes for which patents are difficult to enforce and any other elements of its product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect, and some courts inside and outside the United States are less willing or unwilling to protect trade secrets. Arsanis seeks to protect its proprietary technology and processes, in part, by entering into confidentiality agreements with Arsanis’s employees, consultants, scientific advisors and contractors. Arsanis cannot guarantee that Arsanis has entered into such agreements with each party that may have or have had access to trade secrets or proprietary technology and processes. Arsanis also seeks to preserve the integrity and confidentiality of its data and trade secrets by maintaining physical security of its premises and physical and electronic security of its information technology systems. While Arsanis has confidence in these individuals, organizations and systems, agreements or security measures may be breached, and Arsanis may not have adequate remedies for any breach. In addition, Arsanis’s trade secrets may otherwise become known or be independently discovered by competitors.

Third parties may initiate legal proceedings alleging that Arsanis is infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of Arsanis’s business.

Arsanis’s commercial success depends upon its ability and the ability of any collaborators to develop, manufacture, market and sell its product candidates and use proprietary technologies without infringing the proprietary rights and intellectual property of third parties. Arsanis cannot provide any assurances that third-party patents do not exist which might be enforced against its current manufacturing methods, product candidates or future methods or products, resulting in either an injunction prohibiting Arsanis’s manufacture or sales, or, with respect to Arsanis’s sales, an obligation on Arsanis’s part to pay royalties and/or other forms of compensation to third parties. The biotechnology and pharmaceutical industries are characterized by extensive and complex litigation regarding patents and other intellectual property rights. Arsanis may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to its product candidates and technology, including interference proceedings, post grant review and inter partes review before the USPTO. The risks of being involved in such litigation and proceedings may also increase as any product candidates that Arsanis develops approach commercialization and as Arsanis gains greater visibility as a public company. Third parties may assert infringement claims against Arsanis based on existing patents or patents that may be granted in the future, regardless of their merit. There is a risk that third parties may choose to engage in litigation with Arsanis to enforce or to otherwise assert their patent rights. Even if Arsanis believes such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed, which could materially and adversely affect its ability to commercialize any product candidates or technologies covered by the asserted third-party patents. In order to successfully challenge the validity of any such U.S. patent in federal court, Arsanis would need to overcome a presumption of validity.

 

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As this burden is a high one requiring Arsanis to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent.

If Arsanis is found to infringe a third party’s valid and enforceable intellectual property rights, Arsanis could be required to obtain a license from such third party to continue developing, manufacturing and marketing Arsanis’s product candidates and technology. However, Arsanis may not be able to obtain any required license on commercially reasonable terms or at all. Even if Arsanis were able to obtain a license, it could be non-exclusive, thereby giving competitors and other third parties access to the same technologies licensed to Arsanis, and it could require Arsanis to make substantial licensing and royalty payments. Arsanis could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technology or product candidates. In addition, Arsanis could be found liable for monetary damages, including treble damages and attorneys’ fees, if Arsanis is found to have willfully infringed a patent or other intellectual property right. A finding of infringement could prevent Arsanis from manufacturing and commercializing its product candidates or force Arsanis to cease some of its business operations, which could materially harm Arsanis’s business. Claims that Arsanis has misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on Arsanis’s business, financial condition, results of operations and prospects.

Others may claim an ownership interest in Arsanis’s intellectual property and product candidates, which could expose Arsanis to litigation and have a significant adverse effect on its prospects.

While Arsanis is presently unaware of any claims or assertions by third parties with respect to its patents or other intellectual property, Arsanis cannot guarantee that a third party will not assert a claim or an interest in any of such patents or intellectual property. For example, a third party may claim an ownership interest in one or more of Arsanis’s, or its licensors’, patents or other proprietary or intellectual property rights. A third party could bring legal actions against Arsanis and seek monetary damages or enjoin clinical testing, manufacturing or marketing of the affected product candidate or product. If Arsanis becomes involved in any litigation, it could consume a substantial portion of Arsanis’s resources and cause a significant diversion of effort by technical and management personnel. If any such action is successful, in addition to any potential liability for damages, Arsanis could be required to obtain a license to continue to manufacture or market the affected product candidate or product, in which case Arsanis could be required to pay substantial royalties or grant cross-licenses to patents. Arsanis cannot, however, assure you that any such license would be available on acceptable terms, if at all. Ultimately, Arsanis could be prevented from commercializing a product, or forced to cease some aspect of its business operations as a result of claims of patent infringement or violation of other intellectual property rights. Further, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of any adverse party. This is especially true in intellectual property cases, which may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree. Any of the foregoing could have a material adverse effect on Arsanis’s business, financial condition, results of operations or prospects.

If Arsanis is unable to protect the confidentiality of its proprietary information, the value of Arsanis’s technology and products could be adversely affected.

Trade secrets and know-how can be difficult to protect. To maintain the confidentiality of trade secrets and proprietary information, Arsanis enters into confidentiality agreements with its employees, consultants, collaborators and others upon the commencement of their relationships with Arsanis. These agreements require that all confidential information developed by the individual or made known to the individual by Arsanis during the course of the individual’s relationship with Arsanis be kept confidential and not disclosed to third parties. Arsanis’s agreements with employees and personnel policies also provide that any inventions conceived by the individual in the course of rendering services to Arsanis shall be its exclusive property. However, Arsanis may not obtain these agreements in all circumstances, and individuals with whom Arsanis has these agreements may

 

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not comply with their terms. Thus, despite such agreement, there can be no assurance that such inventions will not be assigned to third parties. In the event of unauthorized use or disclosure of Arsanis’s trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection, particularly for Arsanis’s trade secrets or other confidential information. To the extent that Arsanis’s employees, consultants or contractors use technology or know-how owned by third parties in their work for Arsanis, disputes may arise between Arsanis and those third parties as to the rights in related inventions. To the extent that an individual who is not obligated to assign rights in intellectual property to Arsanis is rightfully an inventor of intellectual property, Arsanis may need to obtain an assignment or a license to that intellectual property from that individual, or a third party or from that individual’s assignee. Such assignment or license may not be available on commercially reasonable terms or at all.

Adequate remedies may not exist in the event of unauthorized use or disclosure of proprietary information. The disclosure of Arsanis’s trade secrets would impair its competitive position and may materially harm Arsanis’s business, financial condition and results of operations. Costly and time-consuming litigation could be necessary to enforce and determine the scope of Arsanis’s proprietary rights, and failure to maintain trade secret protection could adversely affect its competitive business position. In addition, others may independently discover or develop Arsanis’s trade secrets and proprietary information, and the existence of Arsanis’s own trade secrets affords no protection against such independent discovery. For example, a public presentation in the scientific or popular press on the properties of Arsanis’s product candidates could motivate a third party, despite any perceived difficulty, to assemble a team of scientists having backgrounds similar to those of Arsanis’s employees to attempt to independently reverse engineer or otherwise duplicate antibody technologies to replicate Arsanis’s success.

Arsanis may be subject to claims asserting that its employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what Arsanis regards as its own intellectual property.

Many of Arsanis’s employees, consultants or advisors are currently, or were previously, employed at universities or other biotechnology or pharmaceutical companies, including its competitors or potential competitors. Although Arsanis tries to ensure that its employees, consultants and advisors do not use the proprietary information or know-how of others in their work, Arsanis may be subject to claims that these individuals, or Arsanis, have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer, or that patents and applications Arsanis has filed to protect inventions of these employees, even those related to one or more of its product candidates, are rightfully owned by their former or current employer. Litigation may be necessary to defend against these claims. If Arsanis fails in defending any such claims, in addition to paying monetary damages, Arsanis may lose valuable intellectual property rights or personnel. Even if Arsanis is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

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

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

Arsanis has not yet registered trademarks in its potential markets. Any registered trademarks or trade names may be challenged, circumvented or declared generic or determined to be infringing on other marks. Arsanis may

 

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not be able to protect its rights to these trademarks and trade names, which Arsanis needs to build name recognition among potential partners or customers in markets of interest. At times, competitors may adopt trade names or trademarks similar to Arsanis’s, thereby impeding Arsanis’s ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of Arsanis’s registered or unregistered trademarks or trade names. Over the long term, if Arsanis is unable to establish name recognition based on its trademarks and trade names, then Arsanis may not be able to compete effectively and its business may be adversely affected. Arsanis’s efforts to enforce or protect proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact its financial condition or results of operations.

Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by Arsanis’s intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect its business or permit Arsanis to maintain its competitive advantage. For example:

 

   

others may be able to make products that are similar to product candidates Arsanis develops but that are not covered by the claims of the patents that Arsanis owns or licenses or may own in the future;

 

   

Arsanis, or any partners or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that Arsanis licenses or may own in the future;

 

   

Arsanis, or any partners or collaborators, might not have been the first to file patent applications covering certain of Arsanis’s or their inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of Arsanis’s technologies without infringing its owned or licensed intellectual property rights;

 

   

it is possible that Arsanis’s pending licensed patent applications or those that Arsanis may own in the future will not lead to issued patents;

 

   

issued patents that Arsanis holds rights to may be held invalid or unenforceable, including as a result of legal challenges by its competitors;

 

   

Arsanis’s competitors might conduct research and development activities in countries where Arsanis does not have patent rights and then use the information learned from such activities to develop competitive products for sale in major commercial markets;

 

   

Arsanis may not develop additional proprietary technologies that are patentable;

 

   

the patents of others may have an adverse effect on Arsanis’s business; and

 

   

Arsanis may choose not to file a patent for certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

Should any of these events occur, they could significantly harm Arsanis’s business, financial condition, results of operations and prospects.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

The regulatory approval processes of the FDA, the EMA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if Arsanis is ultimately unable to obtain regulatory approval for any product candidates, Arsanis’s business will be substantially harmed.

The time required to obtain approval by the FDA is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of

 

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the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Arsanis has not obtained regulatory approval for any product candidate and it is possible that none of Arsanis’s existing product candidates or any product candidates Arsanis may seek to develop in the future will ever obtain regulatory approval.

Any product candidates that Arsanis develops could fail to receive regulatory approval for many reasons, including the following:

 

   

the FDA may disagree with the design or implementation of Arsanis’s clinical trials;

 

   

Arsanis may be unable to demonstrate to the satisfaction of the FDA that a product candidate is safe, pure and potent or effective for its proposed indication;

 

   

results of clinical trials may not meet the evidentiary standards required by the FDA for approval;

 

   

Arsanis may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

   

FDA may disagree with Arsanis’s interpretation of data from preclinical studies or clinical trials;

 

   

data collected from clinical trials of Arsanis’s product candidates may not be sufficient to support the submission of a biologics license application, or BLA, to the FDA or other submission or to obtain regulatory approval in the United States;

 

   

FDA may find deficiencies with or fail to approve the manufacturing processes or facilities of third-party manufacturers with which Arsanis contracts for clinical and commercial supplies; and

 

   

the approval policies or regulations of the FDA may significantly change in a manner rendering Arsanis’s clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in Arsanis’s failing to obtain regulatory approval to market any product candidates, which would significantly harm its business, results of operations and prospects. The FDA has substantial discretion in the approval process, and determining when or whether regulatory approval will be obtained for any product candidates. Even if Arsanis believes the data collected from clinical trials of its product candidates are promising, such data may not be sufficient to support approval by the FDA.

In addition, even if Arsanis were to obtain approval, regulatory authorities may approve any of its product candidates for fewer or more limited indications than Arsanis requests, may not approve the price Arsanis intends to charge for its products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for product candidates.

Arsanis, or any future collaborator, may not be able to obtain orphan drug designation or orphan drug exclusivity for product candidates.

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

Even if Arsanis, or any future collaborator, obtains orphan drug designation for a product candidate, Arsanis, or they, may not be able to obtain orphan drug exclusivity for that product candidate. Generally, a product with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first

 

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marketing approval for the indication for which it has such designation, in which case the FDA or the EMA will be precluded from approving another marketing application for the same drug for that indication for the applicable exclusivity period. The applicable exclusivity period is seven years in the United States and 10 years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or the EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

Even if Arsanis, or any future collaborator, obtains orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because the FDA has taken the position that, under certain circumstances, another drug with the same active moiety can be approved for the same condition. Specifically, the FDA’s regulations provide that it can approve another drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

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

A Fast Track designation by the FDA may not actually lead to a faster development, regulatory review or approval process.

If a product is intended for the treatment of a serious or life-threatening condition and the product demonstrates the potential to address unmet needs for this condition, the treatment sponsor may apply for FDA Fast Track designation. Fast Track designation does not ensure that Arsanis will experience a faster development, regulatory review or approval process compared to conventional FDA procedures. Additionally, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from Arsanis’s clinical development program.

Even if Arsanis completes the necessary preclinical and clinical studies, the marketing approval process is expensive, time consuming and uncertain and may prevent Arsanis or any future collaborators from obtaining approvals for the commercialization of product candidates. As a result, Arsanis cannot predict when or if, and in which territories, Arsanis, or any future collaborator, will obtain marketing approval to commercialize a product candidate.

The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drug products are subject to extensive regulation by the FDA, EMA and other regulatory authorities, and regulations may differ from country to country. Arsanis, and any future collaborators, are not permitted to market product candidates in the United States or in other countries until Arsanis, or they, receives approval of a BLA from the FDA, approval of a marketing authorization application, or MAA, from the EMA, or marketing approval from other applicable regulatory authorities. Arsanis is in the early stages of product candidate development and is subject to the risks of failure inherent in that process. Arsanis has not submitted an application for or received marketing approval for any product candidate in the United States, Europe or in any other jurisdiction. Arsanis has not yet been successful at conducting and managing the clinical trials necessary to obtain marketing approvals, including FDA approval of a BLA and EMA approval of an MAA.

 

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The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved.

In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that Arsanis’s data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical studies could delay, limit or prevent marketing approval of a product candidate. Any marketing approval Arsanis, or any future collaborator, ultimately obtains may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

Any delay in obtaining or failure to obtain required approvals could materially adversely affect Arsanis’s ability or that of any future collaborators to generate revenue from the particular product candidate, which likely would result in significant harm to Arsanis’s financial position and adversely impact its stock price.

Failure to obtain marketing approval in foreign jurisdictions would prevent any product candidates Arsanis’s develops from being marketed abroad.

In order to market and sell Arsanis’s products in the European Union and many other jurisdictions, Arsanis, and any future collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. Arsanis, and any future collaborators, may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.

In many countries outside the United States, a product candidate must also be approved for reimbursement before it can be sold in that country. In some cases, the price that Arsanis intends to charge for its products, if approved, is also subject to approval. Obtaining non-U.S. regulatory approvals and compliance with non-U.S. regulatory requirements could result in significant delays, difficulties and costs for Arsanis and its collaborators and could delay or prevent the introduction of product candidates in certain countries. In addition, if Arsanis or its collaborators fail to obtain the non-U.S. approvals required to market product candidates outside the United States or if Arsanis or its collaborators fail to comply with applicable non-U.S. regulatory requirements, Arsanis’s target market will be reduced and its ability to realize the full market potential of product candidates will be harmed and Arsanis’s business, financial condition, results of operations and prospects may be adversely affected.

Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as “Brexit.” On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, Brexit could materially impact the regulatory regime with respect to the approval of any product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent Arsanis from commercializing any product candidates in the United Kingdom and/or the European Union and restrict Arsanis’s ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, Arsanis may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for Arsanis’s product candidates, which could significantly and materially harm its business.

 

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Even if Arsanis, or any future collaborator, obtains marketing approvals for any product candidates Arsanis develops, the terms of approvals and ongoing regulation of its products may limit how Arsanis, or they, manufacture and market its products, which could materially impair Arsanis’s ability to generate revenue.

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

In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. Arsanis, its third-party manufacturers, any future collaborators and their third-party manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.

Accordingly, assuming Arsanis, or any future collaborator, receives marketing approval for any product candidates, Arsanis, and any future collaborators, and Arsanis’s and their third-party manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.

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

Any product candidates for which Arsanis, or any future collaborators, obtains marketing approval in the future could be subject to post-marketing restrictions or withdrawal from the market and Arsanis, or any future collaborators, may be subject to substantial penalties if Arsanis, or they, fails to comply with regulatory requirements or if Arsanis, or they, experiences unanticipated problems with its products following approval.

Any product candidates for which Arsanis, or any future collaborators, obtains marketing approval in the future, as well as the manufacturing processes, post-approval studies and measures, labeling, advertising and promotional activities for such product, among other things, will be subject to continual requirements of and review by the FDA, EMA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation Strategy, or REMs.

The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions

 

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of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if Arsanis, or any future collaborators, does not market any product candidates for which Arsanis, or they, receives marketing approval for only their approved indications, Arsanis, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the Federal Food, Drug, and Cosmetic Act and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state healthcare fraud and abuse laws and state consumer protection laws.

In addition, later discovery of previously unknown side effects or other problems with Arsanis’s products or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

   

restrictions on such products, manufacturers or manufacturing processes;

 

   

restrictions on the labeling or marketing of a product;

 

   

restrictions on product distribution or use;

 

   

requirements to conduct post-marketing studies or clinical trials;

 

   

warning letters or untitled letters;

 

   

withdrawal of the products from the market;

 

   

refusal to approve pending applications or supplements to approved applications that Arsanis submits;

 

   

recall of products;

 

   

restrictions on coverage by third-party payors;

 

   

fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of marketing approvals, including license revocation;

 

   

refusal to permit the import or export of products;

 

   

product seizure; and

 

   

injunctions or the imposition of civil or criminal penalties.

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

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

Arsanis also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact Arsanis’s business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. An under-staffed FDA could result in delays in the FDA’s responsiveness or in its ability to review submissions or applications, issue regulations or guidance, or implement

 

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or enforce regulatory requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, which requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within the Office of Management and Budget on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one provisions and other previously issued executive orders relating to the review of federal regulations, however it is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, Arsanis’s business may be negatively impacted.

Arsanis’s relationships with healthcare providers and physicians and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose Arsanis to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any drugs for which Arsanis obtains marketing approval. Arsanis’s future arrangements with third-party payors, healthcare providers and physicians may expose Arsanis to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Arsanis markets, sells and distributes any drugs for which it obtains marketing approval. These include the following:

 

   

Anti-Kickback Statute—the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

 

   

False Claims Act—the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal healthcare program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500 to $11,000 per false claim;

 

   

HIPAA—the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters, and, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms and technical safeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health information;

 

   

Transparency Requirements—federal laws require applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals; and

 

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Analogous State and Foreign Laws—analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws, can apply to sales or marketing arrangements and claims involving healthcare items or services and are generally broad and are enforced by many different federal and state agencies as well as through private actions.

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

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

The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is also prohibited in the European Union. The provision of benefits or advantages to physicians is governed by the national anti-bribery laws of European Union Member States, such as the U.K. Bribery Act 2010, or the Bribery Act. Infringement of these laws could result in substantial fines and imprisonment.

Payments made to physicians in certain European Union Member States must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization and/or the regulatory authorities of the individual European Union Member States. These requirements are provided in the national laws, industry codes or professional codes of conduct, applicable in the European Union Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.

The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the European Union, including personal health data, is subject to the E.U. General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the European Union, including the United States, and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR will be a rigorous and time-intensive process that may increase Arsanis’s cost of doing business or require Arsanis to change its business practices, and despite those efforts, there is a risk that Arsanis may be subject to fines and penalties, litigation, and reputational harm in connection with its European activities.

 

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Recently enacted and future legislation may increase the difficulty and cost for Arsanis and any future collaborators to obtain marketing approval of and commercialize product candidates and affect the prices Arsanis, or they, may obtain.

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

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that Arsanis receives for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

In March 2010, then-President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA. Among the provisions of the ACA of importance to Arsanis’s business, including, without limitation, its ability to commercialize and the prices Arsanis may obtain for any product candidates that are approved for sale, are the following:

 

   

an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic products;

 

   

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

 

   

expansion of federal healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;

 

   

extension of manufacturers’ Medicaid rebate liability;

 

   

expansion of eligibility criteria for Medicaid programs;

 

   

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

 

   

new requirements to report financial arrangements with physicians and teaching hospitals;

 

   

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

 

   

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

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by

 

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Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices Arsanis may obtain for any product candidates for which Arsanis may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

Arsanis expects that these healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that Arsanis receives for any approved product and/or the level of reimbursement physicians receive for administering any approved product Arsanis might bring to market. Reductions in reimbursement levels may negatively impact the prices Arsanis receives or the frequency with which its products are prescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. In May 2017, the U.S. House of Representatives passed legislation known as the American Health Care Act of 2017. Thereafter, the Senate Republicans introduced and then updated a bill to replace the ACA known as the Better Care Reconciliation Act of 2017. The Senate Republicans also introduced legislation to repeal the ACA without companion legislation to replace it, and a “skinny” version of the Better Care Reconciliation Act of 2017. In addition, the Senate considered proposed healthcare reform legislation known as the Graham-Cassidy bill. None of these measures was passed by the U.S. Senate.

The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In October 2017, the President signed a second Executive Order allowing for the use of association health plans and short-term health insurance, which may provide fewer health benefits than the plans sold through the ACA exchanges. At the same time, the Administration announced that it will discontinue the payment of cost-sharing reduction, or CSR, payments to insurance companies until Congress approves the appropriation of funds for such CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. A bipartisan bill to appropriate funds for CSR payments was introduced in the Senate, but the future of that bill is uncertain.

More recently, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise. Further, each chamber of Congress has put forth multiple bills designed to repeal or repeal and replace portions of the ACA. Although none of these measures has been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the ACA. Congress will likely consider other legislation to replace elements of the ACA during the next Congressional session.

Arsanis will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on its business. It is possible that repeal and replacement initiatives, if enacted into law, could ultimately result in

 

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fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. Accordingly, such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that Arsanis may successfully develop and for which Arsanis may obtain marketing approval and may affect its overall financial condition and ability to develop and commercialize product candidates. While the timing and scope of any potential future legislation to repeal and replace ACA provisions is highly uncertain in many respects, it is also possible that some of the ACA provisions that generally are not favorable for the research-based pharmaceutical industry could also be repealed along with ACA coverage expansion provisions.

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

In addition, on May 11, 2018, the Administration issued a plan to lower drug prices. Under this blueprint for action, the Administration indicated that the Department of Health and Human Services (HHS) will: take steps to end the gaming of regulatory and patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics to boost price competition; evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to and lower the cost of new drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessive pricing by relying more on value-based pricing by expanding outcome-based payments in Medicare and Medicaid; work to give Part D plan sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be negotiated for a lower price by Part D plans, and improving the design of the Part B Competitive Acquisition Program; update Medicare’s drug-pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that prevent pharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D plan members be provided with an annual statement of plan payments, out-of-pocket spending, and drug price increases.

At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for Arsanis’s products, once approved, or put pressure on product pricing. Arsanis expects that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for Arsanis’s product candidates or additional pricing pressures.

Moreover, legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical drugs. Arsanis cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed,

 

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or what the impact of such changes on the marketing approvals of Arsanis drug candidates, if any, may be. In addition, increased scrutiny by Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject Arsanis and any future collaborators to more stringent drug labeling and post-marketing testing and other requirements.

Arsanis is subject to anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing Arsanis’s operations. If Arsanis fails to comply with these laws, Arsanis could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect its business, results of operations and financial condition.

Arsanis’s operations are subject to anti-corruption laws, including the Bribery Act, the FCPA and other anti-corruption laws that apply in countries where Arsanis does business and may do business in the future. The Bribery Act, FCPA and these other laws generally prohibit Arsanis, its officers and employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. Arsanis may in the future operate in jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and may participate in collaborations and relationships with third parties whose actions could potentially subject Arsanis to liability under the Bribery Act, FCPA or local anti-corruption laws. In addition, Arsanis cannot predict the nature, scope or effect of future regulatory requirements to which its international operations might be subject or the manner in which existing laws might be administered or interpreted.

Arsanis is also subject to other laws and regulations governing its international operations, including regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, which Arsanis collectively refers to as Trade Control Laws.

There is no assurance that Arsanis will be completely effective in ensuring its compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control Laws. If Arsanis is not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control Laws, Arsanis may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on its business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control Laws by U.K., U.S. or other authorities could also have an adverse impact on Arsanis’s reputation, business, results of operations and financial condition.

If Arsanis fails to comply with environmental, health and safety laws and regulations, Arsanis could become subject to fines or penalties or incur costs that could significantly harm its business.

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

Arsanis maintains workers’ compensation insurance to cover for costs and expenses Arsanis may incur due to injuries to its employees resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities. However, Arsanis does not maintain insurance for environmental

 

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liability or toxic tort claims that may be asserted against Arsanis. In addition, Arsanis may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair research, development or production efforts, which could adversely affect its business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

Risks Related to Ownership of Arsanis Common Stock

The price of Arsanis Common Stock is volatile and may fluctuate substantially, which could result in substantial losses for purchasers of its common stock.

Arsanis’s stock price is volatile. The stock market in general, and the market for biopharmaceutical companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for Arsanis Common Stock may be influenced by many factors, including:

 

   

results of clinical trials of its product candidates or those of competitors;

 

   

the success of competitive products or technologies;

 

   

commencement or termination of collaborations;

 

   

announcements regarding potential strategic transactions;

 

   

regulatory or legal developments in the United States and other countries;

 

   

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

   

the recruitment or departure of key personnel;

 

   

the level of expenses related to any of its product candidates or clinical development programs;

 

   

the results of efforts to discover, develop, acquire or in-license additional product candidates;

 

   

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

   

variations in financial results or those of companies that are perceived to be similar to Arsanis;

 

   

changes in the structure of healthcare payment systems;

 

   

market conditions in the pharmaceutical and biotechnology sectors;

 

   

general economic, industry and market conditions; and

 

   

the other factors described in this “Risk Factors” section.

If any of the foregoing matters were to occur, or if Arsanis’s operating results fall below the expectations of investors or securities analysts, the price of its common stock could decline substantially. For example, following Arsanis’s announcement of the discontinuation of its Phase 2 clinical trial of ASN100 as a result of the DRC’s futility determination, the price of Arsanis Common Stock substantially declined. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation often has been instituted against that company. Such litigation, if instituted against Arsanis, could cause Arsanis to incur substantial costs to defend such claims and divert management’s attention and resources, which could seriously harm its business, financial condition, results of operations and prospects.

Arsanis’s executive officers, directors and principal stockholders maintain the ability to control all matters submitted to stockholders for approval.

Arsanis’s executive officers and directors, combined with its stockholders who own more than 5% of its outstanding common stock and their affiliates, in the aggregate, beneficially own shares representing more than a

 

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majority of Arsanis’s outstanding common stock. In addition, three of Arsanis’s directors are affiliated with stockholders who each own more than 5% of its outstanding common stock. If these stockholders were to act together, they would be able to control all matters submitted to Arsanis’s stockholders for approval, as well as management and affairs. For example, these persons, if they act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of Arsanis’s assets. This concentration of voting power could delay or prevent an acquisition of Arsanis’s company on terms that other stockholders may desire or result in management of Arsanis’s company that its public stockholders disagree with.

A significant portion of Arsanis’s total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of its common stock to drop significantly, even if Arsanis’s business is performing well.

Sales of a substantial number of shares of Arsanis Common Stock in the public market could occur at any time, subject to compliance with applicable securities law. These sales, or the perception in the market that holders of a large number of shares intend to sell shares, could reduce the market price of Arsanis Common Stock.

If securities analysts do not publish research or reports about Arsanis’s business or if they publish negative evaluations of its stock, the price of Arsanis’s stock could decline.

The trading market for Arsanis Common Stock will rely, in part, on the research and reports that industry or financial analysts publish about Arsanis or its business. Arsanis does not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of Arsanis, the trading price of its stock would likely decrease. Even if Arsanis does obtain analyst coverage, if one or more of the analysts covering its business downgrade their evaluations of Arsanis’s stock, the price of its stock could decline. If one or more of these analysts cease to cover Arsanis’s stock, Arsanis could lose visibility in the market for its stock, which in turn could cause its stock price to decline.

An active trading market for Arsanis Common Stock may not be sustained.

Arsanis’s shares of common stock began trading on the Nasdaq Global Market on November 16, 2017. Given the limited trading history of its common stock, there is a risk that an active trading market for Arsanis’s shares will not be sustained, which could put downward pressure on the market price for its common stock and thereby affect the ability of Arsanis’s stockholders to sell their shares. An inactive trading market may also impair Arsanis’s ability to raise capital to continue to fund operations by selling shares and may impair its ability to acquire other companies or technologies by using Arsanis’s shares as consideration.

If Arsanis fails to continue to meet the requirements for continued listing on the Nasdaq Global Market, its common stock could be delisted from trading, which would decrease the liquidity of its common stock and ability to raise additional capital.

Arsanis Common Stock is listed for quotation on the Nasdaq Global Market. Arsanis is required to meet specified financial requirements, including requirements for a minimum amount of capital, a minimum price per share and continued business operations so that it is not characterized as a “public shell company.” Additionally, if Arsanis conducts a reverse merger (including the Merger), the combined organization following such transaction will need to meet Nasdaq’s initial listing standards. If Arsanis is unable to comply with Nasdaq’s listing standards, Nasdaq may determine to delist its common stock from the Nasdaq Global Market or other of Nasdaq’s trading markets. If Arsanis Common Stock is delisted for any reason, it could reduce the value of its common stock and liquidity.

 

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If Arsanis commits certain material breaches under its agreement with the Gates Foundation, and fails to cure them, Arsanis may be required to redeem shares of its stock held by the Gates Foundation and its affiliates.

In the event the Gates Foundation terminates Arsanis’s agreement for certain specified uncured material breaches by Arsanis, Arsanis will be obligated, among other remedies, to redeem the then-held shares of its stock purchased by the Gates Foundation pursuant to the agreement or to facilitate the purchase of such stock by a third party. For any such redemption, the Gates Foundation stock will be valued at the greater of the original purchase price (plus specified interest) or the fair market value of such stock. If Arsanis is required to redeem such shares or to compensate the Gates Foundation, its financial condition could be materially and adversely affected.

Arsanis is an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make its common stock less attractive to investors.

Arsanis is an “emerging growth company,” or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as Arsanis remains an EGC, Arsanis is permitted and intends to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

not being required to comply with the auditor attestation requirements in the assessment of Arsanis’s internal control over financial reporting;

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

reduced disclosure obligations regarding executive compensation; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Investors may find Arsanis Common Stock less attractive as a result of Arsanis’s reliance on these exemptions. If some investors find Arsanis Common Stock less attractive as a result, there may be a less active trading market for its common stock and its stock price may be more volatile.

Arsanis will incur increased costs as a result of operating as a public company, and its management will be required to devote substantial time to new compliance initiatives.

As a public company, and particularly after Arsanis is no longer an EGC, Arsanis will incur significant legal, accounting and other expenses that it did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC and the Nasdaq Global Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Arsanis’s management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase Arsanis’s legal and financial compliance costs and will make some activities more time-consuming and costly. For example, Arsanis expects that these rules and regulations may make it more difficult and more expensive for Arsanis to obtain director and officer liability insurance.

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

Effective internal control over financial reporting is necessary for Arsanis to provide reliable financial reports and, together with adequate disclosure controls and procedures, is designed to prevent fraud. Any failure

 

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to implement required new or improved controls, or difficulties encountered in their implementation, could cause Arsanis to fail to meet its reporting obligations. In addition, any testing by Arsanis, as and when required, conducted in connection with Section 404 of the Sarbanes-Oxley Act, or Section 404, or any subsequent testing by Arsanis’s independent registered public accounting firm, as and when required, may reveal deficiencies in Arsanis’s internal control over financial reporting that are deemed to be significant deficiencies or material weaknesses or that may require prospective or retroactive changes to its financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in Arsanis’s reported financial information, which could have a negative effect on the trading price of its common stock.

Pursuant to Section 404, Arsanis will be required to furnish a report by its management on Arsanis’s internal control over financial reporting, including an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. However, while Arsanis remains an EGC, Arsanis will not be required to include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, Arsanis will be engaged in a process to document and evaluate its internal control over financial reporting, which is both costly and challenging. In this regard, Arsanis will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite its efforts, there is a risk that neither Arsanis nor Arsanis’s independent registered public accounting firm will be able to conclude within the prescribed timeframe that Arsanis’s internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of Arsanis’s financial statements.

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

Provisions in Arsanis’s corporate charter and by-laws, each as amended and restated, may discourage, delay or prevent a merger, acquisition or other change in control of Arsanis that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of Arsanis Common Stock, thereby depressing the market price of its common stock. In addition, because the Arsanis Board of Directors is responsible for appointing the members of its management team, these provisions may frustrate or prevent any attempts by Arsanis’s stockholders to replace or remove its current management by making it more difficult for stockholders to replace members of the Arsanis Board of Directors. Among other things, these provisions:

 

   

establish a classified board of directors such that not all members of the board are elected at one time;

 

   

allow the authorized number of Arsanis’s directors to be changed only by resolution of the board of directors;

 

   

limit the manner in which stockholders can remove directors from the board;

 

   

establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to the board of directors;

 

   

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by Arsanis’s stockholders by written consent;

 

   

limit who may call stockholder meetings;

 

   

authorize the board of directors to issue preferred stock without stockholder approval, which could be used to institute a shareholder rights plan, or so-called “poison pill,” that would work to dilute the stock

 

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ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by the board of directors; and

 

   

require the approval of the holders of at least 75% of the votes that all Arsanis’s stockholders would be entitled to cast to amend or repeal certain provisions of its charter or by-laws.

Moreover, because Arsanis is incorporated in Delaware, Arsanis is governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of Arsanis’s outstanding voting stock from merging or combining with Arsanis for a period of three years after the date of the transaction in which the person acquired in excess of 15% of Arsanis’s outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

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

Arsanis’s restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on its behalf, any action asserting a breach of fiduciary duty owed by Arsanis’s directors, officers, other employees or stockholders to the company or its stockholders, any action asserting a claim against Arsanis arising pursuant to the Delaware General Corporation Law or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or any action asserting a claim arising pursuant to Arsanis’s certificate of incorporation or by-laws, each as amended and restated, or governed by the internal affairs doctrine. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Arsanis or its directors, officers, other employees or other stockholders, which may discourage such lawsuits against Arsanis and its directors, officers, other employees or other stockholders. Alternatively, if a court were to find this provision in Arsanis’s restated certificate of incorporation to be inapplicable or unenforceable in an action, Arsanis may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect its business and financial condition.

Because Arsanis does not anticipate paying any cash dividends on its capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

Arsanis has never declared or paid cash dividends on its capital stock. Arsanis currently intends to retain all of its future earnings, if any, to finance the growth and development of its business. In addition, Arsanis’s ability to pay cash dividends may be restricted by any future indebtedness. Arsanis’s ability to pay cash dividends may also, under certain circumstances, be limited under the terms of a letter agreement Arsanis has entered into with the Gates Foundation. As a result, capital appreciation, if any, of Arsanis Common Stock will be your sole source of gain for the foreseeable future, and investors seeking cash dividends should not purchase shares of Arsanis Common Stock.

Risks Related to X4

Risks Related to X4’s Financial Position and Need for Additional Capital

X4 has incurred significant losses since its inception. X4 expects to continue to incur losses and may never generate profits from operations or maintain profitability.

Since inception, X4 has incurred significant operating losses. X4’s net losses were $17.9 million and $22.0 million for the years ended December 31, 2016 and 2017, respectively, and $22.0 million for the nine months ended September 30, 2018. As of September 30, 2018, X4 had an accumulated deficit of $68.0 million. To date, X4 has financed its operations primarily through issuances of shares of common stock, preferred stock

 

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or convertible notes and through borrowing under its prior loan and security agreement with Silicon Valley Bank and under its existing loan and security agreement with Hercules Capital, Inc. X4 has not generated any revenue from product sales to date. X4 has devoted substantially all of its efforts to research and development, including clinical trials. X4 has not completed the development of any drugs. X4 expects to continue to incur significant expenses and increasing operating losses for at least the next few years as X4 conducts additional clinical trials for its product candidates; continues to discover and develop additional product candidates; acquires or in-licenses other product candidates and technologies; maintains, expands and protects its intellectual property portfolio; hires additional clinical, scientific and commercial personnel; establishes a commercial manufacturing source and secures supply chain capacity sufficient to provide commercial quantities of any product candidates for which it may obtain regulatory approval; seeks regulatory approvals for any product candidates that successfully complete clinical trials; establishes a sales, marketing and distribution infrastructure to commercialize any products for which it may obtain regulatory approval; and adds operational, financial and management information systems and personnel, including personnel to support its product development and planned future commercialization efforts, as well as to support its transition to a public reporting company. X4 may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its business. The size of X4’s future net losses will depend, in part, on the rate of future growth of its expenses and its ability to generate revenues. Even if X4 achieves profitability in the future, X4 may not be able to sustain profitability in subsequent periods. The net losses X4 incurs may fluctuate significantly from quarter to quarter and year to year.

X4’s ability to generate profits from operations and thereafter to remain profitable depends heavily on:

 

   

the scope, number, progress, duration, endpoints, cost, results and timing of clinical trials and nonclinical studies of X4’s current or potential future product candidates, including in particular the scope, progress, duration, endpoints, cost, results and timing for initiation and completion of the Phase 3 trial of X4P-001 for the treatment of WHIM syndrome, X4’s Phase 1/2 clinical trial of X4P-001 for the treatment of severe congenital neutropenia, or SCN, X4’s Phase 1/2 clinical trial of X4P-001 for the treatment of Waldenström macroglobulinemia, or WM, and X4’s Phase 1/2 for the treatment of clear cell renal cell carcinoma, or ccRCC;

 

   

X4’s ability to raise sufficient funds to support the development and potential commercialization of its product candidates;

 

   

the outcomes and timing of regulatory reviews, approvals or other actions;

 

   

X4’s ability to obtain marketing approval for its product candidates;

 

   

X4’s ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent X4 retains development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;

 

   

the success of any other business, product or technology that X4 acquires or in which X4 invests;

 

   

X4’s ability to maintain, expand and defend the scope of its intellectual property portfolio;

 

   

X4’s ability to manufacture any approved products on commercially reasonable terms;

 

   

X4’s ability to establish a sales and marketing organization or suitable third-party alternatives for any approved product; and

 

   

the number and characteristics of product candidates and programs that X4 pursues.

Based on X4’s current plans, X4 does not expect to generate significant revenue from product sales unless and until X4 or a potential future licensee or collaborator obtains marketing approval for, and commercializes, one or more of X4’s current or potential future product candidates. Neither X4 nor a licensee may ever succeed in obtaining marketing approval for, or commercializing, X4’s product candidates and, even if it does, X4 may never generate revenues that are significant enough to generate profits from operations. Even if X4 does generate profits from operations, it may not be able to sustain or increase profitability on a quarterly or annual basis. X4’s

 

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failure to generate profits from operations and remain profitable would decrease its value and could impair its ability to raise capital, expand its business, maintain its research and development efforts, diversify its product offerings or continue its operations. A decline in X4’s value could also cause you to lose all or part of your investment.

X4’s limited operating history may make it difficult for you to evaluate the success of X4’s business to date and to assess its future viability.

X4 was formed in 2012 and did not commence significant operations until 2014. X4’s operations to date have been limited to organizing the company, converting from a limited liability company to a corporation, entering into licensing arrangements for X4P-001, hiring a team of experienced personnel, raising capital, and undertaking nonclinical studies and clinical trials and regulatory activities for its development programs, primarily X4P-001. X4 has not yet demonstrated its ability to successfully complete development of any product candidate, including large-scale, pivotal clinical trials required for regulatory approval of its product candidates, obtain marketing approvals, manufacture a commercial scale product, or arrange for a third party to do so on its behalf, or conduct sales and marketing activities necessary for successful product commercialization. Typically, it takes many years to develop one new product from the time it is discovered to when it is commercially available, if ever. In addition, the CXCR4 receptor that X4 is pursuing with respect to its product candidates is a relatively novel target with a limited research and development history. Consequently, any early predictions made about X4’s future success or viability may not be as accurate as they could be if X4 had a longer operating history.

As an early-stage company, X4 may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors that may alter or delay its plans. Assuming X4 completes the development and obtains marketing approval for any of its product candidates, X4 will need to transition from a company with a research and development focus to a company capable of supporting commercial activities. X4 may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.

X4 will require substantial additional funding. If X4 is unable to raise capital when needed, X4 could be forced to delay, reduce or eliminate any product development programs or commercialization efforts.

X4’s operations have consumed a large amount of cash since inception. X4 expects its research and development expenses to increase substantially in future periods as X4 continues to advance the clinical development of its product candidates and prepares for the launch and commercialization of any product candidates for which it receives regulatory approval, including potentially building its own commercial organization to address the United States and certain other markets. In addition, if X4 obtains marketing approval for any of its product candidates that are not then subject to licensing, collaboration or similar arrangements with third parties, X4 expects to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. Furthermore, X4 expects to incur additional costs associated with operating as a public company in the United States. Accordingly, X4 will need to obtain substantial additional funding in connection with its continuing operations.

X4 cannot be certain that additional funding will be available on acceptable terms, or at all. If X4 is unable to raise additional capital when needed or in sufficient amounts or on terms acceptable to it, X4 could be forced to delay, reduce or eliminate its research and development programs or any future commercialization efforts of one or more of its product candidates or one or more of its other research and development initiatives. X4 also could be required to:

 

   

seek collaborators for one or more of X4’s current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

 

   

relinquish or license on unfavorable terms X4’s rights to technologies or product candidates that X4 otherwise would seek to develop or commercialize itself.

 

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X4’s future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

   

the scope, number, initiation, progress, timing, costs, design, duration, any potential delays, and results of clinical trials and nonclinical studies for X4’s current or future product candidates, particularly the Phase 3 trial of X4P-001 for the treatment of WHIM syndrome, X4’s Phase 1/2 clinical trial of X4P-001 for the treatment of SCN, X4’s Phase 1/2 clinical trial of X4P-001 for the treatment of WM, and X4’s Phase 1/2 for the treatment of ccRCC;

 

   

the clinical development plans X4 establishes for these product candidates;

 

   

the number and characteristics of product candidates and programs that X4 develops or may in-license;

 

   

the outcome, timing and cost of regulatory reviews, approvals or other actions to meet regulatory requirements established by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that X4 perform more studies for its product candidates than those that X4 currently expects;

 

   

X4’s ability to obtain marketing approval for its product candidates;

 

   

the cost of filing, prosecuting, defending and enforcing X4’s patent claims and other intellectual property rights covering its product candidates, including any such patent claims and intellectual property rights that X4 has licensed from Genzyme pursuant to the terms of its license agreement with Genzyme;

 

   

X4’s ability to maintain, expand and defend the scope of its intellectual property portfolio, including the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against X4 or its product candidates;

 

   

the cost and timing of completion of commercial-scale outsourced manufacturing activities with respect to X4’s product candidates;

 

   

X4’s ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent X4 retains development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;

 

   

the cost of establishing sales, marketing and distribution capabilities for any product candidates for which X4 may receive regulatory approval in regions where X4 chooses to commercialize its products on its own;

 

   

the success of any other business, product or technology that X4 acquires or in which X4 invests;

 

   

the costs of acquiring, licensing or investing in businesses, product candidates and technologies;

 

   

X4’s need and ability to hire additional management and scientific and medical personnel;

 

   

the costs to operate as a public company in the United States, including the need to implement additional financial and reporting systems and other internal systems and infrastructure for X4’s business;

 

   

market acceptance of X4’s product candidates, to the extent any are approved for commercial sale; and

 

   

the effect of competing technological and market developments.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and X4 may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, X4’s product candidates, if approved, may not achieve commercial success. X4’s commercial revenues, if any, will be derived from sales of products that will not be commercially available for sale by X4 for at least the next few years, if at all. Accordingly, X4 will need to continue to rely on additional financing to achieve its business objectives. In addition, X4 may seek additional

 

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capital due to favorable market conditions or strategic considerations, even if X4 believes that it has sufficient funds for its current or future operating plans. Additional financing may not be available to X4 on acceptable terms, or at all. The unavailability of additional financing on acceptable terms, or at all, would have an adverse effect on your investment.

X4’s independent registered public accounting firm has included an explanatory paragraph relating to X4’s ability to continue as a going concern in its report on X4’s audited financial statements included in this proxy statement/prospectus/information statement.

The report from X4’s independent registered public accounting firm for the year ended December 31, 2017 includes an explanatory paragraph stating that X4’s recurring losses from operations and required additional funding to finance X4’s operations raise substantial doubt about X4’s ability to continue as a going concern. If X4 is unable to obtain sufficient funding, its business, prospects, financial condition and results of operations will be materially and adversely affected and X4 and the combined organization may be unable to continue as a going concern. If X4 is unable to continue as a going concern, X4 may have to liquidate its assets and may receive less than the value at which those assets are carried on its audited financial statements, and it is likely that investors will lose all or a part of their investment. After the closing of the Merger, future reports from the combined organization’s independent registered public accounting firm may also contain statements expressing substantial doubt about its ability to continue as a going concern. If X4 seeks additional financing to fund its business activities in the future and there remains substantial doubt about its ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to X4 on commercially reasonable terms or at all.

Raising additional capital may cause dilution to the combined organization’s investors, restrict its operations or require it to relinquish rights to its technologies or product candidates. Future debt obligations may expose X4 to risks that could adversely affect its business, operating results and financial condition and may result in further dilution to the combined organization’s stockholders.

Until such time, if ever, as X4 can generate substantial product revenues, X4 expects to finance its cash needs through a combination of equity offerings, debt financings, and licensing, collaboration or similar arrangements. X4 does not have any committed external sources of funds and may seek to raise additional capital at any time. To the extent that X4 raises additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of its common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting X4’s ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or other distributions, acquiring or licensing intellectual property rights and other operating restrictions that could adversely impact X4’s ability to conduct its business and may result in liens being placed on its assets and intellectual property. If X4 defaults on such indebtedness, X4 could lose such assets and intellectual property.

If X4 raises additional funds through licensing, collaboration or similar arrangements with third parties, X4 may have to relinquish valuable rights to its technologies, future revenue streams, research and development programs or product candidates or grant licenses on terms that are not favorable to X4. If X4 is unable to raise additional funds through equity or debt financings or through licensing, collaboration or similar arrangements when needed, X4 may be required to delay, limit, reduce or terminate its product development or future commercialization efforts or grant rights to develop and market product candidates that X4 would otherwise prefer to develop and market itself.

X4 has not generated any revenues since inception and may never become profitable.

To date, X4 has not generated any revenues. X4’s ability to generate revenue and become profitable depends upon its ability to successfully obtain marketing approval and commercialize its product candidates,

 

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including X4P-001, X4P-002, X4P-003 or other product candidates that X4 may develop, in-license or acquire in the future. Even if X4 is able to successfully achieve regulatory approval for these product candidates, X4 is unable to predict the extent of any future losses and does not know when any of these product candidates will generate revenue for X4, if at all. X4’s ability to generate revenue from X4P-001 or other product candidates also depends on a number of additional factors, including its ability to:

 

   

successfully complete development activities, including all necessary nonclinical studies and clinical trials;

 

   

complete and submit New Drug Applications, or NDAs, to the FDA and obtain regulatory approval for indications for which there is a commercial market;

 

   

complete and submit marketing applications to, and obtain regulatory approval from, foreign regulatory authorities;

 

   

set and obtain a commercially viable price for its products;

 

   

obtain commercial quantities of its products at acceptable cost levels;

 

   

develop a commercial organization capable of sales, marketing and distribution for the products X4 intends to sell itself in the markets in which X4 has retained commercialization rights;

 

   

find suitable partners to help X4 market, sell and distribute its approved products in other markets; and

 

   

obtain coverage and adequate reimbursement from third-party, including government, payors.

In addition, because of the numerous risks and uncertainties associated with product development, including the possibility that X4’s product candidates may not advance through development or demonstrate safety and efficacy for their intended uses, the FDA or any other regulatory agency may require additional clinical trials or nonclinical studies. X4 is unable to predict the timing or amount of increased expenses, or when or if X4 will be able to achieve or maintain profitability, and such expense could increase beyond its expectations if the FDA or any other regulatory agency requires such additional clinical trials or nonclinical studies as part of the application and approval process or post-approval process if X4 is successful at achieving regulatory approval. Even if X4 is able to successfully complete the development and regulatory reviews described above, X4 anticipates incurring significant costs associated with commercializing these products, if they are approved.

Even if X4 is able to generate revenues from the sale of its product candidates, X4 may not become profitable and may need to obtain additional funding to continue operations. If X4 fails to become profitable or is unable to sustain profitability on a continuing basis, then X4 may be unable to continue its operations at planned levels and be forced to reduce its operations. If X4 does achieve profitability, X4 may not be able to sustain or increase profitability on a quarterly or annual basis. X4’s failure to become and remain profitable would decrease the value of the company and could impair its ability to raise capital, maintain its discovery and preclinical development efforts, expand its business or continue its operations and may require it to raise additional capital that may dilute your ownership interest. A decline in the value of X4 could also cause you to lose all or part of your investment.

Risks Related to Development and Commercialization of X4’s Product Candidates

X4 depends almost entirely on the success of its lead product candidate, X4P-001, which X4 is developing initially for the treatment of WHIM syndrome, SCN, WM and ccRCC. X4 cannot be certain that X4 will be able to obtain regulatory approval for, or successfully commercialize, X4P-001 or any other product candidate.

X4’s business depends almost entirely on the successful clinical development, regulatory approval and commercialization of X4P-001. X4 currently has no drug product for sale and may never be able to develop marketable drug products. X4 plans to initiate a global Phase 3 pivotal trial of X4’s lead product candidate,

 

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X4P-001, in WHIM patients in the first half of 2019, and may be required to complete additional nonclinical studies and clinical trials before X4 can seek regulatory approval. X4P-001 for the treatment of SCN and for the treatment of WM has not yet entered clinical development and X4P-001 for the treatment of ccRCC has not yet entered Phase 3 clinical development. X4’s other programs, including X4P-002 and X4P-003, are still in the preclinical development stage. The clinical trials of X4’s product candidates are, and the manufacturing and marketing of its product candidates will be, subject to extensive and rigorous review and regulation by government authorities in the United States and in other countries where X4 intends to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, X4 must successfully meet a number of critical developmental milestones, including:

 

   

developing dosages that will be well-tolerated, safe and effective;

 

   

completing the development and scale-up to permit manufacture of its product candidates in commercial quantities and at acceptable costs;

 

   

demonstrating through pivotal clinical trials that the product candidate is safe and effective in patients for the intended indication;

 

   

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; and

 

   

obtaining and maintaining patent and trade secret protection and non-patent exclusivity for its product candidate.

The time necessary to achieve these developmental milestones for any individual product candidate is long and uncertain, and X4 may not successfully complete these milestones for X4P-001 or any other product candidates that X4 may develop. X4 has not yet completed development of any product candidate. X4 also may not be able to finalize the design or formulation for its other programs, X4P-002 for the treatment of glioblastoma multiforme, or GBM, and X4P-003, a next generation molecule for the treatment of rare diseases linked to defects in CXCR4 trafficking.

X4 is continuing to test and develop its product candidates and may explore possible design or formulation changes to address safety, efficacy, manufacturing efficiency and performance issues to the extent any arise. X4 may not be able to complete development of any product candidates that demonstrate safety and efficacy and that will have a commercially reasonable treatment and storage period. If X4 is unable to complete development of X4P-001 or any other product candidates that X4 may develop, X4 will not be able to commercialize and earn revenue from them.

The regulatory review and approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable, and if X4 is ultimately unable to obtain regulatory approval for its product candidates, including X4P-001, its business will be substantially harmed.

Of the large number of drugs in development in the United States, only a small percentage receive FDA regulatory approval and are commercialized in the United States. X4 is not permitted to market X4P-001 or any other product candidate in the United States until X4 receives approval of an NDA from the FDA, or in any foreign countries until X4 receives the requisite approval from such countries or jurisdictions, such as the marketing authorization application, or MAA, in the European Union from the European Medicines Agency, or EMA. Prior to submitting an NDA to the FDA for approval of X4P-001 for the treatment of WHIM syndrome, X4 will need to successfully complete the Phase 3 pivotal trial of X4P-001 in patients with WHIM syndrome and potentially additional clinical trials and/or nonclinical studies. Successfully completing clinical trials and obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA, or a comparable foreign regulatory authority, may delay, limit or deny approval of X4P-001 for the treatment of WHIM syndrome or other indications for many reasons, including, among others:

 

   

disagreement with the design or implementation of its clinical trials;

 

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disagreement with the sufficiency of X4’s clinical trials, including disagreement with its plan to conduct a single pivotal Phase 3 trial of X4P-001 in patients with WHIM syndrome;

 

   

failure to demonstrate the safety and efficacy of X4P-001 or any other product candidate for its proposed indications;

 

   

failure to demonstrate that any clinical and other benefits of X4P-001 or any other product candidate outweigh its safety risks;

 

   

a negative interpretation of the data from its nonclinical studies or clinical trials;

 

   

deficiencies in the manufacturing or control processes or failure of third-party manufacturing facilities with which X4 contracts for clinical and commercial supplies to comply with current Good Manufacturing Practice requirements, or cGMPs;

 

   

insufficient data collected from clinical trials of X4P-001 or changes in the approval requirements that render its nonclinical and clinical data insufficient to support the filing of an NDA or to obtain regulatory approval; or

 

   

changes in clinical practice in or approved products available for the treatment of the target patient population that could have an impact on the indications that X4 is pursuing for X4P-001 or its other product candidates.

The FDA or a comparable foreign regulatory authority may also require more information, including additional nonclinical or clinical data to support approval, which may delay or prevent approval and X4’s commercialization plans, or cause X4 to abandon the development program. Even if X4 obtains regulatory approval, its product candidates may be approved for fewer or more limited indications than X4 requests, such approval may be contingent on the performance of costly post-marketing clinical trials, or X4 may not be allowed to include the labeling claims necessary or desirable for the successful commercialization of such product candidate. For instance, it is possible that X4P-001 could be approved for an indication but fail to be used for treating patients in that indication due to the availability of other available treatments or then-accepted clinical practice.

X4 depends on license agreements with Genzyme, Beth Israel Deaconess Medical Center and Georgetown University to permit X4 to use patents and patent applications. Termination of these rights or the failure to comply with obligations under these agreements could materially harm X4’s business and prevent it from developing or commercializing its product candidates.

X4 is a party to license agreements with Genzyme, Beth Israel Deaconess Medical Center and Georgetown University under which X4 was granted rights to patents and patent applications that are important to its business. X4 relies on these license agreements in order to be able to use various proprietary technologies that are material to its business, including certain patents and patent applications that cover its product candidates, including X4P-001. X4’s rights to use these patents and patent applications and employ the inventions claimed in these licensed patents are subject to the continuation of and its compliance with the terms of its license agreements.

X4’s license agreement with Genzyme imposes upon X4 various diligence, payment and other obligations, including the following:

 

   

X4’s obligation to pay Genzyme milestone payments in the aggregate amount of up to $25.0 million, contingent upon the achievement by X4 of certain late-stage regulatory and sales milestones with respect to licensed products.

 

   

X4’s obligation, upon the consummation by X4 of a change of control transaction, to pay Genzyme 5.5% of the consideration paid to its equity holders, other than Genzyme, in connection with such change of control transaction, after deducting its outstanding debt obligations and the aggregate cash

 

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investments made by its equity holders prior to the closing of the change of control transaction.

 

   

X4’s obligation to pay Genzyme tiered royalties based on net sales of licensed products that X4 commercializes under the agreement.

 

   

X4’s obligation to pay Genzyme a certain percentage of cash payments received by X4 or its affiliates in consideration for the grant of a sublicense under the license granted to it by Genzyme.

If X4 fails to comply with any of its obligations under the Genzyme license agreement, or X4 is subject to a bankruptcy, Genzyme may have the right to terminate the license agreement, in which event X4 would not be able to market any product candidates covered by the license.

Prior to July 2014, X4 did not control the prosecution, maintenance, or filing of the patents and patent applications that are licensed to X4 under the Genzyme license agreement, or the enforcement of these patents and patent applications against infringement by third parties. Thus, these patents and patent applications were not drafted by X4 or its attorneys, and X4 did not control or have any input into the prosecution of these patents and patent applications prior to its execution of the Genzyme license agreement in July 2014. Under the terms of the license agreement with Genzyme, since July 2014, X4 has controlled the right to control the prosecution, maintenance, and filing of the patents and patent applications that are licensed to X4, and the enforcement of these patents and patent applications against infringement by third parties. However, X4 cannot be certain that the same level of attention was given to the drafting and prosecution of these patents and patent applications as X4 may have used if X4 had control over the drafting and prosecution of such patents and patent applications. X4 also cannot be certain that drafting or prosecution of the patents and patent applications licensed to X4 has been conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents.

Pursuant to X4’s license agreement with Beth Israel Deaconess Medical Center, X4 paid an upfront, one-time fee for the rights granted by the license agreement. This license agreement imposes upon X4 various obligations, including the requirement to provide Beth Israel Deaconess Medical Center with progress reports at regular intervals and to maintain specified levels of insurance. Beth Israel Deaconess Medical Center may terminate the agreement for non-payment, insolvency of X4 or for a material default by X4. X4 has the right to terminate the agreement for any reason upon 90 days advance written notice.

X4’s license agreement with Georgetown imposes upon X4 various diligence, payment and other obligations, including X4’s obligations to pay Georgetown milestone payments in the aggregate amount of up to $0.8 million, contingent upon the achievement by X4 of certain sales milestones with respect to licensed products, to deliver reports upon certain events and at regular intervals and to maintain specified levels of insurance. Georgetown may terminate the agreement for non-payment, insolvency of X4, for X4’s failure to maintain insurance or for a material default by X4. X4 has the right to terminate the agreement for any reason upon 60 days advance written notice.

Disputes may arise under any of X4’s license agreements with Genzyme, Beth Israel Deaconess Medical Center and/or Georgetown University regarding the intellectual property that is subject to such license agreement, including:

 

   

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

 

   

whether and the extent to which X4’s technology and processes infringe on intellectual property that is not subject to the applicable license agreement;

 

   

X4’s diligence obligations with respect to the use of the licensed technology under the applicable license agreement to develop and commercialize products and technologies, including the level of effort and specific activities that will satisfy those diligence obligations; and

 

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the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by X4 and its partners.

If disputes over intellectual property that X4 has licensed prevent or impair its ability to maintain any of its license agreements on acceptable terms, X4 may be unable to successfully develop and commercialize the affected product candidates and technologies.

The results of clinical trials may not support X4’s product candidate claims.

Even if X4’s clinical trials are completed as planned, X4 cannot be certain that their results will support the proposed product candidates, that the FDA or foreign government authorities will agree with X4’s conclusions regarding such results, or that the FDA or foreign governmental authorities will not require additional clinical trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful and the results of later clinical trials often do not replicate the results of prior clinical trials and preclinical testing. The clinical trial results may fail to demonstrate that X4’s product candidates are safe for humans and effective for the intended indications. This failure could cause X4 to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, X4’s clinical trials will delay or prevent the submission of its marketing applications (NDA and/or MAA) and, ultimately, its ability to obtain approval and commercialize its product candidates and generate product revenues. Information about certain clinical trials, including results (positive or negative) will be made public according to each country’s clinical trial register policies (www.clinicaltrials.gov or EU’s clinical trial database EudraCT). Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

X4’s lead product candidate, X4P-001, is only part way through the clinical trials X4 anticipates needing to complete before X4 may be able to submit an NDA to the FDA. Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of early studies and trials may not be predictive of later trial results.

Preclinical and other nonclinical testing and clinical trials are long, expensive and unpredictable processes that are difficult to design and implement, are subject to delays and are uncertain as to outcome. It may take several years to complete the nonclinical testing and clinical development necessary to obtain approval and commercialize a drug, and failure can occur at any stage of testing. Early and interim results of clinical trials do not necessarily predict final results. In particular, the small number of subjects and patients in X4’s early clinical trials may make the results of these clinical trials less predictive of the outcome of later larger clinical trials. The design of a clinical trial may be able to determine whether its results will support approval of a product, and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced or completed. There is no assurance that X4 will be able to design and complete a clinical trial to support marketing approval. Moreover, nonclinical and clinical data are often susceptible to multiple interpretations and analyses. A number of companies in the pharmaceutical and biotechnology industries have experienced significant setbacks in advanced clinical trials, even after promising results in earlier trials.

Delays in X4’s clinical trials may lead to a delay in the submission of its marketing approval application and jeopardize its ability to potentially receive approvals and generate revenues from the sale of its products.

X4 may experience delays in its current or future clinical trials, including its Phase 3 trial of X4P-001 for the treatment of WHIM syndrome, its Phase 1/2 clinical trial of X4P-001 for the treatment of SCN, its Phase 1/2 clinical trial of X4P-001 for the treatment of WM, and its Phase 1/2 for the treatment of ccRCC. X4 does not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned or be completed on schedule, if at all. Clinical trials may be delayed, suspended or terminated for a variety of reasons, such as:

 

   

delay or failure in reaching agreement with the FDA or a comparable foreign regulatory authority on a trial design that X4 is able to execute;

 

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delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

 

   

inability, delay or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be engaged in competing clinical trial programs;

 

   

delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

   

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

 

   

clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

   

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

 

   

delay or failure in obtaining institutional review board, or IRB, approval to conduct a clinical trial at each site;

 

   

delays resulting from negative or equivocal findings of the Data Safety Monitoring Board, or DSMB, if any;

 

   

ambiguous or negative results;

 

   

decision by the FDA, a comparable foreign regulatory authority, or recommendation by a DSMB to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

   

inadequate drug product for use in nonclinical studies or clinical trials;

 

   

lack of adequate funding to continue the product development program; or

 

   

changes in governmental regulations or requirements.

Any delays in completing X4’s clinical trials will increase its costs, slow down its product candidate development and approval process and jeopardize its ability to commence product sales and generate revenues. Any of these occurrences may significantly harm X4’s business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of X4’s product candidates.

X4 may fail to enroll a sufficient number of patients in its clinical trials in a timely manner, which could delay or prevent clinical trials of its product candidates.

Identifying and qualifying patients to participate in clinical trials of X4’s product candidates is critical to its success. The timing of X4’s clinical trials depends on the rate at which X4 can recruit and enroll patients in testing its product candidates. The timing of X4’s clinical trials depends in part on the speed at which X4 can recruit patients to participate in testing X4P-001 and any other current or future product candidates that X4 may develop as well as completion of required follow-up periods. If X4 cannot identify patients to participate in its clinical trials or if patients are unwilling to participate in its clinical trials for any reason, including if patients choose to enroll in competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of X4P-001 and any other current or future product candidates that X4 may develop may be delayed. These delays could result in increased costs, delays in advancing X4’s current or future product candidates, including X4P-001, X4P-002 or X4P-003, delays in testing the effectiveness of its product candidates or termination of the clinical trials altogether.

X4 may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a trial, to complete its clinical trials in a timely manner. In particular, X4 is currently evaluating X4P-001 for the treatment of WHIM syndrome, an orphan disease with limited patient pools from which to draw for clinical trials. The eligibility criteria of X4’s clinical trials will further limit the pool of available trial participants.

 

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Patient enrollment, a significant factor in the duration of clinical trials, is also affected by many factors, including:

 

   

the severity of the disease under investigation;

 

   

the size and nature of the patient population (particularly with respect to orphan drugs which, by definition, are intended for a relatively small patient population);

 

   

the eligibility criteria for the clinical trial in question;

 

   

the design of the clinical trial;

 

   

the inability to obtain and maintain patient consents;

 

   

the risk that enrolled subjects will drop out before completion;

 

   

clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drug that may be approved or for which clinical trials are initiated for the indications that X4 is investigating;

 

   

X4’s CROs and its trial sites’ efforts to facilitate timely screening and enrollment in clinical trials;

 

   

patient referral practices of physicians; and

 

   

X4’s ability to monitor patients adequately during and after treatment.

X4 has made certain assumptions about the rate at which X4 can enroll patients in its clinical trials. To the extent that X4 does not meet this enrollment target, X4’s projected timeline for development of X4’s product candidates may be slowed. X4 relies on CROs and clinical trial sites to ensure the proper and timely conduct of its clinical trials and while X4 will have agreements governing their activities, X4 has limited control over their actual performance.

If X4 experiences difficulty enrolling a sufficient number of patients to conduct its clinical trials as planned, it may be forced to delay, limit or terminate ongoing or planned clinical trials of its product candidates, which would delay its ability to obtain approvals and generate product revenues from any of these product candidates.

If the commercial opportunity in WHIM syndrome is smaller than X4 anticipates, X4’s potential future revenue from X4P-001 for the treatment of WHIM syndrome may be adversely affected and its business may suffer.

If the size of the commercial opportunities in any of X4’s target indications is smaller than X4 anticipates, X4 may not be able to achieve profitability and growth. X4 is developing X4P-001 initially as a treatment for patients with WHIM syndrome and also as a treatment for other rare diseases, including primary immunodeficiencies such as SCN and cancer such as WM. WHIM syndrome, SCN and WM are each rare diseases, with a limited patient population.

X4 is aware of only a few small available patient registries for WHIM syndrome, and X4 relies on various estimates and assumptions to estimate the addressable WHIM syndrome population. Based on a preliminary independent market research study conducted by a third-party research firm study that X4 sponsored, X4 estimates there are more than 1,000 genetically confirmed WHIM patients in the United States. If the commercial opportunity in WHIM syndrome is smaller than X4 anticipates, whether because X4’s estimates of the addressable patient population prove to be incorrect or another reasons, X4’s potential future revenue from X4P-001 may be adversely affected and its business may suffer.

It is critical to X4’s ability to grow and become profitable that X4 successfully identifies patients with WHIM syndrome and any other primary immunodeficiency that X4 may target. X4’s projections of the number of people who have WHIM syndrome or its other potential primary immunodeficiencies, are based on a variety

 

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of sources, including third-party estimates and analyses in the scientific literature, and may prove to be incorrect. Further, new information may emerge that changes X4’s estimate of the prevalence of these diseases or the number of patient candidates for WHIM syndrome. The effort to identify patients with WHIM syndrome or X4’s other potential target indications is at an early stage, and X4 cannot accurately predict the number of patients for whom treatment might be possible. Additionally, the addressable patient population for WHIM syndrome may be limited or may not be amenable to treatment with X4P-001, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect X4’s results of operations and its business. Further, even if X4 obtains significant market share for WHIM syndrome, X4 may never achieve profitability because the potential target patient population in WHIM syndrome is small.

If X4 experiences any of a number of possible unforeseen events in connection with its clinical trials, potential marketing approval or commercialization of its product candidates, or entry into licensing, collaboration or similar arrangements, could be delayed or prevented.

X4 may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent its ability to receive marketing approval or commercialize its product candidates, including:

 

   

clinical trials of its product candidates may produce negative or inconclusive results, and X4 may decide, or regulators may require it, to conduct additional clinical trials or abandon product development programs;

 

   

the number of patients required for clinical trials of its product candidates may be larger than X4 anticipates, enrollment in these clinical trials may be slower than X4 anticipates or participants may drop out of these clinical trials at a higher rate than X4 anticipates;

 

   

X4 may be unable to recruit and enroll a sufficient number of patients in its clinical trials to ensure adequate statistical power to detect any statistically significant treatment effects;

 

   

X4’s third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to X4 in a timely manner, or at all;

 

   

regulators, institutional review boards or independent ethics committees may not authorize X4 or its investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

   

X4 may experience delays in reaching, or X4 may fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

   

X4 may have to suspend or terminate clinical trials of its product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks or undesirable side effects;

 

   

regulators, institutional review boards or independent ethics committees may require that X4 or its investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

   

the cost of clinical trials of X4’s product candidates may be greater than X4 anticipates;

 

   

the supply or quality of X4’s product candidates or other materials necessary to conduct clinical trials of its product candidates may be insufficient or inadequate; and

 

   

X4’s product candidates may have undesirable side effects or other unexpected characteristics, causing X4 or its investigators, regulators, institutional review boards or independent ethics committees to suspend or terminate the clinical trials.

X4’s product development costs will increase if X4 experiences delays in testing or marketing approvals. X4 does not know whether any preclinical tests or clinical trials will begin as planned, will need to be redesigned

 

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or will be completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which X4 may have the exclusive right to commercialize its product candidates, if they are approved, or allow its competitors to bring products to market before X4 does and impair X4’s ability to successfully commercialize its product candidates, which may harm its business and results of operations.

X4 may expend its limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because X4 has limited financial and managerial resources, X4 focuses on specific product candidates. Currently, X4 is focusing its resources predominantly on X4P-001 for the treatment of WHIM syndrome and X4P-001 for the treatment of various cancers. As a result, X4 may forego or delay pursuit of opportunities with other product candidates or for other indications that have or that could later prove to have greater commercial potential. X4’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or alternate and/or profitable market opportunities. X4’s spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If X4 does not accurately evaluate the commercial potential or target market for a particular product candidate, X4 may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for X4 to retain sole development and commercialization rights to such product candidate.

Risks Related to the Marketing and Commercialization of X4’s Product Candidates

If X4 is unable to establish sales and marketing capabilities to market and sell its product candidates, X4 may be unable to generate any revenue.

Even if X4 is ultimately successful in obtaining regulatory approval of X4P-001 for the treatment of WHIM syndrome or another indication, in order to market and sell X4P-001 and its other product candidates in development, X4 currently intends to build and develop its own sales, marketing and distribution operations. Although X4’s management team has previous experience with such efforts, there can be no assurance that X4 will be successful in building these operations. If X4 is unable to establish adequate sales, marketing and distribution capabilities, X4 may not be able to generate product revenue and may not become profitable. X4 will also be competing with many companies that currently have extensive and well-funded sales and marketing operations. If any of X4’s product candidates are approved, X4 may be unable to compete successfully against these more established companies.

X4’s commercial success depends upon attaining significant market acceptance of its product candidates, if approved, among hospitals, physicians, patients and healthcare payors.

Even if X4 obtains regulatory approval for any of its product candidates that X4 may develop or acquire in the future, the product may not gain market acceptance among hospitals, physicians, health care payors, patients and the medical community. Market acceptance of any of X4’s product candidates for which X4 receives approval depends on a number of factors, including:

 

   

the efficacy and safety of such product candidates as demonstrated in clinical trials;

 

   

the clinical indications for which the product candidate is approved;

 

   

acceptance by major operators of hospitals, physicians and patients of the product candidate as a safe and effective treatment, particularly the ability of X4P-001 and X4’s other product candidates to establish themselves as a new standard of care in the treatment paradigm for the indications that X4 is pursuing;

 

   

the potential and perceived advantages of X4’s product candidates over alternative treatments as compared to the relative costs of the product candidates and alternative treatments;

 

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the prevalence and severity of any side effects with respect to X4’s product candidates, including X4P-001;

 

   

X4’s ability to offer any approved products for sale at competitive prices;

 

   

the timing of market introduction of X4’s products as well as competitive products;

 

   

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

 

   

relative convenience and ease of administration; and

 

   

the effectiveness of X4’s sales and marketing efforts and those of its potential future collaborators.

There may be delays in getting X4’s product candidates, if approved, on hospital or insurance formularies or limitations on coverages that may be available in the early stages of commercialization for newly approved drugs. If any of X4’s product candidates are approved but fail to achieve market acceptance among hospitals, physicians, patients or health care payors, X4 will not be able to generate significant revenues, which would have a material adverse effect on its business, prospects, financial condition and results of operations.

Product candidates may cause undesirable side effects that could delay or prevent their marketing approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any, including marketing withdrawal.

Undesirable side effects caused by any of X4’s product candidates that X4 may develop or acquire could cause X4 or the FDA or other regulatory authorities to interrupt, delay or halt X4’s clinical trials and could result in more restrictive labels or the delay or denial of marketing approval by the FDA or other regulatory authorities of such product candidates. Results of X4’s clinical trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, X4’s trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order X4 to cease further development of or deny approval of its product candidates for any or all targeted indications. In addition, any drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm X4’s business, financial condition and prospects significantly.

Further, clinical trials by their nature utilize a sample of the potential patient population. With a limited number of patients, rare and severe side effects of X4’s product candidates may only be uncovered with a significantly larger number of patients exposed to the product candidate. If X4’s product candidates receive marketing approval and X4 or others identify undesirable side effects caused by such product candidates (or any other similar drugs) after such approval, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may withdraw or limit their approval of such product candidates;

 

   

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

 

   

X4 may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

   

X4 may be required to change the way such product candidates are distributed or administered, conduct additional clinical trials or change the labeling of the product candidates;

 

   

regulatory authorities may require a Risk Evaluation and Mitigation Strategy plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools;

 

   

X4 may be subject to regulatory investigations and government enforcement actions;

 

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X4 may decide to remove such product candidates from the marketplace after they are approved;

 

   

X4 could be sued and held liable for injury caused to individuals exposed to or taking its product candidates; and

 

   

X4’s reputation may suffer.

X4 believes that any of these events could prevent it from achieving or maintaining market acceptance of the affected product candidates and could substantially increase the costs of commercializing its product candidates, if approved, and significantly impact its ability to successfully commercialize its product candidates and generate revenues.

X4’s relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose X4 to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Although X4 does not currently have any drugs on the market, once X4 begins commercializing its product candidates, X4 will be subject to additional healthcare statutory and regulatory requirements and enforcement by federal government and the states and foreign governments in the jurisdictions in which X4 conducts its business. Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which X4 obtains marketing approval. X4’s future arrangements with third-party payors and customers may expose X4 to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which X4 markets, sells and distributes any products for which X4 obtains marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

   

the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid; a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

the federal false claims laws impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; in addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;

 

   

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

 

   

the federal physician payment transparency requirements, sometimes referred to as the “Sunshine Act” under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Centers for Medicare & Medicaid Services, or CMS, information related to payments and other transfers of value to physicians and teaching hospitals and the ownership and investment interests of physicians and their immediate family members in such manufacturers;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, which also imposes obligations on certain covered entity healthcare providers, health plans, and healthcare clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

   

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers;

 

   

some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and

 

   

state and foreign laws also govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that X4’s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that X4’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If X4’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to it, X4 may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of X4’s operations. If any of the physicians or other healthcare providers or entities with whom X4 expects to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

Current and future legislation may increase the difficulty and cost for X4 to obtain marketing approval of and commercialize X4’s product candidates and affect the prices X4 may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of X4’s product candidates, restrict post-approval activities and affect its ability to profitably sell any product candidates for which X4 obtains marketing approval.

In the United States, Medicare covers certain drug purchases by the elderly and eligible disabled people and introduced a reimbursement methodology based on average sales prices for physician-administered drugs. In addition, Medicare may limit the number of drugs that will be covered in any therapeutic class. Ongoing cost reduction initiatives and future laws could decrease the coverage and price that X4 will receive for any approved products. While Medicare beneficiaries are limited to most elderly and certain disabled individual, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates.

In March 2010, the ACA became law. The ACA is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the ACA of importance to X4’s product candidates are the following:

 

   

an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic products;

 

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

 

   

expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;

 

   

extension of manufacturers’ Medicaid rebate liability;

 

   

expansion of eligibility criteria for Medicaid programs;

 

   

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

 

   

new requirements to report financial arrangements with physicians and teaching hospitals;

 

   

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

 

   

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

The current administration supports a repeal of the ACA and an Executive Order has been signed mandating that federal agencies try to waive or delay requirements of the ACA that impose economic or regulatory burdens on states, families, the health-care industry and others. The Executive Order also declares that the administration will seek the “prompt repeal” of the law and that the government should prepare to “afford the States more flexibility and control to create a more free and open healthcare market.” At this time, the immediate impact of the Executive Order is not clear. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These new laws may result in additional reductions in Medicare and other healthcare funding.

X4 expects that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that X4 will receive for any approved product. Any reduction in payments from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent X4 from being able to generate revenue, attain profitability, or commercialize its products.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. X4 cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals, if any, of X4’s product candidates may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject X4 to more stringent product labeling and post-marketing conditions and other requirements.

If, in the future, X4 is unable to establish sales and marketing capabilities or to selectively enter into agreements with third parties to sell and market its product candidates, X4 may not be successful in commercializing its product candidates if and when they are approved.

X4 does not have a sales or marketing infrastructure and has no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product for which X4 retains sales and marketing responsibilities, X4 must either develop a sales and marketing organization or outsource these functions to other third parties. In the future, X4 may choose to build a focused sales and marketing infrastructure to sell some of its product candidates if and when they are approved.

 

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There are risks involved both with establishing X4’s own sales and marketing capabilities and with 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 X4 recruits a sales force and establishes marketing capabilities is delayed or does not occur for any reason, X4 would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and X4’s investment would be lost if X4 cannot retain or reposition its sales and marketing personnel.

Factors that may inhibit X4’s efforts to commercialize its product candidates on its own include:

 

   

X4’s inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

   

the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products; and

 

   

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

If X4 enters into arrangements with third parties to perform sales, marketing and distribution services, X4’s product revenue or the profitability of these product revenue to X4 may be lower than if X4 were to market and sell any products that X4 develops itself. In addition, X4 may not be successful in entering into arrangements with third parties to sell and market its product candidates or may be unable to do so on terms that are favorable to X4. X4 may have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market X4’s products effectively. If X4 does not establish sales and marketing capabilities successfully, either on its own or in collaboration with third parties, X4 will not be successful in commercializing its product candidates.

X4 faces substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than X4 does.

The development and commercialization of new drug products is highly competitive. X4 faces competition with respect to its current product candidates, and will face competition with respect to any product candidates that X4 may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the cancer, such as ccRCC. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to X4’s approach and others are based on entirely different approaches. 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.

X4’s lead product candidate, X4P-001, is in clinical development for the treatment of WHIM syndrome. X4 is also developing X4P-001 for the treatment of SCN, for the treatment of WM and for the treatment of ccRCC. For WHIM syndrome, there are no products currently marketed for the treatment of patients with WHIM syndrome, although there are products available to treat chronic neutropenia and infections. There are, however, a variety of available drug therapies marketed for cancer. In many cases, these drugs are administered in combination to enhance efficacy. Some of the currently approved drug therapies are branded and subject to patent protection, and others are available on a generic basis. Many of these approved drugs are well-established therapies and are widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. X4 expects that if its product candidates are approved, they will be priced at a significant premium over competitive generic products. This may make it difficult for X4 to achieve its business strategy of using its product candidates in combination with existing therapies or replacing existing therapies with its product candidates.

 

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X4’s competitors may develop products that are more effective, have a better safety profile, are more convenient or less costly than any that X4 is developing or that would render X4’s product candidates obsolete or non-competitive. X4’s competitors may also obtain marketing approval from the FDA or other regulatory authorities for their products sooner than X4 may obtain approval for its product candidates, which could result in its competitors establishing a strong market position before X4 is able to enter the market.

Many of X4’s competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than X4 does. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of X4’s competitors. 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 may compete with X4 in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, X4’s programs.

X4 intends to market X4P-001 and its other product candidates outside of the United States, and if X4 does, X4 will be subject to the risks of doing business outside of the United States.

Because X4 intends to market X4P-001 and other product candidates, if approved, outside of the United States, X4’s business is subject to risks associated with doing business outside of the United States. Accordingly, X4’s business and financial results in the future could be adversely affected due to a variety of factors, including:

 

   

failure to develop an international sales, marketing and distribution system for X4’s products;

 

   

changes in a specific country’s or region’s political and cultural climate or economic condition;

 

   

unexpected changes in foreign laws and regulatory requirements;

 

   

difficulty of effective enforcement of contractual provisions in local jurisdictions;

 

   

inadequate intellectual property protection in foreign countries;

 

   

inadequate data protection against unfair commercial use;

 

   

trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the United States Department of Commerce and fines, penalties or suspension or revocation of export privileges;

 

   

the effects of applicable foreign tax structures and potentially adverse tax consequences; and

 

   

significant adverse changes in foreign currency exchange rates.

Even if X4 is able to commercialize X4P-001 or any other product candidate that X4 develops, the product may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm its business.

The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted and, in some markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, X4 might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay its commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues X4 is able to generate from the sale of the product in that country. Adverse pricing limitations may hinder X4’s ability to recoup its investment in one or more product candidates, even if its product candidates obtain marketing approval.

 

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X4’s ability to commercialize X4P-001 or any other product candidate successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. and E.U. healthcare industries and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. X4 cannot be sure that coverage and reimbursement will be available for X4P-001 or any other product that X4 commercializes and, if coverage and reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which X4 obtains marketing approval. Obtaining and maintaining adequate reimbursement for X4P-001 may be particularly difficult because of the higher prices typically associated with drugs directed at smaller populations of patients. In addition, third-party payors are likely to impose strict requirements for reimbursement of a higher priced drug, and any launch of a competitive product is likely to create downward pressure on the price initially charged. If reimbursement is not available or is available only to a limited degree, X4 may not be able to successfully commercialize any product candidate for which X4 obtains marketing approval.

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the applicable regulatory authority. Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers X4’s costs, including research, development, intellectual property, manufacturing, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover X4’s costs and may not be made permanent. Reimbursement rates may vary 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. In the United States, third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. In the European Union, reference pricing systems and other measures may lead to cost containment and reduced prices. X4’s inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that X4 develops could have a material adverse effect on its operating results, its ability to raise capital needed to commercialize products and its overall financial condition.

Governments outside the United States tend to impose strict price controls, which may adversely affect X4’s revenues, if any.

In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, X4 may be required to conduct a clinical trial that compares the cost-effectiveness of its product candidate to other available therapies. If reimbursement of X4’s products is unavailable or limited in sc