Prepared by R.R. Donnelley Financial -- DRS Submission No. 1
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Index to Financial Statements

As confidentially submitted to the Securities and Exchange Commission on May 13, 2014.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

 

 

ZP HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2834   45-4488360

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code No.)

 

(I.R.S. Employer

Identification No.)

34790 Ardentech Court

Fremont, California 94555

(510) 745-1200

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

 

 

Vikram Lamba

President and Chief Executive Officer

34790 Ardentech Court

Fremont, California 94555

(510) 745-1200

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

 

 

Copies to:

Robert W. Sweet, Jr., Esq.

Jeffrey L. Quillen, Esq.

Foley Hoag LLP

Seaport West

155 Seaport Boulevard

Boston, Massachusetts 02110

(617) 832-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) 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, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate

offering price (1)

  Amount of
registration fee (2)

Common Stock, par value $0.0001 per share

  $               $            

 

 

(1) Estimated solely for the purpose of determining the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes the offering price attributable to shares that the underwriters have the option to purchase from the registrant and the selling stockholders solely to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

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

 

 

 


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

 

Subject to Completion, dated May 13, 2014

PROSPECTUS

             Shares

ZP Holdings, Inc.

Common Stock

 

 

This is the initial public offering of the common stock of ZP Holdings, Inc. No public market currently exists for our common stock.

We intend to apply to list our shares of common stock on the NASDAQ Global Market under the symbol “            .”

We expect that the initial public offering price will be between $         and $         per share.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11 of this prospectus.

 

     Per
share
     Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions (1)(2)

   $         $     

Proceeds to us (before expenses)

   $         $     

 

(1) We refer you to “Underwriting” beginning on page      of this prospectus for additional information regarding total underwriter compensation.
(2) The underwriters will also be reimbursed for certain expenses incurred in this offering.

We have granted the underwriters a thirty-day option to purchase             additional shares of common stock on the same terms and conditions set forth above if the underwriters sell more than             shares of common stock in this offering.

Certain of our existing investors and             affiliated entities have indicated an interest in purchasing an aggregate amount of $         million worth of our common stock in this offering at the initial public offering price. The underwriters will receive the same underwriting discount on any shares purchased by these entities as they will on any other shares sold to the public in this offering.

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

The underwriters expect to deliver the shares on or about                     , 2014.

 

 

Prospectus dated                     , 2014.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     11   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     38   

INDUSTRY AND MARKET DATA

     39   

USE OF PROCEEDS

     40   

DIVIDEND POLICY

     41   

CAPITALIZATION

     42   

DILUTION

     44   

SELECTED CONSOLIDATED FINANCIAL DATA

     46   

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

     48   

BUSINESS

     70   

MANAGEMENT

     106   

EXECUTIVE COMPENSATION

     112   

RELATED PERSON TRANSACTIONS

     121   

PRINCIPAL STOCKHOLDERS

     125   

DESCRIPTION OF CAPITAL STOCK

     127   

SHARES ELIGIBLE FOR FUTURE SALE

     129   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     131   

LEGAL MATTERS

     135   

EXPERTS

     135   

WHERE YOU CAN FIND MORE INFORMATION

     135   

INDEX TO FINANCIAL STATEMENTS

     F-1   

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf or to which we have referred you. We and the underwriters have not authorized anyone to provide you with information that is different. We and the underwriters are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where such offers and sales are permitted. Regardless of the time of delivery of this prospectus or any free writing prospectus or any sale of our common stock, the information in this prospectus is accurate only as of the date of this prospectus, and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates.

Until                     , 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any free writing prospectus outside of the United States.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our financial statements and related notes and the risk factors beginning on page 11 before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “Zosano,” “Company,” “we,” “us” and “our” in this prospectus to refer to ZP Holdings, Inc.

Overview

We are a clinical stage specialty pharmaceutical company that has developed a proprietary transdermal microneedle patch system to deliver our proprietary formulations of drugs through the skin to treat a variety of indications. Our microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, which often are unavailable using oral formulations or injections. Our microneedle patch system can be used to deliver numerous medications for a wide variety of indications in commercially attractive markets. By focusing our development efforts on established molecules with known safety and efficacy and premium pricing, we plan to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

Our short-wear-time transdermal patch consists of an array of titanium microneedles that is coated with the relevant drug and attached to an adhesive patch. When the patch is applied with our hand-held applicator, the microneedles penetrate the skin to a depth of 200 microns or less, resulting in rapid dissolution and absorption of the drug coating through the capillary bed, but sparing the nerve endings below. Our system enables rapid and consistent delivery of the drug, with therapeutic effect typically occurring within 30 minutes or less, and easy, pain-free administration. We focus on developing drugs specifically formulated to be administered by our microneedle patch system, for indications in which rapid onset, ease of use and stability offer significant therapeutic and practical advantages. We target indications with patient populations that we believe will provide us with an attractive commercial opportunity. Our lead product candidates, and the indications they are expected to treat, are as follows:

 

    Weekly ZP-PTH, for severe osteoporosis;

 

    ZP-Glucagon, for severe hypoglycemia; and

 

    ZP-Triptan, for migraine.

Weekly ZP-PTH is our proprietary formulation of teriparatide, a synthetic form of parathyroid hormone, PTH 1-34 or, PTH, an anabolic product which regulates serum calcium, to be administered weekly for the treatment of severe osteoporosis in women. Osteoporosis is a disease, primarily affecting post-menopausal women, that is characterized by low bone mineral density and structural deterioration of bone tissue, which can lead to an increase in bone fractures. We believe the only anabolic product currently available in the United States is Eli Lilly & Company’s Forteo®, which generates approximately $1.2 billion in annual revenues globally, with a relatively low patient penetration of approximately 6% of all severe osteoporosis patients.

We believe there is a significant opportunity for a new anabolic agent, such as Weekly ZP-PTH, that has the potential to offer equal or more effective bone fracture reduction with added advantages in safety, the convenience of a weekly administration and room temperature stability. Additionally, we intend to seek approval by the United States Food and Drug Administration, or FDA, of our Weekly ZP-PTH product candidate with a longer or unlimited treatment window and potentially without a black-box warning, which could significantly expand the size of its addressable market compared with that of Forteo®.

In January 2014, we completed a Phase 1 clinical study to evaluate the pharmacokinetics, safety and tolerability of Weekly ZP-PTH patches in a range of doses. The study results demonstrated a rapid increase in

 

 

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serum concentration of PTH, quickly followed by a rapid decrease. This pulsatile pattern, which occurred with all patch doses, is important for efficacy of an anabolic agent. The study results also demonstrated dose proportionality and high bioavailability, with no serious adverse events. We expect to have a pre-IND meeting with the FDA, a meeting preliminary to the filing of an investigational new drug application, or IND, in July 2014 to discuss the clinical study design for our planned Phase 2 and Phase 3 studies of Weekly ZP-PTH. Subject to the outcome of our discussions with the FDA, we expect to begin preparations for our Phase 2 Weekly PTH clinical study in the second half of 2014, and complete it by the end of 2015, with commencement of the Phase 3 clinical study to follow thereafter.

ZP-Glucagon is our proprietary formulation of glucagon, a hormone that raises blood glucose levels, for the emergency treatment of life-threatening, severe hypoglycemia. Severe hypoglycemia is a complication of diabetes treatment, often caused by insulin overdose, characterized by a very low level of blood glucose that can lead to loss of consciousness, seizure, coma and death. Time is of the essence in treatment of patients with severe hypoglycemia in an emergency situation. The currently available products on the market are injectables that require reconstitution at the time of need.

In January 2014 we completed a Phase 1 study designed to assess relative bioavailability with our microneedle patch system at various application sites on the body compared to a currently available form of glucagon administered by intramuscular injection. With each of the ZP-Glucagon treatments, we achieved a faster onset and a higher bioavailability during the critical 30 minutes following application compared to the glucagon injection. Additionally, application of our microneedle patch with our easy-to-use applicator avoids the delay in treatment associated with reconstitution of the currently available injectable products. We believe these attributes will provide critical advantages in the emergency rescue of a potentially comatose patient.

We intend to conduct a second Phase 1 study to evaluate the performance of our ZP-Glucagon product in healthy volunteers at various doses, with and without induction of hypoglycemia, in comparison to comparable doses of glucagon administered by intramuscular injection. We expect to initiate this Phase 1 study in the third quarter of 2014. We expect to initiate a Phase 2 study to investigate the safety and efficacy of ZP-Glucagon in the treatment of insulin-induced hypoglycemia in diabetic patients (as opposed to the healthy volunteers used in our Phase 1 studies) after discussions with the FDA subsequent to completion of this second Phase 1 Study that we expect to conduct in the second half of 2014.

ZP-Triptan is our proprietary formulation of zolmitriptan, one of a class of serotonin receptor agonists known as triptans used for the treatment of migraine, a debilitating neurological disease. Most triptans on the market have a long TMAX, or time after administration when maximum serum concentration is reached, and published data indicates a correlation between TMAX and onset and completeness of pain relief.

ZP-Triptan has demonstrated fast onset in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration. As a result, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

In the fourth quarter of 2013, we completed preclinical animal studies that compared the pharmacokinetic profile of ZP-Triptan to that of zolmitriptan administered intravenously. In these preclinical studies, ZP-Triptan achieved rapid onset and bioavailability that compared favorably with intravenous delivery. We intend to initiate a Phase 1 Study to compare the pharmacokinetic and safety/tolerability profiles of escalated patch doses of zolmitriptan to those of one patch dose of sumatriptan and one subcutaneous injection of sumatriptan in healthy volunteers. Our Phase 2 Study will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults.

Our collaboration with Novo Nordisk. In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a microneedle patch product to administer

 

 

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semaglutide, Novo Nordisk’s investigational proprietary human glucagon-like peptide-1 analogue, or GLP-1, to be applied once weekly using our system for the treatment of type 2 diabetes. Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize GLP-1 products, with the initial product candidate being Novo Nordisk’s semaglutide using our microneedle patch system. We are eligible to receive an upfront payment and payments upon achieving certain preclinical, clinical, regulatory and sales milestones which could total more than $60 million for the first product. We are also eligible to receive royalties on sales of products and will receive development support, as well as reimbursement of all development and manufacturing costs. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Microneedle Patch System for Drug Delivery

Our microneedle patch delivers therapeutic compounds into the skin and provides rapid systemic drug delivery in a convenient, pain–free system that offers the following therapeutic and practical benefits, among others:

    rapid onset and high bioavailability

 

    room-temperature stability

 

    consistent delivery independent of the gastrointestinal tract

 

    convenience and ease of use

 

    short wear time, typically 30 minutes or less, with near complete drug delivery (resulting in no drug overdose if the patient forgets to remove the patch); and

 

    avoidance of the biohazard disposal and safety risks associated with needle injections.

Our microneedle patch system consists of a 3 to 6 cm2 array of titanium microneedles approximately 200-350 microns long, coated with a hydrophilic formulation of the relevant drug, and attached to an adhesive patch. The patch is applied with a hand-held applicator that presses the microneedles into the skin to a uniform depth in each application, close to the capillary bed, allowing for rapid and consistent dissolution and absorption of the drug coating, and short of the nerve endings, enabling pain-free administration. The typical patch wear time is 30 minutes or less. The applicator has an intuitive, simple and patient-friendly design and is available in reusable form for chronic indications or in a disposable, single-use form for acute indications.

 

LOGO    LOGO

Our microneedle patch system is able to deliver a wide range of therapeutic compounds, including biologics and other large, complex molecules that have historically been difficult to deliver transdermally. Our microneedle technology and short-wear patch avoid the skin irritation and sensitization caused by skin-permeating ingredients that are necessary in some existing patch technologies, as well as the adhesion failures experienced when patches requiring extended wear times are worn by the patient, for example when swimming, bathing or during other normal daily activities. Our patch is small and unobtrusive and our mechanical applicator

 

 

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is simple and easy to use, unlike some transdermal systems that involve cumbersome, complex and costly devices with external power sources.

We have tested our microneedle patch system in preclinical and clinical studies that demonstrated its technical feasibility with approximately 30 compounds, ranging from small molecules to proteins, including the following:

 

LOGO

Over 30,000 of our patches have been applied to over 400 patients in over seven Phase 1 clinical studies and one Phase 2 study. Based on this research, we believe that our microneedle patch system can be used to deliver treatments for a wide variety of other indications beyond those on which we are currently focused, in which our fast onset, room-temperature stability and ease of use will fill a significant unmet need.

We intend, independently or through strategic collaborations with others, to explore these and other potential applications of our microneedle patch system. We anticipate that our internal development programs will focus on delivery of premium-priced drugs, and that we will collaborate with third parties with respect to delivery of their proprietary drugs.

Our Strategy

Our goal is to make transdermal drug delivery a standard of care for delivering drugs where fast onset would help improve therapeutic efficacy and compliance. The key elements of our strategy are to:

 

    Pursue indications with high unmet medical need and greater probability of clinical, regulatory and commercial success with a competitive pricing model.

 

    Maintain our focus on effective execution of our clinical trials.

 

    Expand our manufacturing capabilities and reduce our cost of goods.

 

    Develop a targeted commercial infrastructure.

 

    Partner selectively to expand the utilization of our microneedle patch drug delivery platform.

 

 

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Intellectual Property

As of April 30, 2014, we held licenses to 23 United States patents and eight United States patent applications, as well as numerous foreign counterparts to many of these patents and patent applications, covering key features of our microneedle patch system, such as formulation, coating, array design, patch anchoring, patch application, delivery, manufacturing and packaging. The last of our issued patents will expire in 2025. We believe that the long life of our patent portfolio may make collaborating with us particularly attractive for third parties seeking to extend the lifecycle of profitable drugs nearing the expiration of their patent protection.

Risks Associated with our Business

Our ability to implement our business strategy is subject to numerous risks of which you should be aware before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” beginning on page 11 of this prospectus. You are encouraged to read that section in its entirety before making an investment decision. These risks include, but are not limited to, the following:

 

    We have a history of losses. We expect to continue to incur losses over the next several years and may never achieve or maintain profitability.

 

    We have recognized only limited revenues and will need to raise additional capital to operate our business, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or lead product candidates

 

    The development and commercialization of our proposed products is subject to many risks. If we do not successfully develop and commercialize our proposed products, our business will be adversely affected.

 

    The commercialization of large dose products using our microneedle patch system may be dependent on large scale development of different size patches and/or different designs for our patch applicator. If we are not successful in implementing these developments in the time frames we expect, the commercialization of products that would benefit from such developments may be delayed and, as a result, our results of operations may be adversely affected.

 

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

 

    We use our own customized equipment to coat and package our microneedle patch system, making us vulnerable to production and supply problems that could negatively impact our sales.

 

    We have no experience selling, marketing or distributing products and have limited internal capability to do so, and we have limited experience manufacturing our proposed products.

 

    If we fail to comply with our obligations to our licensor in our intellectual property license, we could lose license rights that are important to our business.

 

    Our failure to obtain and maintain patent protection for our technology and our products could permit our competitors to develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

 

    We may not successfully manage our growth.

Corporate Information

We were incorporated under the laws of the State of Delaware in January 2012. Our business was spun out of ALZA Corporation, a subsidiary of Johnson & Johnson, in October 2006. We were originally incorporated under the name The Macroflux Corporation, and changed our name to Zosano Pharma, Inc. in 2007 following the spin-off from ALZA. In April 2012, in a transaction to recapitalize the business, a wholly-owned subsidiary of ZP Holdings was merged with and into Zosano Pharma, Inc., whereby Zosano Pharma was the surviving entity and became a wholly-owned subsidiary of ZP Holdings. Our principal executive offices are located at 34790

 

 

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Ardentech Court, Fremont, California 94555. Our telephone number is (510) 745-1200. Our website address is www.zosanopharma.com. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

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

Implications of Being an Emerging Growth Company

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

    being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    not being required to comply with the auditor attestation requirements in the assessment of our 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 mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure obligations regarding executive compensation; and

 

    not being required to hold a non-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common stock offered by ZP Holdings

            shares

 

Common stock to be outstanding after this offering

            shares (             shares in the event the underwriters elect to exercise in full their over-allotment option to purchase additional shares from us).

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million, or approximately $         million if the underwriters exercise in full their over-allotment option, based on the initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We plan to use the net proceeds from this offering to conduct Phase 2 and Phase 3 clinical trials of our Weekly ZP-PTH and ZP-Glucagon product candidates. We intend to use remaining amounts to fund research and development for ZP-Triptan and our preclinical pipeline, to service our debt obligations, enhance our manufacturing capabilities, and for working capital and other general corporate purposes. See “Use of Proceeds” on page 40 for additional information.

 

Risk factors

You should read the “Risk Factors” section beginning on page 11 and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

“                    ”

The number of shares of our common stock to be outstanding after this offering set forth above is based on 20,427,251 shares of our common stock outstanding as of April 30, 2014, and includes an additional              shares of our common stock that will be issued upon the automatic conversion of our convertible promissory notes outstanding at April 30, 2014, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated offering expenses payable by us. By their terms, these notes will convert into our common stock at a conversion price equal to 85% of our initial public offering price.

The number of shares of common stock to be outstanding after this offering set forth above, excludes:

 

    2,171,396 shares of common stock issuable upon the exercise of stock options outstanding under our 2012 Stock Incentive Plan as of April 30, 2014, at a weighted average exercise price of $0.35 per share;

 

    42,712 shares of common stock available for future issuance under our 2012 Stock Incentive Plan as of April 30, 2014; and

 

    an additional         shares of our common stock that will be made available for future issuance under our 2014 Equity and Incentive Plan to be adopted upon the closing of this offering.

 

 

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Except as otherwise noted, all information in this prospectus:

 

    gives effect to a 1-for-         reverse split of our common stock effected on             ;

 

    assumes no exercise of outstanding options described above;

 

    assumes no exercise by the underwriters of their over-allotment option to purchase             additional shares of common stock from us; and

 

    gives effect to the amendment and restatement of our certificate of incorporation and bylaws upon the closing of this offering.

 

 

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Summary Financial Data

The following summary financial data should be read together with our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. Our summary statement of operations data for the years ended December 31, 2013 and 2012 and our selected balance sheet data as of December 31, 2013 and 2012 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected for any future period. The summary financial data in this section are not intended to replace our audited consolidated financial statements and the related notes.

The pro forma balance sheet data as of December 31, 2013 gives effect to the automatic conversion to              shares of common stock of all of our convertible promissory notes outstanding at December 31, 2013 at a price equal to 85% of the assumed initial public offering price, upon the closing of this offering, resulting in our liability for such notes being reclassified to additional paid-in capital. The pro forma as adjusted balance sheet data as of December 31, 2013 gives effect to (1) the pro forma adjustments described above and (2) our receipt of estimated net proceeds of $         million from this offering, based on the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us, as if each had occurred as of December 31, 2013. The pro forma as adjusted summary financial data are not necessarily indicative of what our financial position would have been if this offering had been completed as of the date indicated, nor are these data necessarily indicative of our financial position for any future date or period.

 

     Year Ended
December 31,
 
     2013     2012  
    

(in thousands except per
share data)

 

Statement of Operations Data:

    

Revenue:

    

License fees revenue

   $ 4,250      $ 9,250   

Collaborative development support services

     —          2,374   
  

 

 

   

 

 

 

Total revenue

     4,250        11,624   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     6,502        3,050   

Manufacturing Services

     1,135        2,349   

General and administrative

     4,582        3,077   
  

 

 

   

 

 

 

Total operating expenses

     12,219        8,476   
  

 

 

   

 

 

 

Income (loss) from operations

     (7,969     3,148   
  

 

 

   

 

 

 

Other (expense) income:

    

Interest expense, net

     (760     (663

Warrant revaluation income

     —          71   
  

 

 

   

 

 

 

Income (loss) before equity in loss of joint venture and gain on termination of joint venture

     (8,729     2,556   

Equity in loss of joint venture

     (366     (738

Gain on termination of joint venture

     3,487        —     
  

 

 

   

 

 

 

Net income (loss)

   $ (5,608   $ 1,818   
  

 

 

   

 

 

 

Net income (loss) per common share—basic

   $ (0.27   $ 0.12   

Net income (loss) per common share—diluted

   $ (0.27   $ 0.12   

Weighted-average shares outstanding—basic

     20,427        15,630   

Weighted-average shares outstanding—diluted

     20,427        15,630   

Pro forma net loss per share-basic and diluted (unaudited) (1)

   $       

Weighted-average pro forma shares used in computing pro forma net loss per common share—basic and diluted (unaudited) (1)

   $       

 

 

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     As of December 31,  
     2013      2012  
     Actual     Pro Forma
(unaudited)
     Pro Forma
As Adjusted
(unaudited) (3)
        
     (in thousands)         

Balance Sheet Data:

          

Cash and cash equivalents (3)

   $ 5,913      $                    $                    $ 4,973   

Working capital (deficit)

   $ (1,368   $         $         $ 1,925   

Total assets

   $ 22,084      $         $         $ 19,628   

Long-term debt (3)

   $ 9,711      $         $         $ 9,026   

Accumulated deficit

   $ (124,223   $         $         $ (118,615

Total stockholders’ equity

   $ 477      $         $         $ 6,020   

 

(1) Pro forma weighted-average shares outstanding and net loss per common share for the year ended December 31, 2013 reflect the conversion of all of our convertible promissory notes outstanding at December 31, 2013 into shares of common stock at a conversion price equal to 85% of the assumed initial public offering price, as if the conversion had occurred at the beginning of the period. Does not give effect to the issuance of shares from this proposed initial public offering or the potential effect of dilutive securities, because the impact of such issuance would be anti-dilutive. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.
(2) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, but giving effect to the terms of our convertible promissory notes which provide that such notes will convert automatically at a price equal to 85% of our initial public offering price. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3) Does not include $2.5 million of convertible promissory notes sold in February 2014.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following risks and uncertainties, as well as general economic and business risks, and all of the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, operating results, financial condition and prospects and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our audited consolidated financial statements and the related notes thereto.

RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL

We have a history of losses. We expect to continue to incur losses over the next several years and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Between February 6, 2006, the inception of our business, and December 31, 2013, we accumulated net losses of $124.2 million. We expect to continue to incur additional significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we continue the preclinical and clinical development of our lead product candidates, Weekly ZP-PTH, ZP-Glucagon and ZP-Triptan. These expenditures will be incurred for development, clinical trials, regulatory compliance, infrastructure, manufacturing and additional employees. Even if we succeed in developing, obtaining regulatory approval for and commercializing one or more of our lead product candidates, because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict that we will ever be able to manufacture, distribute and sell any of our products profitably, and we may never generate revenue that is significant enough to achieve or maintain profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

We have recognized only limited revenues and will need to raise additional capital to operate our business, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or lead product candidates.

Since inception, we have generated limited revenues. For the years ended December 31, 2012 and December 31, 2013, we had total revenue of $11.6 million and $4.25 million, respectively. Substantially all of this revenue was from Asahi Kasei Pharma Corporation, or Asahi, in connection with our strategic partnership, which ended in January 2014. We are not approved to make and have not made any commercial sales of products, and we expect our revenue from collaborations to decline significantly in the near term. We expect that our product development activities will require additional significant operating and capital expenditures resulting in negative cash flow for the foreseeable future. Further, after completing this offering, we do not have any committed external source of funds other than possible milestone payments and possible royalty payments under our strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk. The net proceeds from this offering and our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake or to fund completion of clinical development of any of our product candidates. Accordingly, unless and until we generate revenues and become profitable, we will need to raise additional capital to continue to operate our business, including after the consummation of this offering.

We expect to finance our cash needs through a combination of equity offerings, debt financing and license and collaboration agreements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. However, adequate and additional funding may not be available to us on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

 

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If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our research programs or drug candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings or other arrangements with third parties when needed, we may be required to delay, limit, reduce or terminate our development or future commercialization efforts or partner with third parties to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our note payable to an affiliate of BioMed Realty Holdings, Inc., or BMR, imposes restrictions on our business, and if we default on our obligations, BMR would have a right to foreclose on substantially all of our assets, including our intellectual property.

In connection with our reorganization in April 2012, we entered into a Stock Purchase and Loan Restructuring Agreement with BMR and one of its affiliates. Under this agreement, among other things, we issued a promissory note to BMR (which note was subsequently assigned by BMR to another of its affiliates) in the original principal amount of $8,556,533. This note bears interest at the annual rate of 8% and is due in April 2016. We also agreed to covenants that may limit our ability to take some actions without the consent of the noteholder. In particular, without the noteholder’s consent under the terms of the note, we are prohibited from:

 

    incurring indebtedness;

 

    creating liens on our property;

 

    making payments on any debt that is subordinated to the secured promissory note;

 

    making investments in or loans to others;

 

    acquiring assets other than in the ordinary course; and

 

    disposing of the collateral that secures the loan.

Our indebtedness to BMR’s affiliate may limit our ability to finance future operations or capital needs or to engage in, expand or pursue our business activities. It may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding debt, which may not be desirable or possible.

We intend to use the proceeds from this offering to service our debt to BMR and repay the principal of BMR’s secured note. We have pledged substantially all of our assets, including our intellectual property, to secure our obligations under this note. If we default on our obligations prior to repaying the secured note, and are unable to obtain a waiver for such default, BMR’s affiliate would have a right to accelerate the payment of the note, and possibly foreclose on the collateral, which would potentially include our intellectual property and the proceeds of this offering. Any such action on the part of the noteholder would significantly harm our business and our ability to operate.

We have limited operating history upon which to base an investment decision.

Although our business was formed in 2006, we were a development stage company, with limited operations until April 2012. We do not currently have the ability to perform the sales, marketing and manufacturing functions necessary for the production and sale of our products on a commercial scale. Our most advanced product is our Weekly ZP-PTH, for which we intend to continue to conduct Phase 2 clinical trials until at least 2015, with pivotal trials to follow. The successful commercialization of any of our product candidates will require us to perform a variety of functions, including:

 

    continuing to undertake development of our lead product candidates;

 

    participating in the regulatory approval processes;

 

    formulating and manufacturing products; and

 

    conducting sales and marketing activities.

 

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Our operations continue to be focused on organizing and staffing our company, acquiring, developing and securing our proprietary technology and undertaking preclinical and clinical trials of our products. In addition, our previous strategic partnership with Asahi, which terminated in January 2014, has accounted for substantially all of our revenues to date. This collaboration and our limited internal operations provide a limited basis for you to assess our ability to commercialize our products and the advisability of investing further in our securities.

We expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. We will need to transition at some point from a company with a research and development focus to a company capable of supporting commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

The report of our independent registered public accounting firm on our 2013 audited consolidated financial statements contains a going concern modification, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.

Our recurring losses from operations and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern without additional debt or equity financing. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our audited consolidated financial statements for 2013 with respect to this uncertainty. Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock and make it more difficult for us to obtain financing. If we are unable to obtain sufficient capital in this offering, our business, financial condition and results of operations will be materially and adversely affected and we will need to obtain alternative financing or significantly modify our operational plans to continue as a going concern. Further, if we successfully complete and receive the net proceeds from this offering, given our planned expenditures for the next several years, including without limitation, expenditures in connection with our clinical trials of our lead product candidates, our independent registered public accounting firm may conclude, in connection with the preparation of our financial statements for 2014 or any subsequent period that there is substantial doubt regarding our ability to continue as a going concern.

We have prepared our audited consolidated financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence.

RISKS RELATED TO THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES

The development and commercialization of our proposed products is subject to many risks. If we do not successfully develop and commercialize our proposed products, our business will be adversely affected.

We are focusing our development efforts on three lead product candidates, Weekly ZP-PTH, ZP-Glucagon, and ZP-Triptan. The development and commercialization of each of these products is subject to many risks including:

 

    we may experience delays in the enrollment of patients in our clinical trials;

 

    we may not be able to demonstrate that any of our lead product candidates are safe and effective as a treatment for their respective indications to the satisfaction of the United States Food and Drug Administration, or FDA, or other similar regulatory bodies;

 

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    the results of our clinical studies may not meet the level of statistical or clinical significance required by the FDA for marketing approval;

 

    the FDA may disagree with the number, design, size, conduct or implementation of our clinical studies;

 

    the FDA may not find the data from preclinical studies and clinical studies sufficient to demonstrate that clinical and other benefits outweigh its safety risks;

 

    the FDA may disagree with our interpretation of data from our preclinical studies and clinical studies or may require that we conduct additional studies;

 

    the FDA may not accept data generated at our clinical study sites;

 

    the FDA may require development of a risk evaluation and mitigation strategy as a condition of approval;

 

    the FDA may identify deficiencies in our manufacturing processes or facilities or those of our third-party manufacturers; and

 

    the FDA may change its approval policies or adopt new regulations.

If any of these risks materializes, we could experience significant delays or an inability to successfully commercialize our drug candidates, which would have a material adverse effect on our business, financial condition and results of operations.

We will not be able to sell our products if we do not obtain required United States or foreign regulatory approvals.

We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates, including Weekly ZP-PTH, ZP-Glucagon, ZP-Triptan or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the United States and approvals from the FDA-equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any product candidate, we expect that we will have to submit to the FDA an NDA demonstrating that the product candidate is safe for humans and effective for its intended indication and indicated use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. The FDA has substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during its regulatory review. Delays in obtaining regulatory approvals may:

 

    delay commercialization of, and our ability to derive product revenues from, our products;

 

    impose costly procedures on us; and

 

    diminish any competitive advantages that we may otherwise enjoy.

We may never obtain regulatory clearance for any of our products. Failure to obtain approval of any of our products will severely undermine our business by leaving us without a saleable product, and therefore without any source of revenues, until other products can be developed. There is no guarantee that we will ever be able to develop or acquire another product.

 

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In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we can commercialize any drugs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates for sale outside the United States.

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

Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The clinical trial process is also time consuming. We estimate that clinical trials of Weekly ZP-PTH will take at least four years to complete and that completion of preclinical and clinical trials of ZP-Glucagon and ZP-Triptan will each take two or more years to complete. Furthermore, failure of any product candidate can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:

 

    changes in government regulation, administrative action or changes in FDA policy with respect to clinical trials that change the requirements for approval;

 

    unforeseen safety issues;

 

    determination of dosing issues;

 

    lack of effectiveness during clinical trials;

 

    slower than expected rates of patient recruitment and enrollment;

 

    inability to monitor patients adequately during or after treatment; and

 

    inability or unwillingness of medical investigators to follow our clinical protocols.

In addition, we, the FDA, or other regulatory authorities and ethics committees with jurisdiction over our studies may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA or other authorities find deficiencies in our regulatory submissions or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for existing or future clinical trials. Any such unexpected expenses or delays in our clinical trials could increase our need for additional capital, which may not be available on favorable terms or at all.

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

 

    be delayed in obtaining marketing approval for our drug candidates;

 

    not obtain marketing approval at all;

 

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

 

    obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

 

    be subject to additional post-marketing testing requirements; or

 

    have the drug removed from the market after obtaining marketing approval.

Our development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring drugs to market before we do, and thereby impair our ability to successfully commercialize our product candidates.

 

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As an organization, we have never conducted a Phase 3 clinical trial or submitted an NDA, and may be unable to do so for any product candidates we are developing, including our three leading product candidates, Weekly ZP-PTH, ZP-Glucagon or ZP-Triptan.

If our planned Phase 2 clinical trials are successful, we intend to conduct Phase 3 trials, either alone or with a future collaborator, and to submit to the FDA for approval one or more new drug applications, or NDAs. The conduct of Phase 3 clinical trials and the submission of a successful NDA is a complicated process. As an organization, we have not conducted a Phase 3 clinical trial before, have limited experience in preparing, submitting and prosecuting regulatory filings, and have not previously submitted an NDA for any product candidate. We also have had limited interactions with the FDA and have not discussed our clinical trial designs or implementation with the FDA. Consequently, even if our Phase 2 clinical trials are successful, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to NDA submission and approval of Weekly ZP-PTH or any other product candidate we are developing. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of products that we develop. Failure to commence or complete, or delays in, our planned clinical trials, would prevent us from or delay us in commercializing Weekly ZP-PTH or any other product candidate we are developing.

The results of our clinical trials may not support our product claims.

Even if our clinical trials are completed as planned, we cannot be certain that the results will support our product claims. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and preclinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate revenues. In addition, our clinical trials to date have involved small patient populations. Because of the small sample sizes, the results of these clinical trials may not be indicative of future results.

We are conducting, and may in the future conduct, clinical trials for product candidates in sites around the world, and government regulators, including the FDA in the United States, may choose to not accept data from trials conducted in such locations.

We have conducted, and may in the future choose to conduct, one or more of our clinical trials outside the United States. For example, our Phase 1 clinical trial for Weekly ZP-PTH was conducted in Australia.

There is no guarantee that data from these clinical trials will be accepted by regulators approving our product candidates for commercial sale. In the case of the United States, although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this 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 ethical principles. The study population must also adequately represent the United States population, and the data must be applicable to the United States population and United States medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical studies conducted outside of the United States must be representative of the population for whom we intend to label the product 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 studies also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from our clinical trials, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of Weekly ZP-PTH or any future product candidates. Similar regulations and risks apply to other jurisdictions as well.

 

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

 

    foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;

 

    administrative burdens of conducting clinical trials under multiple foreign regulatory schema;

 

    foreign exchange fluctuations; and

 

    diminished protection of intellectual property in some countries.

Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.

The manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for our product candidates will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, current good manufacturing practices, or cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The regulatory approvals for our product candidates may be subject to limitations on the indicated uses for which the products may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product candidate. The FDA closely regulates the post-approval marketing and promotion of drugs and drug delivery devices to ensure they are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and, if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing.

In addition, later discovery of previously unknown problems with our product candidates, manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

    restrictions on such product candidate, or manufacturing processes;

 

    restrictions on the labeling or marketing of a product;

 

    restrictions on product distribution or use;

 

    requirements to conduct post-marketing clinical trials;

 

    warning or untitled letters;

 

    withdrawal of the products from the market;

 

    refusal to approve pending applications or supplements to approved applications that we submit;

 

    recall of products;

 

    fines, restitution or disgorgement of profits or revenue;

 

    suspension or withdrawal of marketing approvals;

 

    refusal to permit the import or export of our products;

 

    product seizure; or

 

    injunctions or the imposition of civil or criminal penalties.

 

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We or our partners may choose not to continue developing or commercialize a product or product candidate at any time during development or after approval, which would reduce or eliminate our potential return on investment for that product or product candidate.

We currently do not have any products on the market. We have three self-funded product candidates in early stages of research and development. In addition, we have recently entered into a strategic partnership and license agreement with Novo Nordisk to commercialize Novo Nordisk’s proprietary GLP-1 using our microneedle patch system.

At any time, we or our partners may decide to discontinue the development of a marketed product or product candidate or not to continue commercializing a marketed product or a product candidate for a variety of reasons, including the appearance of new technologies that make our product obsolete, the position of our partner in the market, competition from a competing product, or changes in or failure to comply with applicable regulatory requirements. For example, from 2011 to 2013, we were a party to a strategic partnership and exclusive license agreement with Asahi to commercialize Asahi’s TeriboneTM product using our microneedle patch system. In January 2014, this relationship with Asahi was terminated. If we terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses. If one of our partners terminates a development program or ceases to market an approved or commercial product, we will not receive any future milestone payments or royalties relating to that program or product under our partnership agreement with that party.

Our near-term product revenue growth heavily relies on the success of our three leading product candidates.

The near-term growth of our revenues heavily relies on one or more of our three leading product candidates, Weekly ZP-PTH, ZP-Glucagon or ZP-Triptan, reaching the market. We cannot assure you that we will be able to complete the clinical trials required for each product candidate in a timely manner, or at all, and ultimately obtain regulatory approval for any of these product candidates, which would limit our near-term growth prospects, and would create uncertainty around the value and usefulness of our microneedle patch system and our manufacturing facility and equipment.

Since 2006, we have devoted substantial resources to the development of the Weekly ZP-PTH. The success of this product in particular is essential to our prospects for business growth over the next few years. We have projected that we will not receive revenues from sales of this product before 2019. If our lead product candidates are not approved, our business and financial prospects will be significantly harmed.

The commercialization of large dose products using our microneedle patch system may be dependent on large scale development of different size patches and/or different designs for our patch applicator. If we are not successful in implementing these developments in the time frames we expect, the commercialization of products that would benefit from such developments may be delayed and, as a result, our results of operations may be adversely affected.

Our microneedle patch system can be used to deliver numerous medications for a wide variety of indications. Our ability to successfully commercialize any given drug product using our microneedle patch system may be dependent on large scale development of different patch sizes or different designs for our patch applicator. With a 3cm2 microneedle patch, we can coat a maximum payload of approximately 3mg including the active drug and formulation excipient. The ratio of active drug to excipient and the total coatable quantity are dependent on the active drug. In order to deliver higher quantities of active drug, we will need to increase the surface area of the patch further. The actual timing development can vary compared to our estimates for reasons that may or may not be within our control. Delays in the development of different size patches and/or different designs for our patch applicator, may adversely affect our business, financial condition and results of operations.

 

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In addition to the level of commercial success of our lead product candidates, our future growth is also dependent on our ability to successfully develop a pipeline of additional product candidates, and we cannot give any assurance that any of our product candidates will receive regulatory approval or that any approved products will be successfully commercialized.

Our long-term growth will be limited unless we successfully develop a pipeline of additional product candidates. We do not have internal new drug discovery capabilities, and our primary focus is on developing improved transdermal drug delivery systems by reformulating drugs previously approved by the FDA using our proprietary technologies.

If we are unable to expand our product candidate pipeline and obtain regulatory approval for our product candidates on the timelines we anticipate, we will not be able to execute our business strategy effectively and our ability to substantially grow our revenues will be limited, which would harm our long-term business, results of operations, financial condition and prospects.

Physicians and patients may not accept and use our products.

Physicians and patients may not accept and use our products. Acceptance and use of any of our products will depend upon a number of factors, including:

 

    perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our products;

 

    cost-effectiveness of our product relative to competing products;

 

    availability of coverage and reimbursement for our product from government or other healthcare payers; and

 

    effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.

Because we expect sales of our lead product candidates, if approved, to generate substantially all of our product revenues for the foreseeable future, the failure of these products to gain market acceptance would harm our business and would require us to seek additional financing.

We may expend our limited resources to pursue a particular product and fail to capitalize on products that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we have decided to focus on developing products that we identified for severe osteoporosis, severe hypoglycemia and migraine. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and products for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product, we may relinquish valuable rights to that product through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product.

If serious adverse or inappropriate side effects are identified during the development of our products, we may need to abandon our development of some of our products.

All of our products are still in preclinical or clinical development. Our products may result in undesirable side effects, or have characteristics that are unexpected. If they do, we may need to abandon their development, which would result in significant harm to our financial position.

 

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We manufacture our products internally to support our clinical needs, and may encounter manufacturing failures that could impede or delay supply for our clinical trials of our microneedle patch system or our product candidates, or delay the preclinical and clinical development or regulatory approval of our product candidates.

Any failure in our internal manufacturing operations could cause us to be unable to meet the demand for our products for our research and development and delay the preclinical and clinical development or regulatory approval of our product candidates. Our internal manufacturing operations may encounter difficulties involving, among other things, production yields, regulatory compliance, quality control and quality assurance, and shortages of qualified personnel. Regulatory approval of our product candidates could be impeded, delayed, limited or denied if the FDA does not maintain the approval of our manufacturing processes and facilities.

In addition, once approved, we plan to manufacture our products for commercial sale internally. We have no experience producing our microneedle patch system in commercial quantities.

Proceeds from this offering, in part will be used to develop and expand our internal manufacturing capabilities. Difficulties could result in commercial supply shortfalls of our products, delay in the commercial launch of any of our product candidates, if approved, delay in our preclinical studies, clinical trials and regulatory submissions, or the recall or withdrawal of our products from the market.

RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES

If we are not able to establish collaborations, we may have to alter our development plans.

Our product development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. We may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of some of those product candidates.

We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may also be restricted under collaboration agreements from entering into agreements on certain terms with other potential collaborators. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular product, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.

We use customized equipment to coat and package our microneedle patch system, making us vulnerable to production and supply problems that could negatively impact our sales.

We presently use customized equipment for the coating and packaging of our microneedle patch system. Because of the customized nature of our equipment, and the fact that we rely on third parties to manufacture our equipment, if the equipment malfunctions and we do not have adequate inventory of spare parts or qualified personnel to repair the equipment, we may encounter delays in the manufacture of our microneedle patch system and may not have sufficient inventory to meet our customers’ demands, which could adversely affect our business, financial condition and results of operations.

We may form strategic partnerships and collaborations in the future, and we may not realize the benefits of such alliances.

We may form strategic partnerships, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business. These

 

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relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction.

For example, under our strategic partnership and license agreement with Novo Nordisk, we and Novo Nordisk are currently conducting a feasibility study to evaluate the feasibility of using our microneedle patch system for the delivery of Novo Nordisk’s proprietary GLP-1. Following the completion of this feasibility study, Novo Nordisk will decide, in its sole discretion, whether to continue or terminate the license agreement. If Novo Nordisk elects to not continue the license agreement, then we will not be eligible to receive any milestone or royalty payments from Novo Nordisk under the agreement.

We expect to rely on third parties to conduct our future clinical trials for our lead product candidates, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We currently expect to engage a third-party contract research organization, or CRO, to conduct certain of our planned clinical trials for Weekly ZP-PTH and any of our other lead product candidates that may progress to clinical development. We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct those clinical trials. Agreements with such third parties might terminate for a variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative arrangements, that would delay our product development activities.

Our reliance on these third parties for research and development activities will reduce our control over these activities, but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our drug candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our drug candidates.

We also expect to rely on other third parties to store and distribute supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our drugs, producing additional losses and depriving us of potential revenue.

RISKS RELATED TO MARKETING AND SALE OF OUR PRODUCTS

We have no experience selling, marketing or distributing products and have limited internal capability to do so, and we have limited experience manufacturing our proposed products.

We currently have no sales, marketing or distribution capabilities. We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of our proposed products. Although we intend to develop a targeted commercial infrastructure to market and distribute our proprietary products, our future success

 

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may depend, in part, on our ability to enter into and maintain collaborative relationships to provide such capabilities, on the collaborators’ strategic interest in the product candidates under development and on such collaborators’ ability to successfully market and sell any such products. We intend to pursue collaborative arrangements regarding the sales and marketing of our products. However, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that our collaborators will have effective sales forces. To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our proposed products, significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise. There can also be no assurance that we will be able to establish or maintain relationships with third-party collaborators or develop in-house sales and distribution capabilities. To the extent that we depend on third parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third parties, and there can be no assurance that such efforts will be successful. In addition, there can also be no assurance that we will be able to market and sell our products in the United States or overseas.

We have limited experience manufacturing our proposed products. If we are unable to establish a new manufacturing facility or expand existing manufacturing facilities, we may be unable to produce commercial materials or meet demand, if any should develop, for our products. Any such failure could delay or prevent our development of any product candidates and would have a material adverse effect on our business, financial condition and results of operations.

If our products do not obtain sufficient market share against competitive products, we may not achieve sufficient product revenues and our business will suffer.

The market for our products is characterized by intense competition and rapid technological advances. All of our products will compete with a number of existing and future drug delivery systems and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs or have substantially greater financial resources than we do, as well as significantly greater experience in:

 

    developing drugs;

 

    undertaking preclinical testing and human clinical trials;

 

    obtaining FDA and other regulatory approvals of drugs;

 

    formulating and manufacturing drugs; and

 

    launching, marketing and selling drugs.

Products developed or under development by competitors may render our products or technologies obsolete or non-competitive.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our products will have to compete with existing therapies. We face competition from pharmaceutical, biotechnology and medical device companies, including transdermal delivery companies, in the United States and abroad. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger

 

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research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations, and therefore, we may not be able to hire or retain qualified personnel to run all facets of our business.

Our ability to generate product revenues will be diminished if patients are unable to obtain adequate levels of reimbursement.

Our ability to commercialize products, alone or with collaborators, will depend in part on the extent to which coverage and reimbursement will be available from:

 

    government and health administration authorities;

 

    private health maintenance organizations and health insurers; and

 

    other healthcare payers.

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, are challenging the prices charged for medical products and services. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if one of our product candidates is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover such drug. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for one of our product candidates, once approved, market acceptance of such product could be reduced.

If we become subject to product liability lawsuits, we may incur substantial liabilities and may be required to limit commercialization of our products.

The testing and marketing of medical products entail an inherent risk of product liability. This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. We may not be able to obtain adequate product liability insurance at an acceptable cost to protect against potential product liability claims, which could prevent or inhibit the commercialization of our products we develop, alone or with collaborators.

Business disruptions could seriously harm our future revenues, results of operations and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we fail to comply with our obligations to our licensor in our intellectual property license, we could lose license rights that are important to our business.

We are a party to an Intellectual Property License Agreement dated October 5, 2006, as amended, with ALZA Corporation and we may enter into additional license agreements in the future. Our existing license agreement imposes, and we expect that any future license agreements will impose, various diligence, product payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any

 

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product that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. The occurrence of such events could have a material adverse effect on our business, financial condition and results of operations.

Our failure to obtain and maintain patent protection for our technology and our products could permit our competitors to develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our commercial success is significantly dependent on intellectual property related to our product portfolio. We are either the licensee or assignee of numerous issued and pending patent applications that cover various aspects of our assets, including, most importantly, our microneedle patch system and our products.

Our success depends in large part on our and our licensor’s ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. In some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if third parties who license patents to us fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.

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 our and our licensor’s patent rights are highly uncertain. Our and our licensor’s pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we or our licensor were the first to make the inventions claimed in our owned and licensed patents or pending patent applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, the first to file a patent application is entitled to the patent. We may become involved in opposition or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such proceeding could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. 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, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

 

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The costs and other requirements associated with prosecution of pending patent applications and maintenance of issued patents are material to us. Bearing these costs and complying with these requirements is essential to procurement and maintenance of patents integral to our proposed product offerings.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or patent applications will come due for payment periodically throughout the lifecycle of patent applications and issued patents. In order to help ensure that we comply with any required fee payment, documentary and/or procedural requirements as they might relate to any patents for which we are an assignee or co-assignee, we employ legal help and related professionals as needed to comply with those requirements. Failure to meet a required fee payment, document production or procedural requirement can result in the abandonment of a pending patent application or the lapse of an issued patent. In some instances the defect can be cured through late compliance but there are situations where the failure to meet the required deadline cannot be cured. Such an occurrence could compromise the intellectual property protection around a preclinical or clinical candidate and possibly weaken or eliminate our ability to protect our eventual market share for that product.

Our business will be harmed if we do not successfully protect the confidentiality of our trade secrets.

In addition to our patented technology and products, we rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such as our corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. In addition, any of these parties may breach the agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

We could be prevented from selling products and could be forced to pay damages and defend against litigation, if we infringe the rights of third parties.

If our products, methods, processes or other technologies infringe the proprietary rights of other parties, we could incur substantial costs and may have to:

 

    obtain licenses, which may not be available on commercially reasonable terms, if at all;

 

    abandon an infringing product;

 

    redesign our products or processes to avoid infringement;

 

    stop using the subject matter claimed in the patents held by others;

 

    pay damages; or

 

    defend litigation or administrative proceedings which may be costly whether we win or lose and which could result in a substantial diversion of our financial and management resources.

We may become involved in costly and time-consuming lawsuits with uncertain outcomes to protect or enforce our patents.

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, or may refuse to stop the other

 

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party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we may be reliant on them to do so.

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

Some of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

There is a great deal of litigation concerning intellectual property in our industry, and we could become involved in litigation. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business, financial condition, results of operations and ability to compete in the marketplace.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our 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 will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or the USPTO, and may become involved in opposition, derivation, reexamination, inter-partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.

The USPTO is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not become effective until March 16, 2013. Accordingly, it is not clear

 

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what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

Intellectual property rights do not necessarily address all potential threats to any competitive advantage we may have.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

 

    Others may be able to make compounds that are the same as or similar to our product candidates, which are aimed initially at the generic market and are not covered by the claims of the patents that we own or have exclusively licensed.

 

    We or any of our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed.

 

    Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

 

    It is possible that our pending patent applications will not lead to issued patents.

 

    Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

    Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

RISKS RELATED TO LEGISLATION AND ADMINISTRATIVE ACTIONS

Our 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 us 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 product candidates for which we obtain marketing approval. Our future arrangements with third party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain 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 providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

 

    the federal False Claims Act imposes criminal and civil penalties, including 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 government 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;

 

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    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal false statements statute prohibits 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;

 

    federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals;

 

    the federal transparency requirements under the PPACA, requires manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

    analogous state laws and regulations such as state anti-kickback and false claims laws and analogous non-U.S. fraud and abuse laws and regulations, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and 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 in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

State and non-U.S. 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 preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our 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 our 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 our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect 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.

Healthcare reform may have a material adverse effect on our industry and our results of operations.

From time to time, legislation is implemented to reign in rising healthcare expenditures. In March 2010, President Obama signed into law the PPACA, as amended by the Health Care and Education Reconciliation Act. The PPACA includes a number of provisions affecting the pharmaceutical industry, including annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics and increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program. In addition, among other things, the PPACA also establishes a new Patient-Centered Outcomes Research Institute to oversee,

 

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identify priorities in and conduct comparative clinical effectiveness research. Congress has also proposed a number of legislative initiatives, including possible repeal of the PPACA. At this time, it remains unclear whether there will be any changes made to certain provisions of the PPACA or its entirety. In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. Most recently, on August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which may result in such changes as aggregate reductions to Medicare payments to providers of up to two percent per fiscal year, starting in 2013. The full impact on our business of the PPACA and the Budget Control Act is uncertain. We cannot predict whether other legislative changes will be adopted, if any, or how such changes would affect the pharmaceutical industry generally.

If any of our products becomes subject to a product recall it could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design, manufacture or labeling. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the product would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a product is found. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, we could be required to report those actions as recalls. A recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

We may be exposed to liability claims associated with the use of hazardous materials and chemicals.

Our research and development activities may involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenue, if any.

In some countries, particularly in 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 coverage and reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidate to other available therapies. If reimbursement of our drugs is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

 

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RISKS RELATED TO EMPLOYEE MATTERS, OUR OPERATIONS AND MANAGING GROWTH

We may not successfully manage our growth.

Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management and on administrative, operational and financial resources. To manage this growth, we may be required to expand our facilities, augment our operational, financial and management systems and hire and train additional qualified personnel. Our inability to manage this growth could have a material adverse effect on our business, financial condition and results of operations.

Our business and operations would suffer in the event of computer system failures or security breaches.

Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development and manufacturing programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and development of our product candidates could be delayed.

Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of individually identifiable information, including, without limitation, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Effective upon the completion of this offering, we will adopt a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent improper activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We may enter into or seek to enter into business partnerships, combinations and/or acquisitions which may be difficult to integrate, disrupt our business, divert management attention or dilute stockholder value.

We may enter into business partnerships, combinations and/or acquisitions. We have limited experience in making acquisitions, which are typically accompanied by a number of risks, including:

 

    the difficulty of integrating the operations and personnel of the acquired companies;

 

    the potential disruption of our ongoing business and distraction of management;

 

    potential unknown liabilities and expenses;

 

    the failure to achieve the expected benefits of the combination or acquisition;

 

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    the maintenance of acceptable standards, controls, procedures and policies; and

 

    the impairment of relationships with employees as a result of any integration of new management and other personnel.

If we are not successful in completing acquisitions that we may pursue in the future, we would be required to reevaluate our business strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete the acquisitions. In addition, we could use substantial portions of our available cash as all or a portion of the purchase price, or we could issue additional securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.

We rely on key executive officers and scientific and medical advisors, and their knowledge of our business and technical expertise would be difficult to replace.

We are highly dependent on our chief executive officer, our chief scientific officer and our principal scientific, regulatory and medical advisors. We do not have “key person” life insurance policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our key personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.

We will need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.

RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK

There is no public market for our common stock and an active trading market for our common stock may not develop and you may not be able to resell your shares of our common stock at or above the initial offering price, if at all.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock was determined through negotiations with the underwriters and may not be indicative of the price at which our common stock will trade upon the completion of this offering. Although we intend to apply to have our common stock listed, and expect our common stock to be approved for listing, on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop or is not sustained, it may be difficult for you to sell shares you purchased in this offering at an attractive price, if at all.

The trading price of the shares of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.

Our stock price may be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

 

    announcements relating to development, regulatory approvals or commercialization of our product candidates or those of competitors;

 

    results of clinical trials of our products or those of our competitors;

 

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    announcements by us or our competitors of significant strategic partnerships or collaborations or terminations of such arrangements;

 

    actual or anticipated variations in our operating results;

 

    changes in financial estimates by us or by any securities analysts who might cover our stock;

 

    conditions or trends in our industry;

 

    changes in laws or other regulatory actions affecting us or our industry;

 

    stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the biopharmaceutical industry;

 

    announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

    capital commitments;

 

    investors’ general perception of our company and our business;

 

    disputes concerning our intellectual property or other proprietary rights;

 

    recruitment or departure of key personnel; and

 

    sales of our common stock, including sales by our directors and officers or specific stockholders.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies whose shares trade in the stock market. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources from our business.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that equity research analysts publish about us and our business. We do not currently have, and may never obtain, research coverage by equity research analysts. Equity research analysts may elect not to provide research coverage of our common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our common stock. In the event we do have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.

We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma as adjusted net tangible book value per share after this offering. Based on the initial public offering price of $         per share, you will experience immediate dilution of $         per share, representing the difference between our pro forma as adjusted net tangible book value per share after this offering and the initial public offering price.

 

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In addition, as of April 30, 2014, we had outstanding stock options to purchase an aggregate of 2,171,396 shares of common stock at a weighted average exercise price of $0.35 per share. To the extent these outstanding options are exercised, there will be further dilution to investors in this offering.

A significant portion of our total outstanding shares are restricted from immediate resale, but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or if the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.

Upon the completion of this offering, the             shares sold in this offering will be freely tradable and the remaining outstanding shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of lock-up agreements between some of our stockholders and the underwriters. The representatives of the underwriters may release these stockholders from their lock-up agreements with the underwriters at any time, which would allow for earlier sales of shares in the public market.

In addition, following the completion of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately             million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 in the case of our affiliates.

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Upon the completion of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates will, in the aggregate, beneficially own approximately     % of our outstanding common stock, assuming they purchase all of the shares they have indicated an interest in purchasing in this offering, and giving effect to the conversion of our outstanding convertible promissory notes. Of the foregoing beneficial owners, funds controlled by one investor, New Enterprise Associates, or NEA, will beneficially own approximately     % of our common stock, and funds controlled by a second investor, BioMed Realty Holdings, Inc., and its affiliates, or BMR, will beneficially own approximately     % of our common stock. As a result, NEA and BMR, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets or other significant corporate transactions.

Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.

 

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

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:

 

    being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    not being required to comply with the auditor attestation requirements in the assessment of our 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 mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure obligations regarding executive compensation; and

 

    not being required to hold a non-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.

We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th or (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act and the rules and regulations of The NASDAQ Global Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending December 31, 2015, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we have never been required to assess our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

 

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We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities.

Our disclosure controls and procedures may not be effective to ensure that we make all required disclosures.

Upon consummation of this offering, we will become subject to the periodic reporting requirements of the Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not increase the value of your investment.

We will have broad discretion over the use of proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. We expect to use the net proceeds to us from this offering to conduct clinical trials of Weekly ZP-PTH and ZP-Glucagon, to fund the research and development of our preclinical pipeline, including ZP-Triptan, to service our note with BMR, enhance our manufacturing capability, and for working capital and general corporate purposes. Our failure to apply the net proceeds from this offering effectively could compromise our ability to pursue our growth strategy and we might not be able to yield a significant return, if any, on our investment of these net proceeds. In addition, the net proceeds from this offering may not be sufficient for our anticipated uses, and we may need additional resources to progress our product candidates to the stage we expect. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains and you may never receive a return on your investment.

You should not rely on an investment in our common stock to provide dividend income. We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements

 

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may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Investors seeking cash dividends should not purchase our common stock.

We will incur increased costs and demands upon management as a result of being a public company.

As a public company listed in the United States, we will incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and The NASDAQ Stock Market, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If we do not comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions in Delaware law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

    providing for three classes of directors with the term of office of one class expiring each year, commonly referred to as a staggered board;

 

    authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

    limiting the liability of, and providing indemnification to, our directors;

 

    limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

    requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

    controlling the procedures for the conduct and scheduling of board and stockholder meetings;

 

    limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and

 

    providing that directors may be removed by stockholders only for cause.

These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.

 

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As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.

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

As of December 31, 2013, we had $133.1 million of federal and $129.6 million of state net operating loss carryforwards available to offset future taxable income. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Code has previously occurred or will occur as a result of this offering. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. In some cases, you can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “plan,” “potential” “predict,” “project” or the negative of those terms or similar words. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. You should read these statements carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other “forward-looking” information.

These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

The sections in this prospectus titled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other Items and sections in this prospectus, discuss some of the factors that could contribute to these differences.

You should read this prospectus, the documents that we reference in this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including independent industry publications and market surveys by third parties privately commissioned by us that we believe to be reliable. In presenting this information, we have also made assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for our product candidates. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of             shares of our common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $         million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting estimated underwriting discounts and commissions.

We expect to use the net proceeds from this offering, together with cash and cash equivalents on hand to conduct planned clinical trials for our lead product candidates, fund research and development of our preclinical pipeline, service of debt obligations, enhance our manufacturing capabilities and for working capital and general corporate purposes. Specifically, we intend to apply the net proceeds of this offering as follows:

 

    approximately $         million to fund our planned Phase 2 clinical trial of our Weekly ZP-PTH product candidate;

 

    approximately $         million to fund our planned second Phase 1 clinical trial and initiate a Phase 2 clinical trial and Phase 3 clinical trial of our ZP-Glucagon product candidate;

 

    approximately $         million to initiate Phase 1 and Phase 2 clinical trials of our ZP-Triptan product candidate;

 

    approximately $         million to fund research and development of our preclinical pipeline;

 

    approximately $         million to enhance our manufacturing capabilities;

 

    approximately $         million to repay our debt obligations; and

 

    the remainder for working capital and general corporate purposes.

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. We cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. Many variables are inherent in the development of our lead product candidates at this time, such as the timing and results of preclinical animal studies and clinical trials and the timing of regulatory submissions and evolving regulatory requirements. The amount and timing of our actual expenditures will depend upon such variables and we cannot currently predict the stage of development we expect the net proceeds of this offering to achieve for our clinical studies and product candidates.

As a result, we will have broad discretion over the use of the net proceeds from this offering, and investors will be relying on our judgment regarding the application of the net proceeds of this offering. In addition, we might decide to postpone or not pursue certain clinical trials or preclinical activities if the net proceeds from this offering and the other sources of cash are less than expected.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to finance the growth and development of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any future financing instruments, provisions of applicable law and other factors the board deems relevant. See “Risk Factors—Risks related to this offering and ownership of our common stock—We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on the appreciation in the price of our common stock.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2013 on:

 

    An actual basis;

 

    A pro forma basis giving effect to the conversion of our convertible promissory notes outstanding at December 31, 2013 into             shares of common stock upon the closing of this offering, resulting in the liability for such notes being reclassified to additional paid-in capital, each upon the closing of this offering; and

 

    A pro forma as adjusted basis, giving additional effect to the sale of             shares of our common stock offered in this offering, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the filing and effectiveness of a restated certificate of incorporation upon the closing of this offering.

The pro forma information below is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the following table in conjunction with our financial statements and related notes, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     As of December 31, 2013  
     Actual     Pro Forma      Pro Forma as
Adjusted
 
     (in thousands, except par value)  

Cash and cash equivalents

   $ 5,913      $                    $                

Short-term investment

     361        
  

 

 

   

 

 

    

 

 

 

Revolving line of credit

   $ 496      $         $     

Convertible promissory notes payable, current

     3,108        

Secured promissory note

     9,711        

Stockholders’ equity (deficit):

       

Common stock, $0.0001 par value: 30,000 shares authorized; 20,427,              and              shares issued and outstanding, actual, pro forma and pro forma as adjusted, respectively,

     2        

Additional paid-in capital

     124,698        

Accumulated deficit

     (124,223     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity

     477        
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 13,792      $         $     
  

 

 

   

 

 

    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and giving effect to the terms of the notes which provide that the notes convert into our common stock at a conversion price equal to 85% of our initial public offering price. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalent and total stockholders’ equity (deficit) and total capitalization by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The table above does not include the following potentially dilutive shares of common stock outstanding:

 

    1,879,165 shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $0.36 per share as of December 31, 2013;

 

    334,943 shares of our common stock reserved for future issuance under our 2012 stock incentive plan as of December 31, 2013; and

 

                     shares of common stock issuable upon conversion to common stock of $2.5 million of convertible promissory notes we issued in February 2014.

 

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DILUTION

If you invest in our common stock, your equity interest in our company will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value (deficit) per share of our common stock after this offering. Our pro forma historical net tangible book value (deficit) as of December 31, 2013 was $         million, or $         per share of common stock. Our pro forma net tangible book value (deficit) per share set forth below represents our total assets, excluding intangible assets, less our total liabilities, divided by the number of shares of our common stock outstanding on December 31, 2013, after giving effect to the conversion of our convertible promissory notes outstanding at December 31, 2013 into         shares of common stock, resulting in the liability for such notes being reclassified to additional paid-in capital, upon the closing of this offering. For purposes of this calculation, we use a conversion price equal to 85% of the assumed initial public offering price set forth in the next paragraph.

After giving effect to our issuance and sale of         shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of December 31, 2013 would have been $         million, or $         per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $         per share. The initial public offering price per share will significantly exceed the pro forma as adjusted net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $         per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

Assumed initial public offering price

      $                

Pro forma net tangible book value (deficit) per share as of December 31, 2013

   $                   

Increase per share attributable to sale of shares of common stock in this offering

   $        

Pro forma as adjusted net tangible book value per share

      $     

Dilution per share to new investors

      $     
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the pro forma as adjusted net tangible book value (deficit) by $         million, the pro forma as adjusted net tangible book value (deficit) per share by $         per share (giving effect to the change in the conversion price at which our convertible promissory notes would convert to common stock) and the dilution in pro forma net tangible book value (deficit) per share to investors in this offering by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $         and decrease (increase) the dilution per share to investors participating in this offering by approximately $        , assuming the assumed initial public offering price of $         per share remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value (deficit) will increase to $         per share, representing an immediate increase to existing stockholders of $         per share and an immediate dilution of $         per share to new investors. If any shares are issued upon exercise of outstanding options or warrants, you will experience further dilution.

 

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The following table summarizes, on a pro forma as adjusted basis as of December 31, 2013, after giving effect to the conversion of our convertible promissory notes outstanding at December 31, 2013 into common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before the deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased       Total Consideration       Average
Price
Per Share
 
        
        Number          %          Amount          %      

Existing stockholders

               $                             $                

New investors

             $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $                  $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

The number of shares purchased from us by existing stockholders is based on 20,427,250.579 shares of our common stock outstanding as of December 31, 2013, includes an additional             shares of our common stock that will be issued upon the automatic conversion of our outstanding convertible promissory notes, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated offering expenses payable by us, and giving effect to the terms of the notes which provide that the notes convert into our common stock at a conversion price equal to 85% of our initial public offering price, and excludes:

 

    1,879,165 shares of common stock issuable upon the exercise of stock options outstanding under our 2012 Stock Incentive Plan as of December 31, 2013, at a weighted average exercise price of $0.36 per share;

 

    334,943 shares of common stock available for future issuance under our 2012 Stock Incentive Plan as of December 31, 2013;

 

    an additional             shares of our common stock that will be made available for future issuance under our 2014 Equity and Incentive Plan to be adopted upon the closing of this offering; and

 

                 shares of common stock issuable upon conversion to common stock of $2.5 million of convertible promissory notes we issued in February 2014.

If the underwriters exercise their option to purchase additional shares from us in full, the number of shares held by new investors will increase to             , or     % of the total number of shares of common stock outstanding after this offering and the percentage of shares held by existing stockholders will decrease to     % of the total shares outstanding.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data included in this section are not intended to replace the audited consolidated financial statements and related notes included elsewhere in this prospectus.

We derived the selected statement of operations data for the years ended December 31, 2013 and 2012 and the balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historical results are not indicative of the results that may be expected in the future.

 

     Year ended December 31,  
         2013             2012      
         (in thousands, except per share amounts)      

Statement of Operations Data:

    

License fees revenue

   $ 4,250      $ 9,250   

Collaborative development support services

     —          2,374   
  

 

 

   

 

 

 

Total revenue

     4,250        11,624   

Operating expenses:

    

Research and development

     6,502        3,050   

Manufacturing services

     1,135        2,349   

General and administrative

     4,582        3,077   
  

 

 

   

 

 

 

Total operating expenses

     12,219        8,476   
  

 

 

   

 

 

 

Income (loss) from operations

     (7,969     3,148   

Other income (expense):

    

Interest expense, net

     (760     (663

Warrant revaluation income

     —          71   
  

 

 

   

 

 

 

Income (loss) before equity in loss of joint venture and gain on termination of joint venture

     (8,729     2,556   

Equity in loss of joint venture

     (366     (738

Gain on termination of joint venture

     3,487        —     
  

 

 

   

 

 

 

Net income (loss)

   $ (5,608   $ 1,818   
  

 

 

   

 

 

 

Net income (loss) per common share – basic

   $ (0.27   $ 0.12   
  

 

 

   

 

 

 

Net income (loss) per common share – diluted

   $ (0.27   $ 0.12   
  

 

 

   

 

 

 

Weighted-average shares used in computing net income (loss) per common share – basic

     20,427        15,630   
  

 

 

   

 

 

 

Weighted-average shares used in computing net income (loss) per share – diluted

     20,427        15,630   
  

 

 

   

 

 

 

Pro forma net loss per common share – basic and diluted (1)

   $     
  

 

 

   

Weighted-average shares used in computing pro forma net loss per common share – basic and diluted (1)

         
  

 

 

   

 

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(1) Pro forma weighted-average shares outstanding and net loss per common share, basic and diluted, for the year ended December 31, 2013 reflect the conversion of our convertible promissory notes outstanding at December 31, 2013 into shares of common stock, as if the conversion had occurred at the beginning of the period. Does not give effect to the issuance of shares from this proposed initial public offering or the potential effect of outstanding dilutive securities where the impact of such issuance would be anti-dilutive. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.

 

     As of December 31,  
     2013     2012  
     (in thousands)  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 5,913      $ 4,973   

Working capital (deficit)

     (1,368     1,925   

Total assets

     22,084        19,628   

Long-term debt

     9,711        9,026   

Accumulated deficit

     (124,223     (118,615

Total stockholders’ equity

     477        6,020   

Total liabilities and stockholders’ equity

   $ 22,084      $ 19,628   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our selected consolidated financial data and the audited consolidated financial statements and related notes for the years ended December 31, 2013 and 2012 included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause or contribute to these differences.

Overview

We are a clinical stage specialty pharmaceutical company that has developed a proprietary transdermal microneedle patch system to deliver our proprietary formulations of drugs through the skin to treat a variety of indications. Our microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, which often are unavailable using oral formulations or injections. Our microneedle patch system can be used to deliver numerous medications for a wide variety of indications in commercially attractive markets. By focusing our development efforts on established molecules with known safety and efficacy and premium pricing, we plan to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

In October 2006, our business, originally named The Macroflux Corporation, was spun out of ALZA Corporation, a subsidiary of Johnson & Johnson. Since inception, we have devoted substantially all our resources to the development and commercialization of our microneedle patch system. Our lead product candidates are Weekly ZP-PTH, for the treatment of severe osteoporosis, ZP-Glucagon, for the treatment of severe hypoglycemia and ZP-Triptan, for the treatment of migraine. These lead product candidates are generic drugs specifically formulated to be administered by our microneedle patch system, and are treatments for indications in which rapid onset, ease of use and stability offer particularly important therapeutic and practical advantages, and have patient populations that we believe will provide us with an attractive commercial opportunity.

We are actively engaged in research and preclinical and clinical development for these lead product candidates. Of these product candidates, the more advanced is our Weekly ZP-PTH, for which we have recently completed a Phase 1 clinical study. For ZP-Glucagon, we have completed a clinical Phase 1 study designed to assess relative bioavailability with our microneedle patch system compared to a currently available form of glucagon administered by intramuscular injection. We intend to conduct a second Phase 1 clinical study to evaluate the performance of ZP-Glucagon in the third quarter of 2014. In the fourth quarter of 2013, we completed a preclinical animal study of ZP-Triptan, our proprietary formulation of zolmitriptan, one of a class of serotonin receptor agonists known as triptans used for the treatment of migraine.

We have no product sales to date, and we will not have product sales unless and until we receive approval from the United States Food and Drug Administration, or FDA, or equivalent foreign regulatory bodies, to market and sell one or more of our product candidates. Accordingly, our success depends not only on the development, but also on our ability to finance the development, of these products. We will require substantial additional funding to complete development and seek regulatory approval for these products. Additionally, we currently have no sales, marketing or distribution capabilities and thus our ability to market our products in the future will depend in part on our ability to develop such capabilities.

In addition to developing our lead product candidates, we are actively seeking opportunities to collaborate with biopharmaceutical companies to explore other therapeutic uses for our microneedle patch system. During 2011, 2012 and 2013, we were a party to a strategic partnership and license agreement with Asahi Kasei Pharma Corporation, or Asahi, to develop and commercialize our microneedle patch system for delivery of Asahi’s Teribone™ product for the treatment of severe osteoporosis in Japan, China, Taiwan and South Korea. This

 

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partnership and related license agreement ended in January 2014 and as a result, we have recaptured global commercialization rights on our microneedle patch system for the delivery of parathyroid hormone. In January 2014, we entered into an agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a new transdermal presentation of semaglutide, an investigational proprietary human GLP-1 (Glucagon-Like Peptide-1) analogue, to be administered once a week using our microneedle patch system for the treatment of type 2 diabetes.

For the immediate future, our efforts and resources will be focused primarily on developing our leading product candidates and our preclinical pipeline, building manufacturing infrastructure, raising capital and recruiting key personnel.

Key Developments Important to Understanding Our Financial Statements

The audited consolidated financial statements and the following discussion include the consolidated accounts of ZP Holdings, Inc. and subsidiaries, and our 100% interest in ZP Group LLC, the entity we operated as a joint venture with Asahi until its termination in December 2013. All intercompany balances and transactions have been eliminated in consolidation in our audited consolidated financial statements.

2012 recapitalization

Since inception in 2006, we have been financed primarily by the sale of preferred stock and debt to private investors. In January 2012, ZP Holdings, Inc. was formed. In April 2012, in a transaction to recapitalize the business, a wholly-owned subsidiary of ZP Holdings was merged with and into Zosano Pharma, Inc., whereby Zosano Pharma was the surviving entity and became a wholly-owned subsidiary of ZP Holdings. As part of this reorganization, ZP Holdings issued shares of its common stock to the stockholders and optionholders of Zosano Pharma in exchange for the cancellation of all outstanding common and preferred stock and all outstanding stock options of Zosano Pharma. Also, in connection with this reorganization, all outstanding debt and related accrued interest of Zosano Pharma held by investors was cancelled, and all outstanding warrants to purchase capital stock were terminated. The recapitalization included a stock purchase and loan restructuring agreement with BioMed Realty Holdings, Inc., or BMR, and an affiliate of BMR, under which we issued shares of our common stock to BMR and its affiliate and a secured promissory note to BMR, as more fully described under the caption “Restructuring of lease agreement with BMR” below. BMR, together with its affiliates, is the landlord for our Fremont, California subsidiary and a stockholder and creditor of ZP Holdings.

Restructuring of lease agreement with BMR

Our operations are conducted in a 55,000 square foot facility in Fremont, California, where we operate our manufacturing operations and house our engineering, research and development and administrative employees. In April 2012, we amended the lease agreement with BMR to reduce future rent obligations to approximately $0.7 million per year, with a new lease term of seven years. In addition, ZP Group LLC, the entity operating our previous joint venture with Asahi, signed the new lease as a sub-tenant. In consideration of these amendments, BMR waived all outstanding principal, accrued interest and unpaid rent as of April 2012. We issued a new four-year non-callable secured promissory note to BMR with an original principal amount of $8.6 million bearing interest at the rate of 8% per annum, compounded annually. All principal and interest will become due and payable to BMR in April 2016. The note, which we refer to herein as the BMR secured promissory note, is secured by substantially all of our assets, including intellectual property. In addition to the note, we issued shares of our common stock to BMR, and an affiliate of BMR, in connection with the restructuring. As a result, BMR and its affiliates hold approximately 39.2% of our outstanding shares as of April 30, 2014.

Asahi license and collaboration agreement

In February 2011, we entered into a strategic partnership and license agreement with Asahi whereby we granted to Asahi an exclusive license to use our microneedle patch system for the treatment and prevention of

 

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osteoporosis in Japan, China, Taiwan and South Korea. As consideration for the license, Asahi paid us an upfront license fee of $7.5 million and agreed to pay contingent payments, based upon the achievement of certain contractually specified events, and additional cash royalty payments on sales of future products to be commercialized by Asahi using our microneedle patch system. As of December 31, 2013, Asahi had paid us a total of $16.5 million in additional milestone payments. As part of the collaboration, Asahi also agreed to reimburse us for costs to develop and commercialization our microneedle patch system for delivery of Asahi’s Teribone™ product. Under the license agreement, we were responsible for all product development, including manufacturing of the clinical trial material in support of development activities and clinical trials planned to be conducted by Asahi in Japan.

In April 2012, we reached agreement with Asahi to amend the license agreement and transfer the manufacturing responsibilities from us to ZP Group LLC, a new entity created to grant increased management control to Asahi and its affiliates. ZP Group LLC was a joint venture of AKP USA, Inc., or AKPUS, an affiliate of Asahi, and us, with each holding 50% of the equity interests. We contributed fixed assets to ZP Group LLC necessary for production of clinical trial material. In addition, all of our manufacturing and engineering personnel and some other employees terminated their employment with us and became employees of ZP Group LLC. ZP Group LLC then served as a contract manufacturing organization to both Asahi and us.

As part of the agreement to form ZP Group LLC, the original license agreement was amended to eliminate the product milestones and to reduce the future royalties payable to us on sales of products governed by the agreement. In addition, AKPUS provided ZP Group LLC with a line of credit for working capital needs, and we had the right to receive quarterly cash distributions from ZP Group LLC based on depreciation and utilization of the equipment assets contributed by us to the joint venture.

In December 2013, we entered into a termination agreement with Asahi to terminate our joint venture, which effectively caused ZP Group LLC to cease all operations. As a result, certain employees of ZP Group LLC were hired by us. In connection with the termination, Asahi agreed to pay us $2.4 million as a termination payment, an additional $3.5 million for the settlement of employee-related termination costs, including salaries and benefits, severance payments, and other termination-related fees and expenses, and reimbursement for certain out-of-pocket expenses and non-cancelable purchase commitments of ZP Group LLC. At December 31, 2013, we recorded accounts receivable from joint venture of $3.4 million related to these agreements. In January 2014, also in connection with the termination agreement, our strategic partnership and license agreement was terminated, which included a termination of the exclusive license to Asahi to use our microneedle patch system for the treatment and prevention of osteoporosis in Japan, China, Taiwan and South Korea.

Bridge financing

In September 2013, we raised approximately $3 million through the sale of convertible promissory notes to current investors, including affiliates of BMR, New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P., and ProQuest Management LLC. In February 2014, we sold an additional $2.5 million of the same series of convertible promissory notes to affiliates of BMR and New Enterprise Associates 12, Limited Partnership. The convertible promissory notes, which we refer to herein as the convertible bridge notes, are unsecured, subordinated notes which mature on September 9, 2014 and accrue simple interest at the rate of 8% per annum. The notes will automatically convert into our common stock at a price equal to 85% of the initial public offering price, upon the closing of our initial public offering. Our selected consolidated financial data on page 46 reflects the impact, on a pro forma basis, of the conversion of these notes outstanding at December 31, 2013 on our net loss per common share, given certain assumptions described therein.

Acquisition of Eco Planet Corp.

In October 2013, ZP Holdings entered into a Stock Purchase Agreement with Eco Planet Corp. (currently named Zosano, Inc.), a Delaware corporation with common stock quoted for trading on OTC Markets, pursuant

 

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to which Zosano, Inc. issued and sold to ZP Holdings, for an aggregate cash purchase price of $0.4 million, newly issued shares of common stock equal to 99.9% of the issued and outstanding common stock of Zosano, Inc. as of immediately following the transaction. In connection with our acquisition of Zosano, Inc., we planned to raise new capital through the sale of additional common stock or other securities to institutional investors in a private placement, or the PIPE financing. We had anticipated that in connection with the PIPE financing we would enter into a registration rights agreement pursuant to which the public company would agree to file a registration statement with the SEC to register for resale the securities it planned to issue in the PIPE financing. As of December 31, 2013, we decided not to undertake the PIPE financing as planned and we are actively pursuing the sale of Zosano, Inc.

Collaboration with Novo Nordisk

In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a new transdermal presentation of semaglutide, an investigational proprietary human GLP-1 (Glucagon-Like Peptide-1) analogue, to be administered once a week using our microneedle patch system for the treatment of Type 2 diabetes. Initially, we will collaborate with Novo Nordisk on nonclinical experiments to verify delivery of semaglutide using our microneedle patch system.

Under the terms of the agreement, we will grant Novo Nordisk a worldwide, exclusive license to develop and commercialize Novo Nordisk’s proprietary GLP-1 analogues using our microneedle patch system. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement.

The agreement also provides for potential milestone payments upon achieving certain nonclinical, clinical, regulatory and sales milestones of more than $60 million for the first product. Novo Nordisk has also agreed to pay us royalties on sales of products and will receive development support, as well as reimbursement of all development and manufacturing costs.

Financial Operations Overview

Summary

Our revenue to date has been generated primarily from license and development revenue under our collaboration and license agreement with Asahi, which was terminated in January 2014. We have not generated any commercial product revenue. As of December 31, 2013, we had an accumulated deficit of approximately $124.2 million. We have incurred significant losses and expect to incur significant and increasing losses in the foreseeable future as we advance our product candidates into later stages of development and, if approved, commercialization. We cannot assure you that we will receive additional collaboration revenue in the future, whether pursuant to our agreement with Novo Nordisk or any other partnership that we might pursue.

We expect our research and development expenses and manufacturing expenses to increase as we continue to advance our product candidates through clinical and manufacturing development. Because of the numerous risks and uncertainties associated with our technology and drug development, we are unable to predict the timing or amount of expenses incurred or when, or if, we will be able to achieve profitability.

After this offering, additional capital will be required to undertake our planned research and manufacturing development activities and to meet our operating requirements through 2014 and beyond. We intend to raise such capital through the issuance of additional equity through public or private offering, borrowings, and strategic alliances with partner companies. However, if such financing is not available at adequate levels or on acceptable terms, we could be required to significantly reduce our operating expenses and delay or reduce the scope of or eliminate some of our development programs, enter into a collaboration or other similar arrangement with respect to commercialization rights to Weekly ZP-PTH or any of our other product candidates, out-license intellectual property rights to transdermal delivery technology and sell unsecured assets, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all.

 

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Revenue

Our revenue to date has been generated primarily from non-refundable license fee payments and reimbursements for research and development expenses under our collaboration and license agreement with Asahi. In addition to upfront license payments, we also received from Asahi other contingent payments upon the occurrence of certain contractually defined events. As of December 31, 2013, we had received an aggregate of $16.5 million under the license agreement with Asahi. Reimbursements for research and development expenses under our prior license agreement with Asahi for research and development and out-of-pocket expenses were based on expenses actually incurred and these payments were recognized as revenue on a time and material basis and recorded as service revenue in the consolidated statement of operations.

Research and development expenses

Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our proprietary product candidates. We recognize all research and development costs as they are incurred.

Research and development expenses consist of:

 

    employee-related expenses, which include salaries, benefits and stock-based compensation;

 

    fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations, or CROs, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

 

    fees paid to conduct nonclinical studies, drug formulation, and cost of consumables for used in nonclinical and clinical trials;

 

    other consulting fees paid to third parties; and

 

    allocation of certain shared costs, such as facilities-related costs and IT support services.

We expect our research and development expenses to substantially increase as we begin to plan and initiate Phase 2 and Phase 3 clinical trials on our Weekly ZP-PTH product candidate, a second Phase 1 study and future Phase 2 studies to investigate the safety and efficacy of ZP-Glucagon, and Phase 1 and Phase 2 studies on ZP-Triptan starting in the second half of 2014.

 

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We began tracking our external costs by project in 2006, and implemented a timesheet tracking system for personnel-related costs in the first quarter of 2011. The following table summarizes our research and development expenses incurred during the years ended December 31, 2013 and 2012, and from our inception to December 31, 2013:

 

            From Inception
in October 2006
to
December 31, 2013
 
       
     Year Ended
December 31,
    
     2013      2012     
     (in thousands)  

Product candidate:

        

Weekly ZP-PTH (1)

   $ 1,679       $ —         $ 1,679   

ZP-Glucagon (2)

     2,529         83         2,612  

ZP-Triptan (3)

     118         —           118  

ZP-PTH (Daily) (4)

     —           —           16,504  

Other research and development projects (5)

     900         1,776         7,236   

Unallocated research and development expenses (6)

     1,276         1,191         25,224  
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 6,502       $ 3,050       $ 53,373  
  

 

 

    

 

 

    

 

 

 

 

(1) Spending to date on Weekly ZP-PTH reflects spending since project initiation in the second quarter of 2013.
(2) Spending to date on ZP-Glucagon reflects spending since project initiation in the third quarter of 2012.
(3) We initiated our ZP-Triptan project in September 2013.
(4) We completed Phase 2 clinical studies on a ZP-PTH Daily dosing product candidate prior to 2012. Our research and development focus has since changed to the weekly ZP-PTH program.
(5) Our other research projects include our research and development efforts on compounds other than our lead product candidates and projects in connection with potential partnership and collaboration development.
(6) Unallocated costs include research and development expenses not allocated to a specific program or product candidate, and personnel-related costs prior to the implementation of our timesheet tracking system in 2011.

The project-specific expenses summarized in the table above include costs directly attributable to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and indirect costs to our product candidates on a project-specific basis, and we include these costs in the project-specific expenses. We expect our research and development expenses to increase in the future. The process of conducting the necessary clinical studies to obtain regulatory approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors including but not limited to: the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Furthermore, we have entered into collaborations with major biopharmaceutical companies (Asahi, previously, and Novo Nordisk) to participate in the development and commercialization of our microneedle patch system, and we may enter into additional collaborations in the future. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. Additionally our collaborative partner may only be interested in applying our technology in the development and advancement of their own product candidates, as we have previously experienced. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

Manufacturing services expenses

Manufacturing services expenses prior to the formation of ZP Group LLC in April 2012, and subsequent to the termination of the joint venture in December 2013, consist of the costs of our manufacturing related

 

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activities, including personnel costs, consulting fees, fees paid to contract manufacturing organizations, or CMO, active pharmaceutical ingredients, clinical trial materials and supplies, allocations of facilities-related costs, as well as equipment depreciation expense. Beginning with the formation of ZP Group LLC in April 2012, we paid ZP Group LLC on a pay-per-use basis when we engaged ZP Group LLC as a CMO to manufacture the applicator, coat the active pharmaceutical ingredients on the transdermal microneedles, and assemble the patches in room temperature stable packages for our nonclinical studies and clinical trials. Effective December 2013, ZP Group LLC ceased providing CMO services to us and became a wholly owned subsidiary of Zosano Pharma.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance, human resources management and other administrative personnel, legal and accounting fees, business insurance, allocation of facilities-related costs, costs of maintaining our intellectual property portfolio and other corporate expenses. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administration and professional services.

Interest expense, net

Interest expense, net of interest income, consists primarily of interest costs related to our short-term and long-term borrowings. Interest expense for 2012 consists of interest paid to Silicon Valley Bank for the debt facility we paid off in connection with our recapitalization in April 2012 and accrued interest on the BMR secured promissory note. For 2013, interest expense reflects accrued interest on both the convertible bridge notes issued in September 2013 and the BMR secured promissory note as well as interest on the line of credit.

Warrant revaluation income

Warrant revaluation income in 2012 resulted from the re-measurement of our preferred stock warrant liability associated with the warrants to purchase preferred stock issued to lenders under our debt facilities and certain of the former preferred stockholders of Zosano Pharma prior to the 2012 reorganization. We recorded changes to the estimated fair value of the preferred stock warrants as income or loss at each balance sheet date until they were exercised, expired or converted into shares of our common stock. All outstanding warrants were retired in connection with our 2012 recapitalization.

Equity in loss of joint venture

Equity in loss of joint venture reflects our share of ZP Group LLC’s net loss for the applicable reporting period. Through December 20, 2013, we owned a 50% equity interest in ZP Group LLC. Under the terms of ZP Group LLC’s operating agreement, we recorded our share of ZP Group LLC’s net loss after reimbursement of depreciation expense on our contributed capital equipment.

Gain on termination of joint venture

We recorded a one-time gain in 2013 in connection with the termination of the joint venture in ZP Group LLC. The gain primarily consists of a notice period termination payment and excess personnel termination reimbursement from Asahi, partially offset by the net deficit of our investment in ZP Group LLC.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make

 

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estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are those that are most critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue recognition

To date, we have generated revenue from collaboration and license agreements for the development and commercialization of our technology, in particular our microneedle patch system. Collaboration and license agreements may include non-refundable upfront payments, partial or complete reimbursement of research and development costs, contingent payments based on the occurrence of specified events under our collaboration arrangements and royalties on sales of product candidates if they are successfully approved and commercialized.

Our performance obligations under the collaborations may include the transfer or license of intellectual property rights, provision of research and development services and related materials, and participation on development and/or commercialization committees with the collaboration partners. We make judgments that affect the periods over which we recognize revenue. We periodically review our estimated periods of performance based on the progress under each arrangement and account for the impact of any changes in estimated periods of performance on a prospective basis.

We adopted an accounting standard that provides guidance on revenue recognition using the milestone method. Payments that are contingent upon achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. Milestones are defined as events that can only be achieved based on our partner’s performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones subject to this guidance. Accordingly, we have not recorded any milestone revenue on our consolidated financial statements as the contingent payments received did not meet the definition of milestone revenue.

Amounts related to research and development services are recognized as the related services or activities are performed, in accordance with the contract terms. Payments to us are typically based on the number of full-time equivalent personnel assigned to the collaboration project and the related research and development expenditures incurred.

Accrued research and development and manufacturing expenses

As part of the process of preparing financial statements, we are required to estimate and accrue expenses, the largest of which are research and development expenses. This process involves:

 

    communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost;

 

    estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and

 

    periodically confirming the accuracy of our estimates with selected service providers and making adjustments, if necessary.

 

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Examples of estimated research and development and manufacturing expenses that we accrue include:

 

    fees paid to CROs and other service providers in connection with nonclinical studies and clinical trials;

 

    fees paid to investigative sites in connection with clinical studies;

 

    fees paid to CMOs in connection with the production of nonclinical and clinical study materials; and

 

    professional service fees for consulting and related services.

We base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with research institutions and CROs that conduct and manage nonclinical and clinical studies on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under these contracts often depend on factors such as the successful enrollment of patients and the completion of certain clinical study milestones. Our service providers invoice us in arrears for services performed. In accruing clinical costs, we estimate the time period over which patient enrollment will be completed and the progress of patient enrollment through completion in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the number of patients enrolled or the costs of patient enrollment, our actual expenses could differ from our estimates.

To date, we have not experienced significant changes in our estimates of accrued clinical trial expenses after a reporting period. However, due to the nature of the estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities.

Stock-based compensation

We account for our stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service/vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based awards and stock price volatility.

We account for stock-based compensation to non-employees in accordance with the recognition provisions of ASC 505-50, Equity-Based Payments to Non-Employees, using a fair value approach. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time.

We account for stock-based compensation to employees of ZP Group LLC, our prior joint venture with Asahi, in accordance with ASC 323-10-25 and ASC 323-10-35, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee, using a fair value approach. Under the guidance, a reporting entity should recognize stock-based compensation expense at fair value under ASC 718 if it grants awards in the reporting entity’s stock to employees of the investee, in this case ZP Group LLC, if other investors do not make proportionate awards and the reporting entity’s ownership interest does not increase by a proportionate amount. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time. As a result of the termination of our joint venture with Asahi and the resultant termination of all ZP Group LLC employees, all outstanding unvested stock options granted to employees of ZP Group LLC as of December 20, 2013 were canceled. Vested stock options granted to employees of ZP Group LLC are subject to the exercise provisions under our 2012 Stock Incentive Plan. In February 2014, the board of directors extended the exercise period on the vested stock options by 60 days to allow for more time to exercise, if elected by the former employees of ZP Group LLC.

 

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We estimate the fair value of our stock options and awards and the related compensation expense using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions including: (1) estimated period of time outstanding, or expected term, of the options granted, (2) volatility, (3) risk-free interest rate and (4) expected dividend yield. Because stock-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. We have estimated expected forfeitures of stock options based on our historical employment turnover rate and expected turnover in developing a future forfeiture rate. If our actual forfeiture rate varies from our estimates, additional adjustments to compensation expense may be required in future periods. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if facts change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Information pertaining to the Black-Scholes valuation assumptions used for stock options granted to employees and to employees of our previous joint venture, ZP Group LLC, during 2013 and 2012 is as follows:

 

     Year Ended December 31,  
For valuation of employees and joint venture employees grants:        2013             2012      

Assumptions:

    

Expected volatility

     89.00     89.00

Expected term in years

     6.08        6.08   

Risk-free interest rate

     1.74     0.97

Expected dividend yield

     0.00     0.00

Information pertaining to the Black-Scholes valuation of common stock options granted to non-employees during 2013 and 2012 is as follows:

 

     Year Ended December 31,  
For valuation of non-employee grants:        2013             2012      

Assumptions:

    

Expected volatility

     89.00     89.00

Expected term in years

     10.00        10.00   

Risk-free interest rate

     3.01     1.78

Expected dividend yield

     0.00     0.00

The dividend yield is based upon the assumption that we will not declare a dividend over the life of the options. We have been unable to use historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. We have therefore utilized the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of our stock options considered to have “plain vanilla” characteristics. The risk-free interest rate is based on the U.S. Treasury strip rate on the date of the grant. We compute volatility under the “guideline public company method” by utilizing the average of a peer group comprised of publicly-traded companies and expect to continue to do so until we have adequate historical data regarding the volatility of our traded stock price. The peer group was determined based upon companies considered to be direct competition or having been presented by independent parties as a “comparable” company based upon market sector. In determining a comparable, we have excluded “large-cap” entities. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense recognized in the statement of operations for the years ended December 31, 2012 and 2013 does not record tax-related effects on stock-based compensation given our historical and anticipated operating losses and offsetting changes in its valuation allowance that fully reserves against potential deferred tax assets.

 

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Stock option grants during 2012 and 2013

The following summarizes all stock options and restricted stock awards granted during the years ended December 31, 2012 and 2013:

 

Type of Grant

  Grant Date   

Reason For Grant

  Shares
Underlying
Grants
    Exercise
Price of
Shares
    Grant Date
Fair Value
Per Share
    Total Stock-
Based
Compensation
Expense
 
                   (in $)     (in $)     ($ in thousands)  

Stock options

  June 15, 2012    Awards to founder     283,014        0.35        0.26        73   

Stock options

  July 1, 2012    Awards to founding CEO     566,027        0.39 (1)      0.25        143   

Stock options

  July 25, 2012    Awards to employees     168,303        0.35        0.26        43   

Stock options

  July 25, 2012    Awards to non-employee advisor and consultant     9,675        0.35             (2)           (2) 

Stock options

  July 25, 2012    Awards to employees of joint venture     120,434        0.35             (3)           (3) 

Stock options

  December 11, 2012    Awards to employees     91,667        0.35        0.26        24   

Restricted stock

  December 11, 2012    Awards to officer employees     50,000        —          0.35        18   

Stock options

  December 11, 2012    Awards to employees of joint venture     11,000        0.35             (3)           (3) 

Stock options

  December 11, 2012    Awards to non-employee advisor and consultant     9,674        0.35             (2)           (2) 
      

 

 

       

Total number of shares granted in 2012

    1,309,794         
      

 

 

       

Stock options

  February 15, 2013    Awards to employees     75,448        0.35        0.24        18   

Stock options

  February 15, 2013    Awards to employees of joint venture     42,286        0.35             (3)           (3) 

Stock options

  April 19, 2013    Awards to a director     113,207        0.35        0.24        27   

Stock options

  May 24, 2013    Awards to employees     220,451        0.35        0.24        53   

Stock options

  June 19, 2013    Awards to employees     30,000        0.35        0.24        7   

Stock options

  June 19, 2013    Awards to employees of joint venture     4,000        0.35             (3)           (3) 

Stock options

  July 12, 2013    Awards to employees     318,414        0.35        0.24        77   

Stock options

  July 12, 2013    Awards to employees of joint venture     2,000        0.35             (3)           (3) 

Stock options

  July 12, 2013    Awards to non-employee advisor and consultant     10,000        0.35             (2)           (2) 
            
      

 

 

       

Total number of shares granted in 2013

    815,806         
      

 

 

       

 

(1) Incentive stock option granted to a 10% stockholder. Pursuant to Section 422 of the Internal Revenue Code, incentive stock options granted to 10% stockholders must have an exercise price no less than 110% of fair value.
(2) We account for stock options issued to non-employees in accordance with the recognition provisions of ASC 505-50, Equity-Based Payments to Non-Employees, using a fair value approach. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time.

 

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(3) We account for stock options granted to employees of our previous joint venture, ZP Group LLC, in accordance with the recognition provisions of ASC 323-10-25 and ASC 323-10-35, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee, using a fair value approach. The fair value of these options is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time.

Exercise price and fair value of common stock

All options have been granted at exercise prices determined by our board of directors to be not less than the fair value of the underlying common shares on the date of grant. The fair value of the shares of common stock that underlie the stock options we have granted has historically been estimated by our board of directors based upon information available to it at the time of grant, as further discussed below.

We recorded total non-cash stock-based compensation expense of approximately $65,000 and $63,000 for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013, we had approximately $0.2 million of total unrecognized employee stock-based compensation expense, net of estimated forfeitures, related to stock option grants. We expect the amount of our share-based compensation expense for stock options granted to employees and non-employees to increase in future periods due to increases in headcount and, potentially, to increases in the value of our common stock.

Significant factors used in determining the fair value of our common stock

The fair value of the shares of common stock that underlie the stock options we have granted has historically been determined by our board of directors based upon information available to it at the time of grant. Our board of directors, with the assistance of management, developed these valuations using significant judgment and taking into account numerous factors, including progress in our research and development programs, status of clinical trials and preclinical studies relating to our product candidates, operation and financial performance, the lack of liquidity of our capital stock, the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, general and industry specific economic outlook, and independent third-party valuations of our common stock performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. As we have been a private enterprise, a discount for lack of marketability has been applied to derive the final fair value of our common stock for use in stock option grants. The board has generally considered the most persuasive evidence of fair value to be the prices at which our securities were exchanged in actual arms’ length transactions.

In determining a fair value for our common stock after the April 2012 reorganization, on two separate occasions we engaged an independent third party valuation firm to assess our enterprise value. In each report prepared by the valuation firm, two valuation approaches were considered to determine the enterprise value of our business: the income approach and the market approach.

The income approach estimates the fair enterprise value of a company based on the present value of the company’s future estimated cash flows and the residual value of the company beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in the company achieving these estimated cash flows and taking into account the risk-free rate for the use of funds and the expected rate of inflation over the applicable period. The discount rate used in our third-party valuations was based on rates of return available for alternative investments of similar type and quality.

There are different acceptable methods of applying the market approach. The valuations considered by our board of directors all employ the “guideline public company analysis,” whereby estimates for the fair enterprise

 

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value of a company are calculated by applying market multiples of comparable publicly traded companies, in our case in the biotechnology and pharmaceutical industries. The market multiples are based on key metrics implied by the enterprise values of our comparable publicly-traded peers.

The equity values determined by these valuation approaches were then weighted to determine the aggregate equity value of our business. The resulting equity values were then allocated to the common stock using the option pricing method, or OPM. The OPM treats common stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference. The common stock is modeled to be a call option with a claim on the business at an exercise price equal to the remaining value immediately after any senior security is liquidated. The OPM uses the Black-Scholes option-pricing model to value the call option. The OPM is appropriate to use when, as in our case, the range of possible future outcomes is so difficult to predict that lattice or scenario modeling would be highly speculative.

Valuation performed as of May 31, 2012

In conducting our valuation as of May 31, 2012, the board took into consideration the following company-specific events:

 

    The board believed the April 2012 reorganization, in which all of our previously authorized Series A, B, and C preferred stock were converted into common stock at a price that was acceptable to each series of preferred stockholders, would constitute an exchange at arms’ length.

 

    Also in connection with the April 2012 reorganization, all convertible unsecured promissory notes originally issued prior to the reorganization were converted into common and all outstanding warrants were terminated. These facts further led the board to believe that the fair value determined in connection with the organization represented a fair value exchange in an arms’ length transaction.

 

    There had been no significant clinical, manufacturing and regulatory milestones during 2012 and 2013 until December 2013 when our joint venture with Asahi was terminated.

Further, management engaged a third-party valuation firm to perform a valuation of our common stock. The valuation firm applied both the market approach and the income approach to arrive at an estimated enterprise valuation of our equity. The guideline public company analysis performed for the market approach resulted in a fair value indication for our company of $10 million on a minority, marketable basis. The discounted cash flow analysis performed for the income approach resulted in a fair value indication for our company of $10.4 million on a minority, marketable basis. The market approach and income approach were then equally weighted at 50% to arrive at an estimate enterprise value of our equity. The final step employed by the valuation firm involved allocating our estimated enterprise equity to the common stock using the OPM, to arrive at the estimate of fair value per share of common stock of our company. The OPM assumptions were as follows: a time to liquidity event of 3 years, a risk-free rate of 0.35%, dividend yield of 0%, and volatility of 85% over the time to a liquidity event, which was calculated based on the volatility of the common stock of our comparable publicly-traded peers. The valuation firm then applied a marketability discount of approximately 28%, based on the Finnerty Model, which assumes that the marketability discount on a privately-held security could be approximated by the value of an “average-strike” put option. Based on this analysis, the valuation firm determined the fair value of our common stock to be $0.35 per share as of May 31, 2012.

Based on the company-specific factors discussed above, as supported by the third-party valuation specialists’ report, the board determined that $0.35 per share was not less than the fair value per share of our common stock as of May 31, 2012. At the time of each of the stock awards granted on each date subsequent to May 31, 2012 and through July 12, 2013, the board of directors determined that there had been no significant clinical, manufacturing or regulatory milestones attained that would warrant and increase in the estimate of fair value.

 

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Valuation performed as of December 31, 2013

The Board considered the following factors in estimating the fair value of our common stock as of December 31, 2013:

 

    The collaboration with Asahi is no longer a source of revenue for us.

 

    In the fourth quarter of 2013, encouraged by our findings that higher dosage of PTH can safely and effectively be delivered by our microneedle patch system, we commenced a Phase 1 clinical study to evaluate the pharmacokinetics, safety and tolerability in healthy post-menopausal women of a single application of one or two Weekly ZP-PTH transdermal patches.

 

    Also in the fourth quarter of 2013, we initiated a Phase 1 clinical study to evaluate the pharmacokinetics and safety in healthy individual for the application of ZP-Glucagon transdermal patches.

 

    Further, beginning in the second quarter of 2013 and particularly in the third and fourth quarters of 2013, the volume of initial public offerings by biotechnology companies accelerated significantly. More importantly, for the first time, these included offerings by companies in the early stages of development. As a result of these developments, we believed that investors would have interest in our clinical stage, transdermal drug delivery technology.

We also engaged a third-party valuation firm to evaluate the fair value of our common stock as of December 31, 2013, prepared on a minority, non-marketable interest basis. In conducting its valuation, the valuation firm applied both the market approach and the income approach to arrive at an estimated enterprise valuation of our equity. The guideline public company analysis performed for the market approach resulted in a fair value indication for our company of $16.4 million on a minority, marketable basis. The discounted cash flow analysis performed for the income approach resulted in a fair value indication for our company of $9.3 million on a minority, marketable basis. The valuation firm did not give any weight to the market approach and instead used the more conservative value produced by the income approach to estimate enterprise value of our equity. The final step employed by the valuation firm involved allocating our estimated enterprise equity to the common stock using the OPM, to arrive at the estimate of fair value per share of common stock of our company. The OPM assumptions were as follows: a time to liquidity event of 1.8 years, a risk-free rate of 0.31%, dividend yield of 0%, and volatility of 90% over the time to a liquidity event, which was calculated based on the volatility of the common stock of our comparable publicly-traded peers. The valuation firm then applied a marketability discount of approximately 25%, based on the Finnerty Model. Based on this analysis, the valuation firm determined the fair value of our common stock to be $0.32 per share as of December 31, 2013.

Based on the above factors as supported by the third-party valuation specialists’ report, the board determined that the fair value of our common stock was not greater than $0.32 per share as of December 31, 2013. The board also considered that this valuation provided further support for its prior determination that the fair value of our common stock at the time of grant of all previous awards during 2012 and 2013 was not greater than $0.35 per share.

The valuation described above were made solely for the purposes of valuing the common stock underlying our stock option grants for financial reporting purposes and involved significant judgments and estimates, including assumptions regarding our future performance and the success of our pre-clinical studies and planned clinical trials. If we had made different assumptions, our stock-based compensation expense could have been different. The valuation methodologies we have historically used in estimating the fair value of our common stock are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot predict or offer any assurance with regard to the future value of our common stock. Accordingly, investors are cautioned not to place undue reliance on the valuation methodologies we describe above as an indicator of our future stock prices. Before investing in our common stock, you should carefully read this entire prospectus and consider, among other things, the matters described under “Risk Factors.”

 

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Income taxes

We are subject to income tax under the U.S. federal jurisdiction and the State of California. We file U.S. federal income tax returns and California state income tax returns. To date, we have not been audited by the Internal Revenue Service or any state income tax authority.

We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

As of December 31, 2013, we had net deferred tax assets of $56.5 million. The deferred tax assets primarily consisted of federal and state tax net operating losses and research and development tax credit carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. As of December 31, 2013, we had federal net operating loss carryforwards of approximately $133.1 million and state net operating loss carryforwards of approximately $129.6 million. If not utilized, the federal net operating loss carryforwards will begin to expire in 2026 and state net operating loss carryforwards will begin to expire in 2016. Utilization of net operating loss carryforward may also be subject to an annual limitation due to the ownership change limitations. These annual limitations may result in the expiration of the net operating loss carryforwards before utilization. We have not performed an analysis under Internal Revenue Code Section 382 to determine whether our net operating loss carryforwards will be subject to annual limitation.

As of December 31, 2013, we had federal and state research and development credit carryforwards of approximately $3.4 million and $3.4 million, respectively. If not utilized, the federal tax credits will begin to expire in 2026 and state tax credits currently do not expire.

JOBS Act

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including those that will relieve us of responsibility for (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

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Results of Operations

Comparison of the years ended December 31, 2012 and 2013

Revenue

 

     Year Ended December 31,      Change  
         2013              2012          Amount     %  
     (in thousands)        

Revenue:

          

License fees revenue

   $ 4,250       $ 9,250      $ (5,000     -54

Collaborative development support services

     —           2,374        (2,374     -100
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 4,250       $ 11,624      $ (7,374     -63
  

 

 

    

 

 

    

 

 

   

We have not made any commercial product sales. We have generated revenue from collaboration and license agreements for the development and commercialization of our technology. Total revenue decreased $7.4 million, or 63%, for the year ended December 31, 2013 as compared to the same period in 2012. The decrease in revenue was primarily due to an approximately $7.2 million of payments we received from our license and collaboration with Asahi in 2012 that was not received in 2013. Specifically, we received $5.0 million in license fees from Asahi in 2012 and approximately $2.2 million of collaborative development support services revenue in 2012, which were not received in 2013, in part as a result of the transfer of our manufacturing obligations under our license agreement with Asahi to ZP Group LLC upon forming our joint venture in April 2012.

Research and development expenses

 

     Year Ended December 31,      Change  
         2013              2012          Amount      %  
     (in thousands)         

Research and development expenses

   $ 6,502       $ 3,050       $ 3,452        113

Research and development expenses increased $3.5 million, or 113%, for the year ended December 31, 2013 as compared to the same period in 2012. Of this increase, approximately $1.7 million was due to the initiation of a Phase 1 clinical study involving Weekly ZP-PTH during the second half of 2013 and approximately $2.4 million was attributable to research and development expenses related to the completion of our final formulation and the initiation of a Phase 1 clinical study on ZP-Glucagon. These increases were partially offset by an approximately $0.9 million reduction in other research and development projects.

Manufacturing services expenses

 

     Year Ended December 31,      Change  
         2013              2012          Amount     %  
     (in thousands)        

Manufacturing services expenses

   $ 1,135       $ 2,349       $ (1,214     -52

Manufacturing services expenses decreased by $1.2 million, or 52%, for the year ended December 31, 2013 as compared to the same period in 2012. The decrease was primarily due to a $1.0 million reduction in facility-related cost and equipment depreciation expense as a result of ZP Group LLC’s reimbursement to us for these expenses in accordance with the terms of our strategic partnership with Asahi and to Asahi’s purchase of certain active pharmaceutical ingredients from us for approximately $0.5 million. These decreases were partially offset by an increase of approximately $0.4 million in contract manufacturing expense as a result of the production of our Phase 1 clinical trial materials.

 

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General and administrative expenses

 

     Year Ended December 31,      Change  
         2013              2012          Amount      %  
     (in thousands)         

General and administrative expenses

   $ 4,582       $ 3,077       $ 1,505         49

General and administrative expenses increased $1.5 million, or 49%, for the year ended 2013 as compared to the same period in 2012. The increase in general and administrative expenses was primarily due to $0.5 million increase in personnel cost related to the addition of key executive management personnel, a $0.8 million increase in legal fees in connection with our bridge financing and the acquisition of our short-term investment in Zosano, Inc. and related consulting and accounting fees.

Interest expense, net

 

     Year Ended December 31,      Change  
         2013              2012          Amount      %  
     (in thousands)         

Interest expense, net

   $ 760       $ 663       $ 97        15

Interest expense, net, increased $97,000, or 15%, for the year ended December 31, 2013 as compared to the same period in 2012. The increase was primarily due to the full-year effect of accrued interest on our BMR secured promissory note and the interest expense incurred in connection with our bridge notes issued in September 2013.

Warrant revaluation income

 

     Year Ended December 31,      Change  
         2013              2012          Amount     %  
     (in thousands)        

Warrant revaluation income

   $ —         $ 71       $ (71     -100

Warrant revaluation income resulted from the re-measurement of our preferred stock warrant liability associated with the warrants to purchase preferred stock issued to lenders under our debt facilities and certain of our former preferred stockholders prior to our 2012 recapitalization. In 2012, we recorded income of $71,000 reflecting a decrease in fair value of the underlying security based upon the fair value re-measured on the date of the warrant retirement. After our recapitalization in 2012, these warrants are no longer outstanding.

Equity in loss of joint venture and gain on termination of joint venture

 

     Year Ended December 31,     Change  
         2013             2012         Amount     %  
     (in thousands)        

Equity in loss of joint venture

   $ (366   $ (738   $ (372     -50

Gain on termination of joint venture

     3,487        —          3,487        N/A   

Equity in loss of joint venture reflects our share of ZP Group LLC’s net loss for the applicable reporting period. Equity in loss of joint venture decreased $0.4 million, or 50%, for the year ended December 31, 2013 as compared to the same period in 2012, primarily due to the manufacturing services revenue generated by the joint venture through ZP Group LLC’s contract manufacturing arrangement with us.

 

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Our strategic partnership with Asahi through the joint venture investment in ZP Group LLC was terminated in December 2013. As a result, we recorded a one-time gain on termination of the joint venture of $3.5 million, which represents payments from Asahi for a notice period termination fee of $2.4 million and a non-refundable excess of approximately $1.0 million in reimbursement for the cost of terminating personnel in connection with the wind down of ZP Group LLC.

Liquidity and Capital Resources

Since our inception in October 2006, we have funded our operations primarily through private placements of our preferred stock, secured and unsecured borrowings from private investors, our bank credit facility, and licensing and service revenue from our license and collaboration agreements. We have incurred recurring operating losses and negative cash flows from operating activities since inception, and as of December 31, 2013, had an accumulated deficit of $124.2 million. We expect to incur additional losses in the future to conduct research and development on our product candidates and to conduct pre-commercialization manufacturing activities.

Our primary uses of cash are to fund operating expenses, which have historically been primarily related to research and development and manufacturing activities. From inception through December 31, 2013, we have raised an aggregate of approximately $120 million to finance our business through the sale of preferred stock and $23.8 million from the issuance of debt to private investors. As of December 31, 2013 and 2012, our principal sources of liquidity were our cash and cash equivalents, which totaled $5.9 million and $5.0 million, respectively.

Our recurring operating losses from operations and our need for additional sources of capital to fund our ongoing operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2013 with respect to this uncertainty. We have no current source of revenue to sustain our present activities other than our license and collaborative agreement with Novo Nordisk, and we do not expect to generate substantial revenue for the foreseeable future. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations and there can be no assurance that additional financing will be available to us or that such financing will be available on terms favorable to us, if at all. We intend to raise additional capital through public or private offering of our equity securities, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements, or a combination of such.

There can be no assurance that we will be able to raise sufficient financing to fund our operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Debt financing may not be available to us, and, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Certain of our existing investors have provided us with unsecured bridge financing through the issuance of our bridge notes. The notes are convertible into common stock upon completion of a qualified financing, defined as a financing over $25 million. We sold these notes in two tranches, in September 2013 and February 2014, and raised an aggregate of $5.5 million to sustain our operations.

 

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We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $     million, assuming an initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We anticipate if the offering is successful, these estimated net proceeds, along with our existing cash and cash equivalents of $5.9 million as of December 31, 2013, should be sufficient to meet our anticipated cash requirements for at least the next twelve months. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors, including the factors discussed in “Risk Factors.”

Summary of cash flows

The following table shows a summary of our cash flows for each of the years ended December 31, 2013 and 2012:

 

     Year Ended December 31,  
         2013             2012      
     (in thousands)  

Cash generated from (used in):

    

Operating activities

   $ (3,724   $ 501   

Investing activities

     1,139        1,984   

Financing activities

     3,525        (1,112
  

 

 

   

 

 

 

Total cash generated

   $ 940      $ 1,373   
  

 

 

   

 

 

 

Operating Cash Flow: Net cash used in operating activities was $3.7 million in 2013, as compared to net cash generated from operating activities of $0.5 million for the same period in 2012. Net cash used in 2013 was primarily the result of personnel-related costs, clinical trial costs, professional fees and administrative expenses, partially offset by the receipt of the $2.4 million termination notice payment and excess termination expense reimbursement from Asahi in connection with the termination of our joint venture. Net cash generated in 2012 was primarily the result of the receipt of $5.0 million license fees and in collaboration funding from Asahi, partially offset by net cash used in normal operating activities such as personnel cost, outside services, professional and administrative fees. We expect that our net cash used in operating activities will increase significantly in each of the next several years in order to support our operations and complete the development and commercialization of our product candidates.

Investing Cash Flow: Net cash generated from investing activities was $1.1 million and $2.0 million in 2013 and 2012, respectively. Net cash generated from investing activities included a cash distribution of $2.4 million and $1.5 million for 2013 and 2012, respectively, from ZP Group LLC for the reimbursement of depreciation charges associated with the equipment we contributed to ZP Group LLC during the formation of our joint venture with Asahi. In 2013, cash generated from investing activities was partially offset by the purchase of property and equipment for $0.9 million and cost of acquiring equity invested in Zosano, Inc., for $0.4 million. We expect that we will continue to make investments in property, equipment and leasehold improvements as we expand our operations in the future.

Financing Cash Flow: Net cash generated from financing activities in 2013 was provided through $3.0 million from the issuance of our bridge notes and $0.5 million from reimbursements received from ZP Group LLC, funded through the revolving line of credit facility provided by AKPUS to ZP Group LLC. Net cash used in financing activities in 2012 was related to the payment of certain prior equipment financing in connection with the recapitalization.

 

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2013:

 

     Payments Due by Period  
     Total      Less than
One Year
     1-3 Years      3-5 Years      More than
5 Years
 
     (in thousands)  

Contractual Obligations

              

Short and long-term debt obligations (including interest) (1)

   $ 14,920       $ 3,277       $ 11,643      $ —         $ —     

Operating lease obligations (2)

     3,695         928         1,314         1,289        164   

Purchase commitments (3)

     287         287         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 18,902       $ 4,492       $ 12,957       $ 1,289      $ 164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Short and long-term debt obligations

Bridge financing—related parties convertible promissory notes

In September 2013, we entered into a note purchase agreement with certain of our stockholders pursuant to which we issued our bridge notes, raising an aggregate amount of approximately $3.0 million in debt financing. These bridge notes bear simple interest of 8% per annum, with all unpaid principal and accrued interest due and payable on the earlier of: (i) September 9, 2014; (ii) an event of default, as defined in the notes; or (iii) the date that is 30 days following the closing of a first firm commitment underwritten initial public offering pursuant to a registration statement filed under the 1933 Securities Act. We may accelerate and prepay any portion of the outstanding principal and/or interest at any time upon written consent of the noteholders representing not less than 60% of the principal amount then outstanding.

Upon the closing of a qualified financing, which is defined under the terms of the notes as an equity financing where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of our common stock based on a pre-determined formula.

In February 2014, we sold $2.5 million of additional notes of the same series, which are not reflected in the table above.

Secured financing with BMR

In connection with our recapitalization in April 2012, we renegotiated a new lease agreement with BMR to include reduced rent obligations for our facility in Fremont, California. In connection with the rent reduction, we issued a new secured promissory note to BMR and all previously accrued interest, unpaid rent, future rent obligations and other fees due to BMR were either rolled into the note or eliminated. The note payable to BMR is a 4-year non-callable promissory note, bearing interest at the rate of 8% per annum, compound annually, and has an original principal amount of approximately $8.6 million as of April 2012. This note is secured by a first priority security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual properties. All principal and interest are due and payable to BMR on the earliest of (i) April 26, 2016, (ii) the closing of a sale of our company or business, as defined in the note, or (iii) the date that any distribution is made to our stockholders, as defined in the note. We may prepay the note, in whole or in part, at any time without prepayment penalty or premium. Further, we are required to prepay the note immediately prior to, or in connection with, a sale or partial sale of our company, defined as a transaction in which we are acquired or in which we exclusively license or sell all or substantially all of our assets. In any similar transaction that does not qualify as a sale but results in our cash balance being at least $5.0 million in excess of our cash requirements for the 12 months following the closing of such transaction, we are required to prepay an amount equal to half of the excess cash balance over $5.0 million. We intend to use a portion of the proceeds from this offering to repay the BMR note, as further explained in the section titled “Use of Proceeds.”

 

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The BMR secured promissory note and the related security agreement contain customary conditions related to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of collateralized assets, undergo a change of jurisdiction or relocation of our business, incur debt or incur liens, subject to certain exceptions. The agreements also require us to comply with certain basic financial covenants, such as maintenance of financial records, insurance and prompt payment of taxes.

Line of credit with AKP USA, Inc.

In April 2013, ZP Group LLC obtained a $25 million credit facility under a revolving line of credit arrangement with AKP USA, Inc., or AKPUS, an affiliate of Asahi. The facility bore an interest rate of 1.15% per year, and ZP Group LLC was obligated to pay interest on the principal outstanding on the last day of each month until any outstanding principal was paid in full.

Our joint venture with Asahi was terminated in December 2013. Pursuant to the termination agreement, the entire outstanding principal and unpaid and accrued interest shall was discharged, released and forgiven by AKPUS on March 14, 2014.

 

(2) Operating leases

We have an operating lease with an affiliate of BMR, a stockholder, for a 55,000 square foot facility in Fremont, California where we operate our manufacturing operations and house our engineering, research and development and administrative employees. In April 2012, we amended the lease agreement to reduce future rent obligations with a new lease term of seven years. As a result of the lease renegotiation, we issued a secured promissory note in consideration for previously accrued interest, unpaid rent, future rent obligations and other fees due to the landlord resulting in prepaid rent which is being expensed on a straight-line basis over the term of the lease. As of December 31, 2013, the prepaid rent of approximately $5.9 million is offset against the deferred rent liability of approximately $6.3 million resulting in a net deferred rent liability of approximately $0.4 million.

In addition to the operating lease for our facility, we have other non-cancelable operating leases with various vendors for our copiers and water system.

 

(3) Purchase commitments

Our material non-cancelable purchase commitment with an equipment manufacturer is related to the custom manufacturing of certain coating machinery for the production of our transdermal microneedle patches.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks principally relate to interest rates. We had cash and cash equivalents of $5.9 million and $5.0 million as of December 31, 2013 and 2012, respectively, which consist of bank deposits and money market funds. Any interest-bearing instruments carry a degree of risk; however, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Off-balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Recently Issued Pronouncements

In July 2013, Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a

 

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Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We are currently assessing the impact of this ASU on our financial statements.

In February 2013, the FASB issued guidance which addresses the presentation of amounts reclassified from accumulated other comprehensive income. This guidance does not change current financial reporting requirements, instead an entity is required to cross-reference to other required disclosures that provide additional detail about amounts reclassified out of accumulated other comprehensive income. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

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BUSINESS

Overview

We are a clinical stage specialty pharmaceutical company that has developed a proprietary transdermal microneedle patch system to deliver our proprietary formulations of drugs through the skin to treat a variety of indications. Our microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, which often are unavailable using oral formulations or injections. Our microneedle patch system can be used to deliver numerous medications for a wide variety of indications in commercially attractive markets. By focusing our development efforts on established molecules with known safety and efficacy and premium pricing, we plan to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

Our short-wear-time transdermal patch consists of an array of titanium microneedles that is coated with the relevant drug and attached to an adhesive patch. When the patch is applied with our hand-held applicator, the microneedles penetrate the skin to a depth of 200 microns or less, resulting in rapid dissolution and absorption of the drug coating through the capillary bed, but sparing the nerve endings below. Our system enables rapid and consistent delivery of the drug, with therapeutic effect typically occurring within 30 minutes or less, and easy, pain-free administration. We focus on developing generic drugs specifically formulated to be administered by our microneedle patch system, for indications in which rapid onset, ease of use and stability offer significant therapeutic and practical advantages. We target indications with patient populations that we believe will provide us with an attractive commercial opportunity. Our lead product candidates, and the indications they are expected to treat, are as follows:

 

    Weekly ZP-PTH, for severe osteoporosis;

 

    ZP-Glucagon, for severe hypoglycemia; and

 

    ZP-Triptan, for migraine.

Weekly ZP-PTH is our proprietary formulation of teriparatide, a synthetic form of parathyroid hormone, PTH 1-34 or, PTH, which regulates serum calcium, to be administered weekly for the treatment of severe osteoporosis in women.

Osteoporosis is a disease, primarily affecting post-menopausal women, that is characterized by low bone mineral and structural deterioration of bone tissue, which can lead to an increase in bone fractures. According to the World Health Organization, or WHO, and the International Osteoporosis Foundation, or IOF, a patient has severe osteoporosis when he or she has a T-score £-2.5, plus one or more fragility fractures. According to the National Osteoporosis Foundation, or NOF, approximately 700,000 adults in the United States suffer from severe osteoporosis.

We believe that the main types of osteoporosis drugs currently available in the United States, anti-resorptive agents typically administered orally and an anabolic agent administered by daily injection, each have significant disadvantages. Bisphosphonates, the current standard of care and a type of anti-resorptive agent, have been associated with infrequent but serious adverse events. The only anabolic agent approved in the United States for the treatment of severe osteoporosis, Eli Lilly & Company’s Forteo®, carries a black-box warning and a two-year lifetime limitation on use, at the end of which the patient may revert to the use of an anti-resorptive agent. Based on a market survey of the osteoporosis market commissioned by us in 2010, which we refer to as our 2010 osteoporosis market survey, we estimate that in 2010 only 6% of the treated patients with severe osteoporosis in the United States received prescriptions for Forteo®. Nevertheless, worldwide sales of Forteo® in 2013 exceeded $1.2 billion.

We believe there is a significant opportunity for a new anabolic agent, such as Weekly ZP-PTH, that has the potential to offer equal or more effective bone fracture reduction with added advantages in safety, the convenience

 

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of a weekly administration and room temperature stability. Additionally, we intend to seek FDA approval of our Weekly ZP-PTH product candidate with a longer or unlimited treatment window than Forteo® and potentially without a black-box warning, which could significantly expand the size of its addressable market compared with that of Forteo®.

In January 2014, we completed a Phase 1 clinical study to evaluate the pharmacokinetics, safety and tolerability of Weekly ZP-PTH patches in a range of doses. The study results demonstrated a rapid increase in serum concentration of PTH, quickly followed by a rapid decrease. This pulsatile pattern, which occurred with all patch doses, is important for efficacy of an anabolic agent. The study results also demonstrated dose proportionality and high bioavailability, with no serious adverse events. We expect to have a pre-IND meeting with the FDA, a meeting prior to the filing of an investigational new drug application, or IND, in July 2014 to discuss the clinical study design for our planned Phase 2 and Phase 3 studies of Weekly ZP-PTH. Subject to the outcome of our discussions with the FDA, we expect to begin preparations for our Phase 2 Weekly ZP-PTH clinical study in the second half of 2014, and complete the study by the end of 2015, with commencement of the Phase 3 clinical study to follow thereafter.

ZP-Glucagon is our proprietary formulation of glucagon, a hormone that raises blood glucose levels for the emergency treatment of life-threatening severe hypoglycemia.

Severe hypoglycemia is a complication of diabetes treatment, often caused by insulin overdose, characterized by a very low level of blood glucose that can lead to loss of consciousness, seizure, coma and death. Timely treatment is critical, and may need to be administered to an incapacitated patient in a life-threatening situation by a third party who lacks medical training. Based on a market survey of the hypoglycemia market commissioned by us in 2013, which we refer to as our 2013 hypoglycemia market survey, there are 21 million diagnosed diabetes patients in the United States, of whom 26% are insulin-dependent. Insulin-dependent patients have on average 1.2 severe hypoglycemic events per year.

The current standard of care in a severe hypoglycemic event is administration of glucagon by injection or infusion. The two glucagon products currently marketed in the United States are Eli Lilly’s Glucagon Emergency Kit and Novo Nordisk’s GlucaGen®, which together accounted for $120 million in sales in United States in 2012. These products, which are both injectables, have unstable formulations and require a time-consuming, multi-step reconstitution process prior to injection,

We believe that ZP-Glucagon delivered using our microneedle patch system will offer patients and caregivers the benefit of a simple device providing faster onset and enhanced ease of use, as well as extended room temperature stability, facilitating the product being carried by the patient for use as an emergency rescue kit.

In January 2014, we completed a Phase 1 study of ZP-Glucagon designed to assess relative bioavailability with our microneedle patch system at various application sites compared to a currently available form of glucagon administered by intramuscular injection. With each of the ZP-Glucagon treatments, we achieved a faster onset and a higher bioavailability during the critical thirty minutes following application compared to the glucagon injection. Additionally, application of our microneedle patch with our easy-to-use applicator avoids the delay in treatment associated with reconstitution of the currently available injectable products. We believe these attributes will provide critical advantages in the emergency rescue of a potentially comatose patient.

We intend to conduct a second Phase 1 study to evaluate the performance of our ZP-Glucagon product in healthy volunteers at various doses, with and without induction of hypoglycemia, in comparison to comparable doses of glucagon administered by intramuscular injection. We expect to initiate this Phase 1 study in the third quarter of 2014. We expect to initiate a Phase 2 study to investigate the safety and efficacy of ZP-Glucagon in the treatment of insulin-induced hypoglycemia in diabetic patients (as opposed to the healthy volunteers used in our Phase 1 studies) after discussions with the FDA subsequent to completion of this second Phase 1 study that we expect to conduct in the second half of 2014.

 

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ZP-Triptan is our proprietary formulation of zolmitriptan, one of a class of serotonin receptor agonists known as triptans, used for the treatment of migraine.

Migraine is a debilitating neurological disease that affects approximately 29 million adults in the United States according to a 2014 study by Global Data Pharma Point, or GlobalData. Symptoms of migraine include moderate to severe headache pain, nausea and vomiting, and abnormal sensitivity to light and sound. According to the Migraine Research Foundation, most patients who suffer from migraine experience attacks once or twice per month, and 14 million people, or about 4% of the U.S. population, experience chronic daily headache in which attacks occur at least 15 days per month.

According to GlobalData, sales of prescriptions for medications indicated for migraine in the United States were approximately $1.9 billion in 2012. Of this amount, $1.1 billion was for triptans, administered orally or by several alternative delivery systems, including nasal sprays, iontophoresis-based transdermal devices and subcutaneous injection. We believe that each of the currently available methods of administering triptans has significant disadvantages. Some migraine patients fail to respond consistently to oral triptans, and oral treatments may be ineffectual for patients who are suffering from the nausea or gastric stasis that can be associated with migraine. Oral, nasal and iontophoretic triptan products are also characterized by relatively slow onset of action. Nasal sprays may be unpleasant in taste, and use of injectables can cause discomfort. Because ZP-Triptan has demonstrated fast onset in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

In the fourth quarter of 2013, we completed preclinical animal studies that compared the pharmacokinetic profile of ZP-Triptan to that of zolmitriptan administered intravenously. In these preclinical studies, ZP-Triptan achieved rapid onset and bioavailability that compared favorably with intravenous delivery. We intend to initiate Phase 1 and Phase 2 clinical studies using an active injectable comparator to assess the relative speed of onset of ZP-Triptan compared to an injectable. The Phase 1 study will be designed to compare the pharmacokinetic and safety/tolerability profiles of ascending patch doses of zolmitriptan, one high dose patch of sumatriptan and one subcutaneous injection of sumatriptan in healthy volunteers. Our Phase 2 study will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults.

Our collaboration with Novo Nordisk. In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a microneedle patch product to administer semaglutide, Novo Nordisk’s investigational proprietary human glucagon-like peptide-1 analogue, or GLP-1, to be applied once weekly using our system for the treatment of type 2 diabetes. Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize GLP-1 products, with the initial product candidate being Novo Nordisk’s semaglutide using our microneedle patch system. We are eligible to receive an upfront payment and payments upon achieving certain preclinical, clinical, regulatory and sales milestones which could total more than $60 million for the first product. We are also eligible to receive royalties on sales of products and will receive development support, as well as reimbursement of all development and manufacturing costs. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Transdermal drug delivery

According to Research and Markets, the global value of the market for systemic transdermal drug delivery products in which we expect to participate was approximately $25 billion in 2013 and is expected to grow to approximately $40 billion by 2018. We believe this growth is driven by the increasing availability of transdermal systems for important therapeutic applications and changing disease demographics. We believe that our microneedle patch system has the potential to offer significant practical and therapeutic advantages, compared not only to conventional drug delivery methods such as oral formulations and injections but also to currently available transdermal delivery systems, that will enable us to compete effectively in this market.

 

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Our microneedle patch drug delivery platform offers significant benefits

Our microneedle patch delivers therapeutic compounds into the skin and provides rapid systemic drug delivery in a convenient, pain—free system that offers the following therapeutic and practical benefits, among others:

 

    rapid onset and high bioavailability;

 

    room-temperature stability;

 

    consistent delivery independent of the gastrointestinal tract;

 

    convenience and ease of use;

 

    short wear time, typically thirty minutes or less, with near complete drug delivery (resulting in no drug overdose if the patient forgets to remove the patch); and

 

    avoidance of the biohazard disposal and safety risks associated with needle injections.

Our microneedle patch system consists of a 3 to 6 cm2 array of titanium microneedles approximately 200-350 microns long, coated with a hydrophilic formulation of the relevant drug, and attached to an adhesive patch. The patch is applied with a hand-held applicator that presses the microneedles into the skin to a uniform depth in each application, close to the capillary bed, allowing for rapid and consistent dissolution and absorption of the drug coating, and short of the nerve endings, enabling pain-free administration. The typical patch wear time is thirty minutes or less. The applicator has an intuitive, simple and patient-friendly design and is available in reusable form for chronic indications or in a disposable, single-use form for acute indications.

 

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Our microneedle patch system is able to deliver a wide range of therapeutic compounds, including biologics and other large, complex molecules that have historically been difficult to deliver transdermally. Our microneedle technology and short-wear patch avoid the skin irritation and sensitization caused by skin-permeating ingredients that are necessary in some existing patch technologies, as well as the adhesion failures experienced when patches requiring extended wear times are worn by the patient, for example when swimming, bathing or during other normal daily activities. Our patch is small and unobtrusive and our mechanical applicator is simple and easy to use, unlike some transdermal systems that involve cumbersome, complex and costly devices with external power sources.

Our drug formulations are dry, hydrophilic formulations and the final packaging contains a desiccant and is purged with nitrogen to remove any traces of moisture and oxygen. These features help provide extended product stability and longer shelf life at room temperature than conventional liquid formulations. We have demonstrated a 36-month shelf life at room temperature for our Daily ZP-PTH product candidate and an initial six-month shelf life at up to 40 degrees Celsius for our ZP-Glucagon product candidate. Our dry formulations and room temperature stability obviate the need for refrigeration, eliminate the need for time-consuming reconstitution prior to use, and provide enhanced convenience, portability and ease of use, facilitating more effective treatment and patient compliance.

 

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Our internal development programs involve generic molecules with demonstrated safety and efficacy and a low clinical and regulatory risk relative to new chemical entities, or NCEs. We believe that these programs will have a shorter development time and lower cost to commercialization than typical NCEs. In selecting our development candidates we consider the therapeutic advantage of rapid onset, the size of the market, the level of competition and the potential selling price.

The core competence of our research and development group is identifying and developing drug formulations that can be delivered using our microneedle patch system and optimizing the system to deliver those drugs. We also have significant experience in preclinical development, in the design and conduct of human clinical trials, and in manufacturing process development.

We operate a current good manufacturing practices, or cGMP, manufacturing facility in Fremont, California, and we believe we have sufficient manufacturing and test capabilities to produce the microneedle patch system for our contemplated preclinical and Phase 1, Phase 2 and pivotal trials for our products.

Our development pipeline is extensive

We have tested our microneedle patch system in preclinical and clinical proof of concept studies that demonstrated its technical feasibility with approximately thirty compounds, ranging from small molecules to proteins, including the following:

 

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Over 30,000 of our patches have been applied to over 400 patients in seven Phase 1 clinical studies and one Phase 2 study. Based on this research, we believe that our microneedle patch system can be used to deliver treatments for a wide variety of other indications beyond those on which we are currently focused, in which our fast onset, room-temperature stability, and ease of use will fill a significant unmet need.

After our lead product candidates, the compounds that we have assigned the highest priority for further investigation for use with our microneedle patch system include:

 

    epinephrine, for treatment of anaphylactic shock;

 

    granisetron, for the treatment of chemo-induced nausea and vomiting; and

 

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    sufentanil, for the treatment of post-operative pain.

We intend, independently or through strategic collaborations with others, to explore these and other potential applications of our microneedle patch system. We anticipate that our internal development programs will focus on delivery of generic drugs, and that we will collaborate with third parties with respect to delivery of their proprietary drugs.

Our strategy

Our goal is to make transdermal drug delivery a standard of care for delivering drugs where fast onset would help improve therapeutic efficacy and compliance. The key elements of our strategy are to:

 

    Pursue indications with high unmet medical need and greater probability of clinical, regulatory and commercial success. We focus on indications in which rapid onset, ease of use and stability offer particularly important therapeutic and practical advantages that address unmet needs, that have patient populations large enough to provide us with an attractive commercial opportunity, and where there is currently limited competition and premium pricing. We believe we will be able to compete effectively and profitably in these markets by offering a more effective and lower cost alternative. We also believe that by continuing to focus on indications that can be treated with generic molecules with known safety and efficacy, for which we can develop our own proprietary formulations, we will be able to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

 

    Maintain our focus on effective execution of our clinical trials. We believe that timely and efficient execution of our clinical development plans has been critical to our success to date. We have developed significant experience in the design and conduct of clinical trials and have established strong relationships with clinical teams, contract research organizations, or CROs, and key specialists and opinion leaders in our field that we believe have enabled us to rapidly and cost effectively advance our product candidates and reduce our regulatory risk early in the development process. We intend to continue to maintain, as a primary focus of our efforts, excellence in execution of our clinical development plan.

 

    Expand our manufacturing capabilities and reduce cost of goods. We intend to devote significant resources to expanding the capacity and throughput of our manufacturing operations, and to reducing our manufacturing costs. We believe this will be important to support the late-stage development, launch and commercial production of our product candidates, to establish and maintain high gross margins and to further enhance the product portfolio to include products that have demonstrated technical success on our platform but are not attractive to pursue at the current level of manufacturing costs.

 

    Develop a targeted commercial infrastructure. We believe that the markets on which we have initially focused, and intend to focus in the future, are ones in which there are relatively concentrated prescriber bases that can be served by a small, targeted sales force dedicated to each product and marketing organization. Our goal is to develop a cost-effective commercial infrastructure that will enable us to retain and maximize the commercial opportunity presented by our proprietary products.

 

    Partner selectively to expand the utilization of our microneedle patch drug delivery platform. We have retained all commercial rights to our own lead product candidates. However, we believe that our microneedle patch system can be used to deliver treatments for a wide variety of indications in addition to those on which we have initially focused. We believe that the potential for third parties to offer their own proprietary drugs in a more effective or easier to use form, as well as to significantly extend the product life cycle of a profitable drug through our intellectual property portfolio, with patents that expire through 2025, will be attractive to potential collaborators. We intend to continue to selectively collaborate with third parties with respect to delivery of their proprietary drugs, as we have done in our collaboration with Novo Nordisk. We may also collaborate with third parties to pursue clinical and commercial development of our own products in geographies outside the United States where it may be more cost effective to do so.

 

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Our lead product candidates

The development status of our lead product candidates is summarized below:

 

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Our osteoporosis opportunity: Weekly ZP-PTH

Our product candidate Weekly ZP-PTH is our proprietary formulation of PTH, to be administered weekly for the treatment of severe osteoporosis. We believe that the main types of osteoporosis drugs currently available in the United States have significant disadvantages. We believe there is a significant opportunity for a new anabolic agent, such as Weekly ZP-PTH, that has the potential to offer bone fracture reduction with added advantages in safety, convenience and room temperature stability.

In January 2014, we completed a Phase 1 clinical study that demonstrated pulsatile performance, dose proportionality and high bioavailability, with no safety concerns. We intend to have a pre-IND meeting with the FDA in July 2014 to discuss the clinical study design for our planned Phase 2 and Phase 3 studies of Weekly ZP-PTH and to begin preparations for our Phase 2 Weekly PTH clinical study in the second half of 2014.

Osteoporosis market is large and attractive

Osteoporosis is a disease characterized by low bone mass and structural deterioration of bone tissue, which can lead to an increase in bone fractures. It mainly affects adults age 50 and older. The NOF estimates that approximately nine million adults in the United States have osteoporosis and more than 43 million have low bone mass, placing them at increased risk for osteoporosis and broken bones. Assuming osteoporosis and low bone mass prevalence remain unchanged, the NOF projects that by 2020, 10.7 million adults will have osteoporosis and 58.2 million will have low bone mass. In addition, the NOF has estimated that osteoporosis is responsible for more than two million bone fractures in the United States per year resulting in an estimated $19 billion in costs. As the United States population age 50 and older increases, the NOF projects that the incidence of osteoporosis will also increase. The NOF expects that the number of bone fractures due to osteoporosis will rise to three million by 2025 resulting in an estimated $25.3 billion in costs. A patient has severe osteoporosis when he or she has a T-score £-2.5 plus one or more fragility fractures. Approximately 700,000 adults in the United States suffer from severe osteoporosis.

Significant unmet needs with existing treatments

There are two main types of osteoporosis drugs currently available in the United States, anti-resorptive agents and anabolic agents. Anti-resorptive agents act to prevent bone loss by inhibiting the breakdown of bone, whereas anabolic agents stimulate bone formation to build new, high-quality bone. Both types of drug are typically prescribed by specialists, including gynecologists, endocrinologists, rheumatologists, orthopedists and geriatricians.

 

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We believe both existing anti-resorptive and anabolic therapies have shortcomings in efficacy, tolerability and convenience. In part due to these limitations, they are generally used as alternatives to one another. For example, bisphosphonates, the current standard of care and a type of anti-resorptive agent, do not stimulate new bone growth, and have been associated with infrequent but serious adverse events, such as osteonecrosis of the jaw, atrial fibrillation and anomalous bone fractures, especially of long bones, resulting from “frozen bone.” We believe that this limitation on their efficacy and safety concerns related to these serious adverse events which may limit their duration of use, has created demand for bone anabolic agents as an alternative to anti-resorptive agents.

Despite its drawbacks, Forteo® achieves $1.2 billion revenue with ~6% patient penetration in the United States

The only anabolic agent approved in the United States for the treatment of severe osteoporosis is teriparatide, which is marketed by Eli Lilly & Company as Forteo®. Because it stimulates new bone growth, Forteo may be more effective in maintaining bone health than bisphosphonates. The drawbacks of Forteo include that it must be administered by injection daily, and is unstable at room temperature and must be refrigerated, making it potentially less attractive to patients than orally administered anti-resorptives. More importantly, Forteo® carries a black-box warning and a two-year lifetime limitation on use related to observation of osteosarcoma in a preclinical study prior to the approval. At the end of the two-year period, the patient, who typically still requires treatment, must revert to the use of an anti-resorptive agent. Based on our 2010 osteoporosis market survey, we estimate that in 2010 only 6% of the treated population of severe osteoporosis patients in the United States received prescriptions for Forteo®. Nevertheless, worldwide sales of Forteo® in 2013 exceeded $1.2 billion.

Our Weekly ZP-PTH offers the potential for an effective and differentiated solution with a lower weekly dose exposure and ease-of-use in a market served by Forteo®, a daily injectable

We believe that our Weekly ZP-PTH patch offers an attractive alternative to a daily injection, based on improved efficacy and potentially lower carcinogenicity due to lower overall weekly dose exposure and less frequent dosing. We plan to conduct further clinical studies and carcinogenicity studies for our Weekly ZP-PTH patch, with the intent to obtain approval from the FDA and other regulatory authorities outside the United States with either a longer treatment duration or without a black-box restriction on use.

Clinical rationale for Weekly ZP-PTH development

Forteo® is administered as a daily subcutaneous injection with a dose of 20 µg per day (140 µg per week). In the pivotal clinical studies for Forteo®, Forteo® achieved a fracture efficacy of 65% versus placebo. We believe that equal or better bone fracture efficacy can be achieved with a lower weekly exposure and less frequent administration of PTH, as compared to Forteo®. Forteo®, given its black-box warning, addresses only a small percentage of the severe osteoporosis market. A low weekly exposure dose also has potential for avoidance of a black-box warning, which we believe can significantly increase the total addressable market.

Our Weekly ZP-PTH clinical development strategy is predicated on demonstrating that our microneedle patch system can be used to deliver an optimal dose with the desired pulsatile pharmacokinetic profile, and that such delivery can achieve: (1) significant fracture efficacy; (2) an acceptable adverse event profile; and (3) low carcinogenicity to support avoidance of a black-box warning or limitation on treatment duration.

We therefore set out to establish that:

 

  a. a weekly dose regimen of PTH is effective in reducing fractures;

 

  b. a range of doses of PTH can be safely and effectively delivered using our microneedle patch system; and finally

 

  c. PTH, delivered weekly by our microneedle patch system, can provide pharmacokinetics, safety and tolerability comparable to subcutaneous injections of approved doses of teriparatide in US and abroad

 

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  a. Published data shows that a weekly dose regimen of PTH is effective in reducing fractures

Preclinical and clinical studies by our former collaborator Asahi Kasei Corporation, or Asahi, of weekly subcutaneous delivery of Teribone™, Asahi’s formulation of PTH for the treatment of severe osteoporosis, lead us to believe that requisite fracture efficacy can be achieved safely, with a lower weekly exposure dose and less frequent administration as compared to Forteo®. Asahi launched Teribone™ in 2011 and achieved first calendar year sales of approximately $200 million.

Asahi studies of weekly PTH injection. Preclinical and clinical studies by Asahi of weekly subcutaneous delivery of PTH have demonstrated:

 

    79% vertebral fracture reduction in Asahi’s pivotal clinical study using a 56.5 µg subcutaneous weekly PTH injection;

 

    66% vertebral fracture reduction in Asahi’s clinical study using a lower dose of 28.2 µg subcutaneous weekly PTH injection based on a post-hoc analysis of the study data; and

 

    no carcinogenicity observed in a two-year rat study with an administration of 40.7 µg per kilogram per week.

These studies are described more fully below.

Asahi pivotal clinical study using a 56.5 µg subcutaneous weekly PTH injection

As published in a September 2012 article of the Journal of Clinical Endocrinology’s Metabolism, Asahi completed a Phase 3 trial in Japan with a weekly 56.5 µg injection that was the basis for approval and launch of Teribone™, Asahi’s formulation of PTH. The Phase 3 study was conducted to determine the efficacy of a once-weekly Teribone™ injection for reducing the incidence of vertebral fractures in patients with severe osteoporosis.

After 72 weeks of treatment, the cumulative incidence of new morphometric vertebral fractures was 3.1% in the Teribone™ group and 14.5% in the placebo group, thereby reducing the risk of new vertebral fractures by 79%. The Teribone™ injection also illustrated improvement versus placebo over time. Among the patients taking a Teribone™ injection who were enrolled in the study in treatment weeks 49-72, no patient experienced a vertebral fracture (0%), whereas 13 patients in the placebo group experienced a vertebral fracture (5%).

Asahi clinical study using a 28.2 µg subcutaneous weekly PTH injection

In 1999, Asahi started a once weekly teriparatide (28 µg) randomized, double-blind trial versus placebo (1.4 µg teriparatide) to test reduction of the incidence of vertebral fractures as published in a 2013 article of Calcified Tissue International. The study was conducted in Japanese subjects. A total of 316 subjects participated in the study, which lasted up to 131 weeks. Incident vertebral fractures occurred in 3.3% of subjects in the 28.2 µg teriparatide treated group and 12.6% of subjects in the placebo group during the 78-weeks, indicating a relative risk reduction of 66%.

Asahi two-year rat carcinogenicity study with various dose levels including an administration of 40.7 µg per kilogram per week

As published in a 2012 article of the Journal of Toxicological Sciences, Asahi conducted a five-arm, two-year rat carcinogenicity study with 55 rats per arm. The five arms included one on a daily administration of placebo, three on daily administration of 1.5 µg/kg, 4.5 µg/kg, and 13.6 µg/kg, and one on a weekly administration of 40.7 µg/kg. No carcinogenicity was observed in the animals administered the weekly dose.

 

  b. Our own clinical studies show that a range of doses of PTH can be safely and effectively delivered using our microneedle patch system

We have demonstrated with multiple studies that a range of doses of PTH can be safely and effectively delivered by daily administration using our microneedle patch system.

 

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2008 Phase 2 study with Daily ZP-PTH treatment showed a pulsatile delivery leading to a high bone mineral density, or BMD, gain versus Forteo®

In 2008, we completed a Phase 2 study of ZP-PTH delivered daily by our microneedle patch system, or Daily ZP-PTH. The objective of the study was to determine the safety and efficacy of our microneedle patch system compared to a placebo patch and a subcutaneous teriparatide 20 µg injection in post-menopausal women with osteoporosis. The design consisted of a six-month, randomized, placebo-controlled, positive control, multi-dose daily administration study with 165 patients enrolled. The study contained five arms: three arms of Daily ZP-PTH (20 µg, 30 µg, 40 µg) and a placebo patch, all self-administered daily with a 30-minute wear time, and teriparatide 20 µg injection administered daily. Our Phase 2 study demonstrated that at six months, the Daily ZP-PTH patch at 40 µg increased lumbar spine bone mineral density by 4.97%, compared to a loss of bone mineral density of 0.33% with a placebo, and increased hip bone mineral density by 1.33%, compared to an increase of 0.09% with teriparatide 20 µg injection and a loss of 0.63% with placebo (see tables below).

 

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The Daily ZP-PTH Phase 2 study was the largest and most comprehensive study we have completed to date. As shown in the graph below, it demonstrated the fast-on, fast-off pharmacokinetic profile we believe is critical for strong anabolic effect, which we believe contributed to the increases in lumbar spine and hip bone mass density illustrated above. The pharmacokinetic profile for all patch doses showed a faster time to peak concentration and a shorter apparent half-life than the subcutaneous teriparatide 20 µg injection.

 

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In terms of safety, the mean serum calcium for all Daily ZP-PTH doses increased moderately, but remained within the normal range. None of the patients discontinued the study due to hypercalcemia or hypercalciuria, potentially dangerous conditions with cardiovascular risk. During the six months of therapy, there was no clinically significant hypercalcemia observed and there were no clinically significant changes in liver functions, renal functions, blood counts or electrocardiograms. Also, no antibodies against PTH were detected nor any skin infection observed in any of the Daily ZP-PTH treatment groups.

In summary, the Phase 2 Daily ZP-PTH demonstrated that transdermal delivery of PTH using our microneedle patch system was safe and effective to increase bone density over six months, and demonstrated:

 

    more pulsatile pharmacokinetics profile, with a faster TMAX, a higher CMAX and a shorter half-life (critical to the efficacy of an anabolic) observed with the patch versus Forteo.® TMAX is a measure of the time after administration of a drug when it reaches the highest serum concentration. CMAX is a measure of the peak serum concentration achieved after the drug has been administered; and

 

    comparable efficacy compared to Forteo® as measured by six-month spine bone mineral density, (and superior efficacy compared to Forteo® as measured by six-month hip BMD, even with lower bioavailability versus Forteo®.

 

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005 Clinical Study showed dose proportionality and patient safety with PTH doses up to 240 µg

In 2008, we tested the ability of our microneedle patch system to administer higher doses than the daily dose of 20 µg teriparatide injection approved for Forteo®. Our ZP-PTH 005 study tested delivery of the following doses of PTH: 30 µg, 40 µg, 120 µg, 180 µg, and 240 µg. The 30 µg and 40 µg doses were applied with a single patch and the 120 µg, 180 µg, 240 µg doses were applied with multiple 60 µg patches. The design was a five-way crossover study with 18 healthy volunteers randomized into three groups with application times of 30 minutes, two hours, and eight hours, respectively. The results indicated dose proportionality in both Cmax and in the “area under the concentration curve” or AUC, a measure of dose exposure over time, indicating that higher doses are effectively delivered when multiple patches are used. In terms of safety measurements, we tested serum calcium levels for all doses over 24 hours and observed that, while serum calcium values increased transiently, all values were within the normal range. We believe these results provide support for our decision to develop ZP-PTH at higher doses with a less frequent dosing interval.

 

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  c. Our recent Phase 1 clinical study shows that PTH, delivered weekly by our microneedle patch system, can provide pharmacokinetics, safety and tolerability comparable to weekly subcutaneous injections doses of teriparatide

Encouraged by our finding that higher doses of PTH can safely and effectively be delivered by our microneedle patch system, we undertook a Phase 1 study to evaluate the pharmacokinetics, safety and tolerability of Weekly ZP-PTH transdermal patches with doses ranging from 60 µg to 240 µg of teriparatide, with the goal of replicating the demonstrated efficacy of Forteo® and the 28 µg and 57 µg subcutaneous injections used in Asahi’s studies, as detailed below.

2013 Phase 1 study with Weekly ZP-PTH treatment

During the fourth quarter of 2013, we commenced a Phase 1 study in healthy post-menopausal women of a single application of one or two Weekly ZP-PTH transdermal patches coated with doses ranging from 60 µg to 160 µg of teriparatide, compared to subcutaneous injections of teriparatide at doses of 20 µg or 57 µg. The design was a single-center, open-label, randomized eight-way crossover study in 32 subjects. Test treatments included single patches of 60 µg, 120 µg, 160 µg doses, two patches of 60 µg (120 µg total PTH), two patches of 90 µg (180 µg total PTH), two patches of 120 µg (240 µg total PTH), and doses of two active injectable comparators: teriparatide 20 µg (Forteo®) by subcutaneous injection, and teriparatide 57 µg (Teribone™) by subcutaneous injection. The rationale of the patch dose selection was driven by our desire to replicate the demonstrated efficacy of 28 µg and 57 µg subcutaneous injections in Asahi’s studies while adjusting for a higher bio mass index in a Caucasian population.

 

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As indicated by the chart below, the Phase 1 study demonstrated pulsatile performance with all patch doses, which is a significant factor for anabolic efficacy.

 

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The study results also demonstrated:

 

    The bioavailability of our selected patch doses bracketed the subcutaneous doses of 28 µg and 57 µg, which have proven to be efficacious in reducing fractures in Japanese patients. Our patches illustrated high bioavailability, dose proportionality in ascending doses in the single-patch systems, and dose proportionality in ascending doses in the two-patch systems, enabling us the flexibility of dose selection for future clinical studies; and

 

    With all weekly doses on one- or two-patch systems, we achieved the desired pulsatile pharmacokinetic profile which we believe is critical for anabolic efficacy. We observed pulsatile pharmacokinetic profile comparable to that in our Daily ZP-PTH Phase 2 study and in our 2008 005 ZP-PTH study.

All patch doses were well tolerated when compared to Forteo® and Teribone™.

Planned clinical development of Weekly ZP-PTH

We expect to have a pre-IND meeting with the FDA in July 2014 to discuss the clinical study design for our planned Phase 2 and Phase 3 studies described below. The Phase 2 Weekly ZP-PTH study is expected to provide guidance on dose selection for the Phase 3 Weekly ZP-PTH study, which is expected to be a two-year fracture reduction study.

 

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We expect to have additional meetings with the FDA in during the fourth quarter of 2014 to discuss and get approval for a special protocol assessment, or SPA, for our planned carcinogenicity study, which, if successful may help in extension of the treatment duration or avoidance of a black box warning.

Planned Phase 2 study of Weekly ZP-PTH

We expect to initiate preparation for our Phase 2 Weekly ZP-PTH clinical study in the second half of 2014. The clinical study will be a six-month, randomized, multidose weekly administration study with placebo and active controls. The study will have six arms, with approximately 40 patients per arm (three groups of active doses of Weekly ZP-PTH, a placebo group, and two active injectable comparators: Forteo®, a daily injection, and Teribone™, a weekly injection).

Study objectives. The primary objective of this study is to determine the safety and efficacy of Weekly ZP-PTH when compared to a placebo and the two active injectable comparators. Patients, investigators and independent assessors will be blinded for all patch arms.

Study Population. The study will enroll approximately 240 post-menopausal women aged 50-81 whose last menstrual period was at least one year earlier and who had osteoporosis by the following criteria: a lumbar spine, or LS, bone mineral density, or BMD, T-score, or standard deviation in BMD compared with what would be expected in a healthy young woman, equal to -2.5 or below, or femoral neck or total hip BMD T-score of -5.0 or below, and LS T-score of -1.0 or below; or LS femoral neck or total hip T-score of -2.0 or below with a prevalent vertebral fracture documented by lateral spine radiographs. All subjects will sign informed consent forms and the study is expected to be conducted in multiple centers involving independent Institutional Review Boards and a clinical research organization.

Study Powering. The sample size for the study at 40 patients per group is adequately powered to assess the phase-appropriate safety and efficacy performance for Weekly ZP-PTH.

Study Design. The planned 240 eligible patients will be randomized equally to receive one of the following for six months:

 

    One patch of Weekly ZP-PTH 60 µg dose and one placebo patch;

 

    One patch of Weekly ZP-PTH 160 µg dose and one placebo patch;

 

    Two patches of Weekly ZP-PTH 60 µg dose;

 

    Two patches of placebo;

 

    Weekly administration of Teribone™ (56.5 µg) SC injection; and

 

    Daily administration of Forteo® (20 µg) SC injection.

The treatment allocation amongst the patients receiving patch administration will remain blinded to all parties throughout the study. Study medication will be self-administered for the planned duration of six months.

Primary Efficacy Endpoints. The primary efficacy endpoint will be the increase in spine BMD from baseline compared to placebo, measured after six months of treatment.

Secondary Efficacy Endpoints. The efficacy endpoint will be the increase in hip BMD from baseline compared to placebo, measured after six months of treatment.

Safety outcomes. Safety evaluations to be performed will include physical examinations, vital signs, 12-lead electrocardiograms, or ECGs, clinical laboratory tests and monitoring and recording of adverse events. Specific safety assessments will include post-dose (four hours) determination of serum calcium, determination of creatinine clearance, post-dose ECG assessments at selected visits and assessments of postural hypotension (60 minutes post-dose) at selected clinic visits.

 

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We expect the Phase 2 study to be complete by the end of 2015.

Planned pivotal clinical study for Weekly ZP-PTH

We expect to commence our Phase 3 Weekly PTH clinical study after completion of the Weekly PTH Phase 2 study. The clinical study designed for submission of our Weekly ZP-PTH program will be a randomized, double-blind, 24-month bone fracture reduction study with approximately 450 patients per group, with one group of active dose of Weekly ZP-PTH and a placebo group.

Study objectives. The primary objective of this study is to determine the safety and efficacy of Weekly ZP-PTH when compared to a placebo for prevention of vertebral fracture in otherwise healthy ambulatory post-menopausal women at a high risk of bone fracture due to severe osteoporosis. Patients, investigators and independent assessors will be blinded as to treatment for that outcome. The secondary objectives of this study are to determine the safety and efficacy of Weekly ZP-PTH when compared to a placebo for prevention of non-vertebral fractures. Additional key secondary efficacy outcome measures include BMD of the spine and the hip.

Study Population. The study will enroll otherwise healthy ambulatory women who have been post-menopausal for at least five years aged 50 to 85 (inclusive), meet the study entry criteria and have provided written informed consent. The women will have a BMD T-score of £-2.5 and > -5.0 at the lumbar spine or hip (femoral neck) by dual-energy x-ray absorptiometry, or DXA, and radiological evidence of two or more mild or one or more moderate lumbar or thoracic vertebral fractures, or history of low trauma forearm, humerus, sacral, pelvic, hip, femoral or tibial fracture within the past five years. Post-menopausal women older than 65 who meet the above bone fracture criteria but have a T-score of £-2.0 and > -5.0 may be enrolled. Women older than 65 who do not meet the bone fracture criteria may also be enrolled if their T-score is <-3.0 and > -5.0. All patients are to be in good general health as determined by medical history, physical examination (including vital signs) and clinical laboratory testing.

Study Powering. The sample size for the bone fracture study of 450 patients per group was selected with the goal of 90% power to detect 60% reduction in bone fracture incidence with an estimated placebo fracture rate of 5% per year. The assumed drop-out rate is 30%, which implies an effective rate of approximately 15% assuming that drop-out patients will be at risk for about 50% of the study period. Active doses will be tested sequentially with no correction for multiple testing.

Study Design. The planned 900 eligible patients will be randomized equally to receive one of the following for 24 months:

 

    Weekly ZP-PTH dose; or

 

    a matching placebo.

The treatment allocation will remain blinded to all parties throughout the study. Study medication will be self-administered weekly by our applicator for the planned duration of 24 months. All enrolled patients will also receive calcium and vitamin D supplementation from the time of enrollment until the end of the treatment period.

Patients will receive BMD measurements and radiographs for vertebral fractures every six months.

Primary Efficacy Endpoints. The primary efficacy endpoint will be the number of Weekly ZP-PTH patients showing new vertebral fractures at end-of-treatment when compared to placebo as evaluated by a blinded assessor according to a standardized graded scale of severity of the vertebral deformity. The sample size per treatment arm provides 90% power at a two-sided alpha to detect a superiority difference between placebo patients and those who receive Weekly ZP-PTH on vertebral fracture incidence.

 

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Secondary Efficacy Endpoints. Secondary efficacy parameters will also include reduction in the incidence of non-vertebral fractures to the wrist, hip and rib. Other secondary efficacy endpoints will include changes in BMD of the spine, hip, femoral neck and wrist from baseline to end-of-treatment as assessed by DXA. Additional secondary endpoints will include change in serum bone formation markers across treatment, such as amino pro-peptide of type 1 collagen, or P1NP, osteocalcin and bone-specific alkaline phosphatase.

Safety outcomes. Safety evaluations to be performed will include physical examinations, vital signs, 12-lead electrocardiograms, or ECGs, clinical laboratory tests and monitoring and recording of adverse events. Specific safety assessments will include post-dose (four hours) determination of serum calcium, determination of creatinine clearance, post-dose ECG assessments at selected visits and assessments of postural hypotension (60 minutes post-dose) at selected clinic visits.

Overall study safety will be monitored by an independent data safety monitoring board.

Planned preclinical carcinogenicity study for Weekly ZP-PTH

The current dose exposure for patients receiving marketed Forteo® is 140 µg per week. Although the final dose for the Weekly ZP-PTH Phase 3 study will be selected after completion of the Weekly ZP- PTH Phase 2 study, we expect the target dose exposure with the selected patch dose to be significantly lower than with the current marketed dose of Forteo®. Given the expected lower dose exposure with Weekly ZP-PTH, we believe that we will be able to offer a rationale for seeking either the avoidance of a black-box warning or prolongation of the treatment window beyond two years.

We intend to have a Type C meeting with the FDA in second half of 2014 to discuss avoidance of a black-box warning or two-year use limitation based on planned carcinogenicity studies. We plan to conduct a two-year carcinogenicity study in rats. We expect this study to be completed before the completion of the pivotal clinical program for Weekly ZP-PTH. We expect the study to start as soon as practicable after receiving approval for the carcinogenicity SPA. We expect to expose the rats to an AUC exposure equal to 3x, 10x and 25x of the human AUC exposure with the dose planned for our Phase 3 study.

It is our expectation based on the published carcinogenicity work conducted by Asahi and prior clinical work conducted by ourselves that we will see no carcinogenicity in 3x and 10x arms, which we believe will be adequate to seek approval for extension of treatment duration or avoidance of the black-box warning.

Our hypoglycemia opportunity—ZP-Glucagon

Our product candidate ZP-Glucagon is our proprietary formulation of glucagon, for the emergency rescue of patients suffering from life-threatening, severe hypoglycemia. We believe that ZP-Glucagon delivered using our microneedle patch system will offer patients and caregivers a simple device providing rapid onset and enhanced ease of use, as well as extended room temperature stability, compared with the two glucagon products currently marketed in the United States

In January 2014 we completed a Phase 1 study that demonstrated faster onset and a higher bioavailability with ZP-Glucagon treatments compared to glucagon injection. We intend to initiate a second Phase 1 study to evaluate the performance of ZP-Glucagon in healthy volunteers in the third quarter of 2014. We expect to initiate a Phase 2 study to investigate the safety and efficacy of ZP-Glucagon in the treatment of insulin-induced hypoglycemia in diabetic patients (as opposed to the healthy volunteers used in our Phase 1 studies) after discussions with the FDA subsequent to completion of the planned second Phase 1 study.

Severe hypoglycemia market is attractive and underserved

Severe hypoglycemia is a life-threatening potential complication of diabetes treatment. It is characterized by very low level of blood sugar, often resulting from insulin overdose, which can cause loss of consciousness, seizure, coma and death. Timely treatment is critical. Severe hypoglycemia is treated by restoring blood glucose

 

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to normal levels by administering a glucagon injection or infusion. The treatment is typically provided by a third party, caregiver or a bystander, as the patient is unable to self-administer the injection. Despite the risks involved with hypoglycemia, many insulin-dependent patients do not carry glucagon rescue kits.

There are 21 million diagnosed diabetes patients in the United States, of whom 26% are insulin-dependent. Insulin-dependent patients have on average 1.2 severe hypoglycemic events per year. There are currently two glucagon products marketed in the United States, Glucagon Emergency Kit by Eli Lilly and GlucaGen® by Novo Nordisk. Based on our 2013 hypoglycemia survey, we estimate that in 2012, sales of these products exceeded $120 million in the United States with units sold at an average wholesale price of $188 per unit, and that the injectable glucagon market is growing at approximately 15% year-over-year, largely driven by ongoing price increases.

Sales of glucagon are driven by a combination of new glucagon prescriptions and refills of expired prescriptions after the end of the shelf life. Prescriptions for glucagon are most commonly written by diabetes specialists, including adult and pediatric endocrinologists. Pediatric use and use by the elderly in long-term care facilities comprise approximately 45% of the total prescriptions sold. Both of these segments need an intuitive and easy-to-use system for administration of glucagon.

We believe that ZP-Glucagon also has the potential to address the needs of type 2 insulin-dependent diabetics. There are approximately 2.9 million patients in this segment who, because they become insulin- dependent later in their adult life, do not have the same level of training or education on insulin dosing as type 1 diabetics. We believe that a user-friendly device such as our microneedle patch system for administration of ZP-Glucagon will be an attractive offering for this market segment.

Existing treatments require reconstitution and injection, limiting their usefulness in an emergency rescue situation

There are currently two products marketed in the United States for severe hypoglycemia, Glucagon Emergency Kit by Eli Lilly and GlucaGen® by Novo Nordisk. Due to its chemical constitution, the glucagon molecule is inherently unstable, and both commercially available products require a multi-step reconstitution process prior to use. Reconstitution and injection are typically administered by a third party who may lack medical training. To our knowledge, all competitors marketing or developing products for severe hypoglycemia offer injectable products.

Our ZP-Glucagon solution is intuitive and ready-to-use

We believe that ZP-Glucagon delivered using our microneedle patch system will offer patients and caregivers the benefit of a simple, easy-to-use device with rapid onset, room temperature stability and enhanced portability, which we believe will facilitate patients’ carrying our product as a glucagon rescue kit.

 

LOGO    LOGO

We expect our finished product to be a single-use, disposable, pre-loaded microneedle patch system. We have designed our product to be intuitive and to be administered with a simple “press-and-apply” action without requiring any cumbersome reconstitution. We intend to introduce a Generation 1 product based on our existing 3 cm2 patch

 

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and the reusable applicator (although this applicator is expected to only be used one time). We expect our Generation 2 product to be an integrated patch and applicator system on a 6 cm2 patch with a single-use applicator. While we have developed prototypes for both the 6 cm2 patch and the single-use applicator, we have yet to conduct clinical studies using these versions of our products.

Our ability to offer ZP-Glucagon as a ready to use product is enabled by our innovative stable formulation, which is stable at room temperature for an extended period of time. Additionally, we have observed faster onset of action with our formulations as compared to intramuscular injection. Rapid application, fast onset and high bioavailability are crucial in an emergency rescue situation to bring a patient out of severe hypoglycemia.

Demonstrated high stability of our ZP-Glucagon formulation enables the ready-to-use feature of our product and is a significant source of differentiation compared to current marketed products

In the treatment of severe hypoglycemia, we believe that the practical advantages afforded by the room-temperature stability of our microneedle patch system may be as important as the therapeutic benefits of rapid onset. We have therefore undertaken and completed multiple preclinical, clinical and stability studies designed to select the appropriate formulation to take into further human clinical development.

We have performed stability studies on four formulations of Glucagon. As the purity of an unstable compound typically deteriorates over time, our goal in these studies was to maintain the highest purity level. In our most recent stability studies with those formulations we plan to use in our future clinical studies (Formulation C and Formulation D), we maintained purity levels in excess of 99% after six months at 40°C, or in excess of 100°F, a temperature significantly higher than room temperature, and consistent with the ambient temperatures that might be encountered in a warm climate by a patient carrying the product in a pocket or purse.

 

LOGO

Clinical development of ZP-Glucagon

Glucagon is indicated for use in emergency rescue of severely hypoglycemic patients with a recommended dose of 1 milligram for adults and 0.5 milligram, or mg, for children under 44 pounds. We have conducted preclinical studies and clinical studies with a 0.5 mg dose using our existing 3 cm2 patch and the reusable applicator.

 

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The goal of our ZP-Glucagon clinical development program is to achieve a fast and efficient path to market. The program consists of two Phase 1 studies (of which one has already been completed), each designed to systematically reduce the development risk as studies are completed. The second Phase 1 study will be followed by a Phase 2 study and a Phase 3 study. The Phase 3 study will be designed as a non-inferiority study compared to GlucaGen® with submission in accordance with the 505(b)2 regulatory guidelines. After approval of our Generation 1 product, we will subsequently conduct a bridging study for launch of our Generation 2 product with a 6cm2 patch and a single-use applicator.

The endpoints in a glucagon trial are the responder rate and the time to normalization of glucose levels. Both endpoints are objective and measurable within a very short period of time after administration of glucagon.

Completed Phase 1 study of ZP-Glucagon illustrated fast onset and high bioavailabilty across multiple application sites

Our first Phase 1 study was completed in December 2013. It was designed to assess relative bioavailability with our microneedle patch system on a 3cm2 patch compared to GlucaGen® which is administered by intramuscular injection. We compared subjects across multiple application sites with two formulations (formulation C and formulation D) in a single-center, open-label, randomized five-way crossover study using 0.5 mg on both the ZP-Glucagon patch and GlucaGen®. The study included 20 healthy volunteer subjects.

We achieved a faster onset and a higher bioavailability with each of the ZP-Glucagon treatments vs. the Glucagon IM injection. The pharmacokinetic and pharmacodynamic data is shown below.

 

LOGO

Planned clinical development of ZP-Glucagon

Planned second Phase 1 study

Since we achieved higher bioavailability using a 0.5 mg coated ZP-Glucagon dose in our first Phase 1 study compared to a 0.5 mg dose of GlucaGen® intramuscular injection, we expect to observe a similar result when comparing a 1.0 mg coated ZP-Glucagon dose compared to a 1.0 mg dose of GlucaGen® intramuscular injection. Our second Phase 1 study is designed to confirm our expectation. The study will be designed to evaluate the performance of our Generation 1 ZP-Glucagon product in healthy volunteers without induction of hypoglycemia using up to 1.0 mg coated dose compared to GlucaGen® administered by intramuscular injection. Additionally, we expect to assess the performance of ZP-Glucagon treatments in healthy volunteers with induction of hypoglycemia. Therefore, the clinical design will be a single-center, open-label, randomized six-way crossover study, with planned doses of 0.5 mg and 1.0 mg of ZP-Glucagon and 1.0 mg GlucaGen® administered by intramuscular injection, with the first three treatments given without induction of hypoglycemia and the next three treatments given with induction of hypoglycemia The study will include 10 healthy volunteer subjects of ages 18-60. We expect to initiate this Phase 1 study in the third quarter of 2014.

 

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Planned Phase 2 study

We expect to initiate our Phase 2 study after discussions with the FDA subsequent to completion of the second Phase 1 study. Based on the expected higher bioavailability results from our second Phase 1 study and our subsequent discussions with the FDA, it is possible that we could have a therapeutic patch dose with a coated amount less than 1mg. In the event that our second Phase 1 study does not show higher bioavailability or if the FDA disagrees with our proposal for a coated dose less than 1 mg, we will plan our Phase 2 study with only a 1mg dose.

This study is expected to investigate the safety and efficacy of ZP-Glucagon in the treatment of insulin-induced hypoglycemia in diabetic patients (as opposed to healthy volunteers used in our Phase 1 studies). We expect this study to (i) inform our target dose for the pivotal Phase 3 study and (ii) give us guidance to adequately power the pivotal study.

This study is expected to be a three-way crossover study with 12-18 diabetic patients each of whom would be administered the following three doses:

 

    One patch of ZP-Glucagon target dose applied on the upper arm;

 

    Two patches of ZP-Glucagon 0.5 mg applied on the upper arm; and

 

    Intramuscular injections of 1.0 mg GlucaGen®.

The primary endpoints in this study are expected to be as follows:

 

    Time to increase in blood glucose concentration from base line by 50 mg/dl;

 

    Blood glucose concentration change from baseline 15 minutes after treatment administration;

 

    Maximal change from baseline in blood glucose concentration; and

 

    Incidence of adverse events.

Planned pivotal Phase 3 study

We plan on conducting a single, open-label, crossover non-inferiority pivotal study for our Generation 1 ZP-Glucagon product with GlucaGen® as the active comparator, in approximately 100 diabetic patients in approximately 25 centers. This pivotal study will be a larger version of our Phase 2 study.

The objectives of the study will be:

 

    To demonstrate non-inferiority of ZP-Glucagon to normalize blood glucose in subjects with type-1 or type-2 diabetes mellitus after prior induction of hypoglycemia, compared to the intramuscular injection of glucagon at a dose of 1.0 mg; and

 

    To characterize the safety profile of ZP-Glucagon for the emergency treatment of severe hypoglycemia in subjects with diabetes.

The endpoints in the pivotal study will be:

 

    Time to increase in blood glucose concentration from baseline by 50 mg/dl, measured from treatment administration;

 

    Blood glucose concentration change from baseline 15 minutes after treatment administration;

 

    Maximal change from baseline in blood glucose concentrations;

 

    Time to increase in blood glucose concentration from baseline by 50 mg/dl, as measured from begin of the treatment procedure; and

 

    Incidence of vomiting.

 

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Based on smaller trial sizes, easy enrollment and short time to results, we expect to complete all human studies and develop the Generation 1 ZP-Glucagon within approximately two years from the start of the clinical program. We plan to initiate Phase 2 clinical studies of ZP-Glucagon in the second half of 2014.

We intend to complete a bridging study in order to launch the Generation 2 ZP-Glucagon product with a 6 cm2 patch and a single use applicator after approval of the Generation 1 product.

Our migraine opportunity—ZP-Triptan

Our product candidate ZP-Triptan is our proprietary formulation of zolmitriptan, used for the treatment of migraine. Because ZP-Triptan has demonstrated fast onset in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

In the fourth quarter of 2013, we completed preclinical animal studies that compared the pharmacokinetic profile of ZP-Triptan to that of zolmitriptan administered intravenously. In these preclinical studies, ZP-Triptan achieved rapid onset and bioavailability that compared favorably with intravenous delivery. We intend to initiate a Phase 1 study to compare the pharmacokinetic and safety/tolerability profiles of escalated patch doses of zolmitriptan to those of one patch dose of sumatriptan and one subcutaneous injection of sumatriptan in healthy volunteers. Our Phase 2 study will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults.

Migraine is a large and attractive market

According to the Migraine Research Foundation, migraine is a very common disease that affects 36 million men, women and children in the United States. Symptoms of migraine include moderate to severe headache pain, nausea and vomiting, photophobia (abnormal sensitivity to light), and phonophobia (abnormal sensitivity to sound). Most migraines last between four and 24 hours, but some last as long as three days. According to published studies, 63% of migraine patients experience between one and four migraines per month.

Existing treatments—triptans, which comprise significant proportion of total migraine, have significant disadvantages

According to a 2014 study by GlobalData, sales of prescriptions for medications indicated for migraine in the United States were approximately $1.9 billion in 2012. Of this amount, $1.1 billion was for triptans.

We believe that each of the currently available methods of administering triptans, including oral, nasal spray, subcutaneous injection and iontophorectic transdermal patch, has significant disadvantages. Some migraine patients fail to respond consistently to oral triptans, and oral treatments may be ineffectual for patients who are suffering from the nausea or gastric stasis that can be associated with migraine. Oral, nasal and iontophoretic patch triptan products are also characterized by relatively slow onset of action. Nasal sprays may be unpleasant in taste, and use of injectables can cause discomfort. Because ZP-Triptan has demonstrated fast onset in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

Our ZP-Triptan solution offers fast onset

According to a 2005 article by published in Headache, clinical trials have demonstrated that at least 30% of migraine patients fail to respond consistently to oral triptans. Based on data from multiple published third party clinical trials, including those described in a 2005 article by published in Headache, a peer-reviewed medical journal, we believe patients’ failure to respond consistently results from a variety of causes, including a slower onset of action (typically ranging between one and three hours) and low and inconsistent absorption of oral medication because of reduced gastric motility in migraine patients.

 

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In published studies, migraine sufferers often cite faster onset of pain relief as a key therapeutic attribute they would like from their migraine medication.

The following table compares the time to maximum drug concentration in blood, or Tmax, and pain relief of oral forms, including melts and tablets, and nasal forms of marketed triptans to sumatriptan injection. The data are derived from Prescribing Information for the different formulations of these marketed triptans:

 

Form/Product (API)

   Tmax      Relief at 1
hour (1)
    Relief at 2
hours (1)
 

Transdermal Patch

       

ZP-Triptan (zolmitriptan patch—preclinical)

     9 minutes        

Zecuity (sumatriptan patch)

     1.1 hrs         N/A        53

Subcutaneous

       

Sumavel DosePro (sumatriptan injection)

     12 minutes         70 %     81-82 %

Imitrex (sumatriptan injection)

     12 minutes         73     70

Nasal

       

Imitrex (sumatriptan)

     Not provided         ~38-46 %     43-64 %

Zomig (zolmitriptan)

     3.0 hrs         ~60 %     69-70 %

Oral—Melt

       

Zomig-ZMT (zolmitriptan)

     3.0 hrs        ~45 %     ~63 %

Maxalt-MLT (rizatriptan)

     1.6-2.5 hrs        ~38-43 %     59-74 %

Oral—Tablets

  

Imitrex (sumatriptan)

     2.0-2.5 hrs         ~28-35 %     50-62 %

Treximet (sumatriptan/naproxen sodium)

     1.0 hrs         ~28 %     57-65 %

Zomig (zolmitriptan)

     1.5 hrs         ~35-45 %     59-67 %

Maxalt (rizatriptan)

     1.0-1.5 hrs         ~38-43 %     60-77 %

Amerge (naratriptan)

     2.0-3.0 hrs         19-21 %     42-48 %

Axert (almotriptan)

     1.0-3.0 hrs         ~30 %     55-65 %

Frova (frovatriptan)

     2.0-4.0 hrs         ~12 %     37-46 %

Relpax (eletriptan)

     1.5-2.0 hrs         ~20-30 %     47-77 %

 

(1) Range reflects headache relief data obtained in placebo controlled clinical studies, which include different doses of the same triptan.

In migraine, Tmax closely correlates to speed of onset of pain relief, and has also been shown to be correlated with completeness of pain relief and pain freedom over time. Relief at two hours is the standard endpoint used in migraine studies and represents the percentage of patients reporting a reduction of migraine symptoms from a classification of severe or moderate to mild or none within two hours after taking the medication.

Sumatriptan injection forms have shown improved efficacy profiles over oral and nasal forms which may be attributable to a shorter Tmax. Nasal forms, while claimed by some to be fast-acting, have drug absorption profiles similar to oral forms because a large portion of the administered dose may be swallowed prior to absorption. Given that Tmax closely correlates to speed of onset of pain relief and pain freedom over time, and given that we believe that ZP-Triptan will have a very short Tmax in clinical studies, we believe that ZP-Triptan will provide complete and extensive pain relief for patients and, therefore will be significantly differentiated from oral and nasal triptan products, which all have much slower onset of action.

Migraines may also be associated with nausea and/or vomiting. Twenty-nine percent of patients reported vomiting as a symptom of migraine attacks, according to the American Migraine Study II, and epidemiological studies in migraine reveal that the vast majority of patients (more than 90%) have experienced nausea during a migraine attack and more than 50% have nausea with the majority of attacks, according to an article published in Drugs in 2003 (Volume 63, Issue 21). Depending on the type of migraine episode, a treatment may be more or

 

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less effective. For example, oral treatments may be of little value in a patient who is vomiting or who is experiencing migraine-associated gastric stasis. There is also clinical evidence that oral agents may be less effective when taken at a later stage of a migraine attack, rather than at an earlier stage. Consequently, rapid onset migraine and waking with a migraine attack may reduce the benefits to patients of oral triptans, because both represent fully-developed attacks.

Our ZP-Triptan solution offers ease-of-use

Because ZP-Triptan has demonstrated a fast onset in preclinical studies, and does not depend on gastrointestinal absorption, we expect its efficacy to be superior to currently marketed oral triptans. Our single-use disposable device is ready to apply after opening the packaging, is intuitive, simple and painless to use, and poses no needle stick risk.

Other potential competitive products in the migraine space are sumatriptan products using alternative delivery systems, notably Zecuity™, marketed by Teva (which acquired Zecuity™’s developer, NuPathe), and Sumavel DosePro™, marketed by Zogenix. We believe that our microneedle patch system offers significant advantages over these systems.

 

LOGO   LOGO   LOGO

Our ZP-Triptan solution offers high bioavailability

ZP-Triptan, being delivered through the bloodstream, does not depend for its effectiveness on absorption through the gastrointestinal tract, and we believe will possess significant advantages over oral delivery of triptans. Moreover, we believe ZP-Triptan will also possess advantages over nasal spray delivery, which can be unpleasant in taste.

Our preclinical studies demonstrated fast onset and high bioavailability

In the fourth quarter of 2013, we conducted preclinical studies with a hairless guinea pig animal model. The hairless guinea pig model is a standard animal model that we have used for various development products because the skin is very similar to human skin. We have observed results with our animal model consistently translate to similar performance in subsequent human studies.

 

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The objective of the study was to compare the pharmacokinetic profile of our ZP-Triptan to the pharmacokinetic profile of intravenous injection of zolmitriptan. In a representative study we utilized 3 cm2 patches and 800 µg per patch. As represented in the graph below, ZP-Triptan achieved a time to maximum serum concentration of nine minutes and 100% bioavailability compared to intravenous injection of zolmitriptan, on a dose-normalized basis.

 

LOGO

The data above illustrates that our ZP-Triptan product candidate achieves very strong bioavailability and very short Tmax and support our decision to advance the product into human clinical development.

Planned clinical development of ZP-Triptan

Clinical development strategy for ZP-Triptan

Our ZP-Triptan clinical development strategy is predicated on leveraging our easy-to-use, integrated, single-use disposable system and the fast onset of action demonstrated in our preclinical studies. We intend to conduct our Phase 1 and Phase 2 studies using an active injectable comparator to assess the relative speed of onset compared to an injectable. The margin of superiority, if significant, will determine whether our Phase 3 study involves an active comparator or placebo.

Planned Phase 1 study of ZP-Triptan

Our planned Phase 1 Study will be designed to compare the pharmacokinetic and safety / tolerability profiles of multiple patches of zolmitriptan, one patch of sumatriptan and one subcutaneous injection of

 

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sumatriptan in healthy volunteers. Each subject will receive the sumatriptan treatments in a randomized sequence, followed by the zolmitriptan patch treatments in ascending order, if tolerated. The results of the ZP-Triptan Phase 1 study will guide the dose selection for the ZP Triptan Phase 2 study.

Planned Phase 2 study of ZP-Triptan

Our Phase 2 study will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults. This study is expected to be a randomized, controlled double-blind, parallel-group study with 200 migraine patients each of whom would be administered a ZP-Triptan patch coated with zolmitriptan, placebo patch and a subcutaneous injection of sumatriptan.

Type 2 diabetes; our collaboration with Novo Nordisk.

In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a microneedle patch product to administer semaglutide, Novo Nordisk’s investigational proprietary human glucagon-like peptide-1 analogue, or GLP-1, for the treatment of type 2 diabetes. Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize GLP-1 products with the initial product candidate being Novo Nordisk’s semaglutide administered weekly using our microneedle patch system. We are eligible to receive an upfront payment and payments upon achieving certain preclinical, clinical, regulatory and sales milestones which could total more than $60 million. We are also eligible to receive royalties on sales of products and will receive development support, as well as reimbursement of all development and manufacturing costs. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Further pipeline opportunities

We have tested our microneedle patch system in preclinical and clinical proof of concept studies that demonstrated its technical feasibility with approximately thirty compounds, ranging from small molecules to proteins. Over 30,000 of our patches have been applied to over 400 patients in seven Phase 1 clinical studies and one Phase 2 study. Based on this research, we believe that our microneedle patch system can be used to deliver treatments for a wide variety of indications beyond those on which are currently focused, in which our fast onset, room-temperature stability, and ease of use will fill a significant unmet need.

The other compounds that we have assigned the highest priority for further investigation for use with our microneedle patch system include:

 

    epinephrine, for treatment of anaphylactic shock;

 

    granisetron, for the treatment of chemo-induced nausea and vomiting; and

 

    sufentanil, for the treatment of post-operative pain.

We intend, independently or through strategic collaborations with others, to explore these and other potential applications of our microneedle patch system. We anticipate that our internal development programs will focus on delivery of generic drugs, and that we will collaborate with third parties with respect to delivery of their proprietary drugs.

Competition

Competition for our lead product candidates

The development and commercialization of new products to treat severe osteoporosis, severe hypoglycemia and migraine is highly competitive, and there will be considerable competition from major pharmaceutical, biotechnology and specialty pharmaceutical companies. Many of our competitors have substantially greater financial, technical and other resources than we do. In addition, many of these companies have longer operating histories and more experience than us in preclinical and clinical development, manufacturing, regulatory and global commercialization.

 

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Companies marketing or developing products that treat severe osteoporosis that may compete with our Weekly ZP-PTH product candidate include Amgen, Inc., Eli Lilly and Company and Radius Health, Inc. The following table lists products that we believe may or will compete in the United States against Weekly ZP-PTH, should Weekly ZP-PTH receive approval for sale:

 

Manufacturer

   Product   

Method of Treatment

Amgen

   Romosozumab (1)    Injection (monthly)

Eli Lilly

   Forteo®    Injection in thigh or abdomen (daily)

Radius

   BA058 (1)    Transdermal patch or injection (daily)

 

(1) Currently undergoing clinical testing.

Companies marketing products that treat severe hypoglycemia that may compete with our ZP-Glucagon product candidate include Novo Nordisk and Eli Lilly. The following table sets forth selected products that we believe would potentially compete against ZP-Glucagon, should this product receive approval for sale:

 

Manufacturer

   Product   

Method of Treatment

Novo Nordisk

   GlucaGen®    Injection

Eli Lilly

   Glucagon Emergency Kit    Injection

Biodel

      Stable liquid formulation delivered via pen injector

Xeris

   G-Pen and G-Pen Mini (1)    Stable liquid formulation delivered via pen injector

AMG Medical

      Glucagon powder delivered intranasally

 

(1) Currently undergoing clinical testing.

Companies marketing products that treat migraine that may compete with our ZP-Triptan product candidate include Teva, Zogenix, GlaxoSmithKline, AstraZeneca and Allergan. The following table sets forth selected products that we believe would potentially compete against ZP-Triptan, should this product receive approval for sale:

 

Manufacturer

   Product   

Method of Treatment

Teva

   Zecuity    sumatriptan patch

Zogenix

   Sumavel DosePro    sumatriptan injection

GlaxoSmithKline

   Imitrex Nasal Spray    sumatriptan nasal spray

AstraZeneca

   Zomig Nasal Spray    zolmitriptan nasal spray

Allergan

   Levadex    dihydroergotamine inhaler

Competition in drug delivery platforms

In addition to competition from major pharmaceutical, biotechnology and specialty pharmaceutical companies that develop and market products that compete against those that we develop, we face additional competition from companies that may develop and license drug delivery platforms similar to ours (including transdermal microneedle patches), and from alternative formulations and methods of delivery of the drugs on which we have focused, including oral formulations, nasal sprays, transdermal patches, intramuscular and subcutaneous injection and infusion. Such companies include, but are not limited to, 3M Company, Corium International, Inc. and Pantec Biosolutions AG.

Research and Development

As of March 31, 2014, our research and development organization consisted of nine people, located in our headquarters in Fremont, California. Our research and development staff is supervised by our founder and Chief Scientific Officer and has broad knowledge and skills in a range of disciplines applicable to formulation of drugs and the design and manufacture of our microneedle patch system.

The goals of our research and development efforts are to identify and develop drugs that can be delivered using our microneedle patch system and optimize the system to deliver those drugs.

 

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Manufacturing

We have adequate manufacturing capabilities and capacity to produce the microneedle patch system for preclinical and Phase 1, Phase 2 and pivotal trials of our products. We follow current good manufacturing practices, or cGMP, in our Fremont, California manufacturing facility. We purchase various components or intermediates of our microneedle patch system from third-party vendors, including the metal foil and formed micro-arrays, active pharmaceutical ingredients and formulation, inner ring, adhesive backing, ring and backing assembly, outer ring and primary and secondary packing components. All of these components and intermediaries are available from multiple sources. We also outsource the manufacture of our applicators.

Manufacturing Process

The manufacturing process for our microneedle patch system consists of two primary operations: (1) the formation of the micro-array structure, involving etching of titanium foil and subsequent hydro-forming; and (2) application of the drug formulation to the micro-array structure.

Once a micro-array is completed, we attach it to an inner ring housing the adhesive backing layer, which we purchase from a third party manufacturer. This is performed at our facility using a semi-automatic assembly process.

We apply the drug formulation to the micro-array by a contact process whereby the titanium needles are dipped in a liquid drug formulation until the specified amount of drug is applied to the micro-array structure. We then attach an outer ring to the assembly using a mechanical press fit on the same equipment used for coating the micro-array structure. The outer ring is made from a polymer material, which is readily available from multiple suppliers. We then insert the patch assembly into the primary packaging, which is purged with nitrogen for longer shelf life.

We perform substantially all product testing in-house.

We intend to devote significant resources to expanding the capacity and throughput of our manufacturing operations, and to reducing our manufacturing costs. We believe this will be critical to support the late-stage development, launch and commercial production of our product candidates, and ultimately to establishing and to maintaining high gross margins.

Commercialization

We have not yet established a sales, marketing or drug distribution infrastructure. We generally expect to retain commercial rights in the United States for our current drug candidates, all of which are still in preclinical or clinical development.

We focus on indications that have patient populations large enough to provide us with an attractive commercial opportunity, and where there is currently limited competition and premium pricing. We believe we will be able to compete effectively and profitably in these markets by offering a more effective and lower cost alternative. We also believe that the markets on which we have initially focused, and intend to focus in the future, are ones in which there are relatively concentrated prescriber bases that can be served by a small, targeted sales force dedicated to each product. We intend to develop a small, cost-effective commercial infrastructure that will enable us to retain and maximize the commercial opportunity.

Subject to receiving marketing approvals, we expect to commence commercialization activities by building a focused sales and marketing organization in the United States to sell our drugs. We believe that such an organization will be able to target the community of physicians who are the key specialists in treating the patient populations for which our drug candidates are being developed. Outside the United States, we expect to enter into distribution and other marketing arrangements with third parties for any of our drug candidates that obtain marketing approval.

 

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We also plan to build a marketing and sales management organization to create and implement marketing strategies for any drugs that we market through our own sales organization and to oversee and support our sales force. The responsibilities of the marketing organization would include developing educational initiatives with respect to approved drugs and establishing relationships with thought leaders in relevant fields of medicine.

Intellectual Property

We regard our technology as proprietary. Our strategy is to rely on a combination of patent, trade secret and trademark laws in the United States and other jurisdictions, and to rely on license and confidentiality agreements to further protect our proprietary technology and brand. The laws of some countries in which our products are licensed may not protect our intellectual property rights to the same extent as the laws of the United States.

As of April 30, 2014, we held licenses to 23 United States patents and eight United States patent applications, as well as numerous foreign counterparts to many of these patents and patent applications, covering key features of our microneedle patch system, such as formulation, coating, array design, patch anchoring, patch application, delivery, manufacturing and packaging. These patents are foundational and apply generally to each of our lead product candidates and their related applicators.

We licensed these patents and patent applications from ALZA Corporation, or ALZA, on an exclusive basis for all countries. Under the terms of the license agreement with ALZA, we are responsible for all development and development costs related to our transdermal microneedle patch system. We are also responsible for commercializing our transdermal microneedle patch system, including preparing and paying for all related regulatory filings. We are obligated to pay ALZA royalties on sales by us and our sublicensees of products that would otherwise infringe one of the licensed patents or that is developed by us based on certain ALZA know-how or inventions. We are also obligated to pay ALZA a percentage of non-royalty revenue that we receive from our sublicensees based on sales of such products. In addition, we have filed two provisional patent applications covering our single-use applicator and formulation of ZP-Glucagon. The patents we currently own or hold under licenses are as follows:

 

Patent

   US
Patent Number
  EP
Patent Number
   JP
Patent Number
  CN
Patent Number
   KR
Patent Number

Glucagon Formulation

   US App 61/868,969          

PTH Formulation

   7,556,821; 8,361,022;
8,633,159; US App

11/686,909;

         

Transdermal Formulation/ Coating/PK/PD

   7,537,795;7,579,013

7,963,935; 8,663,155;

  1,333,880;1,392,389;

1,638,523;

   4,659,336

5,007,427

5,388,415

2006-518731
(allowed)

  ZL200480040402.9

ZL200480024334.7

ZL200580023222.4

1821359.6,

ZL02812251.8,

ZL01818583.5

   812097

Micro Projection Design and Anchoring to Skin

   6,050,988;6,083,196;

6,322,808;

6,953,589;7,184,826

  1,037,686;1,037,687;

1,035,889

   4,012,252;4,061,022

4,012,252

  ZL98811989.7
ZL98812096.8
  

Patch Retainer Ring and Delivery Control

   6,855,131

10/978,807 (allowed)

  1,239,917;1,341,452    4,104,975;4,312,407   ZL00818309.0   

Patch Applicator

   6,953,589;

7,087,035;7,097,631

7,131,960;

7,419,481;7,798,987

US 61/860,001

  1,035,889;

1,239,916;

1,341,442;1,341,453;

1,680,154;

   4,198,985;4,659,332;

4,682,144;

JP2008-504343

  1,820,464.3;ZL2004800

39547.7;

1,820,462.7

   818,545

Manufacturing and Packaging Methods

   6,855,372; 7,435,299;

8,632,801,

  EP App

6772047.4; EP

App 6849294.1

   5,438,872;

JP App 2008-548743

  CN200680019269.8   

 

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The last of our issued patents will expire in 2025. We believe that the long life of our patent portfolio may make collaborating with us particularly attractive for third parties seeking to extend the lifecycle of profitable drugs nearing the expiration of their patent protection.

We rely on trade secrets to protect substantial portions of our technology. We generally seek to protect these trade secrets by entering into non-disclosure agreements and other contractual provisions with our employees and customers, and have restricted access to our manufacturing facilities and other technology.

Government regulation and product approval

United States—FDA Process

The research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of our products are subject to extensive regulation by governmental authorities in the United States and other countries. In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply with the applicable United States requirements may subject us to administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution. We expect Weekly ZP-PTH and ZP-Glucagon will each be subject to review by the FDA as a drug under NDA standards. We have not initiated any discussions with the FDA with respect to seeking regulatory approval of Weekly ZP-PTH, ZP-Glucagon and ZP-Triptan.

Drug Approval Process.

None of our drugs may be marketed in the United States until the drug has received FDA approval. The steps to be completed before a drug may be marketed in the United States include:

 

    preclinical laboratory tests, animal studies, and formulation studies, all performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations;

 

    submission to the FDA of an investigational new drug, or IND, application for human clinical testing, which must become effective before human clinical trials may begin and must be updated annually;

 

    adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication to the FDA’s satisfaction;

 

    submission to the FDA of an NDA;

 

    satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with cGMP regulations; and

 

    FDA review and approval of the NDA.

Preclinical tests include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal regulations and requirements. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application, which must become effective before human clinical trials may begin. An IND application will automatically become effective thirty days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND application. In such a case, the IND application sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. We have not submitted an IND application to the FDA for Weekly ZP-PTH, ZP-Glucagon or ZP-Triptan and we cannot be sure that submission of an IND application will result in the FDA allowing clinical trials to begin.

 

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Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND application.

Clinical trials necessary for product approval are typically conducted in three sequential Phases, but the Phases may overlap. The study protocol and informed consent information for study subjects in clinical trials must also be approved by an Institutional Review Board, or IRB, for each institution where the trials will be conducted, and each IRB must monitor the study until completion. Study subjects must sign an informed consent form before participating in a clinical trial. Clinical testing also must satisfy extensive good clinical practice, or GCP, regulations and regulations for informed consent and privacy of individually identifiable information. Phase 1 usually involves the initial introduction of the investigational drug into people to evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics and pharmacologic actions, and, if possible, to gain an early indication of its effectiveness. Phase 1 studies are usually conducted in healthy individuals and are not intended to treat disease or illness. However, Phase 1b studies are conducted in healthy volunteers or in patients diagnosed with the disease or condition for which the study drug is intended, who demonstrate some biomarker, surrogate, or possibly clinical outcome that could be considered for “proof of concept.” Proof of concept in a Phase 1b study typically confirms the hypothesis that the current prediction of biomarker, or outcome benefit is compatible with the mechanism of action. Phase 2 usually involves trials in a limited patient population to (i) evaluate dosage tolerance and appropriate dosage, (ii) identify possible adverse effects and safety risks, and (iii) evaluate preliminarily the efficacy of the drug for specific indications. Several different doses of the drug may be looked at in Phase 2 to see which dose has the desired effects. Patients are monitored for side effects and for any improvement in their illness, symptoms, or both. Phase 3 trials usually further evaluate clinical efficacy and test further for safety by using the drug in its final form in an expanded patient population. A Phase 3 trial usually compares how well the study drug works compared with an inactive placebo and/or another approved medication. One group of patients may receive the new drug being tested, while another group of patients may receive the comparator drug (already-approved drug for the disease being studied), or placebo. There can be no assurance that Phase 1, Phase 2 or Phase 3 testing will be completed successfully within any specified period of time, if at all. Furthermore, we or the FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The FDCA permits the FDA and the IND application sponsor to agree in writing on the design and size of clinical studies intended to form the primary basis of an effectiveness claim in an NDA. This process is known as a Special Protocol Assessment, or SPA. Under an SPA, the FDA agrees to not later alter its position with respect to adequacy of the design, execution or analyses of the clinical trial intended to form the primary basis of an effectiveness claim in an NDA without the sponsor’s agreement, unless the FDA identifies a substantial scientific issue essential to determining the safety or efficacy of the drug after testing begins.

Assuming successful completion of the required clinical testing, the results of the preclinical studies and of the clinical studies, together with other detailed information, including information on the manufacture and composition of the drug, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. The testing and approval process requires substantial time, effort and financial resources. The FDA reviews the application and may deem it to be inadequate, and companies cannot be sure that any approval will be granted on a timely basis, if at all. The FDA may also refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of the advisory committee, but it typically follows such recommendations.

The FDA has various programs, including fast track, priority review and accelerated approval that are intended to expedite or simplify the process for reviewing drugs and/or provide for approval on the basis of surrogate endpoints. Generally, drugs that may be eligible for one or more of these programs are those intended to treat serious or life-threatening conditions, those with the potential to address unmet medical needs, and those

 

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that provide meaningful benefit over existing treatments. A company cannot be sure that any of its drugs will qualify for any of these programs, or if a drug does qualify, that the review time will be reduced.

Before approving an NDA, the FDA usually will inspect the facility or the facilities at which the drug is manufactured and will not approve the product unless the manufacturing is in compliance with cGMP regulations. If the NDA and the manufacturing facilities are deemed acceptable by the FDA, it may issue an approval letter, or in some cases, an approvable letter followed by an approval letter. Both letters usually contain a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter. The approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA may require post-marketing testing and surveillance to monitor the drug’s safety or efficacy, or impose other conditions. Approval may also be contingent on approved risk evaluation and mitigation strategies, or REMS, that limits the labeling, distribution or promotion of a drug product. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market.

After approval, certain changes to the approved product, such as adding new indications, making certain manufacturing changes or making certain additional labeling claims, are subject to further FDA review and approval. Before a company can market products for additional indications, it must obtain additional approvals from the FDA. Obtaining approval for a new indication generally requires that additional clinical studies be conducted. A company cannot be sure that any additional approval for new indications for any product candidate will be approved on a timely basis, or at all.

Post-Approval Requirements.

Often times, even after a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct of additional clinical studies. If such post-approval conditions are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of an approved NDA are required to (i) report certain adverse reactions to the FDA, (ii) comply with certain requirements concerning advertising and promotional labeling for their products, and (iii) continue to have quality control and manufacturing procedures conform to cGMP regulations after approval. The FDA periodically inspects the sponsor’s records related to safety reporting and/or manufacturing facilities. This latter effort includes assessment of ongoing compliance with cGMP regulations. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. We have used and intend to continue to use third-party manufacturers to produce APIs for our products in clinical and commercial quantities, and future FDA inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product after approval may result in restrictions on a product, including withdrawal of the product from the market.

Hatch-Waxman Act

Under the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, Congress created an abbreviated FDA review process for generic versions of pioneer (brand name) drug products. In considering whether to approve such a generic drug product, the FDA requires that an Abbreviated New Drug Application, or ANDA, applicant demonstrate, among other things, that the proposed generic drug product’s active ingredient is the same as that of the reference product, that any impurities in the proposed product do not affect the product’s safety or effectiveness, and that its manufacturing processes and methods ensure the consistent potency and purity of its proposed product.

The Hatch-Waxman Act provides five years of data exclusivity for new chemical entities which prevents the FDA from accepting ANDAs and 505(b)(2) applications containing the protected active ingredient.

 

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The Hatch-Waxman Act also provides three years of exclusivity for applications containing the results of new clinical investigations (other than bioavailability studies) essential to the FDA’s approval of new uses of approved products, such as new indications, delivery mechanisms, dosage forms, strengths or conditions of use.

The Hatch-Waxman Act requires NDA applicants and NDA holders to provide certain information about patents related to the drug for listing in the FDA’s list of Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book). ANDA and 505(b)(2) applicants must then certify regarding each of the patents listed with the FDA for the reference product. A certification that a listed patent is invalid or will not be infringed by the marketing of the applicant’s product is called a “Paragraph IV certification.” If the ANDA or 505(b)(2) applicant provides such a notification of patent invalidity or noninfringement, then the FDA may accept the ANDA or 505(b)(2) application beginning four years after approval of the NDA. If an ANDA or 505(b)(2) application containing a Paragraph IV certification is submitted to the FDA and accepted as a reviewable filing by the agency, the ANDA or 505(b)(2) applicant then must provide, within 20 days, notice to the NDA holder and patent owner stating that the application has been submitted and providing the factual and legal basis for the applicant’s opinion that the patent is invalid or not infringed. The NDA holder or patent owner then may file suit against the ANDA or 505(b)(2) applicant for patent infringement. If this is done within 45 days of receiving notice of the Paragraph IV certification, a one-time 30-month stay of the FDA’s ability to approve the ANDA or 505(b)(2) application is triggered. The 30-month stay begins at the end of the NDA holder’s data exclusivity period, or, if data exclusivity has expired, on the date that the patent holder is notified of the submission of the ANDA. The FDA may approve the proposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed or if the court shortens the period because the parties have failed to cooperate in expediting the litigation.

European Union—EMA Process

In the European Union, or the EU, medicinal products are authorized following a similar demanding process as that required in the United States. Applications are based on the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, or ICH, Common Technical Document and must include a detailed plan for pediatric approval, if such approval is sought. Medicines can be authorized in the EU by using either the centralized authorization procedure or national authorization procedures.

Centralized Procedure

Under the centralized procedure, after the European Medicines Agency, or EMA, issues an opinion, the European Commission issues a single marketing authorization valid across the European Union, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human medicines that are derived from biotechnology processes, such as genetic engineering, contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, and officially designated orphan medicines. For medicines that do not fall within these categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long as the medicine concerned is a significant therapeutic, scientific or technical innovation, or if its authorization would be in the interest of public health.

National Authorization Procedures

There are also two other possible routes to authorize medicinal products in several countries, which are available for products that fall outside the scope of the centralized procedure:

Decentralized Procedure

Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one European Union country of a medicinal product that has not yet been authorized in any European Union country and that does not fall within the mandatory scope of the centralized procedure.

 

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Mutual Recognition Procedure

In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the national procedures of that country. Thereafter, further marketing authorizations can be sought from other European Union countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.

In light of the fact that there is no policy at the EU level governing pricing and reimbursement, the 27 EU Member States each have developed their own, often varying, approaches. In many EU Member States, pricing negotiations must take place between the holder of the marketing authorization and the competent national authorities before the product is sold in their market with the holder of the marketing authorization required to provide evidence demonstrating the pharmaco-economic superiority of its product in comparison with directly and indirectly competing products. We have not initiated any discussions with EMA with respect to seeking regulatory approval of either Weekly ZP-PTH or ZP-Glucagon.

Good Manufacturing Practices

Like the FDA, the EMA, the competent authorities of the EU Member States and other regulatory agencies regulate and inspect equipment, facilities and processes used in the manufacturing of pharmaceutical and biologic products prior to approving a product. If, after receiving clearance from regulatory agencies, a company makes a material change in manufacturing equipment, location, or process, additional regulatory review and approval may be required. Once we or our partners commercialize products, we will be required to comply with cGMP, and product-specific regulations enforced by, the European Commission, the EMA and the competent authorities of EU Member States following product approval. Also like the FDA, the EMA, the competent authorities of the EU Member States and other regulatory agencies also conduct regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. If, as a result of these inspections, it is determined that our or our partners’ equipment, facilities or processes do not comply with applicable regulations and conditions of product approval, regulatory agencies may seek civil, criminal or administrative sanctions and/or remedies against us, including the suspension of our manufacturing operations or the withdrawal of our product from the market.

Other International Markets—Drug Approval Process

In some international markets (e.g., China or Japan), although data generated in United States or EU trials may be submitted in support of a marketing authorization application, additional clinical trials conducted in the host territory, or studying people of the ethnicity of the host territory, may be required prior to the filing or approval of marketing applications within the country.

Pricing and Reimbursement

In the United States and internationally, sales of products that we market in the future, and our ability to generate revenues on such sales, are dependent, in significant part, on the availability and level of reimbursement from third-party payors such as state and federal governments, managed care providers and private insurance plans. Private insurers, such as health maintenance organizations and managed care providers, have implemented cost-cutting and reimbursement initiatives and likely will continue to do so in the future. These include establishing formularies that govern the drugs and biologics that will be offered and also the out-of-pocket obligations of member patients for such products. In addition, particularly in the United States and increasingly in other countries, we are required to provide discounts and pay rebates to state and federal governments and agencies in connection with purchases of our products that are reimbursed by such entities. We have consciously selected compounds for development that offer therapeutic benefit based on fast onset of action and receive a high reimbursement per unit for the currently marketed injectable form. We intend to commercialize our products at prices competitive to those of the currently marketed injectables, thereby securing support of the payors.

 

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There is no legislation at the EU level governing the pricing and reimbursement of medicinal products in the EU. As a result, the competent authorities of each of the 27 EU Member States have adopted individual strategies regulating the pricing and reimbursement of medicinal products in their territory. These strategies often vary widely in nature, scope and application. However, a major element that they have in common is an increased move towards reduction in the reimbursement price of medicinal products, a reduction in the number and type of products selected for reimbursement and an increased preference for generic products over innovative products. These efforts have mostly been executed through these countries’ existing price-control methodologies. The government of the United Kingdom, while continuing for now to utilize its established Pharmaceutical Pricing Reimbursement Scheme approach, has announced its intentions to phasing in, by 2014, a new value-based pricing approach, at least for new product introductions. Under this approach, in a complete departure from established methodologies, reimbursement levels of each drug will be explicitly based on an assessment of value, looking at the benefits for the patient, unmet need, therapeutic innovation, and benefit to society as a whole. It is increasingly common in many EU Member States for Marketing Authorization Holders to be required to demonstrate the pharmaco-economic superiority of their products as compared to products already subject to pricing and reimbursement in specific countries. In order for drugs to be evaluated positively under such criteria, pharmaceutical companies may need to re-examine, and consider altering, a number of traditional functions relating to the selection, study, and management of drugs, whether currently marketed, under development, or being evaluated as candidates for research and/or development. All such cost containment efforts by the payors in US and overseas are likely to support our competitive pricing model.

Sales and Marketing

The FDA regulates all advertising and promotion activities for products under its jurisdiction both prior to and after approval. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Physicians may prescribe legally available drugs for uses that are not described in the drug’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties, and often reflect a physician’s belief that the off-label use is the best treatment for the patients. The FDA does not regulate the behavior of physicians in their choice of treatments, but FDA regulations do impose stringent restrictions on manufacturers’ communications regarding off-label uses. Failure to comply with applicable FDA requirements may subject a company to adverse publicity, enforcement action by the FDA, corrective advertising, consent decrees and the full range of civil and criminal penalties available to the FDA.

We may also be subject to various federal and state laws pertaining to healthcare “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations and very few court decisions addressing industry practices, it is possible that our practices might be challenged under anti-kickback or similar laws. Moreover, recent healthcare reform legislation has strengthened these laws. For example, the recently enacted Patient Protection and Affordable Care Act, or the PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes, so that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA permits the government to assert that a claim that includes items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment, to third-party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal and civil sanctions, including fines and civil monetary penalties, the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid) and corporate integrity agreements, which impose, among other things, rigorous operational and monitoring requirements on companies. Similar sanctions and penalties also can be imposed upon executive

 

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officers and employees, including criminal sanctions against executive officers under the so-called “responsible corporate officer” doctrine, even in situations where the executive officer did not intend to violate the law and was unaware of any wrongdoing.

Given the significant penalties and fines that can be imposed on companies and individuals if convicted, allegations of such violations often result in settlements even if the company or individual being investigated admits no wrongdoing. Settlements often include significant civil sanctions, including fines and civil monetary penalties, and corporate integrity agreements. If the government were to allege or convict us or our executive officers of violating these laws, our business could be harmed. In addition, private individuals have the ability to bring similar actions. Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities. Further, there are an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the lack of clarity in laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state authorities.

Similar rigid restrictions are imposed on the promotion and marketing of medicinal products in the EU and other countries. Laws (including those governing promotion, marketing and anti-kickback provisions), industry regulations and professional codes of conduct often are strictly enforced. Even in those countries where we are not directly responsible for the promotion and marketing of our products, inappropriate activity by our international distribution partners can have implications for us.

Other Governmental Regulations and Environmental Matters

We will be subject to a variety of financial disclosure and securities trading regulations as a public company in the United States, including laws relating to the oversight activities of the SEC and, if any of our capital stock becomes listed on the NASDAQ Global Market or another exchange, we will be subject to the regulations of the NASDAQ Global Market or another exchange, respectively. In addition, the Financial Accounting Standards Board, or the FASB, the SEC and other bodies that will have jurisdiction over the form and content of our accounts, our financial statements and other public disclosure are constantly discussing and interpreting proposals and existing pronouncements designed to ensure that companies best display relevant and transparent information relating to their respective businesses.

If we establish international operations, we will be subject to compliance with the Foreign Corrupt Practices Act, or the FCPA, which prohibits corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We also may be implicated under the FCPA for activities by our partners, collaborators, CROs, vendors or other agents.

Our present and future business has been and will continue to be subject to various other laws and regulations. Various laws, regulations and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals, and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances used in connection with our research work are or may be applicable to our activities. Certain agreements entered into by us involving exclusive license rights or acquisitions may be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted. The extent of government regulation, which might result from future legislation or administrative action, cannot accurately be predicted.

Employees

As of April 30, 2014, we had 33 full-time employees and 6 consultants, and make extensive use of third party contractors, consultants, and advisors to perform many of our present activities. We expect to increase the number of our employees as we increase our operations.

 

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Properties

Our principal executive offices are located at 34790 Ardentech Court, Fremont, California 94555, and are leased under a seven year property rental agreement that commenced in 2012. We do not own any real property. We believe our present facilities are sufficient for our current and planned near-term operations.

Legal Proceedings

We are not currently involved in any material legal proceedings.

 

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MANAGEMENT

Executive Officers, Directors and Key Employees

Our executive officers, directors and key employees, their current positions and their ages as of May 1, 2014 are set forth below:

 

Name    Age      Position(s)

Bruce D. Steel (1) (2) (3)

     47       Chairman of Board of Directors

M. James Barrett (1) (2) (3)

     71       Director

Kleanthis G. Xanthopoulos (2) (3) (4)

     56       Director

Vikram Lamba

     48       President, Chief Executive Officer and Director

Peter E. Daddona

     69       Chief Scientific Officer, EVP R&D and Director

Christopher Krueger

     46       Chief Business Officer

Nandan Oza

     52       Chief Operating Officer

Winnie W. Tso

     52       Chief Financial Officer

 

(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee, effective upon the date of this prospectus.
(4) Member of the audit committee, effective upon the date of this prospectus.

Business Experience

The following is a brief description of the education and business experience of our current directors and executive officers:

Bruce D. Steel has served as a member of our board of directors since April 2012. Mr. Steel is currently the Managing Director of BioMed Ventures, the strategic investment arm of BioMed Realty Trust. Previously, Mr. Steel served as the Chief Executive Officer of Rincon Pharmaceuticals, Inc. and, between 2008 and 2010, as the Chief Business Officer of Anaphore, Inc. Mr. Steel received his Bachelor of Arts from Dartmouth College and his M.B.A. from the Marshall School of Business at the University of Southern California. Mr. Steel also holds the designation of Chartered Financial Analyst. We believe that Mr. Steel’s deep knowledge of the life-sciences industry as well as his executive level experience at various companies qualify him to serve as a member of our board of directors.

M. James Barrett has served as a member of our board of directors since April 2012. Dr. Barrett served as a director of Zosano Pharma, Inc. from October 2006 until April 2012, when Zosano Pharma was recapitalized and became a wholly owned subsidiary of ZP Holdings. Dr. Barrett is a General Partner with New Enterprise Associates, or NEA, where he has served in that role since 2001. Dr. Barrett specializes in biotechnology and works with members of NEA’s healthcare investment group on medical devices, healthcare information systems and healthcare services companies. In addition to our board of directors, Dr. Barrett currently serves as a member of the board of directors of the following public companies: Amicus Therapeutics, Inc., Clovis Oncology, Inc., GlycoMimetics, Inc. and Supernus Pharmaceuticals, Inc. He also serves on the board of directors for Blend Biosciences, Inc., Cardioxyl Pharmaceuticals, Inc., Galera Therapeutics, Inc., Loxo Oncology, Inc., PhaseBio Pharmaceuticals, Inc., Psyadon Pharmaceuticals, Roka Bioscience, Inc. and Senseonics, Inc. Dr. Barrett formerly served on various other boards of directors, including at Targacept, Inc., CoGenesys, Inc. (acquired by Teva Pharmaceutical Industries, Inc.), Iomai Corporation (acquired by Intercell AG), MedImmune, LLC (acquired by AstraZeneca), Pharmion Corporation (acquired by Celgene Corporation), and Inhibitex, Inc. (acquired by Bristol-Myers Squibb). Prior to joining NEA, Dr. Barrett served as Founder, Chairman and Chief Executive Officer of Senseonics, Inc. from 1997 to 2001, where he remains Chairman. Before that, Dr. Barrett led three NEA-funded companies, serving as Chairman and Chief Executive Officer of Genetic Therapy, Inc., President and Chief Executive Officer of Life Technologies, and President and Chief Executive Officer of Bethesda Research Labs.

 

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Prior to that, Dr. Barrett worked in various divisions of SmithKline. Dr. Barrett received a Ph.D. in Biochemistry from the University of Tennessee, his M.B.A. from the University of Santa Clara, and a B.S. in Chemistry from Boston College. We believe that Dr. Barrett’s extensive experience serving on boards of directors of both public and private companies in the healthcare sector and his deep industry experience qualify him to serve as a member of our board of directors.

Kleanthis G. Xanthopoulos has served as a member of our board of directors since April 2013. Dr. Xanthopoulos is the President and Chief Executive Officer and a member of the board of directors of Regulus Therapeutics Inc., having joined Regulus in 2007. Dr. Xanthopoulos is also currently chairman of the board of directors of Apricus Bioscience, Inc., a public company, a member of the board of directors of Biotechnology Industry Organization (BIO) and Sente Inc., and is a member of the executive board of BIOCOM, Southern California’s life science industry association. Prior to joining Regulus, Dr. Xanthopoulos was a managing director of Enterprise Partners Venture Capital. Dr. Xanthopoulos co-founded and served as President and Chief Executive Officer of Anadys Pharmaceuticals from its inception in 2000 to 2006, and remained a Director until its acquisition by Roche in 2011. Dr. Xanthopoulos was Vice President at Aurora Biosciences, which was acquired by Vertex Pharmaceuticals, from 1997 to 2000. Dr. Xanthopoulos participated in The Human Genome Project as a Section Head of the National Human Genome Research Institute from 1995 to 1997. Previously, Dr. Xanthopoulos was an Associate Professor at the Karolinska Institute, in Stockholm, Sweden, after completing a Postdoctoral Research Fellowship at The Rockefeller University, New York. An Onassis Foundation scholar, Dr. Xanthopoulos received his B.Sc. in Biology with honors from Aristotle University of Thessaloniki, Greece, and received both his M.Sc. in Microbiology and Ph.D. in Molecular Biology from the University of Stockholm, Sweden. We believe that Dr. Xanthopoulous’s senior executive experience managing and developing a major biotechnology company and his extensive industry knowledge and leadership experience in the biotechnology industry qualify him to serve as a member of our board of directors.

Vikram Lamba has served as our President and Chief Executive Officer, and as a member of our board of directors, since the inception of ZP Holdings in January 2012. Before that, Mr. Lamba served as Chief Financial Officer and Chief Business Officer of Predictive Biosciences, Inc. from July 2008 until he joined Zosano Pharma in 2011. Prior to that, Mr. Lamba served as Vice President of Corporate Development at Advanced Medical Optics, Inc., where he was responsible for many significant merger and acquisition transactions and strategic alliances. Mr. Lamba served as Vice President for Finance and Chief Financial Officer of GeneOhm Sciences, Inc. and has over 16 years of global experience in various positions with Burmah Castrol PLC and Bayer AG. During his eight years with Bayer in Canada, Germany and the U.S., Mr. Lamba held positions in areas of general management, mergers and acquisitions and finance. Mr. Lamba received an M.B.A. from the Asian Institute of Management and was an exchange student at The Wharton School of the University of Pennsylvania. We believe that Mr. Lamba’s extensive industry knowledge and his experience in corporate management qualify him to serve as a member of our board of directors.

Peter E. Daddona has served as our Chief Scientific Officer, and as a member of our board of directors, since the inception of ZP Holdings in January 2012. Dr. Daddona has also served as Chief Scientific Officer of Zosano Pharma since July 31, 2006. Dr. Daddona founded Zosano Pharma in 2006 as a spin-off of Johnson & Johnson, prior to which he served as Vice President, Scientific Leader and Board member of The Macroflux® Internal Venture at Johnson & Johnson. Previously, Dr. Daddona was Vice President of Macroflux® Technology Development and Biological Sciences and served on the Strategic Product Portfolio Review Committee at ALZA Corporation in Mountain View, California, and held an appointment as Consulting Associate Professor of Dermatology at Stanford University. Before joining ALZA, Dr. Daddona served as Vice President, Immunobiology Research at Centocor, where he focused on preclinical development of therapeutic monoclonal antibodies. Prior to joining Centocor, Dr. Daddona served as Associate Professor of Biological Chemistry and Internal Medicine at the University of Michigan. Dr. Daddona earned his Ph.D. from the University of Connecticut and completed post-doctoral training at Duke University. We believe that Dr. Daddona’s long history with our company and his extensive experience in pharmaceutical drug development qualify him to serve as a member of our board of directors.

 

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Christopher Krueger has served as our Chief Business Officer since February 2013. Prior to joining us, Mr. Krueger served as an independent biotechnology consultant, providing operational guidance to small biotech companies in corporate strategy, financing and partnership opportunities. From 2007 to 2010, Mr. Krueger served as Senior Vice President and Chief Business Officer at Ardea Biosciences, Inc., a biopharmaceutical company focused on novel treatments for gout, cancer and HIV. Previously, Mr. Krueger served in senior executive roles at Protemix Corporation, Xencor, Inc., X-Ceptor Therapeutics, Inc. and Aurora Biosciences Corporation, where he was responsible for executing and managing a wide range of transactions in the life sciences field, including strategic alliances, technology licensing, mergers and acquisitions and equity and debt financings. Earlier in his career, Mr. Krueger was a corporate lawyer at Cooley LLP. Mr. Kruger holds a J.D. and M.B.A. from the University of Southern California and a B.A. in Economics from the University of California at San Diego.

Nandan Oza has served as our Chief Operations Officer since May 2013. Prior to joining us, Mr. Oza was the Vice President of Chemistry, Manufacturing and Controls of Talon Therapeutics from August 2010 to May 2013. From February 2009 to August 2010, Mr. Oza served as the Founder and Principal of Ally CMC Consulting and grew the firm to have over twenty clients, including start-ups and mid-sized companies. Between February 2007 and February 2009, he was the Vice President of Manufacturing and Supply Chain Operations at Jazz Pharmaceuticals in Palo Alto, California, where he had complete management responsibility for Jazz’s manufacturing operations.

Winnie W. Tso has served as our Chief Financial Officer since April 2014. Prior to joining us in January 2014, Ms. Tso served as Vice President, Finance and Corporate Controller of SciClone Pharmaceuticals, a publicly-traded specialty biopharmaceutical company, in 2013. Prior to that, Ms. Tso served in various Vice President and Principal Accounting Officer positions from 2009 to 2013, including at Velti plc where Ms. Tso helped lead Velti’s U.S. public offering raising in excess of $150 million in equity financing. Prior to Velti, Ms. Tso held senior finance positions at several publicly-traded biopharmaceutical companies, including ARYx Therapeutics, Titan Pharmaceuticals and Genelabs Technologies, where she was responsible for building the finance and accounting infrastructures and implementing systems of internal controls. Ms. Tso is a Certified Management Accountant, a Certified Financial Manager, a Certified Public Accountant licensed in the State of California and a member of the American Institute of Certified Public Accountants. Ms. Tso received her B.S. degree in Business Administration from the Haas School of Business at the University of California, Berkeley.

There are no family relationships among any of our directors or executive officers.

Board Composition

Our board of directors currently consists of five members, all of whom were elected as directors pursuant to a stockholders agreement that we have entered into with certain holders of our common stock. The stockholders agreement will terminate upon the closing of this offering and there will be no further contractual obligations regarding the election of our directors. Our directors and officers hold office until their successors have been elected and qualified, or until their earlier death, resignation or removal.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering provide that the authorized number of directors may be changed only by resolution of the board of directors. Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering also provide that our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in an annual election of directors, and that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office.

 

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Under our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering, our board of directors will be divided into three classes, class I, class II and class III, with members of each class serving staggered three-year terms. Upon the closing of this offering, the members of the classes will be divided as follows:

 

    the class I directors will be Vikram Lamba and Peter E. Daddona, and their initial term will expire at the annual meeting of stockholders to be held in 2015;

 

    the class II directors will be M. James Barrett and Bruce D. Steel, and their initial term will expire at the annual meeting of stockholders to be held in 2016; and

 

    the class III director will be Kleanthis G. Xanthopoulos, and his initial term will expire at the annual meeting of stockholders to be held in 2017.

Upon the expiration of the term of a class of directors, directors in that class will be eligible to be nominated for re-election for a new three-year term at the annual meeting of stockholders in the year in which their term expires.

We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through an established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that Kleanthis Xanthopoulos is an “independent director” as defined under Rule 5605(a)(2) of the NASDAQ Listing Rules. We are actively seeking to identify additional well-qualified individuals to serve as independent directors with the goal of adding one such additional independent director within 90 days of the effective date of this prospectus, and a second within one year from such date.

One of the key functions of our board of directors is informed oversight of our risk management process. The board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure and our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory requirements. Our nominating and corporate governance committee will monitor the effectiveness of our corporate governance practices, including whether they are successful in preventing illegal or improper liability-creating conduct. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

Board Committees

Our board of directors has established an audit committee and a compensation committee. We have also established a nominating and corporate governance committee, effective as of the date of this prospectus. Each of these committees, which are the only standing committees of our board of directors, will operate under a charter that has been approved by our board of directors.

Audit Committee. The current members of our audit committee are Dr. Barrett and Mr. Steel. Effective as of the date of this prospectus, our audit committee will consist of Dr. Barrett, Mr. Steel and Dr. Xanthopoulos. Our board of directors has determined that Dr. Xanthopoulos satisfies the NASDAQ Stock Market independence standards and the independence standards of Rule 10A-3(b)(1) of the Securities Exchange Act. We intend to add at least two new independent directors to our audit committee. Each of the members of our audit committee

 

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meets the requirements for financial literacy under applicable rules and regulations of the SEC and the NASDAQ Stock Market. The board of directors has also determined that Mr. Steel qualifies as an “audit committee financial expert,” as defined by applicable rules of the NASDAQ Stock Market and the SEC. The audit committee assists our board of directors in its oversight of:

 

    the integrity of our financial statements;

 

    our compliance with legal and regulatory requirements;

 

    the qualifications and independence of our independent registered public accounting firm; and

 

    the performance of our independent registered public accounting firm.

The audit committee has direct responsibility for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. The audit committee establishes and implements policies and procedures for the pre-approval of all audit services and all permissible non-audit services provided by our independent registered public accounting firm and reviews and approves any related party transactions entered into by us.

Compensation Committee. The current members of our compensation committee are Dr. Barrett, Mr. Steel and Dr. Xanthopoulos. Effective as of the date of this prospectus, our compensation committee will continue to consist of Dr. Barrett, Mr. Steel and Dr. Xanthopoulos, of whom Dr. Xanthopoulos is an independent director. We intend to add at least two new independent directors to our compensation committee. The compensation committee:

 

    approves the compensation and benefits of our executive officers;

 

    reviews and makes recommendations to the board of directors regarding benefit plans and programs for employee compensation; and

 

    administers our equity compensation plans.

Nominating and Corporate Governance Committee. Effective as of the date of this prospectus, the members of our nominating and corporate governance committee will be Dr. Barrett, Mr. Steel and Dr. Xanthopoulos, of whom Dr. Xanthopoulos is an independent director. We intend to add at least one independent director to our nominating and corporate governance committee. The nominating and corporate governance committee will:

 

    identify individuals qualified to become board members;

 

    recommend to the board of directors nominations of persons to be elected to the board; and

 

    advise the board regarding appropriate corporate governance policies and assists the board in achieving them.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our company, nor has any of them ever been an officer or employee of our company.

Code of Business Conduct and Ethics

We have adopted a written code of business conduct and ethics that applies to our directors, executive officers and employees, effective as of the date of this prospectus. Following this offering, a copy of the code will be posted on the Corporate Governance section of our website, which is located at www.zosanopharma.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website.

 

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Director Compensation

Prior to this offering, we did not have a formal policy regarding compensation of our non-employee directors, and none of our non-employee directors other than Dr. Xanthopoulos received any compensation for service on our board of directors in 2013. In March 2013, we agreed to pay Dr. Xanthopoulos an annual cash fee of $25,000, payable monthly in arrears. In April 2013, we granted Dr. Xanthopoulos an option to purchase 113,207 shares of our common stock at an exercise price of $0.35 per share. The option provides for vesting in equal monthly installments over a period of four years, and becomes fully vested upon a change of control. In July 2013, Dr. Xanthopoulos transferred this option to a family trust for no consideration. We did not grant stock options to any of our other non-employee directors during 2013. We do not pay any compensation to our President and Chief Executive Officer our Chief Scientific Officer in connection with their service on our board of directors.

Following the closing of this offering, our non-employee directors will receive compensation as follows:

 

                                .

The cash fees described above will be paid             . Non-employee directors are also reimbursed upon request for travel and other out-of-pocket expenses incurred in connection with their attendance at meetings of the board and of committees on which they serve.

The following table sets forth information regarding compensation awarded to, earned by or paid to each of our non-employee directors during 2013. See “Executive Compensation” for a discussion of the compensation of Mr. Lamba and Dr. Daddona.

 

     Fees Earned or
Paid in Cash
     Option Awards (1) (2)      Total  

Bruce D. Steel

   $ —         $ —         $ —     

M. James Barrett

     —           —           —     

Kleanthis G. Xanthopoulos

     16,667         27,415         27,415   

 

(1) Represents the aggregate grant date fair value of option awards granted in fiscal year 2013 in accordance with ASC Topic 505-50. The assumptions we use in calculating these amounts are discussed in note 10 to notes to financial statements appearing elsewhere in this prospectus.
(2) Represents a non-statutory option to purchase 113,207 shares of common stock granted in April 2013, which was transferred by Dr. Xanthopoulos to a family trust in July 2013.

 

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EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information regarding compensation earned by our President and Chief Executive Officer and our two most highly compensated executive officers other than our President and Chief Executive Officer who served as executive officers as of December 31, 2013. We refer to these individuals as our named executive officers.

 

     Year      Salary      Bonus (1)      Total  

Vikram Lamba

     2013       $ 412,000       $ 185,400       $ 597,400   

Chief Executive Officer

           

Peter Daddona

     2013         334,750         120,510         455,260   

Chief Scientific Officer

           

Thorsten von Stein

     2013         398,000         —           398,000   

Chief Medical Officer (2)

           

 

(1) Represents cash bonus amounts awarded in respect of 2013, payment of which is contingent upon the completion of this offering. Bonus amounts were determined pursuant to applicable employment agreements and based on achievement of individual and company performance goals and other factors deemed relevant by our compensation committee and board of directors.
(2) Pursuant to an amendment to our consulting agreement with Dr. von Stein, effective March 17, 2014, Dr. von Stein is engaged by us as Medical Consultant and no longer serves as our Chief Medical Officer.

Narrative Disclosure to Summary Compensation Table

We review compensation annually for all of our employees, including our executives. In setting executive base salaries and bonuses and granting equity incentive awards, we consider compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short- and long-term results that are in the best interests of our stockholders, and a long-term commitment to our company. We do not target a specific competitive position or a specific mix of compensation among base salary, bonus or long-term incentives.

Our board of directors has historically determined our executives’ compensation. Our compensation committee typically has reviewed and discussed management’s proposed compensation with the President and Chief Executive Officer for all executives other than our President and Chief Executive Officer. Based on those discussions and its discretion, the compensation committee then has recommended the compensation for each executive officer. Our board of directors, without members of management present, has discussed the compensation committee’s recommendations and ultimately approved the compensation of our executive officers. Effective upon the closing of this offering, our compensation committee will approve the compensation and benefits of our executive officers.

We have formal employment agreements with Vikram Lamba, our President and Chief Executive Officer, and Peter Daddona, our Chief Scientific Officer, and we have a formal consulting agreement with Thorsten von Stein, who was our Chief Medical Officer until March 17, 2014. Mr. Lamba’s employment agreement provides for an initial annual base salary of $400,000, subject to increase from time to time, and we currently pay Mr. Lamba an annual base salary of $412,000. Mr. Lamba’s employment agreement provides for a target annual bonus of 40% of his annual base salary, with a bonus opportunity between 0% and 80% of annual base salary, to be determined by the board of directors in its discretion based on individual and company performance against goals established annually by the compensation committee, as well as the company’s then prevailing cash position. Dr. Daddona’s employment agreement provides for an initial annual base salary of $325,000, subject to increase from time to time, and we currently pay Dr. Daddona an annual base salary of $334,745. Dr. Daddona’s

 

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employment agreement provides for a target annual bonus of 30% of his annual base salary, with a bonus opportunity between 0% and 60% of annual base salary, to be determined by the board of directors in its discretion based on individual and company performance against goals established annually by the compensation committee, as well as the company’s then prevailing cash position. Each of Vikram Lamba and Dr. Daddona is an employee-at-will, and is entitled to certain severance benefits if he is terminated without cause or resigns for good reason, as defined in his agreement. Dr. von Stein’s consulting agreement provided for a consulting fee of $500 per hour, up to a maximum daily amount of $2,800, for fiscal year 2013, and we currently pay Dr. von Stein a consulting fee of $550 per hour, up to a maximum of $4,400 per day. Dr. von Stein’s consulting agreement can be terminated on 60 days’ prior written notice.

Outstanding Equity Awards at Year-End

The following table sets forth information regarding outstanding stock options held by our named executive officers as of December 31, 2013.

 

     Option Awards  

Name

   Number of
Securities
Underlying
Unexercised
Options (#)
exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
unexercisable
     Option
Exercise Price
($)
     Option
Expiration
Date
     Option Grant
Date
 

Vikram Lamba

     212,259 (1)      353,768       $ 0.385         7/1/2017         7/1/2012   

Peter Daddona

     106,130 (1)      176,884       $ 0.35         6/15/2022         6/15/2012   

Thorsten von Stein

     3,427 (2)      6,248       $ 0.35         7/25/2022         7/25/2012   
     2,419 (2)      7,255       $ 0.35         12/11/2022         12/11/2012   

 

(1) This option becomes exercisable for 25% of the underlying shares on the first anniversary of the grant date, and thereafter becomes exercisable for the remaining underlying shares in equal monthly installments over three years, resulting in the option being exercisable for 100% of the underlying shares on the fourth anniversary of the grant date; provided that if the holder is terminated without cause or resigns for good reason (as these terms are defined in the holder’s employment agreement), then the option will become exercisable for an additional 18.75% of the total underlying shares; provided further that if the option holder is terminated without cause or resigns for good reason within one year after a change in control (as defined in the holder’s employment agreement), then the option will become exercisable for 100% of the underlying shares.
(2) This option becomes exercisable for 25% of the underlying shares on the first anniversary of the grant date, and thereafter becomes exercisable for the remaining underlying shares in equal monthly installments over three years, resulting in the option being exercisable for 100% of the underlying shares on the fourth anniversary of the grant date; provided that if the holder is terminated without cause (as defined in our 2012 Stock Incentive Plan), then the option will become exercisable for 100% of the underlying shares.

Severance and Change in Control Arrangements

Pursuant to the terms of Mr. Lamba’s employment agreement, if we terminate Mr. Lamba’s employment without cause or Mr. Lamba resigns for good reason, as these terms are defined in the employment agreement, then Mr. Lamba is entitled to receive certain severance payments, including nine months’ salary, pro rata bonus payment in respect of those nine months, and acceleration of vesting of a portion of his outstanding stock option. Also, upon a change in control, as defined in the employment agreement, all shares of Mr. Lamba’s founder’s stock will be released from our repurchase option described below, and if within a year after a change of control Mr. Lamba’s employment is terminated without cause or Mr. Lamba resigns for good reason, then Mr. Lamba’s stock option will vest in full. In January 2012, in connection with the incorporation of ZP Holdings, we issued and sold to Mr. Lamba 2,500,000 shares of our common stock as founder’s stock pursuant to a Restricted Stock Purchase Agreement dated as of January 26, 2012 between us and Mr. Lamba. Following the April 2012

 

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reorganization, we entered into a Stock Repurchase Option Agreement dated as of May 15, 2012 with Mr. Lamba which provides us an option to repurchase certain shares of Mr. Lamba’s founder’s stock upon certain terminations of Mr. Lamba’s employment with us, and also provides for the release of the shares from this repurchase option upon a change of control as described above.

Pursuant to the terms of Dr. Daddona’s employment agreement, if we terminate Dr. Daddona’s employment without cause or Dr. Daddona resigns for good reason, as these terms are defined in the employment agreement, then Dr. Daddona is entitled to receive certain severance payments, including nine months’ salary, pro rata bonus payment in respect of those nine months, and acceleration of vesting of a portion of his outstanding stock option. Also, upon a change in control, as defined in the employment agreement, all unvested shares of Dr. Daddona’s founder’s stock will be released from our repurchase option described below, and if within a year after a change of control Dr. Daddona’s employment is terminated without cause or Dr. Daddona resigns for good reason, then Dr. Daddona’s stock option will vest in full. In January 2012, in connection with the incorporation of ZP Holdings, we issued and sold to Dr. Daddona 1,250,000 shares of our common stock as founder’s stock pursuant to a Restricted Stock Purchase Agreement dated as of January 26, 2012 between us and Dr. Daddona. Following the April 2012 reorganization, we entered into a Stock Repurchase Option Agreement dated as of May 15, 2012 with Dr. Daddona which provides us an option to repurchase certain shares of Dr. Daddona’s founder’s stock upon certain terminations of Dr. Daddona’s employment with us, and also provides for the release of the shares from this repurchase option upon a change of control as described above.

Pursuant to the terms of our non-statutory stock option agreements with Dr. von Stein, if Dr. von Stein’s services are terminated without cause, as defined in our 2012 Stock Incentive Plan, then Dr. von Stein’s outstanding stock options will vest in full.

Stock Incentive and Equity Compensation Plans

We believe that equity-based awards are important vehicles by which to align the interest of our employees with the financial interests of our stockholders, and we historically have awarded stock options broadly to our employees, including our named executive officers. The material terms and conditions of our stock incentive and equity compensation plans are described below.

We have the following equity incentive plans: (i) 2012 Stock Incentive Plan; and (ii) 2014 Equity and Incentive Plan. Following the closing of this offering, our 2014 Equity and Incentive Plan will be the only effective equity compensation plan pursuant to which we will make new awards.

2012 Stock Incentive Plan

Our 2012 Stock Incentive Plan provides for the grant of equity-based awards, denominated in shares of our common stock, including incentive stock options, non-statutory stock options and restricted stock awards. We will not make any new awards under the 2012 Stock Incentive Plan following the completion of this offering. The material features of our 2012 Stock Incentive Plan are summarized below. The complete text of our 2012 Stock Incentive Plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

General. The maximum number of shares of common stock which may be issued under our 2012 Stock Incentive Plan is 2,264,108. Any shares subject to an award granted under our 2012 Stock Incentive Plan to any person are counted against this limit.

Purposes. The purpose of our 2012 Stock Incentive Plan is to encourage and enable our officers and employees and other persons providing services to us and our subsidiaries to acquire a proprietary interest in our business. We believe that by providing such persons with a direct stake in our welfare will assure a closer identification of their interests with our interests and the interests of our shareholders, thereby stimulating their efforts on our behalf and strengthening their desire to remain with us.

 

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Administration. Our 2012 Stock Incentive Plan has been administered by our board of directors, and, following the closing of this offering, will be administered by the compensation committee of our board of directors. Subject to the terms of our 2012 Stock Incentive Plan, the board of directors may determine the types of awards and the terms and conditions of such awards, interpret provisions of our 2012 Stock Incentive Plan and select participants to receive awards.

Source of shares. The shares of common stock issued or to be issued under our 2012 Stock Incentive Plan consist of authorized but unissued shares and shares that we have reacquired. Shares of common stock underlying any awards issued under the 2012 Stock Incentive Plan that are forfeited, cancelled, reacquired by us or otherwise terminated (other than by exercise) will be added back to the shares of common stock with respect to which awards may be granted under the 2012 Stock Incentive Plan.

Eligibility. Awards may be granted under the 2012 Stock Incentive Plan to our and our subsidiaries’ respective officers, directors, employees, and to consultants and advisors to and us and/or our subsidiaries.

Amendment or termination of our stock incentive plan. Our board of directors may terminate or amend the 2012 Stock Incentive Plan at any time. No amendment or termination may adversely impair the rights of grantees with respect to outstanding awards without the affected participant’s consent to such amendment. In addition, an amendment will be contingent on approval of our stockholders to the extent required by law. Unless terminated earlier, our 2012 Stock Incentive Plan will terminate in April 2022, but will continue to govern unexpired awards.

Options. Our 2012 Stock Incentive Plan permits the granting of options to purchase shares of common stock intended to qualify as “incentive stock options” under the Internal Revenue Code, and options that do not qualify as incentive stock options, which are referred to as non-statutory stock options. We may grant non-statutory stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors. Incentive stock options will only be granted to our employees.

The exercise price of each incentive stock option and non-statutory stock option may not be less than 100% of the fair market value of shares of our common stock on the date of grant. If we grant incentive stock options to any 10% stockholder, the exercise price may not be less than 110% of the fair market value of shares of our common stock on the date of grant. The term of each option may not exceed 10 years from the date of grant, except that the term of any incentive stock option granted to any 10% stockholder may not exceed five years from the date of grant. At the time of grant of the award, our board of directors determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by the board of directors.

In general, an optionee may pay the exercise price of an option by cash or check or, if so provided in the applicable option agreement and with the written consent of the board of directors, by tendering shares of our common stock having a fair market value equal to the aggregate exercise price of the options being exercised, by a personal recourse note issued by the optionee in a principal amount equal to the aggregate exercise price of the options being exercised, by a “cashless exercise” through a broker supported by irrevocable instructions to the broker to deliver sufficient funds to pay the applicable exercise price, by reducing the number of shares otherwise issuable to the optionee upon exercise of the option by a number of shares having a fair market value equal to the aggregate exercise price of the options being exercised, or by any combination of these methods of payment.

Incentive stock options granted under our 2012 Stock Incentive Plan may not be transferred or assigned other than by will or under applicable laws of descent and distribution. Our board of directors may determine the extent to which a non-statutory option shall be transferable.

 

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Restricted stock awards. Restricted stock awards entitle the recipient to acquire, for a purchase price determined by the board of directors, shares of common stock subject to such restrictions and conditions as the board of directors may determine at the time of grant, including continued employment and/or achievement of pre-established performance goals and objectives.

Adjustments upon changes in capitalization. We will make appropriate and proportionate adjustments in outstanding awards and the number of shares available for issuance under the 2012 Stock Incentive Plan to reflect recapitalizations, reclassifications, stock dividends, stock splits, reverse stock splits and other similar events.

Effect of a change in control. Upon the occurrence of a “change in control transaction” (as defined in the 2012 Stock Incentive Plan), unless otherwise provided in any stock option agreement or restricted stock agreement, our board of directors (or the board of directors of any corporation assuming the obligations of our company), may, in its discretion, take any one or more of the following actions as to some or all outstanding stock options or restricted stock awards:

 

    provide that such stock options will be assumed, or equivalent stock options substituted, by the acquiring or succeeding corporation (or an affiliate thereof);

 

    upon written notice to the optionees, provide that all unexercised stock options will terminate immediately prior to the consummation of the change in control transaction unless exercised by the optionee to the extent otherwise then exercisable within a specified period following the date of such notice;

 

    upon written notice to the grantees, provide that all unvested shares of restricted stock will be repurchased at cost;

 

    make or provide for a cash payment to the optionees equal to the difference between (x) the fair market value of the per share consideration (whether cash, securities or other property or any combination thereof) the holder of a share of our common stock will receive upon consummation of the change in control transaction times the number of shares of common stock subject to outstanding vested stock options (to the extent then exercisable at prices not equal to or in excess of such per share consideration) and (y) the aggregate exercise price of such outstanding vested stock options, in exchange for the termination of such stock options; or

 

    provide that all or any outstanding stock options will become exercisable and all or any outstanding restricted stock awards will vest in part or in full immediately prior to the change in control transaction.

To the extent that any stock options are exercisable at a price equal to or in excess of the per share consideration in the change in control transaction, our board of directors may provide that such stock options will terminate immediately upon the consummation of the change in control transaction without any payment being made to the holders of such stock options.

2014 Equity and Incentive Plan

Our board of directors has adopted, and our stockholders have approved, our 2014 Equity and Incentive Plan. A total of         shares of our common stock will initially be reserved for issuance under our 2014 Equity and Incentive Plan, subject to automatic annual increases as set forth in the plan. The 2014 Equity and Incentive Plan provides for the issuance of (i) cash awards and (ii) equity-based awards, denominated in shares of our common stock, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance share awards and dividend equivalent rights.

Purpose. The purpose of our 2014 Equity and Incentive Plan is to (i) provide long-term incentives and rewards to those employees, officers, directors and other key persons (including consultants) of the company and

 

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its subsidiaries who are in a position to contribute to the long-term success and growth of the company and its subsidiaries, (ii) to assist the company and its subsidiaries in attracting and retaining persons with the requisite experience and ability, and (iii) to more closely align the interests of such employees, officers, directors and other key persons with the interests of the company’s stockholders.

Administration. Our 2014 Equity and Incentive Plan will be administered by the compensation committee of our board of directors. The compensation committee is generally granted broad authority to administer the plan, including the power to determine and modify the terms and conditions, not otherwise inconsistent with the terms of the plan, of any award. All decisions and interpretations of the compensation committee shall be binding on all persons subject to the plan including the company and plan grantees.

Sources of shares. The shares of common stock to be issued under the 2014 Equity and Incentive Plan consist of authorized but unissued shares and shares that we have reacquired. Shares of common stock underlying any award issued under the 2014 Equity and Incentive Plan that are forfeited, canceled, satisfied without issuance of stock, otherwise terminated or, for shares of stock issued pursuant to any unvested full value award, reacquired by the company shall be added back to the shares of common stock with respect to which awards may be granted under the plan.

Eligibility. Incentive stock options may only be granted to our employees. All other awards may be granted to our employees, officers, directors and key persons (including consultants and prospective employees).

Amendment or termination of our 2014 Equity and Incentive Plan. Subject to requirements of law or any stock exchange or similar rules which would require a vote of our stockholders, our board of directors may, at any time, amend or discontinue the plan and the compensation committee may, at any time, amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding award without the holder’s consent.

Options. Our 2014 Equity and Incentive Plan permits the granting of options to purchase common stock that are intended to qualify as “incentive stock options” under the Code, and options that do not qualify as incentive stock options, which are referred to as non-statutory stock options. We may grant non-qualified stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors. Incentive stock options will only be granted to our employees. The exercise price of each incentive stock option may not be less than 100% of the fair market value of shares of our common stock on the date of grant. If we grant incentive stock options to any person holding 10% or more of the outstanding voting stock of the company, the exercise price may not be less than 110% of the fair value of shares of our common stock on the date of grant. The exercise price of any non-qualified stock option will be determined by our board of directors and may not be less than the fair value of shares of our common stock.

The term of each option may not exceed 10 years from the date of grant, and no option shall be transferable by the optionee other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the compensation committee, in its sole discretion, may provide in the award agreement regarding a given option, or may agree in writing with respect to an outstanding option, that the optionee may transfer their non-statutory stock options to members of their immediate family, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the company to be bound by all of the terms and conditions of this plan and the applicable option.

In general, an optionee may pay the exercise price of an option by cash or, if so provided in the applicable option agreement, by tendering shares of our common stock, by a “cashless exercise” through a broker supported by an irrevocable instruction to such broker to deliver sufficient funds to pay the applicable exercise price, by reducing the number of shares otherwise issuable to the optionee upon exercise of the option by a number of shares having a fair market value equal to the aggregate exercise price of the options being exercised or by any other method permitted by the compensation committee.

 

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Stock appreciation rights. Pursuant to the 2014 Equity and Incentive Plan, we may grant stock appreciation rights, or an award entitling the recipient to receive cash or shares of our common stock having a value on the date of exercise calculated as follows: (i) the exercise price of a share of common stock on the grant date is less the fair market value of the common stock on the date of exercise and (ii) multiplied by the number of shares of stock with respect to which the stock appreciation right shall have been exercised. The exercise price of a stock appreciation right shall not be less than 100% of the fair market value of our common stock on the date of grant, and the terms and conditions of the stock appreciation rights shall be determined from time to time by the compensation committee.

Restricted stock awards. Pursuant to the 2014 Equity and Incentive Plan, we may grant restricted stock awards entitling the recipient to acquire, at such a price as determined by the compensation committee, shares of common stock subject to such restrictions and conditions as the compensation committee may determine at the time of grant. Conditions may be based on continuing employment or achievement of pre-established performance goals and objectives. A holder of a restricted stock award may exercise voting rights upon (i) execution of a written instrument setting forth the award and (ii) payment of any applicable purchase.

Restricted stock units. Pursuant to the 2014 Equity and Incentive Plan, we may grant restricted stock units which entitle the holder, upon vesting of the right, to a number of shares of common stock as determined in the award agreement. The compensation committee shall determine the restrictions and conditions applicable to each restricted stock unit at the time of grant, and a holder of a restricted stock unit shall only have exercisable rights as a stockholder upon settlement of restricted stock units. Unless otherwise provided in the award agreement, a holder’s rights in all restricted stock units that have not vested shall automatically terminate immediately following the holder’s termination of employment with the company for any reason.

Unrestricted stock awards. Pursuant to the 2014 Equity and Incentive Plan, we may grant unrestricted awards of shares of common stock free of any restrictions under the plan. The right to receive shares of unrestricted stock awards on a deferred basis may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution.

Performance share awards. Pursuant to the 2014 Equity and Incentive Plan, we may grant performance share awards entitling the recipient to acquire shares of common stock upon the attainment of specified performance goals; provided, however, that the compensation committee, in its discretion, may provide either at the time of grant or at the time of settlement that a performance share award will be settled in cash. The period during which performance is to be measured for performance share awards shall not be less than one year, and such performance share awards, and all rights with respect to such awards, may not be sold, assigned, transferred, pledged or otherwise encumbered.

Dividend equivalent rights. Pursuant to the 2014 Equity and Incentive Plan, we may grant dividend equivalent rights entitling the recipient to receive credits based on cash dividends that would be paid on the shares of stock specified in the dividend equivalent right (or other award to which it relates). Dividend equivalent rights may be settled in cash or shares of stock or a combination thereof, in a single installment or installments. A dividend equivalent right granted as a component of another award may provide that such dividend equivalent right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such dividend equivalent right shall expire or be forfeited or annulled under the same conditions as such other award.

Cash awards. The compensation committee, in its discretion, may provide for cash payments to be made under the 2014 Equity and Incentive Plan. Such cash awards may be made subject to such terms, conditions and restrictions as the compensation committee considers necessary or advisable.

Effect of a change in control. If we experience a “change in control,” as defined in the 2014 Equity and Incentive Plan, the compensation committee may in its discretion, at the time an award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating

 

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to the exercise or payment of the award; (ii) provide for termination of any awards not exercised prior to the occurrence of a change in control; provided that the holder of any such award is given written notice of such prospective action by the administrator at least ten calendar days prior to the effective date of the change in control; (iii) provide for payment to the holder of the award of cash or other property with a fair market value equal to the amount that would have been received upon the exercise or payment of the award had the award been exercised or paid upon the change in control in exchange for cancellation of the award; (iv) adjust the terms of the award in a manner determined by the compensation committee to reflect the change in control; (v) cause the award to be assumed, or new rights substituted therefor, by another entity; or (vi) make such other provision as the compensation committee may consider equitable to the holders of awards and in our best interests.

401(k) Retirement Plan

We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Code. In general, all of our employees, upon meeting certain requirements, are eligible to participate in the 401(k) plan. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit and have the amount of the reduction contributed to the 401(k) plan. Employee contributions are held and invested by the plan’s trustee. The 401(k) plan also permits the Company to make discretionary matching contributions. The Company did not make any matching contribution for the years ended December 31, 2013 and 2012.

Limitation of Liability and Indemnification

Our amended and restated certificate of incorporation includes provisions that will limit or eliminate the personal liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breaches of their fiduciary duties as directors, except liability for:

 

    any breach of the director’s duty of loyalty to us or our stockholders;

 

    any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

    any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

 

    any transaction from which the director derived an improper personal benefit.

These limitations do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies, including injunctive relief or rescission. If Delaware law is amended to authorize the further elimination or limiting of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended.

As permitted by Delaware law, our certificate of incorporation that will be effective as of the closing date of this offering will also provide that:

 

    we will indemnify our directors and officers to the fullest extent permitted by law;

 

    we may indemnify our other employees and other agents to the same extent that we indemnify our officers and directors, unless otherwise determined by our board of directors; and

 

    we will advance expenses to our directors and officers in connection with legal proceedings in connection with a legal proceeding to the fullest extent permitted by law.

The indemnification provisions contained in our certificate of incorporation that will be effective as of the closing date of this offering are not exclusive.

 

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We believe that these provisions are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we understand that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

In addition, we have entered into indemnification agreements with each of our directors and maintain standard policies of insurance under which coverage is provided to our directors and officers against losses arising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law.

 

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RELATED PERSON TRANSACTIONS

The following is a description of transactions since January 1, 2011 to which we have been a party, and in which any of our directors, executive officers or beneficial owners of more than 5% of our voting securities, or any of their respective affiliates or immediate family members, had or will have a direct or indirect material interest, which have not already been described in the “Executive Compensation” section of this report. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, from unrelated third parties.

Issuance of Founder’s Shares

In January 2012, in connection with the incorporation of ZP Holdings, Inc., we issued and sold to Vikram Lamba, our President and Chief Executive Officer and a director, 2,500,000 shares of our common stock as founder’s stock pursuant to a restricted stock purchase agreement between us and Mr. Lamba, and we issued and sold to Peter Daddona, our Chief Scientific Officer and a director, 1,250,000 shares of our common stock as founder’s stock pursuant to a restricted stock purchase agreement between us and Dr. Daddona. Following the April 2012 recapitalization, we entered into a stock repurchase option agreement with Mr. Lamba pursuant to which we have an option to repurchase certain shares of Mr. Lamba’s founder’s stock in the event of Mr. Lamba’s termination without cause or resignation for good reason (as these terms are defined in Mr. Lamba’s employment agreement). Of the 2,500,000 shares, 1/3 of the shares were released from the repurchase option on May 15, 2012 and the remainder are released in equal monthly installments over three years beginning on January 26, 2012, provided that an additional 2/9 of the total shares are released from the repurchase option upon Mr. Lamba’s death or termination due to disability and all shares are released from the repurchase option upon a qualified sale (as defined in the stock repurchase option agreement). Following the April 2012 recapitalization, we also entered into a stock repurchase option agreement with Dr. Daddona pursuant to which we have an option to repurchase certain shares of Dr. Daddona’s founder’s stock in the event of Dr. Daddona’s termination without cause or resignation for good reason (as these terms are defined in Dr. Daddona’s employment agreement). Of the 1,250,000 shares, 1/3 of the shares were released from the repurchase option on May 15, 2012 and the remainder are released in equal annual installments over three years beginning on January 26, 2012, provided that all shares are released from the repurchase option upon a qualified sale (as defined in the stock repurchase option agreement).

Secured Loan and Real Property Lease with BMR

In April 2012, in connection with our April 2012 recapitalization, described in further detail in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Developments Important to Understanding Our Financial Statements—2012 recapitalization” section of this prospectus, we issued 4,947,076 shares of our common stock and a four year non-callable secured promissory note in the original principal amount of $8,556,533 to BioMed Realty Holdings, Inc., or BMR, and 430,180 shares of our common stock to BioMed Realty, L.P., each of which is an affiliate of our landlord, BMR-34790 Ardentech Court LP. As a result, BMR and BioMed Realty, L.P. together held approximately 23.8% of our voting securities following the recapitalization. We issued these securities to BMR and BioMed Realty, L.P. in exchange for reduction of future rent payments pursuant to an amendment to our lease agreement with BMR-34790 Ardentech Court LP, cancellation of an unsecured convertible promissory note issued to BMR in July 2011 and cancellation of a stock purchase warrant issued to BMR in July 2011.

The BMR secured promissory note bears interest at the annual rate of 8%, compounded annually, and all principal and interest are due and payable on the earliest of (i) April 26, 2016, (ii) the closing of a sale of our company or business, as defined in the BMR secured promissory note, and (iii) the date that any distribution is made to our stockholders, as defined in the BMR secured promissory note. We may prepay the BMR secured promissory note, in whole or in part, at any time without prepayment penalty or premium. Further, we are

 

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required to prepay the BMR secured promissory note immediately prior to, or in connection with, a sale or partial sale of our company or business, as defined as a transaction in which we are acquired or in which we exclusively license or sell all or substantially all of our assets. In any similar transaction that does not qualify as a sale but results in our cash balance being at least $5.0 million in excess of our cash requirements for the 12 months following the closing of such transaction, we are required to prepay an amount equal to half of the excess cash balance over $5.0 million. The BMR secured promissory note is secured by a first priority security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual property. As of the date of this prospectus, the aggregate outstanding principal and accrued interest under the BMR secured promissory note is approximately $10.0 million.

In December 2012, BMR transferred the BMR secured promissory note and its 4,947,076 shares of our common stock to its affiliate, BMV Direct SOTRS LP. In December 2012, BioMed Realty transferred its 430,180 shares of our common stock to its affiliate, BMV Direct SO LP. As a result of these transfers, each of BMV Direct SOTRS LP and BMV Direct SO LP owns more than 5% of our voting securities.

We also have an operating lease with BMR-34790 Ardentech Court LP, which is an affiliate of BMV Direct SOTRS LP and BMV Direct SO LP, for a 55,000 square foot facility in Fremont, California, where we operate our manufacturing operations and house our engineering, research and development and administrative employees. In 2011, 2012 and 2013, we recorded rent expense to BMR-34790 Ardentech Court LP in the amounts of approximately $1,636,000, $874,000 and $620,000, respectively. In April 2012, we amended the lease agreement to reduce future rent obligations to approximately $730,000 per year, with a new lease term of seven years.

2013 Bridge Loan

In September 2013, we issued and sold convertible promissory notes, which we refer to as the 2013 bridge notes, in the aggregate original principal amount of $3,033,723.04 to our stockholders BMV Direct SOTRS LP, BMV Direct SO LP, New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P. and ProQuest Management LLC. Each of BMV Direct SOTRS LP, BMV Direct SO LP (together with its affiliate BMV Direct SOTRS LP), New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P., and ProQuest Management LLC (together with its affiliate ProQuest Investments IV, L.P.) then owned more than 5% of our voting securities, and as of the date of this prospectus each of BMV Direct SOTRS LP, BMV Direct SO LP (together with its affiliate BMV Direct SOTRS LP) and New Enterprise Associates 12, Limited Partnership owns more than 5% of our voting securities. The following is the original principal amount of 2013 bridge notes that were issued to our directors, executive officers and holders of more than 5% of our voting securities, and their affiliates or immediate family members:

 

    BMV Direct SOTRS LP, in the original principal amount of $991,047.43;

 

    BMV Direct SO LP, in the original principal amount of $303,372.00;

 

    New Enterprise Associates 12, Limited Partnership, in the original principal amount of $1,159,532.21;

 

    ProQuest Investments IV, L.P., in the original principal amount of $579,766.10; and

 

    ProQuest Management LLC, in the original principal amount of $5.30.

As consideration for our issuance of the 2013 bridge notes, each investor paid us an amount equal to the original principal amount of the note issued to the investor. The 2013 bridge notes mature on September 9, 2014 and accrue simple interest at the annual rate of 8%. As of the date of this prospectus, the aggregate outstanding principal and accrued interest under the 2013 bridge notes is approximately $3.2 million. Pursuant to their terms, the 2013 bridge notes will automatically convert upon the closing of this offering into shares of our common stock, at a conversion price equal to 85% of the price per share at which our common stock is sold in this offering.

 

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2014 Bridge Loan

In February 2014, we issued and sold convertible promissory notes, which we refer to as the 2014 bridge notes, in the aggregate original principal amount of $2,500,000 to our stockholders BMV Direct SOTRS LP, BMV Direct SO LP and New Enterprise Associates 12, Limited Partnership. Each of BMV Direct SOTRS LP, BMV Direct SO LP and New Enterprise Associates 12, Limited Partnership then owned, and as of the date of this prospectus owns, more than 5% of our voting securities. The following is the original principal amount of 2014 bridge notes that were issued to our directors, executive officers and holders of more than 5% of our voting securities, and their affiliates or immediate family members:

 

    BMV Direct SOTRS LP, in the original principal amount of $1,069,709.23;

 

    BMV Direct SO LP, in the original principal amount of $249,000.00; and

 

    New Enterprise Associates 12, Limited Partnership, in the original principal amount of $1,181,290.77.

As consideration for our issuance of the 2014 bridge notes, each investor paid us an amount equal to the original principal amount of the note issued to the investor. The 2014 bridge notes mature on September 9, 2014 and accrue simple interest at the annual rate of 8%. As of the date of this prospectus, the aggregate outstanding principal and accrued interest under the 2014 bridge notes is approximately $2.5 million. Pursuant to their terms, the 2014 bridge notes will automatically convert upon the closing of this offering into shares of our common stock, at a conversion price equal to 85% of the price per share at which our common stock is sold in this offering.

Agreement with Our Stockholders

In April 2012, in connection with our April 2012 recapitalization, we entered into a stockholder rights and voting agreement, which we refer to as the stockholders agreement, with certain holders of our common stock, including Vikram Lamba, our President and Chief Executive Officer and a holder of more than 5% of our voting securities, Peter Daddona, our Chief Scientific Officer and a holder of more than 5% of our voting securities, BMR, then a holder of more than 5% of our voting securities, BioMed Realty, L.P., then a holder of more than 5% of our voting securities (together with its affiliate BMR), New Enterprise Associates 12, Limited Partnership, a holder of more than 5% of our voting securities, NEA Ventures 2006, Limited Partnership, a holder of more than 5% of our voting securities (together with New Enterprise Associates 12, Limited Partnership), ProQuest Investments IV, L.P., then a holder of more than 5% of our voting securities, and Nomura Phase4 Ventures L.P., then a holder of more than 5% of our voting securities. In December 2012, BMR and BioMed Realty, L.P. assigned its rights under the stockholders agreement to BMV Direct SOTRS LP and BMV Direct SO LP, respectively. Each of BMV Direct SOTRS LP and BMV Direct SO LP owns more than 5% of our voting securities. The stockholders agreement provides each of the stockholders that is a party to the agreement with a secondary right of first refusal in respect of sales of securities by certain holders of our capital stock, and contains provisions with respect to the election of our board of directors and its composition. The stockholders agreement will terminate upon the closing of this offering.

Interests of Directors in our Financial Relationships

Two of our directors, Bruce Steel and M. James Barrett, may be deemed to have indirect material interests in our financial relationships with certain of our stockholders based on their association with such stockholders:

 

    Bruce Steel is a limited partner with a variable economic interest in each of BMV Direct SOTRS LP and BMV Direct SO LP, which entitles him to a percentage of certain distributions of these entities. Mr. Steel does not have voting or dispositive control of either of these entities. Mr. Steel disclaims beneficial ownership in our securities directly held by these entities except to the extent of his pecuniary interest therein.

 

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    M. James Barrett is one of seven Managers of NEA 12 GP, LLC, or NEA 12 LLC, the sole general partner of NEA Partners 12, Limited Partnership, or NEA Partners 12, which is the sole general partner of our stockholder, New Enterprise Associates 12, Limited Partnership. NEA Partners 12, NEA 12 LLC and each of the Managers of NEA 12 LLC share voting and dispositive power with regard to our securities directly held by New Enterprise Associates 12, Limited Partnership. Dr. Barrett disclaims beneficial ownership in these shares except to the extent of his pecuniary interest therein, if any.

Participation in this Offering

Certain of our existing stockholders, or their affiliates, have expressed an interest in purchasing an aggregate of $        million of our common stock in this offering at the initial public offering price.

Indemnification of Directors and Officers

Our amended and restated certificate of incorporation that will be effective as of the closing date of this offering provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into indemnification agreements with each of our directors that are broader in scope than the specific indemnification provisions contained in the Delaware General Corporation Law. See the “Executive Compensation—Limitation of Liability and Indemnification” section of this prospectus for a further discussion of these arrangements.

Policies and Procedures for Related Person Transactions

While we have not historically had a written policy with respect to the review and approval of transactions with our directors, officers and principal stockholders, it has been the practice of our board of directors to review all interested party transactions and not to authorize any such transaction unless the board of directors, excluding any interested directors, determines that the terms of the proposed transaction are as favorable or more favorable to our company than would be available from an unrelated party in an arms’ length negotiation. Pursuant to the charter of our audit committee that we expect to become effective upon the closing of this offering, our audit committee will be responsible for reviewing and approving in advance any related person transactions. For the purposes of this policy, a “related person transaction” is any transaction between us or any of our subsidiaries and any (a) of our directors or executive officers, (b) nominee for election as a director, (c) person known to us to own more than five percent of any class of our voting securities, or (d) member of the immediate family of any such person, if the nature of such transaction is such that it would be required to be disclosed under Item 404 of Regulation S-K (or any similar successor provision).

In determining whether to approve a related person transaction, the audit committee will take into account, among other factors it deems appropriate, whether the related person transaction is on terms no less favorable than terms generally available to an unaffiliated third-person under the same or similar circumstances and the extent of the related person’s interest in the transaction.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to beneficial ownership of our common stock, as of April 30, 2014, by:

 

    each person or entity, or group of affiliated persons or entities, known by us to beneficially own more than 5% of our common stock;

 

    each of our directors;

 

    each of our named executive officers; and

 

    all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 30, 2014 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. Except as otherwise indicated, the address of each of the persons in this table is c/o ZP Holdings, Inc., 34790 Ardentech Court, Fremont, California 94555.

Each stockholder’s percentage ownership before the offering is determined in accordance with Rule 13d-3 under the Exchange Act and is based on 20,427,251 shares of our common stock outstanding as of April 30, 2014. Each stockholder’s percentage ownership after the offering assumes the issuance of the shares of our common stock offered hereby and assumes no exercise of the underwriters’ over- allotment option. Shares beneficially owned after the offering also assumes             shares of common stock that will be issued immediately prior to the closing of this offering in connection with the automatic conversion of our outstanding convertible promissory notes, outstanding at April 30, 2014, based on the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and giving effect to the terms of the notes which provide that the notes convert into our common stock at a conversion price equal to 85% of our initial public offering price. Except as otherwise set forth under the heading “Right to Acquire,” the table below assumes no exercise of stock options to purchase an aggregate of 2,171,396 shares of our common stock outstanding on April 30, 2014. Amounts under the heading “Right to Acquire” represent shares that may be acquired upon exercise of outstanding stock options exercisable within 60 days after April 30, 2014.

 

   

Shares Beneficially
Owned Prior to

the Offering

    Shares Beneficially
Owned After the
Offering
 
Name of Beneficial Owner (1)   Shares
Outstanding
    Right to
Acquire
    Total
Shares
    Percentage
Ownership
    Total
Shares
  Percentage
After the
Offering
 

5%+ Stockholders

           

BMV Direct SOTRS LP (2)

17190 Bernardo Center Drive

San Diego, CA 92128

    8,010,268        —          8,010,268        39.21           

New Enterprise Associates 12,

Limited Partnership (3)

Chevy Chase, MD 20815

5425 Wisconsin Avenue, Suite 800

    7,175,544        —          7,175,544        35.13           

Directors and Named Executive Officers:

           

Vikram Lamba (4)

    2,525,000        271,221        2,796,221        13.51           

Peter Daddona (4)

    1,275,151        141,507        1,416,658        6.94           

Thorsten von Stein (4)

    44        8,264        8,308        *              

M. James Barrett

    22        —          22        *              

Bruce Steel

    —          —          —          *              

Kleanthis Xanthopoulos (4)

    —          35,377        35,377        *              

Current Directors and Executive Officers as a Group (8 persons) (4)

    3,800,173        569,567        4,369,740        21.39           

 

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 * Less than 1%
(1) Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
(2) Includes 6,193,293 shares of common stock owned by BMV Direct SOTRS LP and 1,816,975 shares of common stock owned by BMV Direct SO LP. The sole general partner of BMV Direct SOTRS LP is BioMed Realty Holdings, Inc. The sole shareholder of BioMed Realty Holdings, Inc. and the sole general partner of BMV Direct SO LP is BioMed Realty, L.P. The sole general partner of BioMed Realty, L.P. is BioMed Realty Trust, Inc. BioMed Realty Trust, Inc. has sole voting and dispositive power with respect to the shares directly held by BMV Direct SOTRS LP and BMV Direct SO LP. Bruce Steel is a limited partner with a variable economic interest in each of BMV Direct SOTRS LP and BMV Direct SO LP. Mr. Steel disclaims beneficial ownership in the shares directly held by each of BMV Direct SOTRS LP and BMV Direct LP except to the extent of his pecuniary interest therein.
(3) Includes 7,175,524.904 shares of common stock owned by New Enterprise Associates 12, Limited Partnership, or NEA 12 and 19.836 shares of common stock owned by NEA Ventures 2006, Limited Partnership, or Ven 2006. The shares directly held by NEA 12 are indirectly held by NEA Partners 12, Limited Partnership (“NEA Partners 12”), the sole general partner of NEA 12, NEA 12 GP, LLC, or NEA 12 LLC, the sole general partner of NEA Partners 12, and each of the individual Managers of NEA 12 LLC. The individual Managers of NEA 12 LLC are M. James Barrett, Peter J. Barris, Forest Baskett, Ryan D. Drant, Patrick J. Kerins, Krishna “Kittu” Kolluri and Scott D. Sandell. The shares directly held by Ven 2006 are indirectly held by Karen P. Welsh, the general partner of Ven 2006. NEA Partners 12, NEA 12 LLC and the Managers share voting and dispositive power with regard to the shares of the securities directly held by NEA 12. M. James Barrett has neither voting nor dispositive power with respect to the shares held by Ven 2006. M. James Barrett and all other indirect holders of these shares have disclaimed his beneficial ownership in these shares except to the extent of their pecuniary interest therein, if any.
(4) Includes options that will become exercisable within 60 days of April 30, 2014.
(5) Includes additional shares of our common stock that will be issued upon the automatic conversion of our convertible promissory notes outstanding at April 30, 2014, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated offering expenses payable by us, and giving effect to the terms of the notes which provide that the notes convert into our common stock at a conversion price equal to 85% of our initial public offering price.

 

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DESCRIPTION OF CAPITAL STOCK

Upon the completion of this offering, our authorized capital stock will consist of                 shares of common stock, $0.0001 par value per share, and                 shares of preferred stock, $0.0001 par value per share, all of which shares of preferred stock will be undesignated. As of April 30, 2014, we had 20,427,250.579 shares of common stock issued and outstanding, outstanding stock options to purchase 2,171,396 shares of common stock, and an undetermined number of shares of common stock were potentially issuable pursuant to outstanding convertible promissory notes (which will automatically convert, in accordance with their terms, into shares of our common stock upon the closing of this offering at a conversion price equal to 85% of the price per share at which our common stock is sold in this offering). As of April 30, 2014, there were 31 holders of record of our common stock. The following descriptions of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries. For a complete description, you should refer to our amended and restated certificate of incorporation and our amended and restated bylaws, which are filed as exhibits to the registration statement of which this prospectus forms a part.

Common Stock

Voting rights. Holders of our common stock are entitled to one vote per share held of record on all matters to be voted upon by our stockholders. The election of directors by our stockholders is determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Other matters subject to a vote by our stockholders are decided by the affirmative vote of our stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter. Our common stock does not have cumulative voting rights.

Dividend rights. Subject to preferences that may be applicable to the holders of any outstanding shares of our preferred stock, the holders of our common stock are entitled to receive such lawful dividends as may be declared by our board of directors.

Liquidation and dissolution. In the event of our liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of our preferred stock, the holders of shares of our common stock will be entitled to receive pro rata all of our remaining assets available for distribution to our stockholders.

Other rights and restrictions. Our certificate of incorporation does not permit us to redeem shares of our common stock at our election, provide for a sinking fund with respect to our common stock or provide for the granting of preemptive rights to any stockholder. All outstanding shares are fully paid and nonassessable.

Preferred Stock

Prior to this offering, our certificate of incorporation did not provide for any preferred stock. Upon the closing of this offering, pursuant to our amended and restated certificate of incorporation, our board of directors will be authorized, without stockholder approval, from time to time to issue up to                 shares of preferred stock in one or more series, each of the series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as the board of directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for others to acquire, or of discouraging others from attempting to acquire, a majority of our outstanding voting stock. We have no current plans to issue any shares of preferred stock.

Options

As of April 30, 2014, options to purchase 2,171,396 shares of our common stock were outstanding under our 2012 Stock Incentive Plan, at a weighted average exercise price of $0.35 per share.

 

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Anti-Takeover Effects of Provisions of Delaware Law and Our Charter and By-laws

Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms.

We must comply with Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to an interested stockholder. An “interested stockholder” includes a person who, together with affiliates and associates, owns, or did own within three years before the determination of interested stockholder status, 15% or more of the corporation’s voting stock. The existence of this provision generally will have an anti-takeover effect for transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Upon the closing of this offering, our amended and restated certificate of incorporation and our amended and restated bylaws will require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, upon the closing of this offering, special meetings of our stockholders may be called only by the board of directors and some of our officers. Our amended and restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of candidates for election to our board of directors. Our amended and restated certificate of incorporation and amended and restated bylaws also provide that, effective upon the closing of this offering, our board of directors will be divided into three classes, with each class serving staggered three-year terms. These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management.

Listing on the NASDAQ Global Market

We intend to apply to have our common stock listed on the NASDAQ Global Market under the symbol “                    .”

Authorized but Unissued Shares

The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the NASDAQ Listing Rules. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make it more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be                     .

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock, and a liquid public trading market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares issued upon exercise of outstanding options or warrants or in the public market after this offering, or the anticipation of those sales, could adversely affect the public market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities. We intend to apply to have our common stock listed on the NASDAQ Global Market under the symbol “                    .”

Upon the closing of this offering, and after giving effect to the issuance of the             shares of our common stock offered in this offering and the conversion of our convertible promissory notes outstanding at April 30, 2014 into             shares of common stock upon the closing of this offering, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated offering expenses payable by us, and giving effect to the terms of the notes which provide that the notes convert into our common stock at a conversion price equal to 85% of our initial public offering price, we will have outstanding an aggregate of shares of common stock, assuming no exercise of outstanding options after                     . Of these shares, the             shares sold by us (assuming that the underwriters do not exercise their over-allotment option), in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement.

The remaining             shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act and will further be subject to either restrictions on transfer under the lock-up agreements described below or restrictions on transfer for a period of 180 days from the effectiveness of the registration statement of which this prospectus forms a part under stock option agreements entered into between us and the holders of those shares. Following the expiration of these restrictions, these shares will become eligible for public sale if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.

In addition, of the 2,171,396 shares of common stock that were issuable pursuant to stock options outstanding under our 2012 Stock Option Plan as of April 30, 2014, options to purchase 605,661 shares of common stock had vested and were exercisable as of April 30, 2014. Upon exercise, these shares will be eligible for sale, subject to the lock-up agreements and securities laws described below.

Rule 144

Affiliate Resales of Restricted Securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is an affiliate of ours, or who was an affiliate at any time during the 90 days before a sale, who has beneficially owned shares of our common stock for at least six months would be entitled to sell in “broker’s transactions” or certain “riskless principal transactions” or to market makers, a number of shares within any three-month period that does not exceed the greater of:

 

    1% of the number of shares of our common stock then outstanding, which will equal approximately                  shares immediately after this offering; or

 

    the average weekly trading volume in our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with

 

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the SEC and the NASDAQ Stock Market concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.

Non-Affiliate Resales of Restricted Securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.

Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.

Rule 701

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchased shares from us in connection with a compensatory stock or option plan or other written agreement entered into before the effective date of our initial public offering is entitled to sell such shares without further restriction under the Securities Act.

Lock-up Agreements

Our executive officers and directors and the holders of substantially all of our outstanding stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters.

The representatives of the underwriters currently do not anticipate shortening or waiving any of the lock-up agreements and do not have any pre-established conditions for such modifications or waivers. The representatives of the underwriters may, however, with the approval of our board of directors, release for sale in the public market all or any portion of the shares subject to the lock-up agreements.

Stock Options

As of April 30, 2014, we had outstanding options to purchase 2,171,396 shares of common stock, of which options to purchase 605,661 shares of common stock were vested and exercisable. Following this offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock subject to outstanding options and options and other awards issuable pursuant to our 2012 Stock Incentive Plan and 2014 Equity and Incentive Plan.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a general discussion of the material U.S. federal income tax considerations applicable to non-U.S. holders (as defined below) with respect to their purchase, ownership and disposition of shares of our common stock. This discussion is for general information only and is not tax advice. Accordingly, all prospective non-U.S. holders of our common stock should consult their tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock.

This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing and proposed U.S. Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, all as in effect as of the date of this prospectus, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any change could alter the tax consequences to non-U.S. holders described in this prospectus. We assume in this discussion that a non-U.S. holder holds shares of our common stock as a capital asset (generally, property held for investment).

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances nor does it address any aspects of U.S. federal estate or gift taxes, and state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as:

 

    insurance companies;

 

    tax-exempt organizations;

 

    financial institutions;

 

    brokers or dealers in securities or currencies;

 

    regulated investment companies;

 

    pension plans;

 

    controlled foreign corporations;

 

    passive foreign investment companies;

 

    persons subject to the alternative minimum tax;

 

    owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; and

 

    certain U.S. expatriates.

In addition, this discussion does not address the tax treatment of partnerships or other pass-through entities, or persons who hold our common stock through partnerships or other pass-through entities, for U.S. federal income tax purposes. A partner in a partnership or other pass-through entity that will hold our common stock should consult his, her or its tax advisor regarding the tax consequences of acquiring, holding and disposing of our common stock through a partnership or other pass-through entity, as applicable.

We have not sought and will not seek any ruling from the Internal Revenue Service, which we refer to as the IRS, with respect to the statements made and the conclusions reached in the following discussion. There can be no assurance that the IRS will not challenge one or more of the tax consequences described herein, or that any such challenge would not be sustained by a court.

NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL TAX LAWS TO THEIR PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK IN LIGHT OF THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

 

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Non-U.S. Holder Defined

For purposes of this discussion, a non-U.S. holder means a beneficial owner of our common stock that, for U.S. federal income tax purposes, is an individual, corporation, estate or trust that is not a U.S. person. For purposes of this discussion, a U.S. person is:

 

    an individual who is a citizen or resident of the United States;