Threshold Pharmaceuticals
THRESHOLD PHARMACEUTICALS INC (Form: S-4, Received: 05/15/2017 06:08:30)
Table of Contents

As filed with the Securities and Exchange Commission on May 12, 2017

Registration No.            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

THRESHOLD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   94-3409596

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3705 Haven Ave., Suite 120

Menlo Park, California 94025

(650) 474-8200

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

 

 

Wilfred E. Jaeger, M.D.

Interim Chief Executive Officer

Threshold Pharmaceuticals, Inc.

3705 Haven Ave., Suite 120

Menlo Park, California 94025

(650) 474-8200

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

 

 

Copies to:

 

Chadwick Mills

Rama Padmanabhan

Robert Phillips

Cooley LLP

101 California Street

San Francisco, CA 94111

(415) 693-2000

 

Eric E. Poma, Ph.D.

Chief Executive Officer and

Chief Scientific Officer

Molecular Templates, Inc.

9301 Amberglen Blvd, Suite 100

Austin, TX 78729

(512) 869-1555

 

William C. Hicks

Matthew J. Gardella

Robert E. Burwell

Mintz Levin Cohn Ferris Glovsky & Popeo, P.C.

One Financial Center

Boston, MA 02111

(617) 542-6000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and the satisfaction or waiver of all other conditions under the merger agreement described herein.

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

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

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

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

 

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

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

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

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

offering price

per share

 

Proposed

maximum

aggregate

offering price(2)

 

Amount of

registration fee(3)

Common stock, par value $0.001 per share

  143,000,000   N/A   $870,648.94   $100.91

 

 

(1) Relates to common stock, $0.001 par value per share, of Threshold Pharmaceuticals, Inc., a Delaware corporation, or Threshold, issuable to holders of common stock, $0.001 par value per share, and warrants and options of Molecular Templates, Inc., a Delaware corporation, or Molecular, in the proposed merger of Trojan Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Threshold, with and into Molecular. The amount of Threshold common stock to be registered is based on the estimated number of shares of Threshold common stock that are expected to be issued pursuant to the merger, without taking into account the effect of a reverse stock split of the Threshold common stock, assuming a post-split exchange ratio of 0.6605 shares of Threshold common stock for each outstanding share of Molecular common stock.
(2) Molecular has an accumulated capital deficit, therefore, the proposed maximum aggregate offering price is one-third of the aggregate par value of Molecular capital stock being acquired in the proposed merger, aggregate exercise (offering) price of warrants to be exchanged for warrants for the Registrant’s common stock, in accordance with Rule 457(g)(1) of the Securities Act, and the aggregate exercise (offering) price of stock options to be assumed in the transaction described herein, in accordance with Rule 457(h)(1) of the Securities Act. There is no market for Molecular’s securities.
(3) Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $115.90 per $1,000,000 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, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this proxy statement/prospectus/information statement 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 proxy statement/prospectus/information statement is not an offer to sell and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 12, 2017

 

 

LOGO    LOGO

PROPOSED MERGER

YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Threshold Pharmaceuticals, Inc. and Molecular Templates, Inc.:

Threshold Pharmaceuticals, Inc., or Threshold, and Molecular Templates, Inc., or Molecular, entered into an Agreement and Plan of Merger and Reorganization on March 16, 2017, or the merger agreement, pursuant to which a wholly owned subsidiary of Threshold will merge with and into Molecular, with Molecular surviving as a wholly owned subsidiary of Threshold, which transaction is referred to herein as the merger. Molecular and Threshold believe that the merger will result in a clinical-stage biopharmaceutical company focused on the discovery, development, and commercialization of a next-generation of immunotoxins called engineered toxin bodies for the treatment of cancers and other serious diseases. The surviving corporation following the merger is referred to herein as the combined company or Threshold.

Immediately prior to the effective time of the merger, each share of Molecular’s preferred stock, or Molecular preferred stock, will be converted into one share of Molecular’s common stock, or Molecular common stock, as determined in accordance with the Molecular certificate of incorporation then in effect. At the effective time of the merger, other than the shares of Molecular common stock held or owned by Molecular, Threshold or Merger Sub (which will be cancelled without conversion or payment) and with respect to any shares of Molecular common stock held by stockholders who are entitled to demand and have properly demanded appraisal of such shares pursuant to, and in strict compliance in all respects with, the Delaware General Corporation Law, each share of Molecular common stock will be converted into the right to receive a fraction of a share of Threshold common stock, or the exchange ratio (as defined in the merger agreement). It is currently anticipated that, at the closing of the merger, the exchange ratio would be approximately      pre-split shares of Threshold’s common stock, or Threshold common stock, and would be within a range of approximately      to      post-split shares of Threshold common stock. The exchange ratio is determined pursuant to a formula in the merger agreement and described in the accompanying proxy statement/prospectus/information statement, and these estimates are subject to adjustment.

In connection with the merger, each outstanding and unexercised option to purchase shares of Molecular common stock will be assumed by Threshold and will be converted into an option to purchase that number of shares of Threshold common stock as determined pursuant to the exchange ratio described in more detail below. Each outstanding warrant to purchase shares of Molecular’s capital stock will be exercised on a net exercise basis for shares of Molecular’s series C preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio. Each of Molecular’s convertible promissory notes will be converted into shares of Molecular’s series C-1 preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio.

Each share of Threshold common stock issued and outstanding at the time of the merger will remain issued and outstanding and those shares, subject to the reverse split to be effected in connection with the merger, will be unaffected by the merger. All options and warrants to purchase shares of Threshold common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger.

Applying the exchange ratio, the former Molecular securityholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following


Table of Contents

the merger, and the Threshold stockholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following the merger, in each case without giving effect to the issuance of shares of Threshold common stock in the concurrent financing described below and excluding, in each case, out-of-the-money securities. These estimates are subject to adjustment prior to closing of the merger, including an upward adjustment to the extent that Threshold’s net cash at the effective time of the merger is less than $12,500,000 (and as a result, Threshold securityholders could own less, and Molecular securityholders could own more, of the combined company), or a downward adjustment to the extent that Threshold’s net cash at the effective time of the merger is more than $17,500,000 (and as a result, Threshold securityholders could own more, and Molecular securityholders could own less, of the combined company).

Shares of Threshold common stock are currently listed on The NASDAQ Capital Market under the symbol “THLD.” Threshold intends to file an initial listing application in the near term for the combined company with The NASDAQ Capital Market. After completion of the merger, Threshold will be renamed “Molecular Templates, Inc.” and it is expected that the common stock at the combined company will trade on The NASDAQ Capital Market under the symbol “MTEM.” On May 11, 2017, the last trading day before the date of the accompanying proxy statement/prospectus/information statement, the closing sale price of Threshold common stock was $0.49 per share.

Concurrent with the execution of the merger agreement, Threshold and Molecular entered into an equity commitment letter, or the equity commitment letter, with Longitude Venture Partners III, L.P., or Longitude, pursuant to which Longitude agreed to purchase $20.0 million of equity securities from the combined company immediately following the consummation of the merger through a private placement, or the concurrent financing. Subsequent to the execution of the merger agreement, Threshold and Molecular have obtained equity commitment letters from additional investors in a form substantially similar to the Longitude equity commitment letter for an additional $20.0 million of equity securities of the combined company, such that the aggregate size of the concurrent financing is expected to be approximately $40.0 million. The closing of the concurrent financing is conditioned upon the closing of the merger, as well as certain other conditions. The concurrent financing will have a dilutive impact on Molecular’s and Threshold’s securityholders. Certain related parties of Molecular have agreed to participate in the concurrent financing. The concurrent financing is more fully described in the accompanying proxy statement/prospectus/information statement.

Threshold is holding its 2017 annual meeting of stockholders, or the Threshold annual meeting, in order to obtain the stockholder approvals necessary to complete the merger and related matters. At the Threshold annual meeting, which will be held at 3705 Haven Ave., Suite 120, Menlo Park, California 94025 at      a.m., local time, on     , 2017, unless postponed or adjourned to a later date, Threshold will ask its stockholders to, among other things:

 

  1. approve the issuance of shares of Threshold common stock to Molecular stockholders pursuant to the terms of the merger agreement;

 

  2. approve the issuance of shares of Threshold common stock in the concurrent financing;

 

  3. approve an amendment to the Threshold 2014 Equity Incentive Plan, or the 2014 Plan, to increase the total number of shares of Threshold common stock currently available for issuance under the 2014 Plan by 19,000,000 shares, prior to giving effect to the reverse split to be effected in connection with the merger;

 

  4. approve an amendment to the amended and restated certificate of incorporation of Threshold changing the Threshold corporate name to “Molecular Templates, Inc.”;

 

  5. approve an amendment to the amended and restated certificate of incorporation of Threshold effecting a reverse stock split of Threshold’s issued and outstanding common stock within a range, as determined by the Threshold board of directors, of every 5 to 15 shares (or any number in between) of outstanding Threshold common stock being combined and reclassified into one share of Threshold common stock;

 

ii


Table of Contents
  6. elect the Class I directors to the Threshold board of directors for a term of three years (provided, however, that if the merger is completed, the Threshold board of directors will be reconstituted as provided in the merger agreement);

 

  7. approve, on a non-binding, advisory basis, the compensation of Threshold’s named executive officers as disclosed in the accompanying proxy statement/prospectus/information statement;

 

  8. approve, on a non-binding, advisory basis, the compensation that will be paid or may become payable to Threshold’s named executive officers in connection with the merger;

 

  9. ratify the selection of Ernst & Young LLP as Threshold’s independent registered public accounting firm for the fiscal year ending December 31, 2017 (provided, however, that it is likely that the combined company may decide to engage a new independent registered public accounting firm immediately or shortly after the merger is completed);

 

  10. consider and vote upon an adjournment of the Threshold annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 4 and 5; and

 

  11. transact such other business as may properly come before the stockholders at the Threshold annual meeting or any adjournment or postponement thereof.

As described in the accompanying proxy statement/prospectus/information statement, certain Molecular stockholders who in the aggregate own approximately     % of the outstanding shares of Molecular common stock on an as-converted to common stock basis, and certain Threshold stockholders who in the aggregate own     % of the outstanding shares of Threshold common stock, are parties to support agreements with Threshold and Molecular, respectively, whereby such stockholders agreed to vote in favor of certain proposals described in the accompanying proxy statement/prospectus/information statement, subject to the terms of the support agreements.

In addition, following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the U.S. Securities and Exchange Commission, or the SEC, and pursuant to the conditions of the merger agreement, the Molecular stockholders who are party to the support agreements will each execute an action by written consent of the Molecular stockholders, or the written consent, adopting the merger agreement, thereby approving the merger and related transactions. These stockholders hold a sufficient number of shares of Molecular capital stock to adopt the merger agreement, and no meeting of Molecular stockholders to adopt the merger agreement and approve the merger and related transactions will be held. Nevertheless, all Molecular stockholders will have the opportunity to elect to adopt the merger agreement, thereby approving the merger and related transactions, by signing and returning to Molecular the written consent.

After careful consideration, the Threshold and Molecular boards of directors have approved the merger agreement and the proposals described in this proxy statement/prospectus/information statement, and each of the Threshold and Molecular boards of directors has determined that it is advisable to consummate the merger. Threshold’s board of directors recommends that its stockholders vote “FOR” the proposals described in the accompanying proxy statement/prospectus/information statement, and Molecular’s board of directors recommends that its stockholders sign and return the written consent to Molecular indicating their approval of the merger and adoption of the merger agreement and related transactions.

More information about Threshold, Molecular and the merger agreement and transactions contemplated thereby and the foregoing proposals is contained in the accompanying proxy statement/prospectus/information statement. Threshold and Molecular urge you to read the accompanying proxy statement/prospectus/information statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “ RISK FACTORS ” BEGINNING ON PAGE 33 OF THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT.

 

iii


Table of Contents

Threshold and Molecular are excited about the opportunities the merger brings to both Threshold’s and Molecular’s stockholders, and thank you for your consideration and continued support.

 

Wilfred E. Jaeger, M.D.    Eric E. Poma, Ph.D.
Interim Chief Executive Officer
Threshold Pharmaceuticals, Inc.
   Chief Executive Officer and
Chief Scientific Officer
   Molecular Templates, Inc.

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

The accompanying proxy statement/prospectus/information statement is dated     , 2017 and is first being mailed to Threshold and Molecular stockholders on or about     , 2017.

 

iv


Table of Contents

THRESHOLD PHARMACEUTICALS, INC.

3705 HAVEN AVE., SUITE 120

MENLO PARK, CALIFORNIA 94025

(650) 474-8200

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On      , 2017

 

Time:           a.m., local time
Date:        , 2017
Place:    3705 Haven Ave., Suite 120, Menlo Park, California 94025

Purposes:

 

  1. To approve the issuance of shares of common stock of Threshold Pharmaceuticals, Inc., or Threshold, to stockholders of Molecular Templates, Inc., or Molecular, pursuant to the terms of the Agreement and Plan of Merger and Reorganization between Threshold, Molecular and Trojan Merger Sub, Inc., dated March 16, 2017, a copy of which is attached as Annex A , which is referred to in this Notice as the merger agreement;

 

  2. To approve the issuance of shares of Threshold common stock in the concurrent financing as contemplated by the equity commitment letter with Threshold, Molecular and Longitude Venture Partners III, L.P., or Longitude, a copy of which is attached as Annex B , and other equity commitment letters with certain other investors in a form substantially similar to the equity commitment letter with Longitude, pursuant to which Threshold will sell, and such investors have agreed to buy, immediately following the closing of the merger, $40.0 million of shares of equity securities of the combined company;

 

  3. To approve an amendment to the Threshold 2014 Equity Incentive Plan, or the 2014 Plan, to increase the total number of shares of Threshold common stock currently available for issuance under the 2014 Plan by 19,000,000 shares, prior to giving effect to the reverse split to be effected in connection with the merger, in the form attached as Annex C ;

 

  4. To approve an amendment to the amended and restated certificate of incorporation of Threshold changing the Threshold corporate name to “Molecular Templates, Inc.” in the form attached as Annex D ;

 

  5. To approve an amendment to the amended and restated certificate of incorporation of Threshold effecting a reverse stock split of Threshold’s issued and outstanding common stock within a range, as determined by the Threshold board of directors, of every 5 to 15 shares (or any number in between) of outstanding Threshold common stock being combined and reclassified into one share of Threshold common stock in the form attached as Annex E ;

 

  6. To elect the Class I directors to the Threshold board of directors for a term of three years (provided, however, that if the merger is completed, the board of directors will be reconstituted as provided in the merger agreement);

 

  7. To approve, on a non-binding, advisory basis, the compensation of Threshold’s named executive officers as disclosed in the accompanying proxy statement/prospectus/information statement;

 

  8. To approve, on a non-binding, advisory basis, the compensation that will be paid or may become payable to Threshold’s named executive officers in connection with the merger;

 

  9. To ratify the selection of Ernst & Young LLP as Threshold’s independent registered public accounting firm for the fiscal year ending December 31, 2017 (provided, however, that it is likely that the combined company may decide to engage a new independent registered public accounting firm immediately or shortly after the merger is completed);

 

  10. To consider and vote upon an adjournment of the Threshold annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 4 and 5; and

 

  11. To transact such other business as may properly come before the stockholders at the Threshold annual meeting or any adjournment or postponement thereof.


Table of Contents

Record

Date:

  

 

Threshold’s board of directors has fixed     , 2017 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Threshold annual meeting and any adjournment or postponement thereof. Only holders of record of shares of Threshold common stock at the close of business on the record date are entitled to notice of, and to vote at, the Threshold annual meeting. At the close of business on the record date, Threshold had      shares of common stock outstanding and entitled to vote.

Your vote is important. The affirmative vote of a majority of the votes cast in person or by proxy at the Threshold annual meeting, assuming a quorum is present, is required for approval of Proposal Nos. 1, 2, 3, 7, 8, 9 and 10. The affirmative vote of the holders of a majority of the outstanding shares of Threshold common stock entitled to vote at the Threshold annual meeting is required for approval of Proposal Nos. 4 and 5. With respect to Proposal No. 6, directors are elected by a plurality of the affirmative votes cast by those shares present in person or represented by proxy and entitled to vote at the Threshold annual meeting, and the nominees for director receiving the highest number of affirmative votes will be elected. Each of Proposal Nos. 1, 4 and 5 are conditioned upon each other and the approval of each such proposal is a condition to the completion of the merger. Therefore, the merger cannot be consummated without the approval of Proposal Nos. 1, 4 and 5. Proposal No. 3 is conditioned upon the consummation of the merger via the approval of Proposal Nos. 1, 4 and 5. If merger is not completed or the stockholders do not approve Proposal No. 3, the amendment to the 2014 Plan will not become effective. Proposal Nos. 1, 4 and 5 are not conditioned upon Proposal 3 being approved.

Even if you plan to attend the Threshold annual meeting in person, Threshold requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Threshold annual meeting if you are unable to attend. You may change or revoke your proxy at any time before it is voted at the Threshold annual meeting.

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

By Order of Threshold’s Board of Directors,

Wilfred E. Jaeger, M.D.

Interim Chief Executive Officer

Menlo Park, California

    , 2017


Table of Contents

REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement incorporates important business and financial information about Threshold that is not included in or delivered with this document. You may obtain this information without charge through the SEC website ( www.sec.gov ) or upon your written or oral request by contacting the Chief Financial Officer of Threshold Pharmaceuticals, Inc., 3705 Haven Ave., Suite 120, Menlo Park, California 94025 or by calling (650) 474-8200.

To ensure timely delivery of these documents, any request should be made no later than     , 2017 to receive them before the Threshold annual meeting.

For additional details about where you can find information about Threshold, please see the section titled “ Where You Can Find More Information ” beginning on page 341 of this proxy statement/prospectus/information statement.


Table of Contents

TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1  

PROSPECTUS SUMMARY

     11  

The Companies

     11  

The Merger

     12  

Reasons for the Merger

     13  

Opinion of Threshold Financial Advisor

     15  

Interests of Certain Directors, Officers and Affiliates of Threshold and Molecular

     15  

Management Following the Merger

     16  

Overview of the Merger Agreement and Agreements Related to the Merger Agreement

     17  

Equity Commitment Letter

     20  

Regulatory Approvals

     22  

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

     22  

NASDAQ Stock Market Listing

     22  

Anticipated Accounting Treatment

     23  

Appraisal Rights and Dissenters’ Rights

     23  

Comparison of Stockholder Rights

     23  

Risk Factors

     23  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION AND DATA

     25  

Selected Historical Consolidated Financial Data of Threshold

     25  

Selected Historical Consolidated Financial Data of Molecular

     26  

Selected Unaudited Pro Forma Condensed Combined Financial Data of Threshold and Molecular

     28  

Comparative Historical and Unaudited Pro Forma Per Share Data

     30  

MARKET PRICE AND DIVIDEND INFORMATION

     31  

RISK FACTORS

     33  

Risks Related to the Merger

     33  

Risks Related to Threshold’s Business

     39  

Risks Related to Drug Discovery, Development and Commercialization

     42  

Risks Related to Threshold’s Financial Performance and Operations

     51  

Risks Related to Threshold’s Dependence on Third Parties

     55  

Risks Related to Threshold’s Intellectual Property

     57  

Risks Related To Threshold’s Industry

     60  

Risks Related to Molecular’s Financial Condition and Capital Requirements

     70  

 

i


Table of Contents
     Page  

Risks Related to the Development of Molecular’s Product Candidates

     73  

Risks Related to Regulatory Approval of Molecular’s Product Candidates and Other Legal Compliance Matters

     80  

Risks Related to Molecular’s Intellectual Property

     85  

Risks Related to Molecular’s Reliance on Third Parties

     93  

Risks Related to Commercialization of Molecular’s Product Candidates

     96  

Risks Related to Molecular’s Business Operations

     100  

Risks Related to the Combined Company

     101  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     107  

THE ANNUAL MEETING OF THRESHOLD STOCKHOLDERS

     108  

Date, Time and Place

     108  

Purposes of the Threshold Annual meeting

     108  

Recommendation of Threshold’s Board of Directors

     109  

Record Date and Voting Power

     110  

Voting and Revocation of Proxies

     110  

Required Vote

     111  

Solicitation of Proxies

     112  

Other Matters

     112  

THE MERGER

     113  

Background of the Merger

     113  

Threshold Reasons for the Merger

     121  

Molecular Reasons for the Merger

     124  

Opinion of Threshold Financial Advisor

     126  

Interests of the Threshold Directors and Executive Officers in the Merger

     133  

Interests of the Molecular Directors and Executive Officers in the Merger

     138  

Form of the Merger

     142  

Merger Consideration and Exchange Ratio

     142  

Stock Options and Warrants

     144  

Effective Time of the Merger

     145  

Regulatory Approvals

     145  

Tax Treatment of the Merger

     145  

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

     145  

Information Reporting and Backup Withholding

     148  

Anticipated Accounting Treatment

     149  

 

ii


Table of Contents
     Page  

NASDAQ Stock Market Listing

     149  

Appraisal Rights and Dissenters’ Rights

     150  

THE MERGER AGREEMENT

     153  

Structure

     153  

Completion and Effectiveness of the Merger

     153  

Merger Consideration and Exchange Ratio

     153  

Determination of Threshold’s Net Cash

     155  

Threshold Common Stock

     156  

Procedures for Exchanging Molecular Stock Certificates

     156  

Fractional Shares

     157  

Representations and Warranties

     157  

Covenants; Conduct of Business Pending the Merger

     160  

Non-Solicitation

     163  

Disclosure Documents

     166  

Meeting of Threshold Stockholders and Written Consent of Molecular’s Stockholders

     166  

Regulatory Approvals

     166  

Molecular Stock Options and Molecular Warrants

     166  

Indemnification and Insurance for Officers and Directors

     167  

Additional Agreements

     167  

NASDAQ Stock Market Listing

     168  

Conditions to the Completion of the Merger

     168  

Termination of the Merger Agreement and Termination Fee

     170  

Amendment

     172  

Expenses

     172  

Directors and Officers of Threshold Following the Merger

     172  

Amendments to the Certificate of Incorporation of Threshold

     173  

Annual meeting of Threshold Stockholders

     173  

Molecular Written Consent

     173  

AGREEMENTS RELATED TO THE MERGER

     174  

Support Agreements

     174  

Lock-up Agreements

     174  

Bridge Loan

     174  

Potentially Transferrable Assets Dispositions

     175  

Molecular Note Conversion Agreement

     175  

Equity Commitment Letter

     175  

 

iii


Table of Contents
     Page  

THRESHOLD DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE

     178  

Executive Officers of Threshold

     178  

Background of Executive Officers

     178  

Directors of Threshold

     178  

Background of Directors

     179  

Certain Corporate Governance Matters

     184  

Section 16(a) Beneficial Ownership Reporting Compliance

     185  

Director Compensation

     186  

Director Compensation Table

     187  

THRESHOLD EXECUTIVE COMPENSATION

     189  

Description of Compensation Arrangements

     189  

Summary Compensation Table

     191  

Outstanding Equity Awards at Fiscal Year-End

     192  

Option Exercises During 2016

     193  

Post-Termination Compensation

     193  

MOLECULAR EXECUTIVE COMPENSATION

     195  

Summary Compensation Table

     195  

Outstanding Equity Awards at Fiscal Year-End

     196  

Employment Benefits Plan

     198  

MATTERS BEING SUBMITTED TO A VOTE OF THRESHOLD STOCKHOLDERS

     200  

PROPOSAL NO. 1:

 

APPROVAL OF THE ISSUANCE OF COMMON STOCK IN THE MERGER

     200  

PROPOSAL NO. 2:

 

APPROVAL OF THE ISSUANCE OF THRESHOLD COMMON STOCK IN THE CONCURRENT FINANCING

     201  

PROPOSAL NO. 3:

 

APPROVAL OF THE AMENDMENT TO THE THRESHOLD 2014 EQUITY INCENTIVE PLAN

     202  

PROPOSAL NO. 4:

 

APPROVAL OF CORPORATE NAME CHANGE

     214  

PROPOSAL NO. 5:

 

APPROVAL OF THE AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THRESHOLD EFFECTING THE REVERSE STOCK SPLIT

     215  

PROPOSAL NO. 6:

 

ELECTION OF DIRECTORS

     221  

PROPOSAL NO. 7:

 

ADVISORY VOTE ON EXECUTIVE COMPENSATION

     222  

PROPOSAL NO. 8:

 

ADVISORY VOTE ON GOLDEN PARACHUTE COMPENSATION

     223  

PROPOSAL NO. 9:

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     224  

PROPOSAL NO. 10:

 

APPROVAL OF POSSIBLE ADJOURNMENT OF THE ANNUAL MEETING

     226  

 

iv


Table of Contents
     Page  
THRESHOLD BUSINESS      227  
MOLECULAR BUSINESS      251  

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

     282  

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

     298  
MANAGEMENT FOLLOWING THE MERGER      312  

Executive Officers and Directors

     312  

Board of Directors of the Combined Company Following the Merger

     315  

Director Compensation

     318  
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS      319  
DESCRIPTION OF THRESHOLD CAPITAL STOCK      325  

COMPARISON OF RIGHTS OF HOLDERS OF THRESHOLD CAPITAL STOCK AND MOLECULAR CAPITAL STOCK

     329  
PRINCIPAL STOCKHOLDERS OF THRESHOLD      338  
PRINCIPAL STOCKHOLDERS OF MOLECULAR      342  
LEGAL MATTERS      345  
EXPERTS      346  
WHERE YOU CAN FIND MORE INFORMATION      347  
TRADEMARK NOTICE      348  
OTHER MATTERS      349  
INDEX TO THRESHOLD CONSOLIDATED FINANCIAL STATEMENTS      F-1  
INDEX TO MOLECULAR CONSOLIDATED FINANCIAL STATEMENTS      F-28  
INDEX TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS      F-47  
Annex A —Agreement and Plan of Merger and Reorganization   
Annex B —Equity Commitment Letter   
Annex C —Amended Threshold 2014 Equity Incentive Plan   
Annex D —Amendment to Amended and Restated Certificate of Incorporation (Corporate Name Change)   
Annex E —Amendment to Amended and Restated Certificate of Incorporation (Reverse Stock Split)   
Annex F —Opinion of Threshold Financial Advisor   
Annex G —Appraisal Rights (Section 262 of the Delaware General Corporation Law)   

 

v


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE MERGER

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split described in Proposal No. 5 of this proxy statement/prospectus/information statement.

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

 

Q: What is the merger?

 

A: Threshold Pharmaceuticals, Inc., or Threshold, and Molecular Templates, Inc., or Molecular, have entered into an Agreement and Plan of Merger and Reorganization, dated March 16, 2017, or the merger agreement. The merger agreement contains the terms and conditions of the proposed business combination of Threshold and Molecular. Under the merger agreement, Trojan Merger Sub, Inc., a wholly owned subsidiary of Threshold, or Merger Sub, will merge with and into Molecular, with Molecular surviving as a wholly owned subsidiary of Threshold. This transaction is referred to in this proxy statement/prospectus/information statement as the merger. After the completion of the merger, Threshold will change its corporate name to “Molecular Templates, Inc.” as required by the merger agreement. The surviving corporation following the merger is referred to herein as the combined company.

Immediately prior to the effective time of the merger, each share of Molecular’s preferred stock, or Molecular preferred stock, will be converted into one share of Molecular’s common stock, or Molecular common stock, as determined in accordance with the Molecular certificate of incorporation then in effect. At the effective time of the merger, other than the shares of Molecular common stock held or owned by Molecular, Threshold or Merger Sub (which will be cancelled without conversion or payment) and with respect to any shares of Molecular common stock held by stockholders who are entitled to demand and have properly demanded appraisal of such shares pursuant to, and in strict compliance in all respects with, the Delaware General Corporation Law, or the DGCL, each share of Molecular common stock will be converted into the right to receive a fraction of a share of Threshold common stock, or the “exchange ratio” (as defined in the merger agreement). It is currently anticipated that, at the closing of the merger, the exchange ratio would be approximately      pre-split shares of Threshold’s common stock, or Threshold common stock, and would be within a range of approximately      to      post-split shares of Threshold common stock. The exchange ratio is determined pursuant to a formula in the merger agreement and described in this proxy statement/prospectus/information statement, and these estimates are subject to adjustment.

In connection with the merger, each outstanding and unexercised option to purchase shares of Molecular common stock will be assumed by Threshold and will be converted into an option to purchase that number of shares of Threshold common stock as determined pursuant to the exchange ratio (as defined in the merger agreement). Each outstanding warrant to purchase shares of Molecular’s capital stock will be exercised on a net exercise basis for shares of Molecular’s series C preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio. Each of Molecular’s convertible promissory notes, or the Molecular notes, will be converted into shares of Molecular’s series C-1 preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio.

Threshold stockholders and optionholders will continue to own and hold their existing shares of Threshold common stock and options, respectively. All options and warrants to purchase shares of Threshold common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger.

 

1


Table of Contents

Applying the exchange ratio, the former Molecular securityholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following the merger, and the Threshold stockholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock, following the merger in each case without giving effect to the issuance of shares of Threshold common stock in the concurrent financing described below and excluding, in each case, out-of-the-money securities. These estimates are subject to adjustment prior to closing of the merger, including an upward adjustment to the extent that Threshold’s net cash at the effective time of the merger is less than $12,500,000 (and as a result, Threshold securityholders could own less, and Molecular securityholders could own more, of the combined company), or a downward adjustment to the extent that Threshold’s net cash at the effective time of the merger is more than $17,500,000 (and as a result, Threshold securityholders could own more, and Molecular securityholders could own less, of the combined company).

The merger agreement terms applicable to the calculation of the exchange ratio, which is described in the section titled “ The Merger—Merger Consideration and Exchange Ratio ” beginning on page 141 of this proxy statement/prospectus/information statement, are complex and circumstances as of the effective time of the merger may result in an exchange ratio that differs from estimates in this proxy statement/prospectus/information statement.

 

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

 

A: If, for any reason, the merger does not close, Threshold’s board of directors may elect to, among other things, dissolve or liquidate its assets, attempt to complete another strategic transaction like the merger, attempt to sell or otherwise dispose of the various assets of Threshold or continue to operate the business of Threshold. If Threshold decides to dissolve and liquidate its assets, Threshold would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left, if any, to distribute to stockholders after paying the debts and other obligations of Threshold and setting aside funds for reserves.

 

Q: Why are the two companies proposing to merge?

 

A: Following the merger, Threshold and Molecular believe that the merger will result in a clinical-stage biopharmaceutical company focused on the discovery, development, and commercialization of a next-generation of immunotoxins called engineered toxin bodies, or ETBs, for the treatment of cancers and other serious diseases. Threshold and Molecular believe that the combined company will have the following potential advantages: (i) a diversified, clinical-stage product development portfolio; (ii) appropriate resources to fund its research and development activities; (iii) an experienced management team and (iv) the potential for Molecular to access additional sources of capital.

 

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

 

A: You are receiving this proxy statement/prospectus/information statement because you have been identified as a stockholder of Threshold or Molecular as of the applicable record date, and you are entitled, as applicable, to vote at the Threshold annual meeting to approve the matters set forth herein, or to sign and return the Molecular written consent to adopt and approve the matters set forth in the written consent. This document serves as:

 

    a proxy statement of Threshold used to solicit proxies for the Threshold annual meeting to vote on the matters set forth herein;

 

    a prospectus of Threshold used to offer shares of Threshold common stock in exchange for shares of Molecular common stock in the merger; and

 

    an information statement of Molecular used to solicit the written consent of its stockholders for approval of matters relating to the merger.

 

2


Table of Contents
Q: What is the concurrent financing?

 

A: Concurrent with the execution of the merger agreement, Threshold and Molecular entered into an equity commitment letter, or the equity commitment letter, with Longitude Venture Partners III, L.P., or Longitude, pursuant to which Longitude agreed to purchase $20.0 million of equity securities from the combined company immediately following the consummation of the merger through a private placement, or the concurrent financing. Subsequent to the execution of the merger agreement, Threshold and Molecular have obtained equity commitment letters from additional investors in a form substantially similar to the Longitude equity commitment letter for an additional $20.0 million of equity securities of the combined company, such that the aggregate size of the concurrent financing is expected to be approximately $40.0 million. The closing of the concurrent financing is conditioned upon the closing of the merger, as well as certain other conditions. The concurrent financing will have a dilutive impact on Molecular’s and Threshold’s securityholders. Certain related parties of Molecular have agreed to participate in the concurrent financing. For a more complete description of the concurrent financing, please see the section titled “ Agreements Related to the Merger—Equity Commitment Letter ” beginning on page 174 of this proxy statement/prospectus/information statement.

 

Q: What proposals will be voted on at the Threshold annual meeting in connection with the merger?

 

A: Pursuant to the terms of the merger agreement, the following proposals must be approved by the requisite stockholder vote at the Threshold annual meeting:

 

    Proposal No. 1 to approve the issuance of shares of Threshold common stock to Molecular stockholders pursuant to the merger agreement, a copy of which is attached as Annex A ;

 

    Proposal No. 4 to approve an amendment to the amended and restated certificate of incorporation of Threshold changing the Threshold corporate name to “Molecular Templates, Inc.” in the form attached as Annex D ; and

 

    Proposal No. 5 to approve an amendment to the amended and restated certificate of incorporation of Threshold effecting a reverse stock split of Threshold’s issued and outstanding common stock within a range of, as determined by the Threshold board of directors, every 5 to 15 shares (or any number in between) of outstanding Threshold common stock being combined and reclassified into one share of Threshold common stock in the form attached as Annex E , which is referred to herein as the reverse stock split.

Proposal Nos. 1, 4 and 5 are referred to herein collectively as the merger proposals. Each of the merger proposals is conditioned upon the approval of all of the other merger proposals and the approval of each merger proposal is a condition to completion of the merger. Neither the issuance of Threshold common stock in connection with the merger, the amendment to Threshold’s amended and restated certificate of incorporation to effect the reverse stock split nor the amendment to Threshold’s amended and restated certificate of incorporation effect the name change will take place unless all of the merger proposals are approved by the Threshold stockholders and the merger is completed. Therefore, the completion of the merger cannot proceed without the approval of each of the merger proposals. In addition to the requirement of obtaining Threshold stockholder approval, each of the other closing conditions set forth in the merger agreement must be satisfied or waived. For a more complete description of the closing conditions under the merger agreement, please see the section titled “ The Merger Agreement—Conditions to the Completion of the Merger ” beginning on page 167 of this proxy statement/prospectus/information statement.

The presence, in person or represented by proxy, at the Threshold annual meeting of the holders of a majority of the shares of Threshold common stock outstanding and entitled to vote at the Threshold annual meeting is necessary to constitute a quorum at the meeting.

 

3


Table of Contents
Q: What proposals are to be voted on at the Threshold annual meeting, other than the merger proposals required in connection with the merger?

 

A: At the Threshold annual meeting, the holders of Threshold common stock will also be asked to consider the following proposals, along with any other business that may properly come before the Threshold annual meeting or any adjournment or postponement thereof:

 

    Proposal No. 2 to approve the issuance of shares of Threshold common stock in the concurrent financing as contemplated by the equity commitment letter with Threshold, Molecular and Longitude, a copy of which is attached as Annex B , and other equity commitment letters with certain other investors in a form substantially similar to the equity commitment letter with Longitude;

 

    Proposal No. 3 to approve an amendment to the Threshold 2014 Equity Incentive Plan, or the 2014 Plan, to increase the total number of shares of Threshold common stock currently available for issuance under the 2014 Plan by 19,000,000 shares, prior to giving effect to the reverse split to be effected in connection with the merger, in the form attached as Annex C ;

 

    Proposal No. 6 to elect the Class I directors to the Threshold board of directors for a term of three years (provided, however, that if the merger is completed, the Threshold board of directors will be reconstituted as provided in the merger agreement);

 

    Proposal No. 7 to approve, on a non-binding, advisory basis, the compensation of Threshold’s named executive officers as disclosed in this proxy statement/prospectus/information statement;

 

    Proposal No. 8 to approve, on a non-binding, advisory basis, the compensation that will be paid or may become payable to Threshold’s named executive officers in connection with the merger;

 

    Proposal No. 9 to ratify the selection of Ernst & Young LLP as Threshold’s independent registered public accounting firm for the fiscal year ending December 31, 2017 (provided, however, that it is likely that the combined company may decide to engage a new independent registered public accounting firm immediately or shortly after the merger is completed); and

 

    Proposal No. 10 to approve an adjournment of the Threshold annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 4 and 5.

 

The approval of Proposal Nos. 2, 3, 6, 7, 8, 9 and 10 are not conditions to the merger. The approval of advisory Proposal Nos. 7 and 8 are not binding on the Threshold board of directors. Proposal No. 3 is conditioned upon the consummation of the merger via the approval of Proposal Nos. 1, 4 and 5. If the merger is not completed or the stockholders do not approve Proposal No. 3, the amendment to the 2014 Plan will not become effective. Proposal Nos. 1, 4 and 5 are not conditioned upon Proposal 3 being approved. All of such proposals, together with the merger proposals, are referred to collectively in this proxy statement/prospectus/information statement as the proposals.

Threshold stockholders should understand, however, that if the merger with Molecular is completed, the effect of the approval of Proposal Nos. 6 and 9 will be limited since the composition of the Threshold board of directors will be changed upon completion of the merger and the concurrent financing in accordance with the merger agreement and equity commitment letter with Longitude, respectively, and it is likely that the combined company may decide to engage a new independent registered public accounting firm immediately or shortly after completion of the merger.

 

Q: What stockholder votes are required to approve the proposals at the Threshold annual meeting?

 

A: The affirmative vote of a majority of the votes cast in person or by proxy at the Threshold annual meeting, assuming a quorum is present, is required for approval of Proposal Nos. 1, 2, 3, 7, 8, 9 and 10. The affirmative vote of the holders of a majority of the outstanding shares of Threshold common stock entitled to vote at the Threshold annual meeting is required for approval of Proposal Nos. 4 and 5. With respect to Proposal No. 6, directors are elected by a plurality of the affirmative votes cast by those shares present in person or represented by proxy and entitled to vote at the Threshold annual meeting, and the nominees for director receiving the highest number of affirmative votes will be elected.

 

4


Table of Contents

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR,” “AGAINST” and “WITHHOLD” votes, abstentions and broker non-votes. “WITHHOLD” votes with respect to the election of one or more nominees for director pursuant to Proposal No. 6 will not be voted with respect to the director or directors indicated, although they will be counted for purposes of determining the presence of a quorum for the transaction of business at the Threshold annual meeting. Abstentions and broker non-votes will also be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the annual meeting. Abstentions and broker non-votes will not, however, be considered votes cast at the Threshold annual meeting and will therefore not have any effect with respect to Proposal Nos. 1, 2, 3, 7, 8, 9 and 10. Abstentions and broker non-votes will have the same effect as “AGAINST” votes for Proposal Nos. 4 and 5.

The adoption of the merger agreement and the approval of the merger and related transactions by the Molecular stockholders require the affirmative votes of the holders of (i) a majority of the outstanding shares of Molecular common stock and preferred stock, voting together as a single class on an as-converted to common stock basis, and (ii) 80% of the outstanding shares of Molecular preferred stock, voting together as a single class on an as-converted to common stock basis.

As of March 31, 2017, the directors and executive officers of Threshold owned or controlled 13.31% of the outstanding shares of Threshold common stock entitled to vote at the Threshold annual meeting. The directors and executive officers of Threshold owning these shares are subject to support agreements pursuant to which they have agreed to vote all shares of Threshold common stock owned by them as of the record date in favor of Proposal Nos. 1, 4 and 5 and against any “acquisition proposal” (as defined in the merger agreement).

 

Q: What will Molecular stockholders, warrant holders and optionholders receive in the merger?

 

A: Applying the exchange ratio, the former Molecular securityholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following the merger, and the Threshold stockholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following the merger, in each case without giving effect to the issuance of shares of Threshold common stock in the concurrent financing and excluding, in each case, out-of-the-money securities. These estimates are subject to adjustment prior to closing of the merger, including an upward adjustment to the extent that Threshold’s net cash at the effective time of the merger is less than $12,500,000 (and as a result, Threshold securityholders could own less, and Molecular securityholders could own more, of the combined company), or a downward adjustment to the extent that Threshold’s net cash at the effective time of the merger is more than $17,500,000 (and as a result, Threshold securityholders could own more, and Molecular securityholders could own less, of the combined company).

Shares of Threshold common stock are currently listed on The NASDAQ Capital Market under the symbol “THLD.” Threshold intends to file an initial listing application in the near term for the combined company with The NASDAQ Capital Market. After completion of the merger, Threshold will be renamed “Molecular Templates, Inc.” and it is expected that the common stock of the combined company will trade on The NASDAQ Capital Market under the symbol “MTEM.” On May     , 2017, the last trading day before the date of this proxy statement/prospectus/information statement, the closing sale price of Threshold common stock was $     per share. In connection with the merger, each outstanding and unexercised option to purchase shares of Molecular common stock will be converted into an option to purchase Threshold common stock, with the number of shares and exercise price being appropriately adjusted to reflect the exchange ratio between Threshold common stock and Molecular common stock determined in accordance with the merger agreement. Immediately prior to the effective time of the merger, each outstanding Molecular warrant will be exercised on a net exercise basis, without any action on the part of the holder thereof, for shares of Molecular’s series C preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio.

 

5


Table of Contents

For a more complete description of what Molecular stockholders, warrant holders and optionholders will receive in the merger, please see the sections titled “ Market Price and Dividend Information ” beginning on page 31 and “ The Merger Agreement—Merger Consideration and Exchange Ratio ” beginning on page 152 of this proxy statement/prospectus/information statement. For a description of the dilutive effect of the concurrent financing on Threshold’s and Molecular’s current securityholders, see section titled “ Agreements Related to the Merger—Equity Commitment Letters ” beginning on page 174 of this proxy statement/prospectus/information statement.

 

Q: Who will be the directors of Threshold following the merger?

 

A: Immediately following the merger, Threshold’s board of directors will be composed of seven members, consisting of (i) two members designated by Threshold, namely Harold E. Selick, Ph.D., the former Chief Executive Officer of Threshold who will be the chairman of the board of directors of the combined company immediately following the merger, and David R. Hoffmann, currently a Threshold board member, (ii) two members designated by Molecular, namely Eric E. Poma, Ph.D., who will be the Chief Executive Officer and Chief Scientific Officer of the combined company immediately following the merger, and Kevin M. Lalande, who currently is a Molecular board member and managing director of SHV Management Services, LLC (affiliates of which will own approximately     % of the combined company’s outstanding shares of common stock immediately following the closing of the merger), and (iii) three members to be mutually agreed upon by Threshold and Molecular meeting the U.S. Securities and Exchange Commission, or SEC, and the NASDAQ Stock Market LLC, or NASDAQ, independence requirements, including David Hirsch, M.D., Ph.D., of Longitude upon the consummation of the concurrent financing, which will take place immediately following the effective time of the merger.  The staggered structure of the current Threshold board of directors will remain in place for the combined company following the completion of the merger.

It is anticipated the director classes of the combined company board of directors will be as follows:

 

    Class I directors (term ending 2020):      and     ;

 

    Class II directors (term ending 2018):      and     ; and

 

    Class III directors (term ending 2019):     ,      and     .

 

Q: Who will be the executive officers of Threshold immediately following the merger?

 

A: Immediately following the merger, the executive management team of Threshold is expected to consist of members of the Molecular executive management team prior to the merger, including:

 

Name

  

Title

Eric E. Poma, Ph.D.

   Chief Executive Officer, Chief Scientific Officer and Class      Director

Jason Kim

   President, Chief Operating Officer and Principal Financial Officer

David Valacer, M.D.

   Chief Medical Officer

Jack Higgins, Ph.D.

   Executive Vice President, Operations and Head of Manufacturing

Kurt Elster

   Executive Vice President, Corporate Development

Erin Willert, Ph.D.

   Executive Vice President, Research and Development

Jen-Sing Liu, Ph.D.

   Executive Vice President, Manufacturing

 

Q: As a Threshold stockholder, how does Threshold’s board of directors recommend that I vote?

 

A: After careful consideration, Threshold’s board of directors recommends that Threshold stockholders vote “FOR” all of the proposals.

 

Q: As a Molecular stockholder, how does Molecular’s board of directors recommend that I vote?

 

A: After careful consideration, Molecular’s board of directors recommends that Molecular stockholders execute the written consent indicating their vote in favor of the adoption of the merger agreement and the approval of the merger and the transactions contemplated thereby.

 

6


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

 

A: You should carefully review the section titled “ Risk Factors ” beginning on page 33 of this proxy statement/prospectus/information statement, which sets forth certain risks and uncertainties related to the merger, risks and uncertainties to which the combined company’s business will be subject, and risks and uncertainties to which each of Threshold and Molecular, as an independent company, is subject.

 

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

 

A: The merger is anticipated to occur as early as the second quarter of 2017 after the Threshold annual meeting to be held on     , 2017, but the exact timing cannot be predicted. For more information, please see the section titled “ The Merger Agreement—Conditions to the Completion of the Merger ” beginning on page 167 of this proxy statement/prospectus/information statement.

 

Q: What do I need to do now?

 

A: Threshold and Molecular urge you to read this proxy statement/prospectus/information statement carefully, including its annexes, and to consider how the merger affects you.

If you are a Threshold stockholder of record, you may provide your proxy instructions in one of four different ways:

 

    You can attend the Threshold annual meeting in person and Threshold will provide you with a ballot when you arrive at the meeting.

 

    You can mail your signed proxy card in the enclosed return envelope.

 

    You can provide your proxy instructions via telephone by following the instructions on your proxy card.

 

    You can provide your proxy instructions via the Internet by following the instructions on your proxy card.

Your vote must be received by     , 2017, 11:59 p.m. Eastern Time to be counted.

If you hold your shares in “street name” (as described below), you may provide your proxy instructions via telephone or the internet by following the instructions on your vote instruction form. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the Threshold annual meeting.

If you are a Molecular stockholder, you may execute and return your written consent to Molecular in accordance with the instructions provided.

 

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

 

A: If you are a Threshold stockholder, the failure to return your proxy card or otherwise provide proxy instructions will reduce the aggregate number of votes required to approve Proposal Nos. 1, 2, 3, 7, 8, 9 and 10 and to elect directors pursuant to Proposal No. 6 and will have the same effect as voting against Proposal Nos. 4 and 5. Also, your shares will not be counted for purposes of determining whether a quorum is present at the Threshold annual meeting.

 

Q: May I vote in person at the Threshold annual meeting?

 

A:

If your shares of Threshold common stock are registered directly in your name with Threshold’s transfer agent, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Threshold. If you are a Threshold stockholder of record, you may attend the Threshold annual meeting and vote your shares in person. Even if you plan to

 

7


Table of Contents
  attend the Threshold annual meeting in person, Threshold requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Threshold annual meeting if you are unable to attend.

If your shares of Threshold common stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the Threshold annual meeting. However, because a beneficial owner is not the stockholder of record, you may not vote these shares in person at the Threshold annual meeting unless you obtain a legal proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the meeting.

 

Q: When and where is the Threshold annual meeting being held?

 

A: The Threshold annual meeting will be held at 3705 Haven Ave., Suite 120, Menlo Park, California 94025, at      a.m., local time, on     , 2017. Subject to space availability, all Threshold stockholders as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis.

 

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

 

A: Unless your broker has discretionary authority to vote on certain matters, your broker will not be able to vote your shares of Threshold common stock on matters requiring discretionary authority without instructions from you. If you do not give instructions to your broker, your broker can vote your Threshold shares with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of The NASDAQ Capital Market on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the Threshold shares will be treated as broker non-votes. It is anticipated that all proposals other than Proposal No. 9 will be non-discretionary. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.

 

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

 

A: Threshold stockholders of record, unless such stockholders’ vote is governed by a support agreement, may change their vote at any time before their proxy is voted at the Threshold annual meeting in one of three ways:

 

    You may send a written notice to the Secretary of Threshold stating that you would like to revoke your proxy.

 

    You may submit new proxy instructions either on a new proxy card or via the Internet.

 

    You may attend the Threshold annual meeting and vote in person, but attendance alone will not revoke a proxy. You must specifically request at the meeting that it be revoked.

If a Threshold stockholder who owns Threshold shares in “street name” has instructed a broker to vote its shares of Threshold common stock, the stockholder must follow directions received from its broker to change those instructions.

 

Q: Who is paying for this proxy solicitation?

 

A:

Threshold and Molecular will share equally the cost of printing and filing of this proxy statement/prospectus/information statement and the proxy card. Arrangements will also be made with brokerage firms

 

8


Table of Contents
  and other custodians, nominees and fiduciaries who are record holders of Threshold common stock for the forwarding of solicitation materials to the beneficial owners of Threshold common stock. Threshold will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. Threshold, has retained      to assist it in soliciting proxies using the means referred to above. Threshold will pay fees of     , which threshold expects to be approximately $    , plus reimbursement of out-of-pocket expenses.

 

Q: What are the material U.S. federal income tax consequences of the reverse stock split to Threshold stockholders?

 

A: The reverse stock split described in Proposal No. 5 should constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a U.S. holder (as described in more detail in the section titled “ Matters Being Submitted to a Vote of Threshold Stockholders—Proposal No.  5: Approval of the Amendment of the Certificate of Incorporation of Threshold Effecting the Reverse Stock Split—Certain Material U.S. Federal Income Tax Consequences of the Reverse Stock Split to U.S. Holders beginning on page 209 of this proxy statement/prospectus/information statement) of Threshold common stock generally should not recognize gain or loss upon such reverse stock split, except with respect to cash received in lieu of a fractional share of Threshold common stock, as discussed below in the section titled “ Matters Being Submitted to a Vote of Threshold Stockholders—Proposal No.  5: Approval of the Amendment of the Certificate of Incorporation of Threshold Effecting the  Reverse Stock Split—Certain Material U.S. Federal Income Tax Consequences of the Reverse Stock Split to U.S. Holders—Cash in Lieu of Fractional Shares beginning on page 209 of this proxy statement/prospectus/information statement. A U.S. holder’s aggregate tax basis in the shares of Threshold common stock received pursuant to such reverse stock split should equal the aggregate tax basis of the shares of the Threshold common stock surrendered (excluding any portion of such basis that is allocated to any fractional share of Threshold common stock), and such U.S. holder’s holding period in the shares of Threshold common stock received should include the holding period in the shares of Threshold common stock surrendered. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Threshold common stock surrendered to the shares of Threshold common stock received in a recapitalization pursuant to such reverse stock split. U.S. holders of shares of Threshold common stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares. For more information, please see the section titled “Matters Being Submitted to a Vote of Threshold Stockholders—Proposal No.  5: Approval of the Amendment of the Certificate of Incorporation of Threshold Effecting the Reverse Stock Split—Certain Material U.S. Federal Income Tax Consequences of the Reverse Stock Split to U.S. Holders” beginning on page 209 of this proxy statement/prospectus/information statement.

 

Q: What are the material U.S. federal income tax consequences of the merger to Molecular stockholders?

 

A: Each of Threshold and Molecular intends the merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Code. In general, and subject to the qualifications and limitations set forth in the section titled “ The Merger—Material U.S. Federal Income Tax Consequences of the Merger ” beginning on page 144 of this proxy statement/prospectus/information statement, if the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. holders of Molecular common stock will be as follows:

 

    a Molecular stockholder will not recognize gain or loss upon the exchange of Molecular common stock for Threshold common stock pursuant to the merger, except to the extent of cash received in lieu of a fractional share of Molecular common stock as described below;

 

    a Molecular stockholder who receives cash in lieu of a fractional share of Threshold common stock in the merger will recognize capital gain or loss in an amount equal to the difference between the amount of cash received in lieu of a fractional share and the stockholder’s tax basis allocable to such fractional share;

 

9


Table of Contents
    a Molecular stockholder’s aggregate tax basis for the shares of Threshold common stock received in the merger (including any fractional share interest for which cash is received) will equal the stockholder’s aggregate tax basis in the shares of Molecular common stock surrendered in the merger; and

 

    the holding period of the shares of Threshold common stock received by a Molecular stockholder in the merger will include the holding period of the shares of Molecular common stock surrendered in exchange therefor.

Tax matters are very complicated, and the tax consequences of the merger to a particular Molecular stockholder will depend on such stockholder’s circumstances. Accordingly, you are strongly urged to consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws. For more information, please see the section titled “ The Merger—Material U.S. Federal Income Tax Consequences of the Merger ” beginning on page 144 of this proxy statement/prospectus/information statement.

 

Q: Who can help answer my questions?

 

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

Threshold Pharmaceuticals, Inc.

3705 Haven Ave., Suite 120

Menlo Park, California 94025

Telephone: (650) 474-8200

Attn: Investor Relations

Email: ir@thresholdpharm.com

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

Molecular Templates, Inc.

9301 Amberglen Blvd, Suite 100

Austin, TX 78729

Telephone: (512) 869-1555

Attn: Investor Relations

Email: IR@mtem.com

 

10


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the merger, the proposals being considered at the Threshold annual meeting and the Molecular stockholder actions that are the subject of the written consent, you should read this entire proxy statement/prospectus/information statement carefully, including the merger agreement and the other annexes to which you are referred in this proxy statement/prospectus/information statement. For more information, please see the section titled “Where You Can Find More Information” beginning on page 341 of this proxy statement/prospectus/information statement. Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split described in Proposal No. 5 of this proxy statement/prospectus/information statement.

The Companies

Threshold Pharmaceuticals, Inc.

3705 Haven Ave., Suite 120

Menlo Park, California 94025

(650) 474-8200

Threshold is a clinical-stage biopharmaceutical company that has historically used its expertise in the tumor microenvironment to discover and develop therapeutic and diagnostic agents that selectively target tumor cells for the treatment of patients living with cancer. Threshold has discontinued development of all of its product candidates other than evofosfamide. In December 2015, Threshold announced that neither of two pivotal Phase III clinical trials of evofosfamide met its primary endpoint of demonstrating a statistically significant improvement in overall survival. However, based on a meaningful improvement in overall survival was reported for a subgroup of 123 Asian patients, Threshold is engaging in discussions with Japan’s Pharmaceuticals and Medical Devices Agency, or PMDA, regarding potential registration pathways and additional clinical trials that would be required. In the meantime, Threshold’s current evofosfamide development strategy is limited to its company-sponsored Phase I clinical trial of evofosfamide in combination with immune checkpoint antibodies in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center, initiated March 1, 2017, and investigator-sponsored clinical trials of evofosfamide in combination with antiangiogenic therapies in a variety of tumor types.

Molecular Templates, Inc.

9301 Amberglen Blvd, Suite 100

Austin, TX 78729

(512) 869-1555

Molecular is a clinical-stage oncology company focused on the discovery and development of novel, targeted, biologic therapeutics for cancer. Molecular believes its proprietary biologic drug platforms, which it refers to as engineered toxin bodies, or ETBs, provide a differentiated mechanism of action that solves problems associated with currently available cancer therapeutics. ETBs use a genetically engineered version of the Shiga-like Toxin A subunit, or SLTA, a ribosomal inactivating bacterial protein. ETBs combine the specificity of an antibody with SLTA’s potent mechanism of cell destruction. In Molecular’s second- and third-generation ETBs, Molecular has modified the SLTA further to reduce immunogenicity and deliver payloads into the cell. Molecular believes the target specificity of ETBs, their ability to self-internalize, their potent and differentiated mechanism of cell kill and their safety profile provide opportunities for the clinical development of these agents to address multiple cancer types.

 



 

11


Table of Contents

Trojan Merger Sub, Inc.

3705 Haven Ave., Suite 120

Menlo Park, California 94025

(650) 474-8200

Merger Sub is a wholly-owned subsidiary of Threshold and was formed solely for the purpose of carrying out the merger.

The Merger (see page 113)

If the merger is completed, Merger Sub will merge with and into Molecular, with Molecular surviving as a wholly-owned subsidiary of Threshold.

Immediately prior to the effective time of the merger, each share of Molecular preferred stock will be converted into one share of Molecular common stock, as determined in accordance with the Molecular certificate of incorporation then in effect. At the effective time of the merger, other than the shares of Molecular common stock held or owned by Molecular, Threshold, or Merger Sub, which will be cancelled without conversion or payment, and with respect to any shares of Molecular common stock held by stockholders who are entitled to demand and have properly demanded appraisal of such shares pursuant to, and in strict compliance in all respects with, the DGCL, each share of Molecular common stock will be converted into the right to receive a fraction of a share of Threshold common stock as determined pursuant to the exchange ratio.

In connection with the merger, each outstanding and unexercised option to purchase shares of Molecular common stock will be assumed by Threshold and will be converted into an option to purchase that number of shares of Threshold common stock as determined by the exchange ratio described in more detail below. Each outstanding warrant to purchase shares of Molecular’s capital stock will be exercised on a net exercise basis for shares of Molecular’s series C preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio. Each of Molecular’s convertible promissory notes will be converted into shares of Molecular’s series C-1 preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio.

Each share of Threshold common stock issued and outstanding at the time of the merger will remain issued and outstanding and those shares, subject to the reverse split to be effected in connection with the merger, will be unaffected by the merger. Please see the section titled “The Merger—Stock Options and Warrants” beginning on page 143 of this proxy statement/prospectus/information statement.

For a more complete description of the exchange ratio, please see the section titled “The Merger Agreement—Merger Consideration and Exchange Ratio—Exchange Ratio” beginning on page 152 of this proxy statement/prospectus/information statement.

The merger will be completed as promptly as practicable after all of the conditions to completion of the merger are satisfied or waived, including the approval or written consent of the Threshold and Molecular stockholders, as applicable. Threshold and Molecular are working to complete the merger as quickly as practicable. The merger is anticipated to occur as early as the second quarter of 2017, after the Threshold annual meeting of stockholders. However, Threshold and Molecular cannot predict the exact timing of the completion of the merger because it is subject to various conditions. After completion of the merger, assuming that Threshold receives the required stockholder approval of Proposal No. 4, Threshold will be renamed “Molecular Templates, Inc.”

 



 

12


Table of Contents

Reasons for the Merger (see pages 119 and 122)

Following the merger, the combined company will be a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of a next-generation of immunotoxins called ETBs for the treatment of cancers and other serious diseases. Threshold and Molecular believe that the combined company will have the following potential advantages:

 

    the combined company will be a publicly traded, clinical-stage company with a diversified development portfolio of ETBs drug candidates in various stages of development as well as evofosfamide in combination with immunotherapies;

 

    the combined company will be led by an experienced senior management team from Molecular and a board of directors of seven members designated by Molecular and Threshold; and

 

    proceeds from the concurrent financing, if completed, would provide funds for the combined company’s research and development and operating activities.

The Threshold board of directors considered a number of factors in reaching its conclusion to approve the merger and to recommend that the Threshold stockholders approve the issuance of shares of Threshold common stock in the merger and the concurrent financing, including the following:

 

    the financial analyses of Ladenburg Thalmann & Co., Inc., Threshold’s financial advisor, or Ladenburg, including Ladenburg’s opinion to the Threshold board as to the fairness to Threshold, from a financial point of view and as of the date of the opinion, of the aggregate number of shares of Threshold common stock to be paid in the merger, as more fully described below in the section titled “ Opinion of Threshold Financial Advisor ” beginning on page 15 of this proxy statement/prospectus/information statement.

 

    the opportunity as a result of the merger for Threshold’s stockholders to participate in the value of the Molecular’s product candidate portfolio and for the combined company’s management to focus on the continued development and potential commercialization of ETBs and evofosfamide;

 

    the lack of success in developing Threshold’s lead product and the difficulty Threshold would have obtaining the amount of funding required to meaningfully redesign the evofosfamide asset and develop the TH-3424 asset in the near-term;

 

    the judgment, advice and analysis of Threshold senior management with respect to the potential strategic, financial and operational benefits of the merger (which judgment, advice and analysis was informed in part on the business, technical, financial, accounting and legal due diligence investigation performed with respect to Molecular), that Molecular’s lead drug candidate represents a sizeable market opportunity and may provide new medical benefits for a large underserved patient population and returns for investors;

 

    the risks associated with continuing to operate Threshold on a stand-alone basis, including the need to rebuild infrastructure and management to continue its operations;

 

    the difficulty Threshold would have obtaining the amount of funding required to meaningfully redesign the evofosfamide asset and develop the TH-3424 asset in the near-term;

 

    the results of substantial efforts made over a significant period of time by Threshold’s senior management and financial advisors to explore strategic alternatives for Threshold, including the discussions that Threshold management and the Threshold board of directors had in fall 2016 with other potential merger candidates;

 

    that the merger would provide the existing Threshold stockholders a significant opportunity to participate in the potential growth of the combined company following the merger;

 



 

13


Table of Contents
    that the combined company will be led by an experienced senior management team and a board of directors with representation from each of the current boards of directors of Threshold and Molecular; and

 

    the projected liquidation value of Threshold and the risks, costs and timing associated with liquidating compared to the value Threshold stockholders will receive in the merger.

In the course of its deliberations, the Threshold board of directors also considered a variety of risks and other countervailing factors related to entering into the merger, including:

 

    the termination fee of up to $750,000 and up to $150,000 in related expenses payable to Molecular upon the occurrence of certain events and the potential effect of such termination fee in deterring other potential acquirors from proposing an alternative transaction that may be more advantageous to Threshold stockholders;

 

    the substantial expenses to be incurred in connection with the merger, including the costs associated with any related litigation;

 

    the possible volatility, at least in the short term, of the trading price of the Threshold common stock resulting from the announcement of the merger;

 

    the risk that the merger might not be consummated in a timely manner, or at all, and the potential adverse effect of the public announcement of the merger or on the delay or failure to complete the merger on the reputation of Threshold;

 

    the risk to the business, operations and financial results of Threshold in the event the merger is not consummated, including the diminution of Threshold’s cash and its likely inability to raise additional capital through the public or private sale of equity securities;

 

    the strategic direction of the combined company following the completion of the merger, which will be determined by a board of directors initially comprised of a majority of the members of the current Molecular board of directors; and

 

    various other risks associated with the combined company and the merger, including those described in the section titled “ Risk Factors ” beginning on page 33 of this proxy statement/prospectus/information statement.

In addition, the Molecular board of directors approved the merger based on a number of factors, including the following:

 

    the potential to provide its current stockholders with greater liquidity by owning stock in a public company;

 

    the cash resources of the combined company expected to be available at the closing of the merger relative to the anticipated burn rate of the combined company;

 

    the potential for access to public capital markets, including sources of capital from a broader range of investors to support the clinical development of its product candidates than it could otherwise obtain if it continued to operate as a privately-held company;

 

    the board’s belief that no alternatives to the merger were reasonably likely to create greater value for Molecular’s stockholders after reviewing the various alternatives that were considered by the Molecular board of directors and the likelihood of achieving any alternative transaction compared to the likelihood of completing the merger; and

 

    the expectation that the merger will be treated as a reorganization for U.S. federal income tax purposes, with the result that the Molecular stockholders will generally not recognize taxable gain or loss for U.S. federal income tax purposes.

 



 

14


Table of Contents

Opinion of Threshold Financial Advisor (see page 123)

On August 30, 2016, Threshold engaged Ladenburg to act as Threshold’s financial advisor in connection with consideration of potential strategic alternatives for Thalmann & Co., Inc. Threshold. As part of this engagement, Threshold’s board of directors requested that Ladenburg evaluate the fairness, from a financial point of view, to Threshold of the exchange ratio for the conversion of Molecular common stock into Threshold common stock pursuant to the merger agreement. On March 16, 2017, at a meeting of Threshold’s board of directors, Ladenburg rendered its oral opinion to Threshold’s board of directors (in its capacity as such), which opinion was subsequently confirmed by delivery of a written opinion dated March 16, 2017, that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered, and qualifications and limitations set forth in the opinion, the exchange ratio for the conversion of Molecular common stock into Threshold common stock pursuant to the merger agreement was fair, from a financial point of view, to Threshold, as more fully described below under the section titled “ The Merger—Opinion of Threshold Financial Advisor ” beginning on page 123 of this proxy statement/prospectus/information statement.

The full text of the written opinion of Ladenburg, dated March 16, 2017, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations of the review undertaken in connection with such opinion, is attached as Annex F . Holders of Threshold common stock are urged to read this opinion carefully and in its entirety. Ladenburg’s opinion was provided for the sole benefit and use of Threshold’s board of directors (in its capacity as such) in connection with its consideration of the merger and addresses only the fairness to Threshold, from a financial point of view, of the exchange ratio for the conversion of Molecular common stock into Threshold common stock pursuant to the merger agreement. It does not address any other aspects of the merger and does not constitute a recommendation as to how holders of Threshold common stock or Molecular common stock should vote or act in connection with the merger. The exchange ratio was determined through negotiations between Threshold and Molecular and not pursuant to any recommendation of Ladenburg. The summary of the opinion set forth under the section titled “ The Merger—Opinion of Threshold Financial Advisor ” beginning on page 123 of this proxy statement/prospectus/information statement is qualified in its entirety by reference to the full text of the opinion.

Interests of Certain Directors, Officers and Affiliates of Threshold and Molecular (see pages 131 and 138)

In considering the recommendation of Threshold’s board of directors with respect to issuing shares of Threshold common stock pursuant to the merger agreement and the other matters to be acted upon by Threshold stockholders at the Threshold annual meeting, Threshold stockholders should be aware that certain members of Threshold’s board of directors and executive officers of Threshold have interests in the merger that may be different from, or in addition to, interests they have as Threshold stockholders.

Continued Service with Combined Company . Harold E. Selick, Ph.D., currently the chairman of Threshold’s board of directors, will continue as chairman of the Board of Directors of the combined company after the effective time of the merger, and David R. Hoffmann, currently a Threshold board member, will continue as a director of the combined company following the merger. Additionally, Joel Fernandes, currently the Senior Vice President of Finance and Controller of Threshold, is expected to be terminated from his position as an officer of Threshold as of the effective time of the merger. After the effective time of the merger, it is expected that Mr. Fernandes will continue to provide services to the combined company as a consultant and to advise the board of the combined company on financial matters.

Severance Arrangements and Equity Acceleration . Upon the completion of the merger, it is expected that the employment of all of Threshold’s executive officers will terminate, and in connection with such termination certain of these executive officers will be entitled to receive cash severance payments and other benefits with a total value of approximately $1.4 million (collectively, not individually, and including the value of the accelerated vesting of unvested stock options and restricted stock awards).

 



 

15


Table of Contents

Threshold Director Compensation Arrangements . Upon completion of the merger, the unvested stock options held by the non-employee directors will accelerate and vest.

Warrants Held by Threshold Director . Wilfred E. Jaeger, M.D. is a holder of a warrant to purchase 25,000 shares of Threshold common stock. In accordance with the terms of the Threshold warrants, upon the consummation of the merger and for the 90-day period following the merger, a warrant holder will have a “put” right, which is a right to require Threshold to purchase the Threshold warrants from such requesting holders by paying to such holders on the effective date of the merger cash in an amount equal to the “Black Scholes Value” (as defined in the Threshold warrants) of the remaining unexercised portion of the Threshold warrants. Accordingly, if Dr. Jaeger were to exercise his put right with respect to his warrant, Threshold would be required to repurchase the warrant at a Black Scholes Value calculation in accordance with the Threshold warrant.

Equity Ownership . As of March 31, 2017, directors and executive officers of Threshold owned or controlled 13.31% of the outstanding shares of Threshold common stock, and, based on the projected number of shares of Threshold common stock to be outstanding immediately after the closing of the merger, would have a pro forma stock ownership of      shares of the combined company, or approximately     % immediately after the closing of the merger (without taking into account shares that may be issued in the concurrent financing).

Threshold directors and executive officers have entered into support agreements in connection with the merger. The support agreements are discussed in greater detail in the section titled “ Agreements Related to the Merger—Support Agreements ” beginning on page 173 of this proxy statement/prospectus/information statement.

In considering the recommendation of Molecular’s board of directors with respect to consenting to the adoption of the merger agreement and the approval of the merger and related transactions, Molecular’s stockholders should be aware that certain members of Molecular’s board of directors and executive officers of Molecular have interests in the merger that may be different from, or in addition to, interests they have as Molecular stockholders.

Continued Service with Combined Company . The executive officers and certain directors of Molecular are expected to become executive officers and directors of the combined company after the closing of the merger.

Equity Ownership . Certain of Molecular’s executive officers and directors have options to purchase shares of Molecular common stock that will each convert into an option to purchase that number of shares of Threshold common stock as determined pursuant to an exchange ratio described in more detail below.

Certain of Molecular’s officers, directors and significant stockholders have entered into support agreements in connection with the merger. The support agreements are discussed in greater detail in the section titled “ Agreements Related to the Merger—Support Agreements ” beginning on page 173 of this proxy statement/prospectus/information statement.

Management Following the Merger (see page 306)

Effective as of the closing of the merger, the combined company’s executive officers are expected to be members of the Molecular executive management team, including:

 

Name

  

Title

Eric E. Poma, Ph.D.

   Chief Executive Officer, Chief Scientific Officer and Class      Director

Jason Kim

   President, Chief Operating Officer and Principal Financial Officer

David Valacer, M.D.

   Chief Medical Officer

Jack Higgins, Ph.D.

   Executive Vice President, Operations and Head of Manufacturing

Kurt Elster

   Executive Vice President, Corporate Development

Erin Willert, Ph.D.

   Executive Vice President, Research and Development

Jen-Sing Liu, Ph.D.

   Executive Vice President, Manufacturing

 



 

16


Table of Contents
Overview of the Merger Agreement and Agreements Related to the Merger Agreement

Merger Consideration and Exchange Ratio (see page 141 )

Immediately prior to the effective time of the merger, each outstanding share of Molecular preferred stock will be converted into Molecular common stock. At the effective time of the merger, upon the terms and subject to the conditions set forth in the merger agreement:

 

    each outstanding share of Molecular common stock (other than the shares of common stock held or owned by Molecular, Threshold or Merger Sub, which will be cancelled without conversion or payment, and with respect to any shares held by stockholders who are entitled to demand and have properly demanded appraisal of such shares pursuant to, and in strict compliance in all respects with, the DGCL) will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio described in more detail below;

 

    each outstanding and unexercised option to purchase shares of Molecular common stock will be assumed by Threshold and will be converted into an option to purchase the number of shares of Threshold common stock as determined pursuant to the exchange ratio described in more detail below;

 

    each outstanding warrant to purchase shares of Molecular’s capital stock will be exercised on a net exercise basis for shares of Molecular’s series C preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio described in more detail below; and

 

    each Molecular note will be converted into shares of Molecular’s series C-1 preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio described in more detail below.

It is anticipated that immediately after the merger but prior to closing the concurrent financing, Molecular securityholders will own, subject to adjustment, approximately     % of the fully-diluted common stock of the combined company, with Threshold securityholders owning approximately     % of the fully-diluted common stock of the combined company. Upon the closing of the concurrent financing, it is anticipated that Molecular securityholders would own approximately     % of the fully-diluted common stock of the combined company, with Threshold securityholders owning approximately     % of the fully-diluted common stock of the combined company. See the section titled “The Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page 152 of this proxy statement/prospectus/information statement.

There will be no adjustment to the total number of shares of Threshold common stock that Molecular stockholders will be entitled to receive in the merger for changes in the market price of Threshold common stock. Accordingly, the market value of the shares of Threshold common stock issued pursuant to the merger will depend on the market value of the shares of Threshold common stock at the time the merger closes, and could vary significantly from the market value on the date of this proxy statement/prospectus/information statement.

Treatment of Threshold Warrants and Stock Options (see page 143)

All options and warrants to purchase shares of Threshold common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger.

In accordance with the terms of the Threshold warrants, upon the consummation of the merger, warrant holders will have a “put” right, which is a right to require Threshold to purchase the Threshold warrants from such requesting holders by paying to such holders on the effective date of the merger, cash in an amount equal to the “Black Scholes Value” (as defined in the Threshold warrants) of the remaining unexercised portion of the Threshold warrants.

 



 

17


Table of Contents

Treatment of Molecular Warrants and Stock Options (see page 143)

At the effective time of the merger, each outstanding option, whether or not vested, to purchase shares of Molecular capital stock unexercised immediately prior to the effective time of the merger will be converted into an option to purchase that number of shares of Threshold common stock as determined pursuant to the exchange ratio described in more detail below. All rights with respect to each Molecular option will be assumed by Threshold in accordance with its terms. Accordingly, from and after the effective time of the merger each option assumed by Threshold may be exercised solely for shares of Threshold common stock.

The number of shares of Threshold common stock subject to each outstanding Molecular option assumed by Threshold will be determined by multiplying the number of shares of Molecular capital stock that were subject to such option by the exchange ratio and rounding the resulting number down to the nearest whole number of shares of Threshold common stock. The per share exercise price for the shares of Threshold common stock issuable upon exercise of each Molecular option assumed by Threshold will be determined by dividing the per share exercise price of Molecular capital stock subject to such option by the exchange ratio and rounding the resulting exercise price up to the nearest whole cent. Any restriction on the exercise of any option will continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such option will otherwise remain unchanged.

Immediately prior to the effective time of the merger, each Molecular warrant will be exercised on a net exercise basis, without any action on the part of the holder thereof, for shares of Molecular’s series C preferred stock, which shares will then be converted into shares of Molecular common stock, which shares in turn will be converted into the right to receive that number of shares of Threshold common stock as determined pursuant to the exchange ratio.

Conditions to the Completion of the Merger (see page 167)

To complete the merger, Threshold stockholders must approve Proposal Nos. 1, 4 and 5. Additionally, the Molecular stockholders must approve the merger and adopt the merger agreement and the transactions contemplated thereby. In addition to obtaining Threshold stockholder approval, each of the other closing conditions set forth in the merger agreement must be satisfied or waived.

Non-Solicitation (see page 162)

The merger agreement contains provisions prohibiting Threshold and Molecular from inquiring about or seeking a competing transaction, subject to specified exceptions described in the merger agreement. Under these “non-solicitation” provisions, each of Threshold and Molecular has agreed that neither it nor its subsidiaries, nor any of its officers, directors, employees, representatives, affiliates, advisors or agents will directly or indirectly:

 

    solicit, initiate, respond to or take any action to facilitate or encourage any inquiries or the communication, making, submission or announcement of any acquisition inquiry or competing proposal or take any action that could reasonably be expected to lead to a competing proposal;

 

    enter into or participate in any discussions or negotiations with any person with respect to an acquisition inquiry or any competing proposal;

 

    furnish any information regarding such party to any person in connection with, in response to, relating to or for the purpose of assisting with or facilitating an acquisition inquiry or a competing proposal;

 

    approve, endorse or recommend any competing proposal, subject to the terms and conditions in the merger agreement;

 

    execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to any competing proposal; or

 

    grant any waiver or release under any confidentiality, standstill or similar agreement (other than to the other party).

 



 

18


Table of Contents

Termination of the Merger Agreement (see page 169)

Either Threshold or Molecular can terminate the merger agreement under certain circumstances, which would prevent the merger from being consummated.

Termination Fee (see page 169)

The merger agreement provides that, upon termination of the merger agreement under specified circumstances, Threshold may be required to pay Molecular a termination fee of $750,000 and up to $150,000 in expense reimbursements plus certain legal fees and expenses, or Molecular may be required to pay Threshold a termination fee of $750,000 and up to $150,000 in expense reimbursements plus certain fees and expenses.

Support Agreements (see page 173)

In connection with the execution of the merger agreement, officers, directors and certain stockholders of Molecular, who collectively beneficially owned or controlled approximately 97.7% of the voting power of Molecular’s outstanding capital stock on an as-converted to common stock basis as of March 16, 2017 entered into support agreements with Threshold under which such stockholders have agreed to, among other things, vote in favor of the merger and the merger agreement and against any competing transaction.

In connection with the execution of the merger agreement, Threshold’s officers and directors, who collectively beneficially owned or controlled approximately 13.31% of Threshold common stock as of March 16, 2017, also entered into support agreements with Molecular under which such stockholders have agreed to, among other things, vote in favor of Proposal Nos. 1, 4 and 5 and against any competing transaction.

Each stockholder executing a support agreement has made representations and warranties to Threshold or Molecular, as applicable, regarding ownership and unencumbered title to the shares subject to such agreement, such stockholder’s power and authority to execute the support agreement, due execution and enforceability of the support agreement, and ownership and unencumbered title to the shares. Unless otherwise waived, all of these support agreements prohibit the transfer, sale, assignment, gift or other disposition by the stockholder of their respective shares of Threshold or Molecular capital stock, or the entrance into an agreement or commitment to do any of the foregoing, subject to specified exceptions. Each Molecular stockholder executing a support agreement has also waived such stockholder’s statutory appraisal rights in connection with the merger.

The support agreements will terminate at the earlier of the effective time of the merger or the termination of the merger agreement in accordance with its terms.

Lock-Up Agreements (see page 173)

The officers, directors and certain other securityholders of Molecular also entered into lock-up agreements, pursuant to which such securityholders have agreed not to, except in limited circumstances, offer, pledge, sell, contract to sell, sell any option to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, any Molecular securities or shares of Threshold common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, until 180 days after the closing date of the merger.

The Molecular securityholders who have executed lock-up agreements as of March 16, 2017 owned, in the aggregate, approximately 97.7% of the shares of Molecular’s outstanding capital stock on an as-converted to common stock basis.

Threshold’s officers and directors also entered into lock-up agreements, pursuant to which such securityholders have agreed not to, except in limited circumstances, offer, pledge, sell, contract to sell, sell any option to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, any Threshold securities or shares of Threshold common stock, including, as applicable, shares issuable upon exercise of certain warrants and options, until 180 days after the closing date of the merger.

 



 

19


Table of Contents

The Threshold stockholders who have executed lock-up agreements as of March 16, 2017 owned, in the aggregate, approximately 13.31% of the shares of Threshold’s outstanding capital stock on an as-converted to common stock basis.

Bridge Loan (see page 172)

In connection with execution of the merger agreement, Threshold entered into a note purchase agreement and promissory note, or the bridge note, with Molecular pursuant to which Threshold provided Molecular with $2.0 million in principal amount of funding. Threshold may lend an additional $2.0 million to Molecular under such note purchase agreement, at its discretion, but is under no obligation to do so. For a description of the bridge note, please see the section titled “ Agreements Related to the Merger—Bridge Loan ” beginning on page 173 of this proxy statement/prospectus/information statement.

Equity Commitment Letters (see page 174)

Concurrent with the execution of the merger agreement, Threshold and Molecular entered into an equity commitment letter, or the equity commitment letter, with Longitude Venture Partners III, L.P., or Longitude, pursuant to which Longitude agreed to purchase $20.0 million of equity securities from the combined company immediately following the consummation of the merger through a private placement. Subsequent to the execution of the merger agreement, Threshold and Molecular obtained equity commitment letters from additional investors in a form substantially similar to the Longitude equity commitment letter for an additional $20.0 million of equity securities of the combined company, such that the aggregate size of the concurrent financing is expected to be approximately $40.0 million. Such transaction is referred to herein as the concurrent financing. The equity securities proposed to be issued and sold in the concurrent financing would be “units,” with each unit to consist of (i) one share of Threshold common stock, and (ii) a warrant to purchase 0.50 shares of Threshold common stock. The warrants would be exercisable for a period of seven years from the effective date of the merger.

The closing of the merger is not conditioned upon the closing of the concurrent financing; however, the closing of the concurrent financing is conditioned upon the closing of the merger. In addition, the conditions to close the concurrent financing also include: (i) the non-existence of a “Molecular Templates material adverse effect” or a “Threshold material adverse effect” (each as defined in the merger agreement); (ii) for Longitude only, the appointment of David Hirsch, M.D., Ph.D., to the Threshold board of directors immediately following the consummation of the merger; and (iii) the receipt by Threshold of additional equity financing commitments by third parties mutually and reasonably acceptable to Threshold, Molecular and Longitude for the purchase of an additional $20.0 million of units, which minimum condition has been satisfied.

The pricing of the unit, or the per unit price (as defined in the warrant), and the exercise price for the warrants were determined by the parties based on the application of an assumed reverse split ratio of 8.1970-to-1 for the reverse split of Threshold common stock to be implemented by the Threshold board of directors after obtaining stockholder approval of Proposal No. 5. Based on that assumed reverse split ratio, the purchase price per unit would be $5.0625 per unit (with the $0.0625 portion being ascribed to the purchase of the warrant, which is fixed and not subject to adjustment), and the exercise price for the warrant would be $5.00 per share. The equity commitment letter provides that if the actual reverse split ratio implemented by the Threshold board of directors differs from the assumed reverse split ratio, the per unit price and the warrant exercise price will be appropriately adjusted. For example and for illustration purposes only: (i) if the actual reverse split ratio were to be 6.6666-to-1, the per unit price would be adjusted to $4.12906 (reflecting $4.0665 per share (which would also be the adjusted exercise price for the warrant) and $0.0625 per warrant); and (ii) if the actual reverse split ratio were to be 10.0000-to-1, the per unit price would be adjusted to $6.1623 (reflecting $6.0998 per share (which would also be the adjusted exercise price for the warrant) and $0.0625 per warrant).

 



 

20


Table of Contents

There will be no adjustment, however, to the composition of the unit as a result of an actual reverse split ratio that differs from the assumed reverse split ratio (i.e., a unit shall remain one share of Threshold common stock and a warrant to purchase 0.50 shares of Threshold common stock). Accordingly, if Threshold sells $40.0 million of units at the per unit price of $5.0625 per unit (based on the assumed reverse split ratio), Threshold expects to issue and sell units representing an aggregate of approximately 8.0 million shares of Threshold common stock and warrants for the purchase of approximately 4.0 million shares of Threshold common stock with an exercise price of $5.00 per share, in each case on a post-reverse split basis. Using the same hypothetical reverse split ratios above (for illustration purposes only): (1) if the actual reverse split ratio were to be 6.6666-to-1, Threshold would expect to issue and sell units representing an aggregate of 9.84 million shares of Threshold common stock, and warrants for the purchase of 4.92 million shares of Threshold common stock with an exercise price of $4.0665 per share; and (2) if the actual reverse split ratio were to be 10.0000-to-1, Threshold would expect to issue and sell units representing an aggregate of approximately 6.56 million shares of Threshold common stock, and warrants for the purchase of 3.28 million shares of Threshold common stock with an exercise price of $6.0998 per share. The concurrent financing will have a dilutive impact on the Threshold and Molecular securityholders. Assuming the assumed reverse split ratio, then it is anticipated that immediately after the merger and the closing of the concurrent financing, on a fully-diluted basis (excluding the warrants), Molecular securityholders would own approximately     % of the common stock of Threshold and existing Threshold securityholders would own approximately     %. On a fully-diluted basis including the shares underlying the warrants, the percentages decline further to     % and     %. For more information, please see section titled “ Risk Factors—Risks Related to the Merger—While Threshold and Molecular have received commitments for the purchase of $40 million in equity securities of the combined company, consummation of concurrent financing is subject to conditions and is not a condition to closing the merger. If Molecular and Threshold complete the merger, but they do not complete the concurrent financing, then the combined company may need to raise additional capital by issuing securities or debt or through licensing arrangements, which may be on worse commercial terms than the concurrent financing, cause significant dilution to the combined company’s stockholders, restrict the combined company’s operations or require the combined company to relinquish proprietary rights .” beginning on page 35 of this proxy statement/prospectus/information statement.

Threshold and Molecular intend for the combined company to use the proceeds from the concurrent financing for research and development, operations, manufacturing, and general administrative activities, but management will have broad discretion as to the application of its uses. For more information, please see the section titled “ Risk Factors—The combined company will have broad discretion in the use of proceeds from the concurrent financing in connection with the merger 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. ” beginning on page 105 of this proxy statement/prospectus/information statement.

The equity commitment letters call for the investors in the concurrent financing to enter into a Securities Purchase Agreement for the issuance and sale of the units, with the warrant component of the unit to be evidenced by the execution of a warrant, in customary form. In addition, the equity commitment letters call for the combined company to provide certain registration rights to the investors in the concurrent financing, including (i) a commitment to file a registration statement with the SEC within 45 days following the closing of the concurrent financing for purposes of registering the shares of Threshold common stock purchased in the concurrent financing and the shares issuable upon exercise of the warrants for resale by the investor, (ii) use its commercially reasonable efforts to have the registration statement declared effective as soon as practicable after filing, and in any event no later than 120 days after the closing of the concurrent financing, and (iii) maintain the registration until all registrable securities may be sold pursuant to Rule 144 under the Securities Act, without restriction as to volume. Please see the section titled “ Agreements Related to the Merger—Equity Commitment Letters ” beginning on page 174 of this proxy statement/prospectus/information statement.

 



 

21


Table of Contents

The concurrent financing will be accomplished, if at all, in a private placement exempt from registration under Section 4(a)(2) and Regulation D under the Securities Act, and the rules promulgated thereunder. The securities to be sold in the concurrent financing have not been registered under the Securities Act, or any state securities laws, and may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. This proxy statement/prospectus/information statement shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful.

 

Regulatory Approvals (see page 164)

Threshold must comply with applicable federal and state securities laws and the rules and regulations of The NASDAQ Capital Market in connection with the issuance of shares of Threshold common stock and the filing of this proxy statement/prospectus/information statement with the SEC. As of the date hereof, the registration statement on Form S-4 of which this proxy statement/prospectus/information statement is a part has not been declared effective.

Material U.S. Federal Income Tax Consequences of the Merger (see page 144)

Each of Threshold and Molecular intends the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. In general, and subject to the qualifications and limitations set forth in the section titled “ The Merger—Material U.S. Federal Income Tax Consequences of the Merger ” beginning on page 144 of this proxy statement/prospectus/information statement, if the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. holders of Molecular common stock will be as follows:

 

    a Molecular stockholder will not recognize gain or loss upon the exchange of Molecular common stock for Threshold common stock pursuant to the merger, except to the extent of cash received in lieu of a fractional share of Threshold common stock as described below;

 

    a Molecular stockholder who receives cash in lieu of a fractional share of Threshold common stock in the merger will recognize capital gain or loss in an amount equal to the difference between the amount of cash received in lieu of a fractional share and the stockholder’s tax basis allocable to such fractional share;

 

    a Molecular stockholder’s aggregate tax basis for the shares of Threshold common stock received in the merger (including any fractional share interest for which cash is received) will equal the stockholder’s aggregate tax basis in the shares of Molecular common stock surrendered in the merger; and

 

    the holding period of the shares of Threshold common stock received by a Molecular stockholder in the merger will include the holding period of the shares of Molecular common stock surrendered in exchange thereof.

Tax matters are very complicated, and the tax consequences of the merger to a particular Molecular stockholder will depend on such stockholder’s circumstances. Accordingly, you are strongly urged to consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws.

 

NASDAQ Stock Market Listing (see page 166)

Threshold intends to file an initial listing application in the near term for the combined company with The NASDAQ Capital Market. If such application is accepted, Threshold anticipates that the common stock of the

 



 

22


Table of Contents

combined company will be listed on The NASDAQ Capital Market following the closing of the merger under the trading symbol “MTEM.”

 

Anticipated Accounting Treatment (see page 148)

The merger will be treated by Threshold as a reverse merger under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. For accounting purposes, Molecular is considered to be acquiring Threshold in the merger.

 

Appraisal Rights and Dissenters’ Rights (see page 148)

Holders of Threshold common stock are not entitled to appraisal rights in connection with the merger. Holders of Molecular common stock are entitled to appraisal rights in connection with the merger under Delaware law. For more information about such rights, please see the provisions of Section 262 of the DGCL attached as Annex G , and the section titled “ The Merger—Appraisal Rights and Dissenters Rights ” beginning on page 148 of this proxy statement/prospectus/information statement.

 

Comparison of Stockholder Rights (see page 326)

Both Threshold and Molecular are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the merger is completed, Molecular stockholders will become Threshold stockholders, and their rights will be governed by the DGCL, the amended and restated bylaws of Threshold and the amended and restated certificate of incorporation of Threshold, as amended, as may be further amended by Proposal Nos. 4 and 5 if approved by the Threshold stockholders at the Threshold annual meeting. The rights of Threshold stockholders contained in the amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, of Threshold differ from the rights of Molecular stockholders under the amended and restated certificate of incorporation and amended and restated bylaws of Molecular, as more fully described under the section titled “ Comparison of Rights of Holders of Threshold Capital Stock and Molecular Capital Stock ” beginning on page 323 of this proxy statement/prospectus/information statement.

Risk Factors (see page 33)

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

 

    the exchange ratio is not adjustable based on the market price of Threshold common stock so the merger consideration at the closing may have a greater or lesser value than at the time the merger agreement was signed;

 

    failure to complete the merger may result in Threshold or Molecular paying a termination fee to the other party and could harm the common stock price of Threshold and future business and operations of each company;

 

    if the conditions to the merger are not met, the merger may not occur;

 

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

 

   

while Threshold and Molecular have received commitments for the purchase of $40.0 million in equity securities of the combined company, consummation of this financing is subject to conditions and is not

 



 

23


Table of Contents
 

a condition to closing the merger; and if Molecular and Threshold complete the merger, but they do not complete the concurrent financing, then the combined company may need to raise additional capital by issuing securities or debt or through licensing arrangements, which may be on worse commercial terms than the concurrent financing, cause significant dilution to the combined company’s stockholders, restrict the combined company’s operations or require the combined company to relinquish proprietary rights;

 

    certain Threshold and Molecular executive officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests;

 

    the market price of Threshold common stock following the merger may decline as a result of the merger;

 

    Threshold stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger;

 

    if the merger is not completed, Threshold’s stock price may decline significantly;

 

    following the completion of the merger, Molecular and Threshold securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company as compared to their current ownership and voting interest in the respective companies;

 

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

 

    certain provisions of the merger agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement; and

 

    because the lack of a public market for Molecular’s capital stock makes it difficult to evaluate the fairness of the merger, the stockholders of Molecular may receive consideration in the merger that is less than the fair market value of Molecular’s capital stock and/or Threshold may pay more than the fair market value of Molecular’s capital stock.

These risks and other risks are discussed in greater detail under the section titled “ Risk Factors ” beginning on page 33 of this proxy statement/prospectus/information statement. Threshold and Molecular both encourage you to read and consider all of these risks carefully.

 



 

24


Table of Contents

SELECTED HISTORICAL AND UNAUDITED PRO FORMA

COMBINED FINANCIAL INFORMATION AND DATA

The following tables present summary historical financial data for Threshold and Molecular, summary unaudited pro forma condensed combined financial data for Threshold and Molecular, and comparative historical and unaudited pro forma per share data for Threshold and Molecular.

Selected Historical Consolidated Financial Data of Threshold

The selected consolidated statements of operations data for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 and the selected consolidated balance sheet data as of December 31, 2016, 2015, 2014, 2013 and 2012 are derived from Threshold’s audited consolidated financial statements, of which the last three years are included elsewhere in this proxy statement/prospectus/information statement. Threshold’s historical results are not necessarily indicative of the results that may be expected in any future period.

The selected historical consolidated financial data below should be read in conjunction with the sections titled “ Threshold Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” “ Risk Factors—Risks Related to Threshold’s Financial Performance and Operations ” and Threshold’s consolidated financial statements and related notes included elsewhere in this proxy statement/prospectus/information statement.

 

     Years Ended December 31,  
     2016     2015      2014     2013     2012  
     (In thousands, except per share data)  

Revenue

   $ —       $ 76,915      $ 14,722     $ 12,495     $ 5,867  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Research and development (1)

     16,554       40,271        35,832       29,334       18,786  

General and administrative (1)

     7,808       9,716        10,141       9,185       7,080  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     24,362       49,987        45,973       38,519       25,866  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (24,362     26,928        (31,251     (26,024     (19,999

Interest income (expense), net

     147       125        121       136       80  

Other income (expense), net

     121       16,769        9,344       (2,325     (51,216
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (24,094     43,822        (21,786     (28,213     (71,135

Provision (benefit ) for income taxes

     —         —          (202     202       —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (24,094   $ 43,822      $ (21,584   $ (28,415   $ (71,135
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

           

Basic

   $ (0.34   $ 0.62      $ (0.36   $ (0.49   $ (1.31

Diluted

   $ (0.34   $ 0.54      $ (0.49   $ (0.49   $ (1.31
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average number of shares used in net loss per common share calculations:

           

Basic

     71,524       70,242        60,335       57,832       54,219  

Diluted

     71,524       73,483        63,386       57,832       54,219  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Includes employee and non-employee non-cash stock-based compensation of:

           

Research and development

   $ 1,281     $ 4,090      $ 3,123     $ 2,562     $ 1,521  

General and administrative

   $ 1,808     $ 2,711      $ 2,365     $ 2,360     $ 1,489  

 



 

25


Table of Contents
     As of December 31,  
     2016      2015      2014     2013     2012  
     (In thousands)  

Balance Sheet Data:

            

Cash, cash equivalents and marketable securities

   $ 23,551      $ 48,680      $ 58,600     $ 82,033     $ 70,848  

Working capital

     21,558        42,342        40,706       58,993       70,199  

Total assets

     24,283        53,669        68,396       104,118       89,521  

Total liabilities

     4,395        12,823        92,372       127,593       103,374  

Total stockholders’ equity (deficit)

     19,888        40,846        (23,976     (23,475     (13,853

Selected Historical Financial Data of Molecular

The selected statements of operations data for the years ended December 31, 2016 and 2015 and the selected balance sheet data as of December 31, 2016 and 2015 are derived from Molecular’s audited financial statements included elsewhere in this proxy statement/prospectus/information statement. Molecular’s historical results are not necessarily indicative of the results that may be expected in any future period.

The selected historical financial data below should be read in conjunction with the sections titled “ Molecular Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” “ Risk Factors—Risks Related to Molecular’s Financial Condition and Capital Requirements ” and Molecular’s financial statements and related notes included elsewhere in this proxy statement/prospectus/information statement.

 

     Years Ended December 31,  
             2016             2015
        (Restated) (1)          
 
     (In thousands, except per share data)  

Revenue

   $ 1,880     $ 526  
  

 

 

   

 

 

 

Operating expenses:

    

General and administrative

     4,477       2,566  

Research and development

     8,017       3,341  

Loss on disposal of equipment

     5       2  
  

 

 

   

 

 

 

Total operating expenses

     12,499       5,909  
  

 

 

   

 

 

 

Loss from operations

     (10,619     (5,383

Other income, net

     19       24  

Interest expense

     (431     (64

Change in fair value of warrant liabilities

     3       3  
  

 

 

   

 

 

 

Loss before income tax benefit

     (11,028     (5,420

Income tax

     —         —    
  

 

 

   

 

 

 

Net loss

   $ (11,028   $ (5,420

Deemed dividends on preferred stock

     (1,572     (1,572
  

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (12,600   $ (6,992
  

 

 

   

 

 

 

 

(1) Molecular restated certain balances as of and for the year ended December 31, 2015 to give effect to the following correction of errors: (i) to record warrant liabilities issued in 2015 as debt discount, change in fair value of the warrant liabilities, and amortization of debt discount; (ii) to record compensation expense for stock options issued to employees; and (iii) to record a valuation allowance against a deferred tax asset.

 



 

26


Table of Contents
     As of December 31,  
             2016             2015
        (Restated) (1)     
 
     (In thousands)  

Balance Sheet Data:

    

Cash, cash equivalents and marketable securities

   $ 1,716     $ 4,245  

Working capital deficit

     (11,923     (1,184

Total assets

     3,098       4,962  

Total long-term obligations

     3,266       2,342  

Total liabilities

     17,032       7,980  

Total mezzanine equity

     25,871       24,299  

Total stockholders’ deficit

     (39,805     (27,317

 

(1) Molecular restated certain balances as of and for the year ended December 31, 2015 to give effect to the following correction of errors: (i) to record warrant liabilities issued in 2015 as debt discount, change in fair value of the warrant liabilities, and amortization of debt discount; (ii) to record compensation expense for stock options issued to employees; and (iii) to record a valuation allowance against a deferred tax asset.

 



 

27


Table of Contents

Selected Unaudited Pro Forma Condensed Combined Financial Data of Threshold and Molecular

The following selected unaudited pro forma condensed combined financial data is intended to show how the merger might have affected historical financial statements. The unaudited pro forma condensed combined balance sheet as of December 31, 2016 assumes that the merger took place on December 31, 2016 and combines the historical balance sheets of Threshold and Molecular as of December 31, 2016. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2016 assumes that the merger took place as of January 1, 2016 and combines the historical results of Threshold and Molecular for the year ended December 31, 2016. The following should be read in conjunction with the section titled “ Unaudited Pro Forma Condensed Combined Financial Statements ” beginning on page F-48 of this proxy statement/prospectus/information statement, Threshold’s audited financial statements and notes thereto included in the Threshold’s most recent Annual Report on Form 10-K, Molecular’s audited and unaudited historical financial statements and the notes thereto beginning on page F-2, the sections entitled “ Threshold Management’s Discussion and Analysis of Financial Condition and Results of Operations ” beginning on page 276 and “ Molecular Management’s Discussion and Analysis of Financial Condition and Results of Operations ” beginning on page 292 of this proxy statement/prospectus/information statement. The following information does not give effect to the proposed reverse stock split of Threshold common stock described in Proposal No. 5.

The unaudited pro forma condensed combined financial statements were prepared in accordance with the regulations of the SEC. The pro forma adjustments reflecting the completion of the merger are based upon the application of the acquisition method of accounting in accordance with GAAP and upon the assumptions set forth in the unaudited pro forma condensed combined financial statements.

The historical financial data has been adjusted to give pro forma effect to events that are (1) directly attributable to the merger, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments are preliminary and based on management’s estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the acquisition and certain other adjustments.

The unaudited pro forma condensed combined financial data is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been combined during the periods presented. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma condensed combined financial statements (see the section entitled “ Unaudited Pro Forma Condensed Combined Financial Statements ” beginning on page F-48 of this proxy statement/prospectus/information statement), the preliminary acquisition-date fair value of the identifiable assets acquired and liabilities assumed reflected in the unaudited pro forma condensed combined financial statements is subject to adjustment and may vary from the actual amounts that will be recorded upon completion of the merger. Further, the unaudited pro forma condensed combined financial statements also include the potential effect of the concurrent financing of $40.0 million, less estimates of related transaction costs and fees, which is subject to certain conditions including the successful completion of the merger. The closing of the merger is not contingent upon the completion of the concurrent financing.

 



 

28


Table of Contents

Selected Unaudited Pro Forma Condensed Combined Statement of Operations Data

December 31, 2016

(in thousands)

 

     Pro Forma
Combined
    Pro Forma
Combined
Including
Concurrent

Financing
 

Unaudited Pro Forma Condensed Combined Statements of Operations Data:

    

Revenues

   $ 1,880     $ 1,880  

Operating expenses:

    

Research and development

     24,571       24,571  

General and administrative

     13,261       13,261  

Loss on disposal of equipment

     5       5  
  

 

 

   

 

 

 

Total operating expenses

     37,837       37,837  

Net loss

   $ (35,901   $ (35,901

Basic and diluted net loss per share

   $ (0.17   $ (0.13

Selected Unaudited Pro Forma Condensed Combined Balance Sheet Data

December 31, 2016

(in thousands)

 

     Pro Forma
Combined
    Pro Forma
Combined
Including
Concurrent

Financing
 

Unaudited Pro Forma Condensed Combined Balance Sheet Data:

    

Cash, cash equivalents and marketable securities

   $ 25,185     $ 63,185  

Working capital

     10,680       48,680  

Total assets

     41,178       79,178  

Long term obligations and warrant liabilities

     4,161       4,161  

Accumulated Deficit

     (45,419     (45,419

Stockholders’ equity

     21,726       59,726  

 



 

29


Table of Contents

Comparative Historical and Unaudited Pro Forma Per Share Data

Unless otherwise indicated, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split described in Proposal No. 5 of this proxy statement/prospectus/information statement.

The information below reflects the historical net loss and book value per share of Threshold common stock and the historical net loss and book value per share of Molecular common stock in comparison with the unaudited pro forma net loss and book value per share after giving effect to the merger of Threshold with Molecular on a pro forma basis (excluding the concurrent financing). You should read the tables below in conjunction with the audited financial statements of Threshold, the audited financial statements of Molecular, the unaudited pro forma condensed combined financial information and the notes related to such financial statements included elsewhere in this proxy statement/prospectus/information statement.

 

     Year Ended
December 31,
2016
 

Threshold Historical Per Common Share Data:

  

Basic and diluted net loss per share

   $ (0.34

Book value per share

     0.27  

Molecular Historical Per Common Share Data:

  

Basic and diluted net loss per share

   $ (41.81

Book value per share

     (132.06

Combined Company Pro Forma Per Common Share Data:

  

Basic and diluted net loss per share

   $ (0.17

Book value per share

     N/A  

 



 

30


Table of Contents

MARKET PRICE AND DIVIDEND INFORMATION

Threshold common stock is listed on The NASDAQ Capital Market under the symbol “THLD.” The following table presents, for the periods indicated, the range of high and low per share sales prices for Threshold common stock as reported on The NASDAQ Capital Market for each of the periods set forth below. Molecular is a private company and its common stock and preferred stock are not publicly traded. These per share sales prices have not been adjusted to give effect to the proposed reverse stock split of Threshold common stock described in Proposal No. 5 of this proxy statement/prospectus/information statement.

 

Threshold Common Stock

 

     High      Low  

2015:

     

First Quarter

   $ 4.69      $ 3.22  

Second Quarter

   $ 4.62      $ 3.29  

Third Quarter

   $ 5.28      $ 3.54  

Fourth Quarter

   $ 4.44      $ 0.45  

2016:

     

First Quarter

   $ 0.62      $ 0.21  

Second Quarter

   $ 0.77      $ 0.30  

Third Quarter

   $ 1.48      $ 0.46  

Fourth Quarter

   $ 0.68      $ 0.35  

2017:

     

First Quarter

   $ 0.72      $ 0.47  

Second Quarter (through May 11, 2017)

   $ 0.56      $ 0.45  

The closing price of Threshold common stock on March 16, 2017, the last trading day prior to the public announcement of the merger, was $0.61 per share and the closing price of Threshold common stock on May 11, 2017 was $0.49 per share, in each case as reported on The NASDAQ Capital Market.

Because the market price of Threshold common stock is subject to fluctuation, the market value of the shares of Threshold common stock that Molecular stockholders will be entitled to receive in the merger may increase or decrease.

Assuming approval of Proposal No. 4 and successful application for initial listing with The NASDAQ Capital Market, following the completion of the merger, the common stock of the combined company will be listed on The NASDAQ Capital Market and will trade under Threshold’s new name, “Molecular Templates, Inc.,” and new trading symbol, “MTEM.”

As of         , 2017 Threshold had      holders of record of its common stock. For detailed information regarding the beneficial ownership of some stockholders of Threshold and Molecular, please see the section titled “ Principal Stockholders of Threshold ” beginning on page 332 and the section titled “ Principal Stockholders of Molecular ” beginning on page 336 of this proxy statement/prospectus/information statement.

 

Dividends

Threshold has never paid or declared any cash dividends on its common stock and does not anticipate paying cash dividends on its common stock for the foreseeable future. Notwithstanding the foregoing, any determination to pay cash dividends subsequent to the merger will be at the discretion of the combined

 



 

31


Table of Contents

company’s then-current board of directors and will depend upon a number of factors, including the combined company’s results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the then-current board of directors deems relevant.

Molecular has never paid or declared any cash dividends on its common or preferred stock. If the merger does not occur, Molecular does not anticipate paying any cash dividends on its common or preferred stock in the foreseeable future, except as may be required under its amended and restated certificate of incorporation, and Molecular intends to retain all available funds and any future earnings to fund the development and expansion of its business. Any future determination to pay dividends will be at the discretion of Molecular’s board of directors, subject to the requirements of Molecular’s amended and restated certificate of incorporation, and will depend upon a number of factors, including its results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors Molecular’s then-current board of directors deems relevant.

 



 

32


Table of Contents

RISK FACTORS

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below before deciding how to vote your shares of stock. You should also read and consider the other information in this proxy statement/prospectus/information statement and additional information about Threshold set forth in its Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC. Please see the section titled “Where You Can Find More Information” beginning on page 341 of this proxy statement/prospectus/information statement.

Risks Related to the Merger

The exchange ratio is not adjustable based on the market price of Threshold common stock so the merger consideration at the closing may have a greater or lesser value than at the time the merger agreement was signed.

At the effective time of the merger, outstanding shares of Molecular common stock (excluding shares held by Threshold, Molecular or Merger Sub and dissenting shares, and after giving effect to the purchase or conversion rights of Molecular’s preferred stockholders, warrant holders and noteholders) will be converted into shares of Threshold common stock. Applying the exchange ratio, the former Molecular securityholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following the merger, and the Threshold stockholders immediately before the merger are expected to own approximately     % of the aggregate number of shares of Threshold common stock following the merger, in each case without giving effect to the issuance of shares of Threshold common stock in the concurrent financing and excluding, in each case, out-of-the-money securities. These estimates are subject to adjustment prior to closing of the merger, including an upward adjustment to the extent that Threshold’s net cash at the effective time of the merger is less than $12,500,000 (and as a result, Threshold securityholders could own less, and Molecular securityholders could own more, of the combined company), or a downward adjustment to the extent that Threshold’s net cash at the effective time of the merger is more than $17,500,000 (and as a result, Threshold securityholders could own more, and Molecular securityholders could own less, of the combined company).

Any changes in the market price of Threshold common stock before the completion of the merger will not affect the number of shares Molecular securityholders will be entitled to receive pursuant to the merger agreement. Therefore, if before the completion of the merger the market price of Threshold common stock declines from the market price on the date of the merger agreement, then Molecular securityholders could receive merger consideration with substantially lower value. Similarly, if before the completion of the merger the market price of Threshold common stock increases from the market price on the date of the merger agreement, then Molecular securityholders could receive merger consideration with substantially more value for their shares of Molecular capital stock than the parties had negotiated for in the establishment of the exchange ratio. The merger agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the value of Threshold common stock, for each one percentage point that the market value of Threshold common stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration issued to Molecular securityholders.

Failure to complete the merger may result in Threshold or Molecular paying a termination fee to the other party and could harm the common stock price of Threshold and future business and operations of each company.

If the merger is not completed, Threshold and Molecular are subject to the following risks:

 

    if the merger agreement is terminated under specified circumstances, Threshold or Molecular will be required to pay the other party a termination fee of $750,000 and up to $150,000 in expense reimbursements;

 

33


Table of Contents
    the price of Threshold common stock may decline and remain volatile; and

 

    costs related to the merger, such as financial advisor, legal and accounting fees, which Threshold and Molecular estimate will total approximately $2.1 million and $1.4 million, respectively, some of which must be paid even if the merger is not completed.

In addition, if the merger is not consummated and Molecular were to be unable to repay the $2.0 million bridge loan Threshold made to Molecular in connection with the execution of the merger agreement, Threshold would be an unsecured creditor of Molecular. Threshold’s bridge loan is effectively subordinated to Molecular’s secured debt.

If the merger agreement is terminated and the board of directors of Threshold or Molecular determines to seek another business combination, there can be no assurance that either Threshold or Molecular will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger.

If the conditions to the merger are not met, the merger may not occur.

Even if the merger is approved by the stockholders of Molecular and the related share issuance is approved by the Threshold stockholders, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the merger agreement and described in the section titled “ The Merger Agreement—Conditions to the Completion of the Merger ” beginning on page 167 of this proxy statement/prospectus/information statement. Threshold and Molecular cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger may not occur or will be delayed, and Threshold and Molecular each may lose some or all of the intended benefits of the merger.

The completion of the merger is not conditioned upon Threshold holding a minimum amount of net cash at the effective time of the merger.

While the merger agreement provides that the exchange ratio may be adjusted upward or downward depending on variations in Threshold’s net cash determined shortly prior to the closing of the merger, the merger agreement does not condition the completion of the merger upon Threshold’s holding a minimum amount of net cash at the effective time of the merger. If Threshold has less cash at the time of the merger than the parties currently expect, the combined company will need to raise substantial additional capital sooner than expected. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on the financial condition of the combined company and its ability to develop product candidates. If the combined company is unable to obtain funding on a timely basis, it may be required to delay or discontinue one or more of its development programs or the commercialization of any product candidates or be unable to expand its operations or otherwise capitalize on potential business opportunities, which could materially harm its business, financial condition, and results of operations.

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

In general, either Threshold or Molecular can refuse to complete the merger if there is a material adverse change affecting the other party between March 16, 2017, the date of the merger agreement, and the closing of the merger. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on Threshold or Molecular, including:

 

    any effect, change, event, circumstance or development in the conditions generally affecting the industries in which Molecular and Threshold operate or the U.S. or global economy or capital markets as a whole to the extent that such conditions do not have disproportionate impact on Molecular or Threshold, as the case may be;

 

34


Table of Contents
    any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation of worsening thereof;

 

    any change in accounting requirements or principles or any change in applicable laws, rules or regulations or the interpretation thereof;

 

    any effect resulting from the execution, delivery, announcement or performance of the parties’ obligations under the merger agreement or the announcement, pendency or anticipated consummation of the merger;

 

    any failure by Threshold or Molecular to meet internal projections or forecasts or third-party revenue or earnings predictions;

 

    with respect to Threshold, any change in the price or trading volume of Threshold common stock;

 

    any rejection by a governmental body of a registration or filing by Molecular or Threshold relating to specified intellectual property rights;

 

    any change in the cash position of Molecular or Threshold which results from operations in the ordinary course of business;

 

    the resignation of a key director or officer of Threshold or Molecular; or

 

    any sale, transfer, license, assignment or other divestiture of specified potentially transferable assets of Threshold for fair market value to a nonaffiliated third party in a bona fide arm’s length transaction.

If adverse changes occur and Threshold and Molecular still complete the merger, the stock price of the combined company may suffer. This in turn may reduce the value of the merger to the stockholders of Threshold, Molecular or both.

While Threshold and Molecular have received commitments for the purchase of $40.0 million in equity securities of the combined company, consummation of the concurrent financing is subject to conditions and is not a condition to closing the merger. If Molecular and Threshold complete the merger, but they do not complete the concurrent financing, then the combined company may need to raise additional capital by issuing securities or debt or through licensing arrangements, which may be on worse commercial terms than the concurrent financing, cause significant dilution to the combined company’s stockholders, restrict the combined company’s operations or require the combined company to relinquish proprietary rights.

Threshold and Molecular have received from Longitude Venture Partners III, L.P., or Longitude, an equity commitment letter, pursuant to which, immediately following the closing of the merger, Longitude will purchase $20.0 million of equity securities in the combined company. Longitude’s investment is subject to certain conditions, including the closing of the merger and the parties’ having secured commitments from additional investors for the purchase of an additional $20.0 million of such securities, which minimum condition has been satisfied. The closing of the merger is not contingent upon the completion of this financing. Holders of equity in the combined company immediately following the merger will experience significant dilution as a result of the closing of the concurrent financing, which, assuming the conditions to the closing of the concurrent financing are satisfied, will take place immediately following the completion of the merger. Since the concurrent financing is subject to conditions and is not a condition to the merger, Molecular and Threshold may complete the merger but not the concurrent financing. If this were to occur, the combined company would have substantially less funds than Molecular and Threshold currently anticipate and may be required to raise additional funds sooner than currently planned.

Additional financing may not be available to the combined company when it needs it or may not be available on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, the terms of such an issuance may be on worse commercial terms than the concurrent financing and may cause more significant dilution to the combined company’s stockholders’ ownership, and the terms of any new equity securities may have preferences over the combined company’s common stock. Any debt financing

 

35


Table of Contents

the combined company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the combined company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the combined company raises additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to current product candidates and potential products or proprietary technologies, or grant licenses on terms that are not favorable to the combined company.

Some Threshold and Molecular executive officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests.

Some officers and directors of Threshold and Molecular participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, the continued service as an officer or director of the combined company, severance and retention benefits, the acceleration of stock option or restricted stock vesting, the ability to require Threshold to repurchase certain warrants, payment of deferred and current year incentive compensation, continued indemnification and the potential ability to sell an increased number of shares of common stock of the combined company in accordance with Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. For example, in connection with Threshold’s employment of its executive officers, Threshold entered into customary severance agreements with its executive officers that provide them with cash severance payments, reimbursement for health coverage costs and the acceleration of their outstanding equity awards by 24 months in the event their employment is terminated without cause in connection with or following a change of control of Threshold. Based on the terms of these employment agreements, Threshold’s executive officers are contractually entitled to these severance payments, benefits and accelerated vesting because they will be terminated in connection with the consummation of the merger.

Based on the terms of their respective severance agreements, Threshold’s executive officers will be entitled to receive an aggregate total value of approximately $1.4 million in severance benefits due to the terminations of their employment upon a change of control to occur in connection with the consummation of the merger. These interests, among others, may influence the officers and directors of Threshold to support or approve the merger.

For more information regarding the interests of the Threshold and Molecular executive officers and directors in the merger, please see the sections titled “ The Merger—Interests of the Threshold Directors and Executive Officers in the Merger ” beginning on page 131 and “ The Merger—Interests of the Molecular Directors and Executive Officers in the Merger ” beginning on page 138 of this proxy statement/prospectus/information statement.

The market price of Threshold common stock following the merger may decline as a result of the merger.

The market price of Threshold common stock may decline as a result of the merger for a number of reasons, including if:

 

    investors react negatively to the prospects of the combined company’s business and prospects from the merger;

 

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

 

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

 

36


Table of Contents

Threshold stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the merger, Threshold stockholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the merger. Threshold stockholders will experience further dilution upon the closing of the concurrent financing, which is expected to occur immediately following the closing of the merger.

If the merger is not completed, Threshold’s stock price may decline significantly.

The market price of Threshold common stock is subject to significant fluctuations. During the 12-month period ended December 31, 2016, the closing sales price of Threshold common stock on The NASDAQ Capital Market ranged from a high of $1.22 in September 2016 to a low of $0.27 in February 2016. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. In addition, the market price of Threshold common stock will likely be volatile based on whether stockholders and investors believe that Threshold can complete the merger or otherwise raise additional capital to support Threshold’s operations if the merger is not consummated and another strategic transaction cannot be identified, negotiated and consummated in a timely manner, if at all. The volatility of the market price of Threshold common stock is exacerbated by low trading volume. Additional factors that may cause the market price of Threshold common stock to fluctuate include:

 

    the initiation of, material developments in, or conclusion of litigation to enforce or defend its intellectual property rights or defend against the intellectual property rights of others;

 

    the entry into any in-licensing agreements securing licenses, patents or development rights;

 

    the entry into, or termination of, key agreements, including commercial partner agreements;

 

    announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

    adverse publicity relating to antibody-based drug candidates, including with respect to other products and potential products in such markets;

 

    the introduction of technological innovations or new therapies that compete with its potential products;

 

    the loss of key employees;

 

    future sales of its common stock;

 

    general and industry-specific economic conditions that may affect its research and development expenditures; and

 

    period-to-period fluctuations in financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of Threshold common stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against Threshold. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm Threshold’s profitability and reputation.

 

37


Table of Contents

Molecular and Threshold securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the completion of the merger as compared to their current ownership and voting interests in the respective companies.

After the completion of the merger, the current stockholders of Molecular and Threshold will own a smaller percentage of the combined company than their ownership of their respective companies prior to the merger. Immediately after the merger but before taking into account the concurrent financing, Molecular securityholders will own approximately     % of the fully-diluted common stock of Threshold, with Threshold securityholders, whose shares of Threshold common stock will remain outstanding after the merger, owning approximately     % of the fully-diluted common stock of the combined company, in each case without giving effect to the issuance of shares of Threshold common stock in the concurrent financing and excluding, in each case, out-of-the-money securities. These estimates are based on the anticipated exchange ratio and are subject to adjustment.

During the pendency of the merger, Threshold and Molecular may not be able to enter into a business combination with another party on favorable terms because of restrictions in the merger agreement, which could adversely affect their respective businesses.

Covenants in the merger agreement impede the ability of Threshold and Molecular to make acquisitions, subject to specified exceptions relating to fiduciary duties or complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the merger agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into specified extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party, subject to specified exceptions. Any such transactions could be favorable to such party’s stockholders.

Certain provisions of the merger agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement.

The terms of the merger agreement prohibit each of Threshold and Molecular from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith, after consultation with its independent financial advisor, if any, and outside counsel, that an unsolicited competing proposal constitutes, or would reasonably be expected to result in, a superior competing proposal and that failure to take such action would be reasonably likely to result in a breach of the fiduciary duties of the board of directors. In addition, if Threshold or Molecular terminates the merger agreement under specified circumstances, including terminating because of a decision of a board of directors to recommend a superior competing proposal, Threshold or Molecular would be required to pay a termination fee of $750,000 and reimburse up to $150,000 of the other party’s non-legal third-party expenses as well as all of its legal third-party expenses associated with preparing this Registration Statement on Form S-4. This termination fee may discourage third parties from submitting competing proposals to Threshold or Molecular or their stockholders, and may cause the respective boards of directors to be less inclined to recommend a competing proposal.

Because the lack of a public market for Molecular’s capital stock makes it difficult to evaluate the fair market value of Molecular’s capital stock, the stockholders of Molecular may receive consideration in the merger that is less than the fair market value of Molecular’s capital stock and/or Threshold may pay more than the fair market value of Molecular’s capital stock.

The outstanding capital stock of Molecular is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Molecular’s capital stock. Because the percentage of Threshold equity to be issued to Molecular stockholders was determined based on negotiations between the parties, it is possible that the value of the Threshold common stock to be received by Molecular stockholders will be less than the fair market value of Molecular’s capital stock, or Threshold may pay more than the aggregate fair market value for Molecular’s capital stock.

 

38


Table of Contents

Threshold’s severance agreements with Threshold’s executive officers and certain other employees require Threshold to pay severance benefits to any of those persons who are terminated under specified circumstances, including in connection with a change of control of Threshold, which could harm Threshold’s financial condition or results.

Threshold’s executive officers and certain other employees are parties to severance agreements that contain change of control and severance provisions providing for severance and other benefits and acceleration of vesting of stock options in the event of a termination of employment under specified circumstances. Based on the terms of their respective severance agreements, Threshold’s executive officers will be entitled to receive an aggregate total value of approximately $1.4 million in severance benefits due to the terminations of their employment upon a change of control to occur in connection with the consummation of the merger. The payment of these severance benefits could harm Threshold’s financial condition and results and reduce the cash available to the combined company following the merger.

Risks Related to Threshold’s Business

The Merger may not be consummated or may not deliver the anticipated benefits Threshold expects.

On March 16, 2017, Threshold entered into the merger agreement with Molecular pursuant to which the securityholders of Molecular will become the majority owners of Threshold common stock. In addition, the proposed concurrent financing is subject to certain conditions, including the closing of the merger. The merger, however, is not conditioned upon the closing of the concurrent financing. Threshold is devoting substantially all of Threshold’s time and resources to consummating the merger and the concurrent financing; however, there can be no assurance that such activities will result in the consummation of the merger and the concurrent financing or that such transaction will deliver the anticipated benefits or enhance stockholder value. Threshold cannot assure you that Threshold will complete the merger in a timely manner or at all. The merger agreement is subject to many closing conditions and termination rights. If the merger does not occur, Threshold’s board of directors may elect to attempt to complete another strategic transaction similar to the merger and the concurrent financing. Attempting to complete another similar strategic transaction will be costly and time-consuming, and Threshold cannot make any assurances that a future strategic transaction will occur on terms that provide the same or greater opportunity for potential value to Threshold’s stockholders, or at all. If Threshold is unable to close another strategic transaction and unable to successfully obtain funding for the continued development of evofosfamide and/or partner TX-3424 or HX4, Threshold’s board of directors may determine to sell or otherwise dispose of Threshold’s various assets, and distribute any remaining cash proceeds to Threshold’s stockholders. In that event, Threshold would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, so Threshold can provide no assurances as to the amount or timing of available cash remaining to distribute to stockholders after paying its obligations and setting aside funds for reserves.

Prior to September 2016, Threshold’s business was almost entirely dependent on the success of evofosfamide and tarloxotinib, and Threshold has suspended further clinical development of tarloxotinib.

Prior to September 2016, Threshold invested substantially all of Threshold’s efforts and financial resources in the research and development of evofosfamide and tarloxotinib. In December 2015, Threshold announced topline results from two pivotal Phase III clinical trials of evofosfamide: TH-CR-406 conducted by Threshold in patients with soft tissue sarcoma, or the 406 trial, and MAESTRO conducted by Merck KGaA, Darmstadt, Germany, or Merck KGaA, in patients with advanced pancreatic cancer; and that neither trial met its primary endpoint of demonstrating a statistically significant improvement in overall survival. In September 2016, Threshold announced that its Phase II proof-of-concept trial evaluating tarloxotinib bromide for the treatment of patients with mutant EGFR-positive, T790M-negative advanced non-small cell lung cancer, or NSCLC, progressing on an EGFR tyrosine kinase inhibitor (TH-CR-601) did not achieve its primary interim response rate endpoint. Threshold is conducting only limited evofosfamide development activities and has suspended all further development of tarloxotinib.

 

39


Table of Contents

If Threshold is unable to consummate the merger with Molecular, there can be no assurance that Threshold will conduct drug development activities in the future. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To date, Threshold has focused substantially all of Threshold’s efforts on Threshold’s research and development activities on Threshold’s lead product candidate, evofosfamide. To date, Threshold has not commercialized any products or generated any revenue from product sales. Threshold is not profitable and has incurred losses in each year since Threshold’s inception in 2001, and Threshold does not know whether or when Threshold will become profitable. Threshold has only a limited operating history upon which to evaluate Threshold’s business and prospects. Threshold continues to incur significant development and other expenses related to Threshold’s ongoing operations. Threshold’s net loss for the year ended December 31, 2016 was $24.1 million and as of December 31, 2016, Threshold had an accumulated deficit of $353.5 million. To date, Threshold has financed Threshold’s operations primarily through the sale of equity securities and debt facilities. The amount of Threshold’s future net losses will depend, in part, on the rate of Threshold’s future expenditures and Threshold’s ability to obtain funding through equity and/or debt financings and strategic collaborations. It will be several years, if ever, before evofosfamide is ready for commercialization.

Threshold’s history of net losses and Threshold’s expectation of future losses, together with Threshold’s limited operating history, make it difficult to evaluate Threshold’s current business and predict Threshold’s future performance. In addition, the net losses Threshold incurs may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of Threshold’s results of operations may not be a good indication of Threshold’s future performance. In any particular quarter or quarters, Threshold’s operating results could be below the expectations of securities analysts or investors, which could cause Threshold’s stock price to decline.

Threshold may not be able to complete the merger, and Threshold may not have sufficient funds to pursue another strategic transaction similar to the merger.

Threshold cannot be sure that Threshold will be able to complete the merger in a timely manner, or at all. The merger agreement is subject to many closing conditions and termination rights.

If the merger is not consummated, Threshold may require substantial additional funding to operate.

Threshold’s future capital requirements will depend on many factors, including:

 

    Threshold’s ability to identify and consummate a new strategic transaction;

 

    the timing and nature of any new strategic transactions that Threshold undertakes, including, but not limited to potential joint developments or partnerships;

 

    whether, as a result of Threshold’s strategic and financial review with a financial advisor, Threshold enters into a new partnership or business combination;

 

    the time and cost necessary to obtain regulatory approvals for evofosfamide;

 

    Threshold’s ability to successfully commercialize evofosfamide;

 

    Threshold’s ability to establish and maintain collaboration partnerships, in-license/out-license or other similar arrangements and the financial terms of such agreements;

 

    the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of evofosfamide or any other future product candidates; and

 

    the cost incurred in responding to disruptive actions by activist stockholders.

 

40


Table of Contents

Until such time, if ever, as Threshold can generate substantial revenue, Threshold would need to finance Threshold’s cash needs through a combination of equity offerings, debt financings, government or other third-party funding and licensing or collaboration arrangements. To the extent that Threshold raises additional capital through the sale of equity or convertible debt securities, the ownership interests of Threshold’s common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of Threshold’s common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting Threshold’s ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If Threshold raises additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, Threshold may have to relinquish valuable rights to Threshold’s technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to Threshold.

Additional funds may not be available when Threshold needs them on terms that are acceptable to Threshold, or at all. If adequate funds are not available to Threshold on a timely basis, Threshold may be required to curtail Threshold’s operations.

If Threshold does not successfully consummate the merger, Threshold’s board of directors may decide to pursue a dissolution and liquidation of Threshold. In such an event, the amount of cash available for distribution to Threshold’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that Threshold can successfully consummate the merger. If the transaction is not completed, Threshold’s board of directors may decide to pursue a dissolution and liquidation of Threshold. In such an event, the amount of cash available for distribution to Threshold’s stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, because the amount of cash available for distribution continues to decrease as Threshold funds its operations. Further, the merger agreement with Molecular contains certain termination rights for each party, and provides that, upon termination under specified circumstances, Threshold may be required to pay Molecular a termination fee of $750,000 and to reimburse certain fees and expenses incurred by Molecular, which would further decrease Threshold’s available cash resources. If Threshold’s board of directors were to approve and recommend, and Threshold’s stockholders were to approve, a dissolution and liquidation of Threshold, Threshold would be required under Delaware corporate law to pay Threshold’s outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Threshold’s stockholders. Threshold’s commitments and contingent liabilities may include (i) regulatory and clinical obligations remaining under Threshold’s evofosfamide trial; (ii) obligations under Threshold’s employment and separation agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of Threshold; and (iii) potential litigation against Threshold, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of Threshold’s assets may need to be reserved pending the resolution of such obligations. In addition, Threshold may be subject to litigation or other claims related to a dissolution and liquidation of Threshold. If a dissolution and liquidation were pursued, Threshold’s board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Threshold common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Threshold.

If the merger is not completed, Threshold would need to raise significant capital to support Threshold’s operations, including continued development of Threshold’s existing drug candidate, or to acquire and develop other products or product candidates.

Given the limited development of evofosfamide, Threshold’s limited cash resources, and the additional capital and resources that would be required to pursue such development if the merger is not completed,

 

41


Table of Contents

Threshold could be required to rely on securing a collaborative or strategic arrangement for evofosfamide to support Threshold’s operations and Threshold’s future development and clinical trial costs. Due to Threshold’s history, limited cash resources, limited operational and management capabilities and the intense competition for pharmaceutical product candidates, even if Threshold generates interest in a collaborative or strategic arrangement to support the further development of evofosfamide, Threshold may not be able to enter into a final agreement on commercially reasonable terms, on a timely basis or at all. Proposing, negotiating and implementing an economically viable collaborative or strategic arrangement is a lengthy and complex process. As of December 31, 2016, Threshold had cash and cash equivalents totaling $23.6 million. Threshold believes that its current cash and cash equivalents will only be sufficient to fund its operations through next 12 months. Threshold competes for collaborative arrangements and license agreements with the drug candidates and technology developed by other pharmaceutical and biotechnology companies and academic research institutions. Threshold’s competitors may have stronger relationships with third parties with whom they may be interested in collaborating, or which have greater financial, development and commercialization resources and/or more established histories of developing and commercializing products than Threshold. As a result, competitors may have a competitive advantage over Threshold in entering into collaborative arrangements with such third parties. In addition, even if Threshold enters into a collaborative or strategic arrangement, the arrangement may not provide Threshold with sufficient funds to support its operations, and there is no assurance that its drug candidates would satisfy the development and/or clinical milestones established in the collaborative or strategic arrangement. Further, any drug candidate Threshold pursues will require additional development and regulatory efforts prior to commercial sale, including extensive clinical testing and approval by the U.S. Food and Drug Administration, or FDA, and other non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities and the possibility that, due to strategic considerations, Threshold will discontinue research or development with respect to a product candidate for which it has already incurred significant expense. Even if the product candidates are approved, Threshold cannot be sure that they would be capable of economically feasible production or commercial success.

Threshold is substantially dependent on Threshold’s remaining employees to facilitate the consummation of the merger.

Threshold’s ability to successfully complete the merger depends in large part on Threshold’s ability to retain Threshold’s remaining personnel, particularly Wilfred E. Jaeger, M.D., Threshold’s Interim Chief Executive Officer, Kristen Quigley, Threshold’s Vice President of Clinical Operations, and Joel Fernandes, Threshold’s Senior Vice President of Finance. However, despite Threshold’s efforts to retain these members of Threshold’s management, one or more may terminate their employment with Threshold on short notice. The loss of the services of any of these employees could potentially harm Threshold’s ability to consummate the merger, as well as fulfill Threshold’s reporting obligations as a public company.

Risks Related to Drug Discovery, Development and Commercialization

Threshold remains dependent upon the success of evofosfamide. If Threshold is unable to successfully develop and obtain regulatory approval for evofosfamide, Threshold’s business and future prospects will be severely harmed.

Threshold has focused Threshold’s development activities on evofosfamide, and substantially all of Threshold’s efforts and expenditures continue to be devoted to evofosfamide. Accordingly, Threshold’s future prospects are dependent on the successful development, regulatory approval and commercialization of evofosfamide. On June 2, 2016, Threshold received preliminary comments from the FDA relating to Threshold’s request for a meeting indicating that Threshold’s analysis of the data from the MAESTRO study and the data from a supporting randomized Phase II study would not provide adequate efficacy data to support the submission of a new drug application, or NDA, for evofosfamide for the treatment of patients with locally advanced

 

42


Table of Contents

unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy. Accordingly, Threshold would be required to successfully conduct one or more additional Phase III clinical trials before the FDA would accept any NDA for evofosfamide. Threshold’s inability to submit an NDA to the FDA for evofosfamide in the absence of additional Phase III development has significantly harmed Threshold’s business and future prospects. Threshold has conducted additional analyses of the data from MAESTRO trial and has reviewed and discussed the results of Threshold’s analyses with the PMDA in Japan, to determine potential registration pathways. However, in March 2017, Threshold received minutes from its formal meeting with the PMDA in Japan indicating that its analysis of the data from the MAESTRO trial and the data from the supporting randomized Phase II study would not provide adequate efficacy data to support the submission of a New Drug Application, or JNDA, to the PDMA for evofosfamide for the treatment of patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy. While Threshold is currently in discussions with the PMDA to clarify the scope of a new clinical trial for which the PMDA would consider necessary to accept a JNDA for evofosfamide in Japan based on the previous results observed in the Japanese sub-population in the MAESTRO trial, Threshold would be required to obtain additional capital in order to conduct any such new clinical trial, and there can be no assurances that Threshold would be successful in obtaining the additional funding, whether through new collaborative, partnering or other strategic arrangements or otherwise, necessary to support any additional clinical development of evofosfamide. Threshold’s current evofosfamide development strategy is limited to the Phase I clinical trial of evofosfamide in combination with immune checkpoint antibodies in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center, and Threshold does not expect to conduct any further development of evofosfamide beyond the Phase I clinical trial unless such development is part of a new collaborative or partnering arrangement or other strategic transaction or Threshold is otherwise able to raise significant additional funding.

In any event, the process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. Changes statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of evofosfamide. Any regulatory approval Threshold may ultimately obtain, from the PMDA or otherwise, may be limited in scope, subject to restrictions or post-approval commitments that render evofosfamide or potential future product candidates not commercially viable. In particular, even if Threshold is able to obtain and maintain regulatory approval of evofosfamide in Japan, the commercial prospects for evofosfamide could be diminished as a result of the more limited patient population in Japan. If any regulatory approval that Threshold does obtain, including from the PMDA, is delayed or is limited, Threshold may decide not to commercialize the applicable product candidate after receiving the approval. In addition, in March 2016, Threshold and Merck KGaA agreed to terminate Threshold’s collaboration and, as a result, Threshold will not receive any clinical development milestones or any other funding from Merck KGaA for the purpose of conducting any further clinical development of evofosfamide. Under Threshold’s former collaboration with Merck KGaA, Merck KGaA was responsible for 70% of the worldwide development expenses for evofosfamide. If Threshold is unable to obtain sufficient additional funding for the further development of evofosfamide, whether through new collaborative, partnering or other strategic arrangements or otherwise, Threshold may be required to cease further development of Threshold’s evofosfamide program. Also, issues with the successful and timely transfer of evofosfamide development activities from Merck KGaA could significantly impact Threshold’s ability to pursue registration with regulatory authorities and potential partners, and there can be no assurance that such development activities will be successfully transferred to Threshold in a timely manner or at all. For these and other reasons, Threshold cannot assure you that Threshold will be able to advance the development of evofosfamide. In such event, Threshold may be required to abandon the development of evofosfamide and forego any return on Threshold’s investment from Threshold’s evofosfamide program, which would severely harm Threshold’s future prospects and may cause Threshold to cease operations.

 

 

43


Table of Contents

Even if Threshold is able to meaningfully advance the development of evofosfamide, the failure of evofosfamide in the future to achieve successful clinical trial endpoints, delays in clinical trial enrollment or events or in the clinical development of evofosfamide, unanticipated adverse side effects related to evofosfamide or any other unfavorable developments or information related to evofosfamide would further significantly harm Threshold’s business and Threshold’s future prospects. Moreover, evofosfamide is not expected to be commercially available in the near term, if at all. Further, the commercial success of evofosfamide, if any, will depend upon its acceptance by physicians, patients, third party payors and other key decision-makers as a therapeutic and cost effective alternative to currently available products. In any event, if Threshold is unable to successfully develop, obtain regulatory approval for and commercialize evofosfamide, Threshold’s ability to generate revenue from product sales will be significantly delayed or precluded altogether and Threshold’s business would be materially and adversely affected, and Threshold may not be able to continue as a going concern.

Threshold currently lacks the ability to discover additional prodrug product candidates and Threshold also may not be able to successfully acquire or in-license and develop additional prodrug product candidates or programs suitable for clinical testing, either of which could limit Threshold’s growth and revenue potential.

Evofosfamide is currently Threshold’s only product candidate in the clinical development stage and Threshold may be unable to develop additional product candidates suitable for clinical testing. In this regard, as part of Threshold’s workforce reduction in December 2015 that followed the reported negative results from the two Phase III clinical trials of evofosfamide, Threshold eliminated Threshold’s discovery research activities conducted in-house, which prevents Threshold’s ability to discover additional prodrug product candidates at this time. In addition, given the uncertain prospects for evofosfamide, Threshold’s strategy includes evaluating opportunities to acquire or in-license additional product candidates or development programs that build on Threshold’s expertise and complement Threshold’s pipeline. Any growth through acquisition or in-licensing will depend upon the availability of suitable product candidates at favorable prices and upon advantageous terms and conditions. Even if appropriate acquisition or in-licensing opportunities are available, Threshold currently does not have, and may not in the future have, the financial resources necessary to pursue them. In addition, other companies, many of which may have substantially greater financial, marketing and sales resources, compete with Threshold for acquisition or in-licensing opportunities. In addition, Threshold may not be able to realize the anticipated benefits of any acquisition or in-licensing opportunity for a variety of reasons, including the possibility that a product candidate proves not to be safe or effective in later clinical trials or the integration of an acquired or licensed product candidate gives rise to unforeseen difficulties and expenditures. For example, in September 2014, Threshold licensed rights to tarloxotinib, a clinical-stage investigational compound that Threshold evaluated in two Phase II proof-of-concept clinical trials. However, based on the interim results of the two Phase II proof-of-concept clinical trials, Threshold determined in September 2016 to discontinue any further development of tarloxotinib, and Threshold will therefore not realize any return on Threshold’s investment in tarloxotinib. In any event, any growth through development of additional product candidates will depend principally on Threshold’s ability to identify, and then to obtain the necessary funding to pursue the acquisition of in-licensing of, additional product candidates on commercially reasonable terms, as well as Threshold’s ability to develop those product candidates and Threshold’s ability to obtain additional funding, whether through partnering arrangements or otherwise, to complete the development of, obtain regulatory approval for and commercialize these product candidates. If Threshold is unable to discover or obtain suitable product candidates for development, Threshold’s growth and revenue potential could be significantly harmed, and Threshold could be required to cease operations.

 

44


Table of Contents

If Threshold does not establish collaborations or other strategic transactions for Threshold’s current and potential future product candidates or otherwise raise substantial additional capital, Threshold will likely need to alter, delay or abandon Threshold’s development and any commercialization plans.

Threshold’s strategy includes selectively partnering or collaborating with other pharmaceutical and biotechnology companies to assist Threshold in furthering the development and potential commercialization of Threshold’s current and potential future product candidates. In this regard, as a result of the termination of Threshold’s collaboration with Merck KGaA, Threshold is no longer eligible to receive any further milestone payments or other funding from Merck KGaA, including the 70% of worldwide development costs for evofosfamide that were previously borne by Merck KGaA. In this regard, Threshold’s ability to advance the clinical development of evofosfamide is dependent upon Threshold’s ability to enter into new partnering, collaborative or other strategic arrangements for evofosfamide, or to otherwise obtain sufficient additional funding for such development. Threshold faces significant competition in seeking appropriate strategic partners, and collaborative and partnering arrangements are complex and time consuming to negotiate and document. Threshold may not be successful in entering into new partnering, collaborative or other strategic arrangements with third parties on acceptable terms, or at all. In addition, Threshold is unable to predict when, if ever, Threshold will enter into any additional partnering, collaborative or other strategic arrangements because of the numerous risks and uncertainties associated with establishing such arrangements. If Threshold is unable to negotiate new partnering, collaborative or other strategic arrangements, Threshold may have to curtail the development of a particular product candidate, reduce, delay, or terminate its development or one or more of Threshold’s other development programs, delay its potential commercialization or reduce the scope of Threshold’s sales or marketing activities or increase Threshold’s expenditures and undertake development or commercialization activities at Threshold’s own expense. For example, Threshold may have to cease further development of Threshold’s evofosfamide program if Threshold is unable to raise sufficient funding for any additional clinical development of evofosfamide through new partnering, collaborative or other strategic arrangements with third parties or other financing alternatives. In this regard, if Threshold decides to undertake any further development of evofosfamide beyond Threshold’s planned Phase I clinical trial of evofosfamide, Threshold would need to obtain additional funding for such development, either through financing or by entering into partnering, collaborative or other strategic arrangements with third parties for any such further development and Threshold may be unable to do. While Threshold is currently determining third party interest in partnering or acquiring TH-3424 and HX4, Threshold may be unable to partner or divest these assets in a timely manner, or at all, and therefore may not receive any return on Threshold’s investment in these assets. If Threshold does not have sufficient funds, Threshold will not be able to advance the development of Threshold’s product candidates or otherwise bring Threshold’s product candidates to market and generate product revenues.

Any partnering, collaborative or other strategic arrangements that Threshold establishes in the future may not be successful or Threshold may otherwise not realize the anticipated benefits from these arrangements. In addition, any such future arrangements may place the development and commercialization of Threshold’s product candidates outside Threshold’s control, may require Threshold to relinquish important rights or may otherwise be on terms unfavorable to Threshold

Threshold has in the past established and intends to continue to establish partnering, collaborative or other strategic arrangements with third parties to develop and commercialize Threshold’s product candidates, and these arrangements may not be successful or Threshold may otherwise not realize the anticipated benefits from these arrangements. Threshold currently has no ongoing collaborations for the development and commercialization of Threshold’s product candidates. Threshold may not be able to locate third-party strategic partners to develop and market Threshold’s product candidates, and Threshold lacks the capital and resources necessary to develop Threshold’s product candidates alone.

 

45


Table of Contents

Preclinical studies and Phase I or II clinical trials of Threshold’s product candidates may not predict the results of subsequent human clinical trials.

Preclinical studies, including studies of Threshold’s product candidates in animal models of disease, may not accurately predict the results of human clinical trials of those product candidates. In particular, promising animal studies suggesting the efficacy of evofosfamide for the treatment of different types of cancer may not accurately predict the ability of evofosfamide to treat cancer effectively in humans. Evofosfamide or any other compounds Threshold may develop may be found not to be efficacious in treating cancer, alone or in combination with other agents, when studied in human clinical trials. In addition, Threshold will not be able to commercialize Threshold’s product candidates until Threshold obtains FDA approval in the United States or approval by comparable regulatory agencies in Japan, Europe and other countries. A number of companies in the pharmaceutical industry, including Threshold and those with greater resources and experience than Threshold, have suffered significant setbacks in Phase III clinical trials, even after encouraging results in earlier clinical trials.

To satisfy FDA, PMDA or other foreign regulatory approval standards for the commercial sale of Threshold’s product candidates, Threshold must demonstrate in adequate and controlled clinical trials that Threshold’s product candidates are safe and effective. Success in early clinical trials, including in Phase I and Phase II clinical trials, does not ensure that later clinical trials will be successful. Initial results from Phase I and Phase II clinical trials of evofosfamide have in the past not been, and may again in the future not be, confirmed by later analysis or in subsequent larger clinical trials. For example, the results that achieved the primary endpoint for progression-free survival in the Phase IIb trial of evofosfamide in pancreatic cancer did not predict the results of overall survival for patients in the MAESTRO trial. Likewise, the results in the Phase I/II trial of evofosfamide in patients with soft tissue sarcoma did not predict the results of overall survival for patients in the 406 trial. In both cases, the 406 trial and the MAESTRO trial failed to meet their primary endpoints of demonstrating a statistically significant improvement in overall survival, based on Threshold’s analyses for the 406 trial and Merck KGaA’s analyses for the MAESTRO trial, notwithstanding positive results in earlier clinical trials. In addition, in January 2016, Threshold announced that an independent data and safety monitoring board, or DSMB, concluded that Threshold’s registrational Phase II clinical trial of evofosfamide plus pemetrexed versus pemetrexed alone in patients with NSCLC was unlikely to reach its primary endpoint of improving overall survival with statistical significance and, as a result, enrollment in this trial was closed. As these examples illustrate, despite the results reported in earlier clinical trials for evofosfamide, Threshold does not know whether potential future clinical trials that Threshold may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market evofosfamide. Threshold’s failure to successfully complete any potential future clinical trials and obtain regulatory approval for evofosfamide would materially and adversely affect Threshold’s business and severely harm Threshold’s future prospects.

Delays in Threshold’s potential future clinical trials could result in increased costs and delay Threshold’s ability to obtain regulatory approval and commercialize Threshold’s product candidates.

Delays in the progression of Threshold’s potential future clinical trials could materially impact Threshold’s product development costs and delay regulatory approval of Threshold’s product candidates. Threshold does not know whether Threshold’s potential future clinical trials of evofosfamide, including Threshold’s Phase I clinical trial of evofosfamide, will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including:

 

    adverse safety events experienced during Threshold’s clinical trials;

 

    a lower than expected frequency of clinical trial events;

 

    delays in obtaining clinical materials;

 

    slower than expected patient recruitment to participate in clinical trials;

 

    delays in reaching agreement on acceptable clinical trial agreement terms with prospective sites or obtaining institutional review board approval,

 

46


Table of Contents
    delays in obtaining regulatory approval to commence new trials;

 

    changes to clinical trial protocols.

Delays in clinical trials can also result from difficulties in enrolling patients in Threshold’s potential future clinical trials, which could increase the costs or affect the timing or outcome of these clinical trials. This is particularly true with respect to diseases with relatively small patient populations. Timely completion of clinical trials depends, in addition to the factors outlined above, on Threshold’s ability to enroll a sufficient number of patients, which itself is a function of many factors, including:

 

    the therapeutic endpoints chosen for evaluation;

 

    the eligibility criteria defined in the protocol;

 

    the perceived benefit of the investigational drug under study;

 

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

 

    Threshold’s ability to recruit clinical trial investigators and sites with the appropriate competencies and experience;

 

    Threshold’s ability to obtain and maintain patient consents; and

 

    competition for patients by clinical trial programs for other treatments.

If Threshold does not successfully complete Threshold’s potential future clinical trials on schedule, the price of Threshold common stock may further decline.

Threshold’s product candidates must undergo rigorous clinical testing, the results of which are uncertain and could substantially delay or prevent Threshold from bringing them to market.

Before Threshold can obtain regulatory approval for a product candidate, Threshold must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies. Clinical trials of new drug candidates sufficient to obtain regulatory marketing approval are expensive and take years to complete.

Threshold cannot be certain of Threshold’s successfully completing clinical testing within the time frames Threshold has planned or anticipated, or at all. Threshold may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent Threshold from receiving regulatory approval or commercializing Threshold’s product candidates, including the following:

 

    Threshold’s clinical trials may produce negative or inconclusive results, such as the results in the 406 trial, the MAESTRO trial and Threshold’s Phase II proof-of-concept trials of tarloxotinib, and Threshold may decide, or regulators may require Threshold, to conduct additional clinical and/or preclinical testing or to abandon programs;

 

    the results obtained in earlier stage clinical testing may not be indicative of results in future clinical trials;

 

    clinical trial results may not meet the level of statistical significance required by the FDA, the PMDA or other regulatory agencies;

 

    enrollment in clinical trials for Threshold’s product candidates may be slower than Threshold anticipates, resulting in significant delays and additional expense;

 

    Threshold or regulators may suspend or terminate Threshold’s clinical trials if the participating patients are being exposed to unacceptable health risks; and

 

47


Table of Contents
    the effects of Threshold’s product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use, if approved.

In addition, clinical results are susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse safety events, including patient fatalities that may be attributable to Threshold’s product candidates, during a clinical trial could cause the trial to be terminated or require additional studies. Furthermore, any of Threshold’s future clinical trials may be overseen by an independent data monitoring committees, or DMC, or DSMBs. These independent oversight bodies are comprised of external experts who review the progress of the ongoing clinical trials as well as safety from other trials, and make recommendations concerning a trial’s continuation, modification, or termination based on periodic review of, unblinded data. Any of Threshold’s potential future clinical trials overseen by an independent DMC or DSMB may be discontinued or amended in response to recommendations made by responsible independent DMCs or DSMBs based on their review of trial results and an independent DMC or DSMB may determine to delay or suspend the trial due to safety or futility findings based on events occurring during a clinical trial. For example, in January 2016, Threshold announced that a DSMB concluded that Threshold’s registrational Phase II clinical trial of evofosfamide plus pemetrexed versus pemetrexed alone in patients with NSCLC was unlikely to reach its primary endpoint of improving overall survival with statistical significance and, as a result, enrollment in this trial was closed and in connection therewith, Threshold determined to cease enrollment in all Threshold-sponsored trials of evofosfamide. The recommended termination or modification of any of Threshold’s potential future clinical trials by an independent DMC or DSMB, could materially and adversely impact the future development of Threshold’s product candidates, and Threshold’s business, prospects, operating results, and financial condition may be materially harmed.

Threshold is subject to significant regulatory approval requirements, which could delay, prevent or limit Threshold’s ability to market Threshold’s product candidates.

Threshold’s research and development activities, preclinical studies, clinical trials and the anticipated manufacturing and marketing of Threshold’s product candidates are subject to extensive regulation by the FDA, the PMDA and other regulatory agencies in the United States and Japan and by comparable authorities in Europe and elsewhere. Threshold requires the approval of the relevant regulatory authorities before Threshold may commence commercial sales of Threshold’s product candidates in a given market. The regulatory approval process is expensive and time consuming, and the timing of receipt of regulatory approval is difficult to predict. Threshold’s product candidates could require a significantly longer time to gain regulatory approval than expected, or may never gain approval. Threshold cannot be certain that, even after expending substantial time and financial resources, Threshold will obtain regulatory approval for any of Threshold’s product candidates. This was the case with the FDA, which would not accept an NDA based on the data from the MAESTRO study. A delay or denial of regulatory approval could delay or prevent Threshold’s ability to generate product revenues and to achieve profitability.

Changes in regulatory approval policies during the development period of any of Threshold’s product candidates, changes in, or the enactment of, additional regulations or statutes, or changes in regulatory review practices for a submitted product application may cause a delay in obtaining approval or result in the rejection of an application for regulatory approval. Regulatory approval, if obtained, may be made subject to limitations on the indicated uses for which Threshold may market a product. These limitations could adversely affect Threshold’s potential product revenues. Regulatory approval may also require costly post-marketing follow-up studies. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping related to the product will be subject to extensive ongoing regulatory requirements. Furthermore, for any marketed product, its manufacturer and its manufacturing facilities will be subject to continual review and periodic inspections by the FDA or other regulatory authorities. Failure to comply with applicable regulatory requirements may, among other things, result in fines, suspensions of regulatory approvals, product recalls, product seizures, operating restrictions and criminal prosecution.

 

48


Table of Contents

Evofosfamide is based on targeting the microenvironment of solid tumors and some hematological malignancies, which currently is an unproven approach to therapeutic intervention.

Threshold’s product candidates are designed to target the microenvironment of solid tumors and some hematological malignancies by, in the case of evofosfamide, harnessing hypoxia for selective toxin activation. Threshold has not nor, to Threshold’s knowledge, has any other company, received regulatory approval for a drug based on these approaches. Threshold cannot be certain that Threshold’s approaches will lead to the development of approvable or marketable drugs. Threshold’s approaches may lead to unintended, or off-target, adverse effects or may lack efficacy or contribution to efficacy in combination with other anti-cancer drugs.

In addition, the FDA, the PMDA or other regulatory agencies may lack experience in evaluating the safety and efficacy of drugs based on these targeting approaches, which could lengthen the regulatory review process, increase Threshold’s development costs and delay or prevent commercialization of Threshold’s current and potential future product candidates.

Threshold’s product candidates may have undesirable side effects that prevent or delay their regulatory approval or limit their use if approved.

Anti-tumor drugs being developed by Threshold are expected to have undesirable side effects. For example, in clinical trials of evofosfamide, some patients have exhibited skin and/or mucosal toxicities that have in some cases caused patients to stop or delay therapy. The extent, severity and clinical significance of these or other undesirable side effects may not be apparent initially and may be discovered or become more significant during drug development or even post-approval. These expected side effects or other side effects identified in the course of clinical trials or that may otherwise be associated with Threshold’s product candidates may outweigh the benefits of Threshold’s product candidates. Side effects may prevent or delay regulatory approval or limit market acceptance if Threshold’s products are approved. In this regard, Threshold’s product candidates may prove to have undesirable or unintended side effects or other characteristics adversely affecting their safety, efficacy or cost effectiveness that could prevent or limit their approval for marketing and successful commercial use, or that could delay or prevent the commencement and/or completion of clinical trials for Threshold’s product candidates.

Threshold has not yet gained sufficient experience with a commercial formulation of evofosfamide.

The formulation of evofosfamide that was the subject of Threshold’s prior clinical trials and is the subject of Threshold’s Phase I clinical trial was changed to address issues with a prior formulation that was subject to storage and handling requirements that were not suitable for a commercial product. The current formulation of evofosfamide may be suitable for a commercial product, but additional data will be required to verify this, and there can be no assurance that Threshold will be able to do so in a timely manner, if at all. If Threshold is not able to develop a viable commercial formulation of evofosfamide, then Threshold may be required to conduct additional Phase III clinical trials of evofosfamide, or Threshold may need to develop an alternative commercial formulation, either of which could delay, perhaps substantially, Threshold’s ability to obtain any regulatory approvals of evofosfamide.

The initial clinical formulations developed for evofosfamide or other potential future product candidates may not remain stable throughout the clinical testing phase.

Threshold has limited experience and data on the drug substance synthesis and the initial formulation for evofosfamide. This initial formulation and those of Threshold’s potential future product candidates may not remain stable during the clinical testing phase. If these formulations were found to be unstable during clinical testing, Threshold may be required to repeat the initial clinical trials which could increase Threshold’s costs and delay the development of the applicable product candidate. Threshold may be required to reformulate these product candidates, including evofosfamide, to improve stability. However, it is possible that Threshold might

 

49


Table of Contents

not be able to develop a formulation of evofosfamide or other future product candidates with adequate quality that meets the need for testing in Threshold’s clinical trials. Threshold may also be required to perform additional clinical bridging studies which may further delay development. Threshold may also be unable to scale up the manufacturing process to synthesize the current drug substance and current formulations, or the newly developed formulations, any of which could adversely affect Threshold’s ability to advance the development of, and potentially obtain regulatory approval of, the applicable product candidate.

Even if Threshold obtains regulatory approvals for Threshold’s current and potential future product candidates, Threshold’s marketed drugs will be subject to ongoing regulatory review. If Threshold fails to comply with continuing U.S. and foreign regulations, Threshold could lose Threshold’s approvals to market drugs and Threshold’s business would be seriously harmed.

Following initial regulatory approval of any drugs Threshold may develop, Threshold will be subject to continuing regulatory review, including review of adverse drug experiences and clinical results that are reported after Threshold’s drug products become commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities used to make any of Threshold’s drug candidates will also be subject to periodic review and inspection by regulatory agencies, including the PMDA should Threshold be able to obtain regulatory approval of evofosfamide in Japan. If a previously unknown problem or problems with a product or a manufacturing and laboratory facility used by Threshold is discovered, regulatory agencies, including potentially the PMDA, may impose restrictions on that product or on the manufacturing facility, including requiring Threshold to withdraw the product from the market. Any changes to an approved product, including the way it is manufactured or promoted, often require regulatory approval before the product, as modified, can be marketed. Manufacturers of Threshold’s products, if approved, will be subject to ongoing regulatory agency requirements for submission of safety and other post- market information. If such manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may:

 

    issue warning letters;

 

    impose civil or criminal penalties;

 

    suspend or withdraw Threshold’s regulatory approval;

 

    suspend or terminate any of Threshold’s ongoing clinical trials;

 

    refuse to approve pending applications or supplements to approved applications filed by Threshold;

 

    impose restrictions on Threshold’s operations;

 

    close the facilities of Threshold’s contract manufacturers;

 

    seize or detain products or require a product recall, or

 

    revise or restrict labeling and promotion.

Regulatory authorities may impose significant restrictions on the indicated uses and marketing of pharmaceutical products.

Even if Threshold obtains regulatory approval for evofosfamide, Threshold would be subject to ongoing requirements by the regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of any product will continue to be closely monitored by regulatory authorities after approval. If the regulatory authorities become aware of new safety information after approval of any of Threshold’s product candidates, they may require labeling changes or establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for

 

50


Table of Contents

potentially costly post-approval studies or post-market surveillance. For example, the label ultimately approved for evofosfamide, if it achieves marketing approval, may include restrictions on use. Advertising and promotion of any product candidate that obtains approval will be heavily scrutinized by government agencies and the public. Violations, including promotion of Threshold’s products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by regulatory authorities. Engaging in impermissible promotion of any approved products for off-label uses could also subject Threshold to false claims litigation under U.S. federal and state statutes and comparable foreign rules and regulations, which could lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which Threshold promotes or distributes any approved products.

If Threshold does not lawfully promote any approved products, Threshold may become subject to such litigation and, if Threshold is not successful in defending against such actions, those actions could compromise Threshold’s ability to become profitable.

Threshold does not have a sales force or marketing infrastructure and may not develop an effective one.

Threshold has no sales experience as a company. There are risks involved with establishing Threshold’s own sales and marketing capabilities, as well as entering into arrangements with third parties to perform these services. Developing an internal sales force and function will require substantial expenditures and will be time-consuming, and Threshold may not be able to effectively recruit, train or retain sales personnel. On the other hand, if Threshold enters into arrangements with third parties to perform sales, marketing and distribution services, Threshold’s product revenues will be lower than if Threshold markets and sells any products that Threshold develops itself. Threshold may not be able to effectively sell Threshold’s product candidates, if approved, which could materially harm Threshold’s business and Threshold’s financial condition.

Risks Related to Threshold’s Financial Performance and Operations

Threshold has incurred losses since Threshold’s inception and anticipates that it will continue to incur significant losses for the foreseeable future.

Due to the recognition of the remaining $65.9 million of deferred revenue from Threshold’s former collaboration with Merck KGaA during the quarter ended December 31, 2015, Threshold reported net income of $43.8 million for the year ended December 31, 2015. However, during the year ended December 31, 2016 Threshold had a net loss of $24.1 million, and Threshold has incurred losses in each of Threshold’s other years since Threshold’s inception in 2001. Threshold expects to incur losses for the foreseeable future. Threshold has devoted and, subject to Threshold’s ability to obtain additional funding and to otherwise meaningfully advance the development of Threshold’s product candidates, Threshold expects to continue to devote, substantially all of Threshold’s resources to the development of evofosfamide. Accordingly, Threshold’s future prospects remain dependent on the successful development, regulatory approval and commercialization of evofosfamide. In this regard, a substantial portion of Threshold’s efforts have been devoted to the two pivotal Phase III clinical trials of evofosfamide. The failure of the 406 trial and the MAESTRO trial to meet their primary endpoints of demonstrating a statistically significant improvement in overall survival as agreed upon with the FDA, based on Threshold’s analyses for the 406 trial and Merck KGaA’s analyses for the MAESTRO trial, has significantly depressed Threshold’s stock price and harmed Threshold’s future prospects. Likewise, the announcement of Threshold’s decision to discontinue the development of tarloxotinib following Threshold’s analysis of the interim results of two Phase II proof-of-concept trials of tarloxotinib has depressed Threshold’s stock price and harmed Threshold’s future prospects. Although Threshold has conducted Threshold’s own analyses of the data from MAESTRO trial and has reviewed and discussed the results of Threshold’s analyses with the PMDA in Japan to determine whether there is an appropriate path forward for submitting marketing authorization applications based on the data from the MAESTRO trial along with a bridging study, the PMDA and other health regulatory authorities have determined that the data from the MAESTRO trial is insufficient to support the approval of any marketing authorizations and that a bridging study or one or more additional clinical trials of evofosfamide

 

51


Table of Contents

would be required to be successfully conducted by Threshold in order to support any such approval, including with respect to the Japanese sub-population Threshold is targeting. If Threshold is required to successfully conduct and complete any additional clinical trials of evofosfamide in order to support potential approval of evofosfamide in Japan, Threshold would be required to obtain additional capital. There can be no assurances that Threshold would be successful in obtaining the additional funding, whether through new collaborative, partnering or other strategic arrangements or otherwise, necessary to support any additional clinical development of evofosfamide. Moreover, apart from the Phase I clinical trial of evofosfamide, Threshold cannot currently predict whether and to what extent Threshold may continue or increase evofosfamide development activities in future periods, if at all, and what Threshold’s future cash needs may be for any such activities. For these and other reasons, Threshold cannot assure you that Threshold will be able to advance the development of evofosfamide. In such event, Threshold may be required to abandon the development of evofosfamide and forego any return on Threshold’s investment from Threshold’s evofosfamide program, which would severely harm Threshold’s future prospects and may cause Threshold to cease operations. In any event, Threshold does not expect to generate any revenue from the commercial sales of evofosfamide or any potential future product candidates, including evofosfamide, in the near term, and Threshold expects to continue to have significant losses for the foreseeable future.

To attain ongoing profitability, Threshold will need to develop products successfully and market and sell them effectively, or rely on other parties to do so. Threshold cannot predict when Threshold will achieve ongoing profitability, if at all. Threshold has never generated revenue from the commercial sales of Threshold’s product candidates, and there is no guarantee that Threshold will be able to do so in the future. If Threshold fails to become profitable, or if Threshold is unable to fund Threshold’s continuing losses, Threshold would be unable to continue Threshold’s research and development programs.

Threshold needs substantial additional funding and may be unable to raise capital, which could force Threshold to delay, reduce or eliminate Threshold’s drug discovery, product development and commercialization activities.

Developing drugs, conducting clinical trials, and commercializing products is expensive. Threshold’s future funding requirements will depend on many factors, including:

 

    the terms and timing of any future collaborative, licensing, acquisition or other strategic arrangements that Threshold may establish for Threshold’s product candidates;

 

    the amount and timing of any licensing fees, milestone payments and royalty payments from potential future partners or collaborators, if any;

 

    the amount and timing of contingent licensing fees, milestone payments and royalty payments that Threshold is obligated to pay to third parties;

 

    the scope, rate of progress and cost of Threshold’s potential clinical trials, including Threshold’s Phase I clinical trial of evofosfamide, and other development activities;

 

    the costs and timing of obtaining regulatory approvals;

 

    the cost of manufacturing clinical, and establishing commercial, supplies of Threshold’s product candidates and any products that Threshold may develop;

 

    the cost and timing of establishing sales, marketing and distribution capabilities;

 

    the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights;

 

    the cost and timing of securing manufacturing capabilities for Threshold’s clinical product candidates and commercial products, if any; and

 

    the costs of lawsuits involving Threshold or Threshold’s product candidates.

 

52


Table of Contents

Threshold believes that Threshold’s cash, cash equivalents and marketable securities will be sufficient to fund Threshold’s projected operating requirements for the next 12 months based upon current operating plans and spending assumptions. However, Threshold will need to raise substantial additional capital to meaningfully advance the clinical development of evofosfamide, whether through new collaborative, partnering or other strategic arrangements or otherwise, and to in-license or otherwise acquire and develop additional product candidates or programs. In particular, Threshold’s ability to meaningfully advance the clinical development of evofosfamide is dependent upon Threshold’s ability to enter into new partnering, collaborative or other strategic arrangements for evofosfamide, or to otherwise obtain sufficient additional funding for such development, particularly since Threshold is no longer eligible to receive any further milestone payments or other funding from Merck KGaA for evofosfamide, including the 70% of worldwide development costs for evofosfamide that were previously borne by Merck KGaA.

While Threshold has been able to fund Threshold’s operations to date, Threshold currently has no ongoing collaborations for the development and commercialization of evofosfamide, and no source of revenue, nor do Threshold expects to generate revenue for the foreseeable future. Threshold also does not have any commitments for future external funding. Until Threshold can generate a sufficient amount of product revenue, which Threshold may never do, Threshold expects to finance future cash needs through a variety of sources, including:

 

    the public equity market;

 

    private equity financing;

 

    collaborative arrangements;

 

    licensing arrangements; and/or

 

    public or private debt.

Threshold’s ability to raise additional funds and the terms upon which Threshold is able to raise such funds have been severely harmed by the negative results reported from Threshold’s two pivotal Phase III clinical trials of evofosfamide and Threshold’s decision to discontinue development of tarloxotinib, and may in the future be adversely impacted by the uncertainty regarding the prospects for future development of evofosfamide and Threshold’s ability to advance the development of evofosfamide or otherwise realize any return on Threshold’s investments in evofosfamide, if at all. Threshold’s ability to raise additional funds and the terms upon which Threshold is able to raise such funds may also be adversely affected by the uncertainties regarding Threshold’s financial condition, the sufficiency of Threshold’s capital resources, Threshold’s ability to maintain the listing of Threshold common stock on The NASDAQ Capital Market and recent and potential future management turnover. As a result of these and other factors, Threshold cannot be certain that sufficient funds will be available to Threshold or on satisfactory terms, if at all. To the extent Threshold raises additional funds by issuing equity securities, Threshold’s stockholders may experience significant dilution, particularly given Threshold’s currently depressed stock price, and debt financing, if available, may involve restrictive covenants. If adequate funds are not available, Threshold may be required to significantly reduce or refocus Threshold’s operations or to obtain funds through arrangements that may require Threshold to relinquish rights to Threshold’s product candidates, technologies or potential markets, any of which could result in Threshold’s stockholders having little or no continuing interest in Threshold’s evofosfamide program as stockholders or otherwise, or which could delay or require that Threshold curtail or eliminate some or all of Threshold’s development activities or otherwise have a material adverse effect on Threshold’s business, financial condition and results of operations.

If Threshold is unable to secure additional funding on a timely basis or on terms favorable to Threshold, Threshold may be required to cease or reduce any product development activities, to conduct additional workforce reductions, to sell some or all of Threshold’s technology or assets or to merge all or a portion of Threshold’s business with another entity. Insufficient funds may require Threshold to delay, scale back, or eliminate some or all of Threshold’s activities, and if Threshold is unable to obtain additional funding, there is uncertainty regarding Threshold’s continued existence.

 

53


Table of Contents

Threshold’s financial results are likely to fluctuate from period to period, making it difficult to evaluate Threshold’s stock based on financial performance.

Threshold believes that period-to-period comparisons of Threshold’s operating results should not be relied upon as predictive of future performance. Threshold’s prospects must be considered in light of the risks, expenses and difficulties encountered by companies with no approved pharmaceutical products, and with only one product candidate in clinical development.

Threshold’s success depends in part on attracting, retaining and motivating key personnel and, if Threshold fails to do so, it may be more difficult for Threshold to execute Threshold’s business strategy. As a small organization Threshold is dependent on key employees and Threshold will need to hire additional personnel to execute Threshold’s business strategy successfully.

Threshold’s success depends on Threshold’s continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on Threshold’s ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. Threshold is highly dependent upon Threshold’s senior management. The loss of the services of one or more of Threshold’s other key employees could delay or adversely impact the development of Threshold’s product candidates.

In December 2015, Threshold announced a workforce reduction constituting approximately two-thirds of Threshold’s workforce with an additional workforce reduction in September 2016, and as of December 31, 2016, Threshold had only 15 employees. Threshold’s success will depend on Threshold’s ability to retain and motivate remaining personnel and hire additional qualified personnel when required, and Threshold’s history of implementing workforce reductions, along with the potential for future workforce reductions, may negatively affect Threshold’s ability to retain and/or attract talented employees. In addition, competition for qualified personnel in the biotechnology field is intense. Threshold faces competition for personnel from other biotechnology and pharmaceutical companies, universities, public and private research institutions and other organizations. Threshold may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. If Threshold is unsuccessful in Threshold’s retention, motivation and recruitment efforts, Threshold may be unable to execute Threshold’s business strategy.

In addition, certain members of Threshold’s management terms were part of Threshold’s December 2015 and September 2016 workforce reductions, including Threshold’s former Senior Vice Presidents of Regulatory Affairs and Pharmaceutical Development and Manufacturing as well as Threshold’s former Chief Scientific Officer and Threshold’s former Chief Operating Officer. Management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution and disrupt Threshold’s ability to successfully manage and grow Threshold’s business, and Threshold’s results of operations and financial condition could suffer as a result.

Significant disruptions of information technology systems or breaches of data security could adversely affect Threshold’s business.

Threshold’s business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of Threshold’s computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses that may result in the impairment of production and key business processes.

In addition, Threshold’s systems are potentially vulnerable to data security breaches—whether by employees or others—that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of Threshold’s employees, clinical trial patients, customers and others. Such disruptions and breaches of security could have a material adverse effect on Threshold’s business, financial condition and results of operations.

 

54


Table of Contents

Threshold’s facilities in California are located near an earthquake fault, and an earthquake or other natural disaster or resource shortage could disrupt Threshold’s operations.

Important documents and records, such as hard copies of Threshold’s laboratory books and records for Threshold’s product candidates, are located in Threshold’s corporate facilities in Menlo Park, California, near active earthquake zones. In the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems, Threshold does not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt Threshold’s operations and could result in additional expense. Although Threshold maintains business interruption insurance coverage, the policy specifically excludes coverage for earthquake and flood.

Risks Related to Threshold’s Dependence on Third Parties

Threshold relies on third parties to manufacture evofosfamide and expects to rely on third parties to manufacture any other potential future product candidates that Threshold may develop. If these parties do not manufacture the active pharmaceutical ingredients or finished drug products of satisfactory quality, in a timely manner, in sufficient quantities and at an acceptable cost, clinical development and commercialization of evofosfamide and any other product candidates Threshold may develop could be delayed.

Threshold does not have Threshold’s own manufacturing capability for the evofosfamide active pharmaceutical ingredient, or API, or evofosfamide drug product. To date, Threshold has relied on, and Threshold expects to continue to rely on, a limited number of third-party contract manufacturers and excipient suppliers for the evofosfamide API and evofosfamide drug product to meet Threshold’s clinical supply needs of evofosfamide. Threshold has no long-term commitments or commercial supply agreements with any of Threshold’s evofosfamide suppliers. Threshold’s current and anticipated future dependence upon others for the manufacture of Threshold’s product candidates may adversely affect Threshold’s ability to develop and commercialize any product candidates on a timely and competitive basis.

Threshold needs to have sufficient evofosfamide API and drug product manufactured to meet the clinical supply demands for Threshold’s clinical trials. If Threshold is not successful in having sufficient quantities of evofosfamide API and drug product manufactured, or if manufacturing is interrupted at Threshold’s contract manufacturers and excipient suppliers for evofosfamide API and Threshold’s evofosfamide drug product manufacturers due to regulatory or other reasons, or consumes more drug product than anticipated because of a higher than expected trial utilization or has quality issues that limit the utilization of the drug product, Threshold may experience a significant delay in Threshold’s evofosfamide clinical program. In any event, Threshold will need to order additional evofosfamide API and drug product and Threshold has in the past experienced delays in the receipt of satisfactory drug product, and any additional delays Threshold may experience in the receipt of satisfactory evofosfamide API or drug product could cause significant delays in Threshold’s potential future evofosfamide clinical trials, which would harm Threshold’s business. Moreover, the need for additional supplies and preparation for registration may require manufacturing process improvements in evofosfamide API and drug product. The manufacturing processes improvements for the evofosfamide API may require facilities upgrades at Threshold’s suppliers, which may lead to delays or disruption in supply, or delays in regulatory approval of evofosfamide. Changes to the formulation of evofosfamide for Threshold’s potential future clinical trials may also require bridging studies to demonstrate the comparability of the new formulation with the old. These studies may delay Threshold’s clinical trials and may not be successful. Even if Threshold is successful in raising the additional capital necessary to meaningfully advance the development of evofosfamide, if Threshold is not successful in procuring sufficient evofosfamide clinical trial material, Threshold may experience a significant delay in Threshold’s evofosfamide clinical program. Finally, Threshold has not engaged any backup or alternative suppliers for parts of Threshold’s evofosfamide supply chain for Threshold’s potential future evofosfamide clinical trials. If Threshold is required to engage a backup or alternative supplier, the transfer of technical expertise and manufacturing process to the backup or alternative supplier would be difficult, costly and

 

55


Table of Contents

time-consuming and would increase the likelihood of a significant delay or interruption in manufacturing or a shortage of supply of evofosfamide.

In any event, additional agreements for more supplies of each of Threshold’s product candidates, including evofosfamide, will be needed to complete clinical development and/or commercialize them. In this regard, Threshold may need to enter into agreements for additional supplies of evofosfamide to commercialize it or develop such capability itself. Threshold cannot be certain that Threshold can do so on favorable terms, if at all. Threshold will need to satisfy all current good manufacturing practice, or cGMP, regulations, including passing specifications. Threshold’s inability to satisfy these requirements could delay Threshold’s clinical programs and the potential commercialization of evofosfamide if approved for commercial sale.

If evofosfamide or any of Threshold’s other product candidates is approved by the FDA, the PMDA or other regulatory agencies for commercial sale, Threshold will need to have it manufactured in commercial quantities. It may not be possible to successfully manufacture commercial quantities of evofosfamide or increase the manufacturing capacity for evofosfamide or any of Threshold’s other product candidates in a timely or economically feasible manner. Prior to commercial launch of evofosfamide, Threshold may be required to manufacture additional validation batches, which the FDA, the PMDA and other regulatory agencies must review and approve. If Threshold is unable to successfully manufacture the additional validation batches or increase the manufacturing capacity for evofosfamide or any other product candidates, the regulatory approval or commercial launch of that product candidate may be delayed, or there may be a shortage of supply which could limit sales.

In addition, if the facility or the equipment in the facility that produces Threshold’s product candidates is significantly damaged or destroyed, adversely impacted by an action of a regulatory agency or if the facility is located in another country and trade or commerce with or exportation from such country is interrupted or delayed, Threshold may be unable to replace the manufacturing capacity quickly or inexpensively. The inability to obtain manufacturing agreements, the damage or destruction of a facility on which Threshold relies for manufacturing or any other delays in obtaining supply would delay or prevent Threshold from completing Threshold’s clinical trials and commercializing Threshold’s current product candidates.

In addition, the evofosfamide formulation includes excipients that might be available from a limited number of suppliers. Threshold has not signed long term supply agreements with these excipient suppliers. Threshold will need to enter into long term supply agreements to ensure uninterrupted supply of these excipients to continuously manufacture clinical batches or commercial supplies, which Threshold may be unable to do in a timely or economically feasible manner or at all.

Threshold also expects to rely on contract manufacturers or other third parties to produce sufficient quantities of clinical trial product for any other product candidates that Threshold may develop. It is possible that Threshold might not be able to develop a formulation for evofosfamide with adequate quality that meets the need for testing in Threshold’s clinical trials. In any event, in order for Threshold to commence any potential future clinical trials of Threshold’s current and potential future product candidates, including Threshold’s Phase I clinical trial of evofosfamide, Threshold needs to obtain or have manufactured sufficient quantities of clinical trial product and there can be no assurance that Threshold will be able to obtain sufficient quantities of clinical trial product in a timely manner or at all. Any delay in receiving sufficient supplies of clinical trial product for Threshold’s potential future studies could negatively impact Threshold’s development programs.

Threshold has no control over Threshold’s manufacturers’ and suppliers’ compliance with manufacturing regulations, and their failure to comply could result in an interruption in the supply of Threshold’s product candidates.

The facilities used by Threshold’s single source contract manufacturers must undergo an inspection by the FDA, the PMDA and other foreign agencies for compliance with cGMP regulations, before the respective product candidates can be approved in their region. In the event these facilities do not receive a satisfactory

 

56


Table of Contents

cGMP inspection for the manufacture of Threshold’s product candidates, Threshold may need to fund additional modifications to Threshold’s manufacturing process, conduct additional validation studies, or find alternative manufacturing facilities, any of which would result in significant cost to Threshold as well as a delay of up to several years in obtaining approval for such product candidate. In addition, Threshold’s contract manufacturers, and any alternative contract manufacturer Threshold may utilize, will be subject to ongoing periodic inspection by the FDA and corresponding state agencies, the PMDA and other foreign agencies for compliance with cGMP regulations, similar foreign regulations and other regulatory standards. Threshold does not have control over Threshold’s contract manufacturers’ compliance with these regulations and standards. Any failure by Threshold’s third-party manufacturers or suppliers to comply with applicable regulations could result in sanctions being imposed on them (including fines, injunctions and civil penalties), failure of regulatory authorities to grant marketing approval of Threshold’s product candidates, delays, suspension or withdrawal of approvals, warning letters, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecution.

Threshold expects to rely on third parties to conduct some of Threshold’s potential future clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of Threshold’s product candidates.

Threshold may use clinical research organizations to assist in conduct of Threshold’s clinical trials. There are numerous alternative sources to provide these services. However, Threshold may face delays outside of Threshold’s control if these parties do not perform their obligations in a timely or competent fashion or if Threshold is forced to change service providers. This risk is heightened for clinical trials conducted outside of the United States, where it may be more difficult to ensure that clinical trials are conducted in compliance with FDA and applicable foreign regulatory requirements. Any third-party that Threshold hires to conduct clinical trials may also provide services to Threshold’s competitors, which could compromise the performance of their obligations to Threshold. If Threshold experiences significant delays in the progress of Threshold’s future clinical trials, if any, the commercial prospects for product candidates could be harmed and Threshold’s ability to generate product revenue would be delayed or prevented.

Threshold is dependent on Eleison Pharmaceuticals, Inc. to develop and commercialize glufosfamide

Threshold is dependent upon Eleison Pharmaceuticals, Inc., or Eleison, to which Threshold exclusively licensed glufosfamide in October 2009, to develop and commercialize glufosfamide. Any profit sharing or other payments to Threshold under the Eleison license depend almost entirely upon the efforts of Eleison, which may not be able to raise sufficient funds to continue clinical development activities with glufosfamide. Even if Eleison is successful at raising sufficient funding, it may not be successful in developing and commercializing glufosfamide. Threshold may also be asked to provide technical assistance related to the development of glufosfamide, which may divert Threshold’s resources from other activities. If the Eleison license terminates in such a way that glufosfamide reverts to Threshold and Threshold seeks alternative arrangements with one or more other parties to develop and commercialize glufosfamide, Threshold may not be able to enter into such an agreement with another suitable third party or third parties on acceptable terms or at all. In such event, since Threshold has no further development plans for glufosfamide, Threshold may not receive any further return on Threshold’s investment in glufosfamide.

Risks Related to Threshold’s Intellectual Property

Hypoxia-targeted prodrug technology is not a platform technology broadly protected by patents, and others may be able to develop competitive drugs using this approach.

Although Threshold has U.S. and foreign issued patents that cover certain hypoxia- and AKR1C3-targeted prodrugs, including evofosfamide, Threshold has no issued patents or pending patent applications that would prevent others from taking advantage of hypoxia-prodrug technology generally to discover and develop new

 

57


Table of Contents

therapies for cancer or other diseases. Consequently, Threshold’s competitors may seek to discover and develop potential therapeutics that operate by mechanisms of action that are the same or similar to the mechanism of action of Threshold’s hypoxia-prodrug product candidate.

Threshold is dependent on patents and proprietary technology. If Threshold fails to adequately protect this intellectual property or if Threshold otherwise do not have exclusivity for the marketing of Threshold’s products, Threshold’s ability to commercialize products could suffer.

Threshold’s commercial success will depend in part on Threshold’s ability to obtain and maintain patent protection sufficient to prevent others from marketing Threshold’s product candidates, as well as to defend and enforce these patents against infringement and to operate without infringing the proprietary rights of others. Threshold will only be able to protect Threshold’s product candidates from unauthorized use by third parties to the extent that valid and enforceable patents cover Threshold’s product candidates or their manufacture or use or if they are effectively protected by trade secrets. If Threshold’s patent applications do not result in issued patents, or if Threshold’s patents are found to be invalid, Threshold will lose the ability to exclude others from making, using or selling the inventions claimed therein. Threshold has a limited number of patents and pending patent applications.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. The laws of many countries may not protect intellectual property rights to the same extent as United States laws, and those countries may lack adequate rules and procedures for defending Threshold’s intellectual property rights. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of Threshold’s intellectual property. Threshold does not know whether any of Threshold’s patent applications will result in the issuance of any patents and Threshold cannot predict the breadth of claims that may be allowed in Threshold’s patent applications or in the patent applications Threshold may license from others.

The degree of future protection for Threshold’s proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect Threshold’s rights or permit Threshold to gain or keep Threshold’s competitive advantage. For example:

 

    Threshold might not have been the first to make the inventions covered by each of Threshold’s pending patent applications and issued patents, and Threshold may have to participate in expensive and protracted interference proceedings to determine priority of invention;

 

    Threshold might not have been the first to file patent applications for these inventions;

 

    others may independently develop identical, similar or alternative product candidates to any of Threshold’s product candidates;

 

    Threshold’s pending patent applications may not result in issued patents;

 

    Threshold’s issued patents may not provide a basis for commercially viable products or may not provide Threshold with any competitive advantages or may be challenged by third parties;

 

    others may design around Threshold’s patent claims to produce competitive products that fall outside the scope of Threshold’s patents;

 

    Threshold may not develop additional patentable proprietary technologies related to Threshold’s product candidates; or

 

    the patents of others may prevent Threshold from marketing one or more of Threshold’s product candidates for one or more indications that may be valuable to Threshold’s business strategy.

Moreover, an issued patent does not guarantee Threshold the right to practice the patented technology or commercialize the patented product. Third parties may have blocking patents that could be used to prevent

 

58


Table of Contents

Threshold from commercializing Threshold’s patented products and practicing Threshold’s patented technology. Threshold’s issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit Threshold’s ability to prevent competitors from marketing the same or related product candidates or could limit the length of the term of patent protection of Threshold’s product candidates. In addition, the rights granted under any issued patents may not provide Threshold with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, Threshold’s competitors may independently develop similar technologies. Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of Threshold’s product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent. Patent term extensions may not be available for these patents. If Threshold is not able to obtain adequate protection for, or defend, the intellectual property position of evofosfamide or any other potential future product candidates, then Threshold may not be able to retain or attract collaborators to partner Threshold’s development programs, including evofosfamide. Further, even if Threshold can obtain protection for and defend the intellectual property position of evofosfamide or any potential future product candidates, Threshold or any of Threshold’s potential future strategic partners still may not be able to exclude competitors from developing or marketing competing drugs. Should this occur, Threshold and potential future strategic partners may not generate any revenues or profits from evofosfamide or any potential future product candidates, or Threshold’s revenue or profit potential would be significantly diminished.

Threshold relies on trade secrets and other forms of non-patent intellectual property protection. If Threshold is unable to protect Threshold’s trade secrets, other companies may be able to compete more effectively against Threshold.

Threshold relies on trade secrets to protect certain aspects of Threshold’s technology, especially where Threshold does not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public during the regulatory approval process. Although Threshold uses reasonable efforts to protect Threshold’s trade secrets, Threshold’s employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose Threshold’s information to competitors. Enforcing a claim that a third party illegally obtained and is using Threshold’s trade secret information is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to or may not protect trade secrets. Moreover, Threshold’s competitors may independently develop equivalent knowledge, methods and know-how.

If Threshold is sued for infringing intellectual property rights of third parties or if Threshold is forced to engage in an interference proceeding, it will be costly and time consuming, and an unfavorable outcome in that litigation or interference would have a material adverse effect on Threshold’s business.

Threshold’s ability to commercialize Threshold’s product candidates depends on Threshold’s ability to develop, manufacture, market and sell Threshold’s product candidates without infringing the proprietary rights of third parties. Numerous United States and foreign patents and patent applications, which are owned by third parties, exist in the general field of cancer therapies or in fields that otherwise may relate to Threshold’s product candidates. If Threshold is shown to infringe, Threshold could be enjoined from use or sale of the claimed invention if Threshold is unable to prove that the patent is invalid. In addition, because patent applications can take many years to issue, there may be currently pending patent applications, unknown to Threshold, which may later result in issued patents that Threshold’s product candidates may infringe, or which may trigger an interference proceeding regarding one of Threshold’s owned or licensed patents or applications. There could also be existing patents of which Threshold is not aware that Threshold’s product candidates may inadvertently infringe or which may become involved in an interference proceeding.

The biotechnology and pharmaceutical industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. For so long as Threshold’s product

 

59


Table of Contents

candidates are in clinical trials, Threshold believes Threshold’s clinical activities fall within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As Threshold’s clinical investigational drug product candidates progress toward commercialization, the possibility of a patent infringement claim against Threshold increases. While Threshold attempts to ensure that Threshold’s active clinical investigational drugs and the methods Threshold employs to manufacture them, as well as the methods for their use Threshold intends to promote, do not infringe other parties’ patents and other proprietary rights, Threshold cannot be certain they do not, and competitors or other parties may assert that Threshold infringes their proprietary rights in any event.

Threshold may be exposed to future litigation based on claims that Threshold’s product candidates, or the methods Threshold employs to manufacture them, or the uses for which Threshold intends to promote them, infringe the intellectual property rights of others. Threshold’s ability to manufacture and commercialize Threshold’s product candidates may depend on Threshold’s ability to demonstrate that the manufacturing processes Threshold employs and the use of Threshold’s product candidates do not infringe third-party patents. If third-party patents were found to cover Threshold’s product candidates or their use or manufacture, Threshold could be required to pay damages or be enjoined and therefore unable to commercialize Threshold’s product candidates, unless Threshold obtained a license. A license may not be available to Threshold on acceptable terms, if at all.

Risks Related To Threshold’s Industry

If Threshold’s competitors are able to develop and market products that are more effective, safer or more affordable than Threshold’s products, or obtain marketing approval before Threshold does, Threshold’s commercial opportunities may be limited.

Competition in the biotechnology and pharmaceutical industries is intense and continues to increase, particularly in the area of cancer treatment. Most major pharmaceutical companies and many biotechnology companies are aggressively pursuing oncology development programs, including traditional therapies and therapies with novel mechanisms of action. Threshold’s cancer product candidates face competition from established biotechnology and pharmaceutical companies and from generic pharmaceutical manufacturers. In particular, if approved for commercial sale for pancreatic cancer, evofosfamide would compete with Gemzar ® , marketed by Eli Lilly and Company; Tarceva ® , marketed by Roche/Genentech and Astellas Oncology; Abraxane ® marketed by Celgene; and FOLFIRINOX, which is a combination of generic products that are sold individually by many manufacturers. There may also be product candidates of which Threshold is not aware at an earlier stage of development that may compete with evofosfamide or other potential future product candidates Threshold may develop. In short, each cancer indication for which Threshold is or may be developing product candidates has a number of established medical therapies with which Threshold’s candidates will compete. Threshold’s evofosfamide product candidate for targeting the tumor hypoxia is likely to be in highly competitive markets and may eventually compete with other therapies offered by companies who are developing or were developing drugs that target tumor hypoxia.

Threshold also faces potential competition from academic institutions, government agencies and private and public research institutions engaged in the discovery and development of drugs and therapies. Many of Threshold’s competitors have significantly greater financial resources and expertise in research and development, preclinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing, sales and marketing than Threshold does. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established pharmaceutical companies.

Threshold’s competitors may succeed in developing products that are more effective, have fewer side effects and are safer or more affordable than Threshold’s product candidates, which would render Threshold’s product candidates less competitive or noncompetitive. These competitors also compete with Threshold to recruit

 

60


Table of Contents

and retain qualified scientific and management personnel, establish clinical trial sites and patient registration for clinical trials, as well as to acquire technologies and technology licenses complementary to Threshold’s programs or advantageous to Threshold’s business. Moreover, competitors that are able to achieve patent protection obtain regulatory approvals and commence commercial sales of their products before Threshold does, and competitors that have already done so, may enjoy a significant competitive advantage.

Threshold’s relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose Threshold 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 Threshold obtains marketing approval. Threshold’s future arrangements with third-party payors and customers may expose Threshold to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Threshold would market, sell and distribute Threshold’s products. As a biotechnology company, even though Threshold does not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to Threshold’s business. The laws that may affect Threshold’s ability to operate include:

 

    The federal Anti-Kickback Statute will constrain Threshold’s marketing practices, educational programs, pricing policies and relationships with healthcare providers or other entities by prohibiting, 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. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

    Federal civil and criminal false claims laws and civil monetary penalty laws impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

    The Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also created federal criminal laws that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them to have committed a violation;

 

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

 

    The federal physician sunshine requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the Affordable Care Act, or ACA, requires manufacturers of drugs, devices, biologics and medical supplies to report annually to HHS information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

 

61


Table of Contents
    Analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and state and foreign laws that govern the privacy and security of health information in specified 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 Threshold’s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that Threshold’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If Threshold’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to Threshold, Threshold may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of Threshold’s operations. If any physicians or other healthcare providers or entities with whom Threshold expects to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

There is a substantial risk of product liability claims in Threshold’s business. If Threshold does not obtain sufficient liability insurance, a product liability claim could result in substantial liabilities.

Threshold’s business exposes Threshold to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Regardless of merit or eventual outcome, product liability claims may result in:

 

    delay or failure to complete Threshold’s clinical trials;

 

    withdrawal of clinical trial participants;

 

    decreased demand for Threshold’s product candidates;

 

    injury to Threshold’s reputation;

 

    litigation costs;

 

    substantial monetary awards against Threshold; and

 

    diversion of management or other resources from key aspects of Threshold’s operations.

If Threshold succeeds in marketing products, product liability claims could result in an FDA or foreign regulatory investigation of the safety or efficacy of Threshold’s products, Threshold’s manufacturing processes and facilities or Threshold’s marketing programs. An FDA or foreign regulatory investigation could also potentially lead to a recall of Threshold’s products or more serious enforcement actions, or limitations on the indications, for which they may be used, or suspension or withdrawal of approval.

Threshold has product liability insurance that covers Threshold’s clinical trials up to a $5 million annual aggregate limit. Threshold intends to expand Threshold’s insurance coverage to include the sale of commercial products if marketing approval is obtained for Threshold’s product candidates or any other compound that Threshold may develop. However, insurance coverage is expensive and Threshold may not be able to maintain insurance coverage at a reasonable cost or at all, and the insurance coverage that Threshold obtains may not be adequate to cover potential claims or losses.

 

62


Table of Contents

Even if Threshold receives regulatory approval to market Threshold’s product candidates, the market may not be receptive to Threshold’s product candidates upon their commercial introduction, which would negatively affect Threshold’s ability to achieve profitability.

Threshold’s product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved products will depend on a number of factors, including:

 

    the effectiveness of the product;

 

    the prevalence and severity of any side effects;

 

    potential advantages or disadvantages over alternative treatments;

 

    relative convenience and ease of administration;

 

    the strength of marketing and distribution support;

 

    the price of the product, both in absolute terms and relative to alternative treatments; and

 

    sufficient third-party coverage or reimbursement.

If Threshold’s product candidates receive regulatory approval but do not achieve an adequate level of acceptance by physicians, patients, healthcare payors and the medical community, Threshold may not generate product revenues sufficient to attain profitability.

If third-party payors do not cover or adequately reimburse patients for any of Threshold’s product candidates if approved for marketing, Threshold may not be successful in selling them.

Threshold’s ability to commercialize any approved products successfully will depend in part on the extent to which coverage and reimbursement will be available from governmental and other third-party payors, both in the United States and in foreign markets. Even if Threshold succeeds in bringing one or more products to the market, the amount reimbursed for Threshold’s products may be insufficient to allow Threshold to compete effectively and could adversely affect Threshold’s profitability. Coverage and reimbursement by a governmental and other third-party payor may depend upon a number of factors, including a governmental or other third-party payor’s determination that use of a product is:

 

    a covered benefit under its health plan;

 

    safe, effective and medically necessary;

 

    appropriate for the specific patient;

 

    cost-effective; and

 

    neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product from each third-party and governmental payor is a time consuming and costly process that could require Threshold to provide supporting scientific, clinical and cost effectiveness data for the use of Threshold’s products to each payor. Threshold may not be able to provide data sufficient to obtain coverage and reimbursement.

Eligibility for coverage does not imply that any drug product will be reimbursed in all cases or at a rate that allows Threshold to make a profit. Interim payments for new products, if applicable, may also not be sufficient to cover Threshold’s costs and may not become permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost drugs that are already reimbursed, may be incorporated into existing payments for other products or services and may reflect budgetary constraints and/or Medicare or Medicaid data used to calculate these rates. Net prices for

 

63


Table of Contents

products also may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.

The health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, became law in November 2003 and created a broader prescription drug benefit for Medicare beneficiaries. The MMA also contains provisions intended to reduce or eliminate delays in the introduction of generic drug competition at the end of patent or nonpatent market exclusivity. The impact of the MMA on drug prices and new drug utilization over the next several years is unknown. The MMA also made adjustments to the physician fee schedule and the measure by which prescription drugs are presently paid, changing from Average Wholesale Price to Average Sales Price. The effects of these changes are unknown but may include decreased utilization of new medicines in physician prescribing patterns, and further pressure on drug company sponsors to provide discount programs and reimbursement support programs.

In March 2010, the United States Congress enacted the ACA, which, among other things, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs and included the following changes to the coverage and payment for drug products under government health care programs:

 

    expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices;

 

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

 

    extended Medicaid drug rebates, previously due only on fee-for-service utilization, to Medicaid managed care utilization, and created an alternate rebate formula for new formulations of certain existing products that is intended to increase the amount of rebates due on those drugs;

 

    expanded the types of entities eligible for the 340B drug discount program that mandates discounts to certain hospitals, community centers and other qualifying providers; and

 

    established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-of-sale discount off the negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D.

Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, former President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely affect Threshold’s future profitability.

There have been, and Threshold expects that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect reimbursement levels for Threshold’s

 

64


Table of Contents

future products or otherwise result in pricing pressures with respect to Threshold’s future products. In this regard, Threshold expects further federal and state proposals and healthcare reforms to continue to be proposed to limit the price of, or to curb pricing increases for, prescription drugs, including as a result of negative publicity regarding drug pricing strategies by pharmaceutical companies and pricing increases on pharmaceutical products generally, which could limit the prices that can be charged for Threshold’s future products, which in turn may limit Threshold’s commercial opportunity and/or negatively impact revenues from sales of Threshold’s future products. In addition, the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates and may have sufficient market power to demand significant price reductions.

Foreign governments tend to impose strict price controls, which may adversely affect Threshold’s potential future profitability.

In some foreign countries, particularly in the European Union and Japan, prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, Threshold may be required to conduct a clinical trial that compares the cost-effectiveness of Threshold’s product candidate to other available therapies. If reimbursement of Threshold’s products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, Threshold’s potential future profitability will be negatively affected.

Threshold may incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose Threshold to significant liabilities.

Threshold’s research and development activities use biological and hazardous materials that are dangerous to human health and safety or the environment. Threshold is subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes resulting from these materials. Threshold is also subject to regulation by the Occupational Safety and Health Administration, or OSHA, the California and federal environmental protection agencies and to regulation under the Toxic Substances Control Act. OSHA or the California or federal environmental protection agencies, may adopt regulations that may affect Threshold’s research and development programs. Threshold is unable to predict whether any agency will adopt any regulations that could have a material adverse effect on Threshold’s operations. Threshold has incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of Threshold’s business in complying with these laws and regulations. Although Threshold believes Threshold’s safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, Threshold cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, Threshold could be held liable for any resulting damages, and any liability could significantly exceed Threshold’s insurance coverage.

 

    reduced liquidity for Threshold’s stockholders;

 

    potential loss of confidence by employees and potential future partners or collaborators; and

 

    loss of institutional investor interest and fewer business development opportunities.

 

65


Table of Contents

Risks Related to Ownership of Threshold Common Stock

Threshold may not be able to correctly estimate Threshold’s future operating expenses or Threshold’s operating expenses may exceed Threshold’s expectations, which could cause the ownership percentage retained by the Threshold stockholders in the combined company to be reduced.

Pursuant to the terms of the merger agreement, if Threshold’s net cash at the consummation of the merger is less than $12.5 million, the ownership percentage of Threshold’s stockholders, option holders and warrant holders in the combined company immediately following the consummation of the merger will be reduced. As of December 31, 2016, Threshold had cash and cash equivalents totaling $23.6 million. However, certain contingent payments related to the merger, including severance and change of control payments payable to Threshold’s existing and former executive officers, will become due and payable in connection with the closing of the merger.

Threshold’s operating expenses and expenses associated with the merger and Threshold’s obligations thereunder may exceed Threshold’s estimates as a result of a variety of factors, many of which are outside of its control. These factors include:

 

    the time, resources and costs associated with the merger, including legal and accounting costs;

 

    the costs associated with complying with its obligations under the merger agreement; and

 

    the costs of any claims or liabilities related to the proposed merger.

If Threshold has not correctly estimated Threshold’s future operating expenses or Threshold’s operating expenses exceed Threshold’s expectations, Threshold may be below the $12.5 million level at the time of the merger’s closing, which would result in an adjustment to the exchange ratio in the merger agreement such that the ownership percentage retained by the Threshold’s stockholders in the combined company immediately following the merger may be reduced.

If Threshold fails to continue to meet all applicable NASDAQ Capital Market requirements and NASDAQ determines to delist the Threshold common stock, the delisting could adversely affect the market liquidity of the Threshold common stock and the market price of the Threshold common stock could decrease.

The Threshold common stock is listed on The NASDAQ Capital Market. In order to maintain Threshold’s listing, Threshold must meet minimum financial and other requirements, including requirements for a minimum amount of capital, a minimum price per share and continued business operations so that Threshold is not characterized as a “public shell company.” On November 11, 2016, Threshold received a notice from the staff, or the NASDAQ Staff, that, for the previous 30 consecutive business days, the closing bid price for the Threshold common stock was below the $1.00 per share minimum bid price requirement for continued listing on The NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2), or the Bid Price Rule. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), the Threshold had 180 calendar days, or until May 10, 2017, to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule, the closing bid price of the Threshold common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time during this 180-day period. Threshold did not regain compliance with the rule by May 10, 2017, but became eligible for an additional 180 calendar day compliance period by meeting the continued listing requirement for market value of publicly held shares and all other applicable standards for initial listing on The NASDAQ Capital Market, with the exception of the bid price requirement, and by providing written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. In March 2017, Threshold’s board of directors approved a reverse stock split, within a reverse split ratio of 1-to-5 and 1-to-15 of Threshold common stock, which would be contingent upon stockholder approval (Proposal No. 5). However, if it appears to the NASDAQ Staff that Threshold will not be able to cure the deficiency, NASDAQ will notify Threshold that its common stock will be subject to delisting. In the event of such a notification, Threshold may appeal the NASDAQ Staff’s determination to delist its securities, but there can be no assurance

 

66


Table of Contents

the NASDAQ Staff would grant Threshold’s request for continued listing. If Threshold fails to continue to meet all applicable NASDAQ Capital Market requirements, NASDAQ may determine to delist the Threshold common stock from The NASDAQ Capital Market. If the Threshold common stock is delisted for any reason, it could reduce the value of the Threshold common stock and its liquidity.

If the Threshold common stock is delisted as a result of Threshold’s failure to comply with the Bid Price Requirement or any other NASDAQ continued listing requirement, Threshold would expect the Threshold common stock to be traded in the over-the-counter market, which could adversely affect the liquidity of the Threshold common stock. Additionally, delisting would substantially impair Threshold’s ability to raise additional funds to fund Threshold’s operations, to meaningfully advance the development of evofosfamide and/or to acquire or in-license additional product candidates or development programs, and Threshold could face other significant material adverse consequences, including:

 

    a limited availability of market quotations for Threshold common stock;

 

    a reduced amount of news and analyst coverage for Threshold;

 

    reduced liquidity for Threshold’s stockholders;

 

    potential loss of confidence by employees and potential future partners or collaborators; and

 

    loss of institutional investor interest and fewer business development opportunities.

The price of Threshold common stock has been and may continue to be volatile.

The stock markets in general, the markets for biotechnology stocks and, in particular, the stock price of the Threshold common stock, have experienced extreme volatility. Further price declines in the stock price of the Threshold common stock could result from general market and economic conditions and a variety of other factors, including:

 

    announcements regarding the development of Threshold’s product candidates, including any delays in any potential future clinical trials, and investor perceptions of Threshold’s ability to advance the development of evofosfamide;

 

    adverse results or delays in potential future clinical trials of evofosfamide;

 

    Threshold’s ability to raise additional capital to advance the development of evofosfamide and the terms of any related financing arrangements;

 

    announcements of regulatory approval or non-approval of Threshold’s product candidates, or delays in the applicable regulatory agency review process;

 

    adverse actions taken by regulatory agencies with respect to Threshold’s product candidates, clinical trials, manufacturing processes or sales and marketing activities;

 

    Threshold’s ability to enter into new collaborative, licensing or other strategic arrangements with respect to Threshold’s product candidates;

 

    the terms and timing of any future collaborative, licensing or other strategic arrangements that Threshold may establish;

 

    announcements of technological innovations, patents or new products by Threshold or Threshold’s competitors;

 

    regulatory developments in the United States, Japan and other foreign countries;

 

    any lawsuit involving Threshold or Threshold’s product candidates;

 

    Threshold’s ability to comply with the minimum listing requirements of NASDAQ;

 

67


Table of Contents
    announcements concerning Threshold’s competitors, or the biotechnology or pharmaceutical industries in general;

 

    developments concerning any strategic alliances or acquisitions Threshold may enter into;

 

    actual or anticipated variations in Threshold’s operating results;

 

    changes in recommendations by securities analysts or lack of analyst coverage;

 

    deviations in Threshold’s operating results from the estimates of analysts;

 

    sales of Threshold common stock by Threshold, including under Threshold’s sales agreement with Cowen and Company, LLC, or Cowen;

 

    sales of Threshold common stock by Threshold’s executive officers, directors and significant stockholders or sales of substantial amounts of common stock; and

 

    additional losses of any of Threshold’s key scientific or management personnel.

In the past, following periods of volatility in the market price of a particular company’s securities, litigation has often been brought against that company. Any such lawsuit could consume resources and management time and attention, which could adversely affect Threshold’s business.

If there are large sales of Threshold common stock, the market price of Threshold common stock could drop substantially. In addition, a significant number of shares of Threshold common stock are subject to issuance upon exercise of outstanding options, which upon such exercise would result in dilution to Threshold’s securityholders.

If Threshold or Threshold’s existing stockholders sell a large number of shares of Threshold common stock or the public market perceives that Threshold or Threshold’s existing stockholders might sell shares of Threshold common stock, the market price of the Threshold common stock could decline significantly. As of December 31, 2016, Threshold had 71,560,294 outstanding shares of common stock, substantially all of which may be sold in the public market without restriction, subject to any affiliate restrictions. On November 2, 2015, Threshold entered into a sales agreement with Cowen, or the Cowen Sales Agreement, under which Threshold may sell shares of Threshold common stock from time to time through Cowen, as Threshold’s agent for the offer and sale of the shares, in an aggregate amount not to exceed $50 million. Though Threshold’s ability to sell shares of common stock through Cowen under Threshold’s sales agreement with Cowen is practically limited or precluded altogether due to Threshold’s currently-depressed stock price, to the extent that Threshold sell shares of Threshold common stock pursuant to the sales agreement with Cowen in the future, Threshold’s stockholders will experience dilution. In addition, as of December 31, 2016, there were 10,941,745 shares of Threshold common stock issuable upon the exercise of outstanding options having a weighted-average exercise price of $3.00 per share. Although Threshold cannot determine at this time how many of the currently outstanding options will ultimately be exercised, the options will likely be exercised only if the exercise price is below the market price of the Threshold common stock. To the extent that the options are exercised, additional shares of Threshold common stock will be issued that will be eligible for resale in the public market, which will result in dilution to Threshold’s securityholders.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on Threshold’s stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of Threshold’s internal control over financial reporting. If Threshold fails to maintain the adequacy of Threshold’s internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, Threshold may not be able to ensure that Threshold can conclude on an ongoing basis that Threshold has effective internal control over financial reporting

 

68


Table of Contents

in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If Threshold cannot favorably assess, or Threshold’s independent registered public accounting firm is unable to provide an unqualified attestation report on, the effectiveness of Threshold’s internal control over financial reporting, investor confidence in the reliability of Threshold’s financial reports may be adversely affected, which could have a material adverse effect on Threshold’s stock price.

Threshold’s certificate of incorporation, Threshold’s bylaws and Delaware law contain provisions that could discourage another company from acquiring Threshold and may prevent attempts by Threshold’s stockholders to replace or remove Threshold’s current management.

Provisions of Delaware law, where Threshold is incorporated, Threshold’s certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by Threshold’s stockholders to replace or remove Threshold’s current management by making it more difficult for stockholders to replace or remove Threshold’s board of directors. These provisions include:

 

    authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

    providing for a classified board of directors with staggered terms;

 

    requiring supermajority stockholder voting to effect certain amendments to Threshold’s certificate of incorporation and bylaws;

 

    eliminating the ability of stockholders to call special meetings of stockholders;

 

    prohibiting stockholder action by written consent; and

 

    establishing advance notice requirements for nominations for election to Threshold’s board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

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

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

In addition, as permitted by Section 145 of the Delaware General Corporation Law, or the DGCL, Threshold’s amended and restated bylaws and Threshold’s indemnification agreements that Threshold has entered into with Threshold’s directors and officers provide that:

 

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

 

    Threshold may, in Threshold’s discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.

 

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

 

69


Table of Contents
    The rights conferred in Threshold’s amended and restated bylaws are not exclusive, and Threshold is authorized to enter into indemnification agreements with Threshold’s directors, officers, employees and agents and to obtain insurance to indemnify such persons.

 

    Threshold may not retroactively amend Threshold’s amended and restated bylaw provisions to reduce Threshold’s indemnification obligations to directors, officers, employees and agents.

Threshold’s ability to use Threshold’s net operating losses to offset future taxable income, if any, may be subject to certain limitations.

In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (generally defined as a greater than 50-percentage-point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. If Threshold undergoes additional ownership changes (some of which changes may be outside Threshold’s control), Threshold’s ability to utilize Threshold’s NOLs could be further limited by Section 382 of the Code. The merger will result in an ownership change under Section 382 of the Code for Threshold, and Threshold’s pre-merger net operating loss carryforwards and certain other tax attributes will be subject to limitation or elimination. The net operating loss carryforwards and certain other tax attributes of Molecular and of the combined company may also be subject to limitations as a result of ownership changes. Threshold’s NOLs may also be impaired under state law. Accordingly, Threshold may not be able to utilize a material portion of Threshold’s NOLs. Furthermore, Threshold’s ability to utilize Threshold’s NOLs is conditioned upon Threshold’s attaining profitability and generating U.S. federal taxable income. Other than for 2015, Threshold has incurred net losses since Threshold’s inception, and Threshold anticipates that it will continue to incur significant losses for the foreseeable future; thus, Threshold does not know whether or when Threshold will generate the U.S. federal taxable income necessary to utilize Threshold’s NOLs. See the risk factors described above under the section titled “— Risks Related to Related to Threshold’s Financial Performance and Operations ” beginning on page 51 of this proxy statement/prospectus/information statement.

Threshold has never paid dividends on Threshold common stock, and Threshold does not anticipate paying any cash dividends in the foreseeable future.

Threshold has never declared or paid cash dividends on Threshold common stock. Threshold does not anticipate paying any cash dividends on Threshold common stock in the foreseeable future. Threshold currently intends to retain all available funds and any future earnings to fund the development and growth of Threshold’s business. As a result, capital appreciation, if any, of Threshold common stock will be Threshold’s stockholders’ sole source of gain for the foreseeable future.

Risks Related to Molecular’s Financial Condition and Capital Requirements

Molecular has incurred losses since its inception, has a limited operating history on which to assess its business, and anticipates that it will continue to incur significant losses for the foreseeable future.

Molecular is a clinical development-stage biopharmaceutical company with a limited operating history. Molecular has incurred net losses in each year since its inception in 2009, including net losses of $11.0 million and $5.4 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, Molecular had an accumulated deficit of $40.4 million.

As of December 31, 2016, Molecular had cash and cash equivalents of $1.7 million. In January 2017, Molecular issued convertible notes, or the Molecular notes, in the aggregate principal amount of $10.0 million. In connection with execution of the merger agreement, Molecular entered into a note purchase agreement and related bridge notes with Threshold pursuant to which Threshold funded to Molecular a principal amount of $2.0 million. Molecular will continue to require substantial additional capital to continue its clinical development and potential commercialization activities. Accordingly, Molecular will need to raise substantial additional

 

70


Table of Contents

capital to continue to fund its operations. The amount and timing of its future funding requirements will depend on many factors, including the pace and results of its clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on its financial condition and its ability to develop its product candidates.

Molecular has devoted substantially all of its financial resources to identify, acquire, and develop its product candidates, including conducting clinical trials and providing general and administrative support for its operations. To date, Molecular has financed its operations primarily through the sale of equity securities and convertible promissory notes. The amount of its future net losses will depend, in part, on the rate of its future expenditures and its ability to obtain funding through equity or debt financings, strategic collaborations or grants. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Molecular expects losses to increase as it completes Phase I development and advances into Phase II development its lead product candidates. Molecular has not yet commenced pivotal clinical trials for any product candidate and it may be several years, if ever, before Molecular completes pivotal clinical trials and has a product candidate approved for commercialization. Molecular expects to invest significant funds into the research and development of its current product candidates to determine the potential to advance these product candidates to regulatory approval.

If Molecular obtains regulatory approval to market one or more products, its future revenue will depend upon the size of any markets in which its product candidates may receive approval, and its ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors and adequate market share for its product candidates in those markets. Even if Molecular obtains adequate market share for one or more products, because the potential markets in which its product candidates may ultimately receive regulatory approval could be very small, Molecular may never become profitable despite obtaining such market share and acceptance of its products.

Molecular expects to continue to incur significant expenses and increasing operating losses for the foreseeable future and its expenses will increase substantially if and as Molecular:

 

    continues the clinical development of its product candidate;

 

    continues efforts to discover new product candidates;

 

    undertakes the manufacturing of its product candidates or increases volumes manufactured by third parties;

 

    advances its programs into larger, more expensive clinical trials;

 

    initiates additional preclinical, clinical, or other trials or studies for its product candidates;

 

    seeks regulatory and marketing approvals and reimbursement for its product candidates;

 

    establishes a sales, marketing, and distribution infrastructure to commercialize any products for which Molecular may obtain marketing approval and market for itself;

 

    seeks to identify, assess, acquire, and/or develop other product candidates;

 

    makes milestone, royalty or other payments under third-party license agreements;

 

    seeks to maintain, protect, and expand its intellectual property portfolio;

 

    seeks to attract and retain skilled personnel; and

 

    experiences any delays or encounters issues with the development and potential for regulatory approval of its clinical candidates such as safety issues, clinical trial accrual delays, longer follow-up for planned studies, additional major studies or supportive studies necessary to support marketing approval.

Further, the net losses Molecular incurs may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of its results of operations may not be a good indication of its future performance.

 

71


Table of Contents

Molecular’s independent registered public accounting firm has expressed doubt about Molecular’s ability to continue as a going concern.

Based on its cash balances, recurring losses since inception and inadequacy of existing capital resources to fund planned operations for a twelve-month period, Molecular’s independent registered public accounting firm has included an explanatory paragraph in its report on Molecular’s financial statements as of and for the years ended December 31, 2016 and December 31, 2015 expressing substantial doubt about Molecular’s ability to continue as a going concern. Molecular will, during the remainder of 2017, require significant additional funding to continue operations. If Molecular is unable to continue as a going concern, it may be forced to liquidate its assets and the values it receives for its assets in liquidation or dissolution could be significantly lower than the values reflected in its financial statements.

Molecular has never generated any revenue from product sales and may never be profitable.

Molecular has no products approved for commercialization and has never generated any revenue. Molecular’s ability to generate revenue and achieve profitability depends on its ability, alone or with strategic collaborators, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize one or more of its product candidates. Molecular does not anticipate generating revenue from product sales for the foreseeable future. Molecular’s ability to generate future revenue from product sales depends heavily on its success in many areas, including but not limited to:

 

    completing research and development of one or more of its product candidates;

 

    obtaining regulatory and marketing approvals for one or more of its product candidates;

 

    manufacturing one or more product candidates and establishing and maintaining supply and manufacturing relationships with third parties that are commercially feasible, meet regulatory requirements and Molecular’s supply needs in sufficient quantities to meet market demand for its product candidates, if approved;

 

    marketing, launching and commercializing one or more product candidates for which Molecular obtains regulatory and marketing approval, either directly or with a collaborator or distributor;

 

    gaining market acceptance of one or more of its product candidates as treatment options;

 

    addressing any competing products;

 

    protecting, maintaining and enforcing its intellectual property rights, including patents, trade secrets and know-how;

 

    negotiating favorable terms in any collaboration, licensing or other arrangements into which Molecular may enter;

 

    obtaining reimbursement or pricing for one or more of its product candidates that supports profitability; and

 

    attracting, hiring and retaining qualified personnel.

Even if one or more of the product candidates that Molecular develops is approved for commercial sale, Molecular anticipates incurring significant costs associated with launching and commercializing any approved product candidate. Molecular also will have to develop or acquire manufacturing capabilities or continue to contract with contract manufacturers in order to continue development and potential commercialization of its product candidates. For instance, if Molecular’s costs of manufacturing its drug products are not commercially feasible, then it will need to develop or procure its drug products in a commercially feasible manner to successfully commercialize any future approved product, if any. Additionally, if Molecular is not able to generate revenue from the sale of any approved products, Molecular may never become profitable.

 

72


Table of Contents

Raising additional capital may cause dilution to Molecular’s stockholders, restrict its operations or require Molecular to relinquish rights.

To the extent that Molecular raises additional capital through the sale of equity, convertible debt or other securities convertible into equity, including the issuance of shares of capital stock by the combined company in the contemplated financing concurrent with the completion of the merger, the ownership interest of Molecular’s stockholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect rights of Molecular’s stockholders. Debt financing, if available at all, would likely involve agreements that include covenants limiting or restricting Molecular’s ability to take specific actions, such as incurring additional debt, making capital expenditures, making additional product acquisitions or declaring dividends. For instance, Molecular’s loan and security agreement with Silicon Valley Bank limits Molecular’s ability to enter into an asset sale, enter into any change of control, incur additional indebtedness, pay any dividends or enter into specified transactions with its affiliates. Molecular has obtained consent from Silicon Valley Bank to enter into the merger agreement and consummate the merger. If Molecular raises additional funds through strategic collaborations or licensing arrangements with third parties, Molecular may have to relinquish valuable rights to its product candidates or future revenue streams or grant licenses on terms that are not favorable to Molecular. Molecular cannot be assured that it will be able to obtain additional funding if and when necessary to fund its entire portfolio of product candidates to meet its projected plans. If Molecular is unable to obtain funding on a timely basis, Molecular may be required to delay or discontinue one or more of its development programs or the commercialization of any product candidates or be unable to expand its operations or otherwise capitalize on potential business opportunities, which could materially harm Molecular’s business, financial condition, and results of operations.

Molecular also has historically received funds from state and federal government grants for research and development. The grants have been, and any future government grants and contracts Molecular may receive may be, subject to the risks and contingencies set forth below under the section titled “— Risks Related to the Development of Molecular s Product Candidates —Reliance on government funding for Molecular s programs may add uncertainty to Molecular s research and commercialization efforts with respect to those programs that are tied to such funding and may impose requirements that limit Molecular s ability to take certain actions, increase the costs of commercialization and production of product candidates developed under those programs and subject Molecular to potential financial penalties, which could materially and adversely affect Molecular s business, financial condition and results of operations .” beginning on page 83 of this proxy statement/prospectus/information statement. Although Molecular might apply for government contracts and grants in the future, it cannot assure you that it will be successful in obtaining additional grants for any product candidates or programs.

Risks Related to the Development of Molecular’s Product Candidates

Clinical trials are costly, time consuming and inherently risky, and Molecular may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Clinical development is expensive, time consuming and involves significant risk. Molecular cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of development. Events that may prevent successful or timely completion of clinical development include but are not limited to:

 

    inability to generate satisfactory preclinical, toxicology or other in vivo or in vitro data or to develop diagnostics capable of supporting the initiation or continuation of clinical trials;

 

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

 

    delays or failure in obtaining required institutional review board, or IRB, approval at each clinical trial site;

 

73


Table of Contents
    failure to obtain or delays in obtaining a permit from regulatory authorities to conduct a clinical trial;

 

    delays in recruiting or failure to recruit sufficient eligible patients in its clinical trials;

 

    failure by clinical sites or CROs or other third parties to adhere to clinical trial requirements;

 

    failure by Molecular clinical sites, CROs or other third parties to perform in accordance with the good clinical practices requirements of the FDA or applicable foreign regulatory guidelines;

 

    patients withdrawing from Molecular’s clinical trials;

 

    adverse events or other issues of concern significant enough for the FDA, or comparable foreing regulatory authority, to put an Investigational New Drug, or IND, on clinical hold;

 

    occurrence of adverse events associated with Molecular’s product candidates;

 

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

 

    the cost of clinical trials of Molecular’s product candidates;

 

    negative or inconclusive results from Molecular’s clinical trials which may result in Molecular’s deciding, or regulators requiring Molecular, to conduct additional clinical trials or abandon development programs in other ongoing or planned indications for a product candidate; and

 

    delays in reaching agreement on acceptable terms with third-party manufacturers and the time for manufacture of sufficient quantities of its product candidates for use in clinical trials.

Any inability to successfully complete clinical development and obtain regulatory approval for one or more of its product candidates could result in additional costs to Molecular or impair its ability to generate revenue. In addition, if Molecular makes manufacturing or formulation changes to its product candidates, Molecular may need to conduct additional nonclinical studies and/or clinical trials to show that the results obtained from such new formulation are consistent with previous results obtained. Clinical trial delays could also shorten any periods during which its products have patent protection and may allow competitors to develop and bring products to market before Molecular does, which could impair its ability to successfully commercialize its product candidates and may harm its business and results of operations.

The approach Molecular is taking to discover and develop next generation immunotoxin therapies (called ETBs) is unproven and may never lead to marketable products.

The scientific discoveries that form the basis for Molecular’s efforts to discover and develop its product candidates are relatively recent. To date, neither Molecular nor any other company has received regulatory approval to market therapeutics utilizing ETBs. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Successful development of ETB therapeutic products by Molecular will require solving a number of issues, including identifying appropriate receptor targets, screening for and selecting potent and safe ETB drug candidates, developing a commercially feasible manufacturing process, successfully completing all required preclinical studies and clinical trials, successfully implementing all other requirements that may be mandated by regulatory agencies from clinical development through post-marketing periods, ensuring intellectual property protection in any territory where an ETB may be commercialized and commercializing an ETB successfully in a competitive product landscape. In addition, any product candidates that Molecular develops may not demonstrate in patients the biological and pharmacological properties ascribed to them in laboratory and preclinical testing, and they may interact with human biological systems in unforeseen, ineffective or even harmful ways. If Molecular does not successfully develop and commercialize one or more product candidates based upon this technological approach, it may not become profitable and the value of its capital stock may decline.

Further, Molecular’s focus on ETB technology for developing product candidates as opposed to multiple, more proven technologies for drug development increases the risk associated with its business. If Molecular is

 

74


Table of Contents

not successful in developing an approved product using ETB technology, it may not be able to identify and successfully implement an alternative product development strategy. In addition, work by other companies pursuing similar technologies may encounter setbacks and difficulties that regulators and investors may attribute to Molecular’s product candidates, whether appropriate or not.

Molecular’s ETB therapeutic product candidates are based on a relatively novel technology, which makes it difficult to predict the time and cost of development and of subsequently obtaining regulatory approval, if at all. To date, no ETB therapeutics have been approved in the United States.

Molecular has concentrated its research and development efforts to date on a limited number of product candidates based on its ETB therapeutic platform and identifying its initial targeted disease indications. Molecular’s future success depends on its successful development of one or more viable product candidates. Currently, only one of its product candidates, MT-3724, is in clinical development, and the remainder of its product candidates are in preclinical development. There can be no assurance that Molecular will not experience problems or delays in developing its product candidates and that such problems or delays will not cause unanticipated costs, or that any such development problems can be solved.

Additionally, the FDA and comparable foreign regulatory authorities have relatively limited experience with ETB therapeutics. No regulatory authority has granted approval to any person or entity, including Molecular, to market or commercialize ETB therapeutics, which may increase the complexity, uncertainty and length of the regulatory approval process for Molecular’s product candidates. If Molecular’s ETB product candidates fail to prove to be safe, effective or commercially viable, its product candidate pipeline would have little, if any, value, which would have a material adverse effect on its business, financial condition or results of operations.

The clinical trial and manufacturing requirements of the FDA, the European Medicines Agency, or the EMA, and other regulatory authorities, and the criteria these regulators use to determine the safety and efficacy of a product candidate, vary substantially according to the type, complexity, novelty and intended use and market of the product candidate. The regulatory approval process for novel product candidates such as ETB therapeutics can be more expensive and take longer than for other, better known or more extensively studied product candidates. It is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for Molecular’s product candidates in either the United States or the European Union or how long it will take to commercialize its product candidates, even if approved for marketing. Approvals by the European Commission may not be indicative of what the FDA may require for approval, and vice versa, and different or additional preclinical studies and clinical trials may be required to support regulatory approval in each respective jurisdiction. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product candidate to market could decrease Molecular’s ability to generate sufficient product revenue, and Molecular’s business, financial condition, results of operations and prospects may be harmed.

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

Undesirable side effects caused by its product candidates could cause Molecular or regulatory authorities to interrupt, delay, or terminate clinical trials or result in a restrictive label or delay regulatory approval.

In addition, Molecular’s MT-3724 product candidate has been studied in only a limited number of patients with a confirmed diagnosis of non-Hodgkin’s lymphoma, and the most common adverse events were peripheral edema, diarrhea, myalgia, cough, fatigue, constipation, nausea, anemia, stomatitis, pyrexia, dizziness, headache, insomnia, dyspnea, neutropenia, thrombocytopenia, blurry vision, dysphagia, oral pain, chills, pneumonia, dehydration, hypoalbuminemia, hyponatremia, dysgeusia, oropharyngeal pain, and maculo-papular rash. Molecular may experience a higher rate or severity of adverse events and comparable or higher rates of discontinuation in testing in its future clinical trials. There is no guarantee that additional or more severe side

 

75


Table of Contents

effects will not be identified through ongoing clinical trials of Molecular’s product candidates for current and other indications. Undesirable side effects and negative results for any of Molecular’s product candidates may negatively impact the development and potential for approval of Molecular’s product candidates for their proposed indications.

Additionally, even if one or more of its product candidates receives marketing approval, and Molecular or others later identify undesirable side effects caused by such products, potentially significant negative consequences could result, including but not limited to:

 

    regulatory authorities may withdraw approvals of such products;

 

    regulatory authorities may require additional warnings on the label;

 

    Molecular may be required to create a REMS plan, which could include a medication guide outlining the risks of such side effects for distribution to patients, a communication plan for healthcare providers, and/or other elements to assure safe use;

 

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

 

    its reputation may suffer.

Any of these events could prevent Molecular from achieving or maintaining market acceptance of a product candidate, even if approved, and could significantly harm its business, results of operations, and prospects.

Molecular’s product development program may not discover all possible adverse events that patients who take MT-3724 or its other product candidates may experience. The number of subjects exposed to MT-3724 or its other product candidates and the average exposure time in the clinical development program may be inadequate to detect all adverse events, or chance findings, that may only be detected once the product is administered to more patients and for greater periods of time.

Clinical trials by their nature utilize a sample of the potential patient population. However, with a limited number of subjects and limited duration of exposure, Molecular cannot be fully assured all severe side effects of MT-3724 or its other product candidates will be uncovered. Such severe side effects may only be uncovered with a significantly larger number of patients exposed to the drug. If such safety problems occur or are identified after MT-3724 or another product candidate reaches the market, the FDA, or comparable foreign regulatory authority, may require that Molecular amend the labeling of the product or temporarily cease marketing the product, or may even withdraw approval for the product.

Molecular’s ETB therapeutic approach is novel. Negative public opinion and increased regulatory scrutiny of ETB-based therapies may damage public perception of the safety of its product candidates and adversely affect its ability to conduct its business or obtain regulatory approvals for its product candidates.

ETB therapy remains a novel technology, with no ETB therapy product approved to date in the United States. Public perception may be influenced by claims that ETB therapy is unsafe, and ETB therapy may not gain the acceptance of the public or the medical community. In particular, Molecular’s success will depend upon physicians who specialize in the treatment of the diseases targeted by Molecular’s product candidates prescribing treatments that involve the use of one or more of its approved product candidates in lieu of, or in addition to, existing treatments with which they are familiar and for which greater clinical data may be available. More restrictive government regulations or negative public opinion regarding ETB-based therapeutics could have an adverse effect on Molecular’s business, financial condition or results of operations and may delay or impair the development and commercialization of its product candidates or demand for any products Molecular may develop. Serious adverse events, or SAEs, in ETB clinical trials for Molecular’s competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of Molecular’s product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates.

 

76


Table of Contents

Molecular is heavily dependent on the success of its product candidates, the most advanced of which is in the early stages of clinical development. Some of its product candidates have produced results in preclinical settings to date, or for other indications than those for which Molecular contemplates conducting development and seeking FDA approval, and Molecular cannot give any assurance that it will generate data for any of its product candidates sufficient to receive regulatory approval in its planned indications, which will be required before they can be commercialized.

Molecular has invested substantially all of its efforts and financial resources to identify, acquire and develop its portfolio of product candidates. Its future success is dependent on its ability to successfully further develop, obtain regulatory approval for, and commercialize one or more product candidates. Molecular currently generates no revenue from sales of any products, and Molecular may never be able to develop or commercialize a product candidate.

Molecular currently has one product candidate in Phase I clinical trials. MT-3724 has only been administered in patients with non-Hodgkin’s lymphoma. This is only one of the multiple indications for which Molecular plans to develop this product candidate. Additionally, Molecular’s clinical and preclinical data to date is not validated and Molecular has no way of knowing if after validation Molecular’s clinical trial data will be complete and consistent. There can be no assurance that the data that Molecular develops for its product candidates in its planned indications will be sufficient to obtain regulatory approval.

In addition, none of its product candidates has advanced into a pivotal clinical trial for Molecular’s proposed indications and it may be years before any such clinical trial is initiated and completed, if at all. Molecular is not permitted to market or promote any of its product candidates before it receives regulatory approval from the FDA or comparable foreign regulatory authorities, and Molecular may never receive such regulatory approval for any of its product candidates. Molecular cannot be certain that any of its product candidates will be successful in clinical trials or receive regulatory approval. Further, Molecular’s product candidates may not receive regulatory approval even if they are successful in clinical trials. If Molecular does not receive regulatory approvals for its product candidates, Molecular may not be able to continue its operations.

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

Clinical testing is expensive and generally takes many years to complete, and the outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of Molecular’s product candidates may not be predictive of the results of larger, later-stage controlled clinical trials. Product candidates that have shown promising results in early-stage clinical trials may still suffer significant setbacks or failure in subsequent clinical trials. Molecular’s clinical trial to date has been conducted on a small number of patients in limited numbers of clinical sites for a limited number of indications. Molecular will have to conduct larger, well-controlled trials in its proposed indications to verify the results obtained to date and to support any regulatory submissions for further clinical development. A number of companies in the biopharmaceutical industry have suffered significant setbacks or failure in advanced clinical trials due to lack of efficacy or adverse safety profiles despite promising results in earlier, smaller clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses. Molecular does not know whether any Phase I, Phase II, Phase III or other clinical trials Molecular may conduct will demonstrate consistent or adequate efficacy and safety with respect to the proposed indication for use sufficient to receive regulatory approval or market its drug candidates.

Molecular may use its financial and human resources to pursue a particular research program or product candidate and fail to capitalize on programs or product candidates that may be more profitable or for which there is a greater likelihood of success.

Because Molecular has limited financial and human resources, it may forego or delay pursuit of opportunities with some programs or product candidates or for other indications that later prove to have greater

 

77


Table of Contents

commercial potential. Molecular’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or more profitable market opportunities. Molecular’s spending on current and future research and development programs and future product candidates for specific indications may not yield any commercially viable products. Molecular may also enter into additional strategic collaboration agreements to develop and commercialize some of its programs and potential product candidates in indications with potentially large commercial markets. If Molecular does not accurately evaluate the commercial potential or target market for a particular product candidate, it may relinquish valuable rights to that product candidate through strategic collaborations, licensing or other royalty arrangements in cases in which it would have been more advantageous for Molecular to retain sole development and commercialization rights to such product candidate, or Molecular may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

Molecular may find it difficult to enroll patients in its clinical trials given the limited number of patients who have the diseases for which its product candidates are being studied. Difficulty in enrolling patients could delay or prevent clinical trials of its product candidates.

Identifying and qualifying patients to participate in clinical trials of Molecular’s product candidates is essential to its success. The timing of Molecular’s clinical trials depends in part on the rate at which Molecular can recruit patients to participate in clinical trials of its product candidates, and Molecular may experience delays in its clinical trials if it encounters difficulties in enrollment.

The eligibility criteria of Molecular’s planned clinical trials may further limit the available eligible trial participants as Molecular expects to require that patients have specific characteristics that Molecular can measure or meet the criteria to assure their conditions are appropriate for inclusion in its clinical trials. For instance, Molecular’s Phase I clinical trial of MT-3724 includes patients with non-Hodgkin’s lymphoma. The estimated prevalence of non-Hodgkin’s lymphoma in the United States is that an estimated 72,580 new cases and 20,150 deaths will be attributable to non-Hodgkin’s B-cell lymphomas in 2016. Molecular may not be able to identify, recruit and enroll a sufficient number of patients to complete its clinical trials in a timely manner because of the perceived risks and benefits of the product candidate under study, the availability and efficacy of competing therapies and clinical trials, and the willingness of physicians to participate in its planned clinical trials. If patients are unwilling to participate in Molecular’s clinical trials for any reason, the timeline for conducting trials and obtaining regulatory approval of its product candidates may be delayed.

If Molecular experiences delays in the completion of, or termination of, any clinical trials of its product candidates, the commercial prospects of its product candidates could be harmed, and its ability to generate product revenue from any of these product candidates could be delayed or prevented. In addition, any delays in completing its clinical trials would likely increase its overall costs, impair product candidate development and jeopardize its ability to obtain regulatory approval relative to its current plans. Any of these occurrences may harm its business, financial condition, and prospects significantly.

Molecular may face potential product liability, and, if successful claims are brought against it, Molecular may incur substantial liability and costs. If the use or misuse of Molecular’s product candidates harms patients, or is perceived to harm patients even when such harm is unrelated to its product candidates, Molecular’s regulatory approvals, if any, could be revoked or otherwise negatively impacted and Molecular could be subject to costly and damaging product liability claims. If Molecular is unable to obtain adequate insurance or is required to pay for liabilities resulting from a claim excluded from, or beyond the limits of, its insurance coverage, a material liability claim could adversely affect its financial condition.

The use or misuse of Molecular’s product candidates in clinical trials and the sale of any products for which Molecular may obtain marketing approval exposes Molecular to the risk of potential product liability claims. Product liability claims might be brought against Molecular by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with its product candidates and approved products,

 

78


Table of Contents

if any. There is a risk that Molecular’s product candidates may induce adverse events. If Molecular cannot successfully defend against product liability claims, it could incur substantial liability and costs. Some of Molecular’s ETB therapeutics have shown in clinical trials adverse events, including peripheral edema, diarrhea, myalgia, cough, fatigue, constipation, nausea, anemia, stomatitis, pyrexia, dizziness, headache, insomnia, dyspnea, neutropenia, thrombocytopenia, blurry vision, dysphagia, oral pain, chills, pneumonia, dehydration, hypoalbuminemia, hyponatremia, dysgeusia, oropharyngeal pain, and maculo-papular rash, among others. There is a risk that Molecular’s future product candidates may induce similar or more severe adverse events. Patients with the diseases targeted by Molecular’s product candidates may already be in severe and advanced stages of disease and have both known and unknown significant preexisting and potentially life-threatening health risks. During the course of treatment, patients may suffer adverse events, including death, for reasons that may be related to Molecular’s product candidates. Such events could subject Molecular to costly litigation, require it to pay substantial amounts of money to injured patients, delay, negatively impact or end its opportunity to receive or maintain regulatory approval to market its products, or require Molecular to suspend or abandon its commercialization efforts. Even in a circumstance in which an adverse event is unrelated to Molecular’s product candidates, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may delay Molecular’s regulatory approval process or impact and limit the type of regulatory approvals its product candidates receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on Molecular’s business, financial condition or results of operations.

Although Molecular has product liability insurance covering its clinical trials in the United States for up to $4.0 million per occurrence up to an aggregate limit of $4.0 million, its insurance may be insufficient to reimburse it for any expenses or losses Molecular may suffer. Molecular also will likely be required to increase its product liability insurance coverage for the advanced clinical trials that it plans to initiate. If Molecular obtains marketing approval for any of its product candidates, it will need to expand its insurance coverage to include the sale of commercial products. There is no way to know if Molecular will be able to continue to obtain product liability coverage and obtain expanded coverage if it requires it, in sufficient amounts to protect it against losses due to liability, on acceptable terms, or at all. Molecular may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limits of, its insurance coverage. Where Molecular has provided indemnities in favor of third parties under its agreements with them, there is also a risk that these third parties could incur liability and bring a claim under such indemnities. An individual may bring a product liability claim against Molecular alleging that one of its product candidates causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and breach of warranties. Claims also could be asserted under state consumer protection acts. Any product liability claim brought against Molecular, with or without merit, could result in:

 

    withdrawal of clinical trial volunteers, investigators, patients or trial sites or limitations on approved indications;

 

    the inability to commercialize, or if commercialized, decreased demand for, its product candidates;

 

    if commercialized, product recalls, withdrawals of labeling, marketing or promotional restrictions or the need for product modification;

 

    initiation of investigations by regulators;

 

    loss of revenues;

 

    substantial costs of litigation, including monetary awards to patients or other claimants;

 

    liabilities that substantially exceed Molecular’s product liability insurance, which Molecular would then be required to pay itself;

 

    an increase in Molecular’s product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, if at all;

 

79


Table of Contents
    the diversion of management’s attention from Molecular’s business; and

 

    damage to Molecular’s reputation and the reputation of its products and its technology.

Product liability claims may subject Molecular to the foregoing and other risks, which could have a material adverse effect on its business, financial condition or results of operations.

Risks Related to Regulatory Approval of Molecular’s Product Candidates and Other Legal Compliance Matters

A potential breakthrough therapy designation by the FDA for Molecular’s product candidates may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that Molecular’s product candidates will receive marketing approval.

Molecular may seek a breakthrough therapy designation from the FDA for some of its product candidates. A breakthrough therapy is defined as a drug or biological product that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug or biological product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs or biological products that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of a clinical trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA could also be eligible for accelerated approval.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if Molecular believes one of its product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional or other accelerated FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of Molecular’s product candidates qualify and are designated as breakthrough therapies, the FDA may later decide that the drugs or biological products no longer meet the conditions for designation and the designation may be rescinded.

Molecular may seek Fast Track designation for one or more of its product candidates, but it might not receive such designation, and even if Molecular does, such designation may not actually lead to a faster development or regulatory review or approval process.

If a product candidate is intended for the treatment of a serious condition and nonclinical or clinical data demonstrate the potential to address unmet medical need for this condition, a product sponsor may apply for FDA Fast Track designation. If Molecular seeks Fast Track designation for a product candidate, Molecular may not receive it from the FDA. However, even if Molecular receives Fast Track designation, Fast Track designation does not ensure that Molecular will receive marketing approval or that approval will be granted within any particular timeframe. Molecular may not experience a faster development or regulatory review or approval process with Fast Track designation compared to conventional FDA procedures. In addition, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from Molecular’s clinical development program. Fast Track designation alone does not guarantee qualification for the FDA’s priority review procedures.

Even if Molecular obtains regulatory approval for a product, Molecular will remain subject to ongoing regulatory requirements.

If any of Molecular’s product candidates are approved, Molecular will be subject to ongoing regulatory requirements with respect to manufacturing, labeling, packaging, storage, advertising, promotion, sampling,

 

80


Table of Contents

record-keeping, conduct of post-marketing clinical trials and submission of safety, efficacy and other post-approval information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to continuously comply with FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations and corresponding foreign regulatory manufacturing requirements. As such, Molecular and its contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA or marketing authorization application.

Any regulatory approvals that Molecular receives for its product candidates may be subject to limitations on the approved indicated uses for which the product candidate may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. Molecular will be required to report adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. If its original marketing approval for a product candidate was obtained through an accelerated approval pathway, Molecular could be required to conduct a successful post-marketing clinical trial in order to confirm the clinical benefit for its products. An unsuccessful post-marketing clinical trial or failure to complete such a trial could result in the withdrawal of marketing approval.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, the regulatory agency may impose restrictions on that product or Molecular, including requiring withdrawal of the product from the market. If Molecular fails to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

    issue warning letters;

 

    impose civil or criminal penalties;

 

    suspend or withdraw regulatory approval;

 

    suspend any of Molecular’s ongoing clinical trials;

 

    refuse to approve pending applications or supplements to approved applications submitted by Molecular;

 

    impose restrictions on Molecular’s operations, including closing its contract manufacturers’ facilities; or

 

    require a product recall.

Any government investigation of alleged violations of law would be expected to require Molecular to expend significant time and resources in response and could generate adverse publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect Molecular’s ability to develop and commercialize its products and the value of Molecular and its operating results would be adversely affected.

Healthcare legislative reform measures may have a material adverse effect on Molecular’s business, financial condition or results of operations.

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the ACA was passed. The ACA was intended to substantially

 

81


Table of Contents

change the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things, addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations, establishes annual fees and taxes on manufacturers of specified branded prescription drugs, and promotes a new Medicare Part D coverage gap discount program. However, the ACA has been under threat of repeal since its passage and in May 2017, the U.S. House of Representatives passed legislation known as the American Health Care Act, or the AHCA, which, if enacted, would amend and repeal significant portions of the ACA. While the AHCA was passed by the U.S. House of Representatives, it is unclear whether and in what form this legislation might be passed by the U.S. Senate and, if so, what form any final legislation might take. In any event, it is not clear what the impact of this legislation or other healthcare reform measures that may be adopted in the future will have on any of Molecular’s product candidates if they are approved.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted, and Molecular expects that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand or lower pricing for its product candidates or additional pricing pressures.

Molecular may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If Molecular is unable to comply, or has not fully complied, with such laws, it could face substantial penalties.

If Molecular obtains FDA approval for any of its product candidates and begins commercializing those products in the United States, its operations will be subject to various federal and state fraud and abuse laws, including, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, its proposed sales, marketing and education programs. In addition, Molecular may be subject to patient privacy regulation by both the federal government and the states in which Molecular conduct its business. The laws that may affect its ability to operate include:

 

    the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

 

    federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent;

 

    HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

    the federal physician sunshine requirements under the Health Care Reform Laws requires manufacturers of drugs, devices, biologics and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including governmental and private payors, to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and

 

82


Table of Contents
 

security of health information in specified circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of Molecular’s business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If Molecular’s operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to Molecular, Molecular may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of its operations, any of which could adversely affect its ability to operate Molecular’s business and its results of operations.

Reliance on government funding for Molecular’s programs may add uncertainty to Molecular’s research and commercialization efforts with respect to those programs that are tied to such funding and may impose requirements that limit Molecular’s ability to take certain actions, increase the costs of commercialization and production of product candidates developed under those programs and subject Molecular to potential financial penalties, which could materially and adversely affect Molecular’s business, financial condition and results of operations.

During the course of Molecular’s development of its lead product candidate, it has been funded in significant part through state grants, including but not limited to the substantial funding it has received from the Cancer Prevention & Research Institute of Texas, or CPRIT. In addition to the funding Molecular has received to date, it has applied and intends to continue to apply for federal and state grants to receive additional funding in the future. Molecular has been awarded a second CPRIT grant for Molecular’s MT-4019 program where contract negotiations are still ongoing and may or may not be successful. Contracts and grants funded by the U.S. government, state governments and their related agencies, including Molecular’s contracts with the State of Texas pertaining to funds Molecular has already received, include provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to:

 

    require repayment of all or a portion of the grant proceeds, in certain cases with interest, in the event Molecular violates certain covenants pertaining to various matters that include any potential relocation outside of the State of Texas, failure to achieve certain milestones or to comply with terms relating to use of grant proceeds, or failure to comply with certain laws;

 

    terminate agreements, in whole or in part, for any reason or no reason;

 

    reduce or modify the government’s obligations under such agreements without the consent of the other party;

 

    claim rights, including certain intellectual property rights, in products and data developed under such agreements;

 

    audit contract-related costs and fees, including allocated indirect costs;

 

    suspend the contractor or grantee from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;

 

    impose State of Texas or U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;

 

83


Table of Contents
    impose qualifications for the engagement of manufacturers, suppliers and other contractors as well as other criteria for reimbursements;

 

    suspend or debar the contractor or grantee from doing future business with the government;

 

    control and potentially prohibit the export of products;

 

    pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions specific to government agreements; and

 

    limit the government’s financial liability to amounts appropriated by the State of Texas on a fiscal-year basis, thereby leaving some uncertainty about the future availability of funding for a program even after it has been funded for an initial period.

 

    In addition to those powers set forth above, the government funding Molecular may receive could also impose requirements to make payments based upon sales of Molecular’s products in the future. For example, under the terms of Molecular’s award from CPRIT, Molecular is required to pay CPRIT a portion of its revenues from sales of products directly funded by CPRIT, or received from Molecular’s licensees or sublicensees, at a percentage in the mid-single digits until the aggregate amount of such payments equals a specified multiple of the grant amount, and thereafter at a rate of less than or equal to three percent, subject to Molecular’s right, under certain circumstances, to make a one-time payment in a specified amount to CPRIT to buy out such payment obligations. See the section titled “ Molecular Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources ” beginning on page 298 of this proxy statement/prospectus/information statement for a description of the CPRIT grant, which includes a description of Molecular’s obligations to make royalty payments.

Molecular may not have the right to prohibit the State of Texas or, if relevant under possible future federal grants, the U.S. government, from using certain technologies developed by Molecular, and Molecular may not be able to prohibit third-party companies, including Molecular’s competitors, from using those technologies in providing products and services to the U.S. government. The U.S. government generally takes the position that it has the right to royalty-free use of technologies that are developed under U.S. government contracts. These and other provisions of government grants may also apply to intellectual property Molecular licenses now or in the future.

In addition, government contracts and grants normally contain additional requirements that may increase Molecular’s costs of doing business, reduce Molecular’s profits and expose Molecular to liability for failure to comply with these terms and conditions. These requirements include, for example:

 

    specialized accounting systems unique to government contracts and grants;

 

    mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent;

 

    public disclosures of certain contract and grant information, which may enable competitors to gain insights into Molecular’s research program; and

 

    mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs and environmental compliance requirements.

If Molecular fails to maintain compliance with any such requirements that may apply to it now or in the future, it may be subject to potential liability and to termination of its contracts.

 

84


Table of Contents

If Molecular fails to comply with environmental, health and safety laws and regulations, Molecular could become subject to fines or penalties or incur costs that could have a material adverse effect on its business, financial condition or results of operations.

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

Risks Related to Molecular’s Intellectual Property

Molecular’s ability to compete may decline if it is unable to establish intellectual property rights or if its intellectual property rights are inadequate to protect its ETB technology, present and future product candidates and related processes for its developmental pipeline.

Molecular relies or will rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect its intellectual property related to its technologies, products and product candidates. Its commercial success and viability depends in large part on its and any potential future licensors’ ability to obtain, maintain and enforce patent and other intellectual property protections in the United States, Europe and other countries worldwide with respect to its current and future proprietary technologies and product candidates. If Molecular or its future collaboration partners do not adequately protect such intellectual property, competitors may be able to use its technologies and erode or negate any competitive advantage it may have, which could materially harm Molecular’s business, negatively affect its position in the marketplace, limit its ability to commercialize product candidates and delay or render impossible its achievement of profitability.

Molecular’s strategy and future prospects are based, in particular, on its patent portfolio. Molecular and its future collaboration partners or licensees will best be able to protect its proprietary ETB technologies, products, product candidates and their uses from unauthorized use by third parties to the extent that valid and enforceable patents, effectively protected trade secrets, or other regulatory exclusivities, cover them. Molecular has sought to protect its proprietary position by filing patent applications in the United States and elsewhere worldwide related to its proprietary ETB technologies, product candidates and methods of use that are important to its business. This process is expensive and time consuming, and Molecular may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that Molecular will fail to identify patentable aspects of its research and development output before it is too late to obtain meaningful patent protection.

Intellectual property rights have limitations and do not necessarily address all potential threats to Molecular’s competitive advantage. Molecular’s ability to obtain patent protection for its proprietary

 

85


Table of Contents

technologies, product candidates and their uses is uncertain and the degree of future protection afforded by its intellectual property rights is uncertain due to a number of factors, including, but not limited to:

 

    Molecular or its future collaboration partners may not have been the first to make the inventions covered by pending patent applications or issued patents;

 

    Molecular or its future collaboration partners may not have been the first to file patent applications covering its ETB technology, product candidates, compositions or their uses;

 

    others may independently develop identical, similar or alternative methods, products product candidates or compositions and uses thereof;

 

    Molecular or its future collaboration partners’ disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability;

 

    any or all of Molecular or its future collaboration partners’ pending patent applications may not result in issued patents;

 

    Molecular or its future collaboration partners may not seek or obtain patent protection in countries that may eventually provide it with a significant business opportunity;

 

    any patents issued to Molecular or its future collaboration partners may not provide a basis for commercially viable products, may not provide any competitive advantages or may be successfully challenged by third parties;

 

    Molecular or its future collaboration partners’ products, compositions and methods may not be patentable;

 

    others may design around Molecular’s or its future collaboration partners’ patent claims to produce competitive products or uses which fall outside of the scope of Molecular’s patents or other intellectual property rights;

 

    others may identify prior art or other bases which could invalidate Molecular or its future collaboration partners’ patents;

 

    Molecular’s 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 Molecular or its future collaboration partners do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in major commercial markets; or

 

    Molecular or its future collaboration partners may not develop additional proprietary technologies or products that are patentable.

Further, the patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unsolved. The patent applications that Molecular owns or in-licenses may fail to result in issued patents with claims that cover its product candidates in the United States or in other foreign countries. There is no assurance that all potentially relevant prior art relating to its patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover Molecular’s product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, Molecular’s patents and patent applications may not adequately protect its intellectual property, provide exclusivity for its product candidates or prevent others from designing around the Molecular claims. Any of these outcomes could impair Molecular’s ability to prevent competition from third parties, which may have an adverse impact on its business.

Molecular, independently or together with its licensors, has filed several patent applications covering various aspects of its ETB technology, product candidates and associated assays and uses. Molecular cannot offer

 

86


Table of Contents

any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to Molecular after patent issuance could deprive Molecular of rights necessary for the successful commercialization of any product candidates that Molecular may develop. Further, if Molecular encounters delays in regulatory approvals, the period of time during which Molecular could market a product candidate under patent protection could be reduced.

If Molecular cannot obtain and maintain effective protection of exclusivity from its regulatory efforts and intellectual property rights, including patent protection or data exclusivity, for its product candidates, Molecular may not be able to compete effectively and its business and results of operations would be harmed.

Molecular may not have sufficient patent terms and regulatory exclusivity protections for its product candidates to effectively protect its competitive position.

Patents have a limited term. In the United States and most jurisdictions worldwide, the statutory expiration of a non-provisional patent is generally 20 years after it is filed. Although various extensions may be available, the life of a patent, and the protection it affords, is limited. Even if patents covering Molecular’s technologies, product candidates and associated uses are obtained, once the patent life has expired for a product candidate, Molecular may be open to competition from generic, biosimilar or biobetter medications.

Patent term extensions under the Hatch-Waxman Act in the United States, and regulatory extensions in Japan and certain other countries, and under Supplementary Protection Certificates in Europe, may be available to extend the patent or data exclusivity terms of Molecular’s product candidates depending on the timing and duration of the regulatory review process relative to patent term. In addition, upon issuance in the United States, any patent term may be adjusted based on specified delays caused by the applicant(s) or the USPTO. Molecular will likely rely on patent term extensions, and Molecular cannot provide any assurances that any such patent term extensions will be obtained and, if so, for how long. As a result, Molecular may not be able to maintain exclusivity for its product candidates for an extended period after regulatory approval, if any, which would negatively impact its business, financial condition, results of operations and prospects. If Molecular does not have sufficient patent terms or regulatory exclusivity to protect its product candidates, its business and results of operations will be adversely affected.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Molecular’s ability to protect its products, and recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents.

As is the case with other biotechnology companies, Molecular’s success is heavily dependent on patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in specified circumstances and weakened the rights of patent owners in specified situations. In addition to increasing uncertainty with regard to Molecular’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Molecular’s ability to obtain new patents or to enforce Molecular’s existing patents and patents that it might obtain in the future.

For Molecular’s U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. 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

 

87


Table of Contents

and may also affect patent litigation. The USPTO has promulgated regulations and developed 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 inventor to file provisions, did not come into effect until March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of Molecular’s business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents, all of which could have a material adverse effect on Molecular’s business, financial condition or results of operations.

An important change introduced by the Leahy-Smith Act is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that filed or files a patent application in the USPTO after March 16, 2013 but before Molecular files an application could therefore be awarded a patent covering an invention of Molecular’s even if Molecular had made the invention before it was made by the third party. This will require Molecular to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, Molecular’s ability to obtain and maintain valid and enforceable patents depends on whether the differences between its technology and the prior art allow its technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidential for a period of time after filing, Molecular cannot be certain that it was the first to either (i) file any patent application related to its product candidates or (ii) invent any of the inventions claimed in its patents or patent applications.

Among some of the other changes introduced by the Leahy-Smith Act are changes that limit where a patentee may file a patent infringement suit and new procedures providing opportunities for third parties to challenge any issued patent in the USPTO. Included in these new procedures is a process known as inter partes review, or IPR, which has been generally used by many third parties over the past two years to invalidate patents. The IPR process is not limited to patents filed after the Leahy-Smith Act was enacted, and would therefore be available to a third party seeking to invalidate any of Molecular’s U.S. patents, even those issued or filed before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate Molecular’s patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Issued patents covering Molecular’s ETB technologies, product candidates and uses could be found invalid or unenforceable if challenged in court.

Even if Molecular’s or its future collaboration partners’ patents do successfully issue and even if such patents cover product candidates and methods of use, third parties may initiate interference, re-examination, post-grant review, IPR or derivation actions in the U.S. Patent and Trademark Office, or USPTO; may initiate third party oppositions in the European Patent Office, or EPO; or may initiate similar actions challenging the validity, enforceability or scope of such patents in other patent administrative proceedings worldwide, which may result in patent claims being narrowed or invalidated. Such proceedings could result in revocation or amendment of Molecular’s patents in such a way that they no longer cover competitive technologies, product candidates or methods of use. Further, if Molecular initiates legal proceedings against a third party to enforce a patent covering its technologies, product candidates or uses, the defendant could counterclaim that Molecular’s relevant patent is invalid or unenforceable. In patent litigation in the United States, certain European and other countries worldwide, it is commonplace for defendants to make counterclaims alleging invalidity and unenforceability in the same proceeding, or to commence parallel defensive proceedings such as patent nullity actions to challenge validity and enforceability of asserted patent claims. Further, in the United States, a third party, including a licensee of one of Molecular’s or its future collaboration partners’ patents, may initiate legal proceedings against Molecular in which the third party challenges the validity, enforceability, or scope of Molecular’s patent(s).

 

88


Table of Contents

In administrative and court actions, grounds for a patent validity challenge may include alleged failures to meet any of several statutory requirements, including lack of novelty, nonobviousness (or inventive step) and, in some cases clarity, adequate written description or non-enablement of, the claimed invention. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the Examiner during prosecution in the USPTO, or made a misleading statement during prosecution in the USPTO, the EPO or elsewhere. Third parties also may raise similar claims before administrative bodies in the USPTO or the EPO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability are unpredictable. With respect to patent claim validity, for example, Molecular cannot be certain that there is no invalidating prior art, of which it or the patent examiner was unaware during prosecution. Further, Molecular cannot be certain that all of the potentially relevant art relating to its patents and patent applications has been brought to the attention of every patent office. If a defendant or other patent challenger were to prevail on a legal assertion of invalidity or unenforceability, Molecular could lose at least in part, and perhaps all, of the patent protection on its ETB technology, product candidates and associated uses.

Molecular may become involved in lawsuits to protect or enforce its patents or other intellectual property rights, which could be expensive, time consuming and unsuccessful and have a material adverse effect on the success of its business.

Competitors may infringe Molecular’s patents or the patents of its future licensors. If Molecular or one of its licensing partners were to initiate legal proceedings against a third party to enforce a patent covering one of its product candidates, the defendant could counterclaim that the patent covering its product candidate is invalid and/or unenforceable. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, nonobviousness, adequate written description, clarity or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable.

There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that Molecular does not have the right to stop the other party from using the claimed invention at issue on the grounds that Molecular’s or its future collaboration partners’ patent claims do not cover the claimed invention. Third parties may in the future make claims challenging the inventorship or ownership of Molecular’s intellectual property. An adverse outcome in a litigation or proceeding involving one or more of its patents could limit Molecular’s ability to assert those patents against those parties or other competitors, and may curtail or preclude its ability to exclude third parties from making and selling similar or competitive products. Similarly, if Molecular asserts trademark infringement claims, a court may determine that the marks it has asserted are invalid or unenforceable, or that the party against whom it has asserted trademark infringement has superior rights to the marks in question. In this case, Molecular could ultimately be forced to cease use of such trademarks.

Even if Molecular establishes infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Molecular’s confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could adversely affect the market price of Molecular’s common stock. Moreover, there can be no assurance that Molecular will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded and can involve substantial expenses. Even if Molecular ultimately prevails in such claims, the monetary cost of such litigation and the diversion of the attention of its management and scientific personnel could outweigh any benefit it receives as a result of the proceedings.

 

89


Table of Contents

Interference or derivation proceedings provoked by third parties or brought by Molecular or declared by the USPTO may be necessary to determine the priority or inventorship of inventions with respect to Molecular’s patents or patent applications or those of its licensors. An unfavorable outcome could require Molecular to cease using the related technology or to attempt to license rights to it from the prevailing party. Molecular’s business could be harmed if the prevailing party does not offer Molecular a license on commercially reasonable terms. Its defense of litigation, interference proceedings, or derivation proceedings may fail and, even if successful, may result in substantial costs and distract its management and other employees. In addition, the uncertainties associated with litigation and administrative proceedings could have a material adverse effect on Molecular’s ability to raise the funds necessary to continue its clinical trials, continue its research programs, license necessary technology from third parties or enter into development partnerships that would help Molecular bring its product candidates to market.

If Molecular is unable to protect the confidentiality of its trade secrets and know-how for its product candidates or any future product candidates, Molecular may not be able to compete effectively in its proposed markets.

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

Although Molecular’s current employment contracts provide for and Molecular expects all of its employees and consultants to assign their inventions to Molecular, and all of Molecular’s employees, consultants, advisors, and any third parties who have access to its proprietary know-how, information or technology are expected to enter into confidentiality agreements, Molecular cannot provide any assurances that all such agreements have been duly executed or that its trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to its trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of Molecular’s trade secrets could impair its competitive position and may have a material adverse effect on its business, financial condition or results of operations. Additionally, if the steps taken to maintain its trade secrets are deemed inadequate, Molecular may have insufficient recourse against third parties for misappropriating trade secrets.

Third-party claims of intellectual property infringement could result in costly litigation or other proceedings and may prevent or delay Molecular’s development and commercialization efforts.

Molecular’s commercial success depends in part on its ability to develop, manufacture, market and sell its product candidates and use its proprietary technology without infringing the patent rights of third parties. Molecular is currently not aware of U.S. or foreign patents or pending patent applications owned by third parties that cover therapeutic uses of ETBs. In the future, Molecular may identify such third-party U.S. and non-U.S issued patents and pending applications. If Molecular identifies any such patents or pending applications, Molecular may in the future pursue available proceedings in the U.S. and foreign patent offices to challenge the validity of these patents and patent applications. In addition, or alternatively, Molecular may consider whether to seek to negotiate a license of rights to technology covered by one or more of such patents and patent applications. If any patents or patent applications cover its product candidates or technologies or a requisite manufacturing

 

90


Table of Contents

process, Molecular may not be free to manufacture or market its product candidates, including MT-3724, as planned, absent such a license, which may not be available to Molecular on commercially reasonable terms, or at all.

It is also possible that Molecular has failed to identify relevant third-party patents or applications. For example, applications filed before November 29, 2000 and applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Moreover, it is difficult for industry participants, including Molecular, to identify all third-party patent rights that may be relevant to its product candidates and technologies because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Molecular may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to its technology. In addition, Molecular may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of a current or future product candidate, or Molecular may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by its activities. Additionally, pending patent applications that have been published can, subject to specified limitations, be later amended in a manner that could cover Molecular’s technologies, its product candidates or the use of its product candidates.

There have been many lawsuits and other proceedings involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and reexamination proceedings before the USPTO and corresponding foreign patent offices. Third parties own numerous U.S. and foreign issued patents and pending patent applications in the fields in which Molecular is developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that Molecular’s product candidates may be subject to claims of infringement of the patent rights of third parties.

Parties making patent infringement claims against Molecular may obtain injunctive or other equitable relief, which could effectively block its ability to further develop and commercialize one or more of its product candidates. Defense of these claims, regardless of their merit, may involve substantial litigation expense and may require a substantial diversion of employee resources from Molecular’s business. In the event of a successful claim of patent infringement against Molecular, Molecular may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign its infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

Molecular may be unsuccessful in obtaining or maintaining third-party rights necessary to develop its ETB technologies or to commercialize its product candidates and associated methods of use through acquisitions and in-licenses.

Presently, Molecular has rights to intellectual property under patent applications that Molecular owns. Because Molecular’s programs may involve a range of ETB targets and antibody domains, which in the future may include targets and antibody domains that require the use of proprietary rights held by third parties, the growth of Molecular’s business may likely depend in part on Molecular’s ability to acquire, in-license or use these proprietary rights. In addition, Molecular’s product candidates may require specific formulations or manufacturing technologies to work effectively and be manufactured efficiently, and these rights may be held by others. Molecular may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that it identifies. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that Molecular may consider attractive. These established companies may have a competitive advantage over Molecular due to their size, cash resources and greater clinical development and commercialization capabilities.

 

91


Table of Contents

For example, Molecular has previously and may continue to collaborate with federal, state or international academic institutions to accelerate its preclinical research or development under written agreements with these institutions. Typically, these institutions grant the rights to the collaborator and retain a non-commercial license to all rights as well as march-in rights in the situation that the collaborator fails to exercise or commercialize certain covered technologies. Regardless of such initial rights, Molecular may be unable to exercise or commercialize certain funded technologies thereby triggering march-in rights of the funding institution. If Molecular is unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking Molecular’s ability to pursue its program.

In addition, companies that perceive Molecular to be a competitor may be unwilling to assign or license rights to it. Molecular also may be unable to license or acquire third-party intellectual property rights on terms that would allow it to make an appropriate return on its investment. If Molecular is unable to successfully obtain rights to third-party intellectual property rights, its business, financial condition and prospects for growth could suffer.

If Molecular is unable to successfully obtain and maintain rights to required third-party intellectual property, Molecular may have to abandon development of that product candidate or pay additional amounts to the third-party, and its business and financial condition could suffer.

The patent protection and patent prosecution for some of Molecular’s product candidates may in the future be dependent on third parties.

While Molecular normally has or seeks and gains the right to fully prosecute the patent applications relating to its product candidates, there may be times when certain patents or patent applications relating to its product candidates, their uses or their manufacture may be controlled by its licensors. If any of its future licensors fail to appropriately and broadly prosecute patent applications and maintain patent protection of claims covering any of its product candidates, their uses or their manufacture, its ability to develop and commercialize those product candidates may be adversely affected and Molecular may not be able to prevent competitors from making, using, importing, and selling competing products. In addition, even where Molecular now has the right to control patent prosecution of patent applications or the maintenance of patents Molecular has licensed from third parties in the future, Molecular may still be adversely affected or prejudiced by actions or inactions of its licensors in effect from actions prior to Molecular assuming control over patent prosecution.

If Molecular fails to comply with obligations in the agreements under which Molecular licenses intellectual property and other rights from third parties or otherwise experiences disruptions to its business relationships with its licensors, Molecular could lose license rights that are important to its business.

Molecular is and will continue to be a party to a number of intellectual property license collaboration and supply agreements that may be important to its business and expects to enter into additional license agreements in the future. Molecular’s existing agreements impose, and Molecular expects that future agreements will impose, various diligence, milestone payment, royalty, purchasing and other obligations on it. If Molecular fails to comply with its obligations under these agreements, or Molecular is subject to a bankruptcy, its agreements may be subject to termination by the licensor or other contract partner, in which event Molecular would not be able to develop, manufacture or market products covered by the license or subject to supply commitments.

Molecular may be subject to claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that its employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Molecular employs individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including Molecular’s competitors or potential competitors. Although Molecular has written agreements and makes every effort to ensure that its employees, consultants and independent contractors

 

92


Table of Contents

do not use the proprietary information or intellectual property rights of others in their work for Molecular, Molecular may in the future be subject to any claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties. Litigation may be necessary to defend against these claims. If Molecular fails in defending any such claims, in addition to paying monetary damages, Molecular may lose valuable intellectual property rights or personnel, which could adversely impact its business. Even if Molecular is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Molecular may not be able to protect its intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Competitors may use Molecular’s technologies in jurisdictions where Molecular has not obtained patent protection to develop its own products and may also export infringing products to territories where Molecular has patent protection, but enforcement is not as strong as that in the United States. These products may compete with Molecular’s products, and Molecular’s patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

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

Risks Related to Molecular’s Reliance on Third Parties

Molecular relies on third parties to conduct its clinical trials, manufacture its product candidates and perform other services. If these third parties do not successfully perform and comply with regulatory requirements, Molecular may not be able to successfully complete clinical development, obtain regulatory approval or commercialize its product candidates, and its business could be substantially harmed.

Molecular has relied upon and plans to continue to rely upon third-party CROs to conduct, monitor and manage its ongoing clinical programs. Molecular relies on these parties for execution of clinical trials and manages and controls only some aspects of their activities. Molecular remains responsible for ensuring that each of its trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and its reliance on the CROs does not relieve Molecular of its regulatory responsibilities. Molecular and its CROs and other vendors are required to comply with all applicable laws, regulations and guidelines, including those required by the FDA and comparable foreign regulatory authorities for all of its product candidates in clinical development. If Molecular or any of its CROs or vendors fail to comply with applicable laws, regulations and guidelines, the results generated in its clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require Molecular to perform additional clinical trials before approving its marketing applications. Molecular cannot be assured that its CROs and other vendors will meet these requirements, or that upon inspection by any regulatory authority, such regulatory authority will determine that efforts, including any of its clinical trials, comply with applicable requirements. Its failure to comply with these

 

93


Table of Contents

laws, regulations and guidelines may require Molecular to repeat clinical trials, which would be costly and delay the regulatory approval process.

If any of Molecular’s relationships with these third-party CROs terminates, Molecular may not be able to enter into arrangements with alternative CROs in a timely manner or do so on commercially reasonable terms. In addition, Molecular’s CROs may not prioritize Molecular’s clinical trials relative to those of other customers, and any turnover in personnel or delays in the allocation of CRO employees by the CRO may negatively affect its clinical trials. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, Molecular’s clinical trials may be delayed or terminated and Molecular may not be able to meet its current plans with respect to its product candidates. CROs also may involve higher costs than anticipated, which could negatively affect Molecular’s financial condition and operations.

In addition, Molecular does not currently have the capability to manufacture product candidates for use in the conduct of its clinical trials, and Molecular lacks the resources and the capability to manufacture any of its product candidates on a clinical or commercial scale without the use of third-party manufacturers. Molecular plans to rely on third-party manufacturers, and their responsibilities will include purchasing from third-party suppliers the materials necessary to produce Molecular’s product candidates for Molecular’s clinical trials and regulatory approval. Molecular expects there to be a limited number of suppliers for some of the raw materials that Molecular expects to use to manufacture its product candidates, and Molecular may not be able to identify alternative suppliers to prevent a possible disruption of the manufacture of its product candidates for its clinical trials, and, if approved, ultimately for commercial sale. Although Molecular generally does not expect to begin a clinical trial unless Molecular believes it has a sufficient supply of a product candidate to complete the trial, any significant delay or discontinuity in the supply of a product candidate, or the raw materials or other material components in the manufacture of the product candidate, could delay completion of its clinical trials and potential timing for regulatory approval of its product candidates, which would harm its business and results of operations.

Molecular does not yet have sufficient information to reliably estimate the cost of the commercial manufacturing of its product candidates and its current costs to manufacture its drug products may not be commercially feasible, and the actual cost to manufacture its product candidates could materially and adversely affect the commercial viability of its product candidates. As a result, Molecular may never be able to develop a commercially viable product.

In addition, Molecular’s reliance on third-party manufacturers exposes Molecular to the following additional risks:

 

    Molecular may be unable to identify manufacturers on acceptable terms or at all;

 

    Molecular’s third-party manufacturers might be unable to timely formulate and manufacture Molecular’s product or produce the quantity and quality required to meet Molecular’s clinical and commercial needs, if any;

 

    Contract manufacturers may not be able to execute Molecular’s manufacturing procedures appropriately;

 

    Molecular’s future third-party manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply its clinical trials or to successfully produce, store and distribute its products;

 

    Manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with cGMPs and other government regulations and corresponding foreign standards, and Molecular does not have control over third-party manufacturers’ compliance with these regulations and standards;

 

94


Table of Contents
    Molecular may not own, or may have to share, the intellectual property rights to any improvements made by Molecular’s third-party manufacturers in the manufacturing process for its product candidates; and

 

    Molecular’s third-party manufacturers could breach or terminate their agreement with Molecular.

Each of these risks could delay Molecular’s clinical trials, the approval, if any of its product candidates by the FDA or the commercialization of its product candidates or result in higher costs or deprive Molecular of potential product revenue. In addition, Molecular relies on third parties to perform release testing on its product candidates prior to delivery to patients. If these tests are not appropriately conducted and test data are not reliable, patients could be put at risk of serious harm, which could result in product liability suits.

The manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of medical products often encounter difficulties in production, particularly in scaling up and validating initial production and absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in Molecular’s supply of its product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Molecular cannot be assured that any stability or other issues relating to the manufacture of its product candidates will not occur in the future. Additionally, Molecular’s manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If Molecular’s manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, Molecular’s ability to provide its product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require Molecular to commence new clinical trials at additional expense or terminate clinical trials completely.

Molecular may be unable to realize the potential benefits of any collaboration.

Even if Molecular is successful in entering into a collaboration with respect to the development and/or commercialization of one or more product candidates, there is no guarantee that the collaboration will be successful. Collaborations may pose a number of risks, including:

 

    collaborators often have significant discretion in determining the efforts and resources that they will apply to the collaboration, and may not commit sufficient resources to the development, marketing or commercialization of the product or products that are subject to the collaboration;

 

    collaborators may not perform their obligations as expected;

 

    any such collaboration may significantly limit Molecular’s share of potential future profits from the associated program, and may require it to relinquish potentially valuable rights to its current product candidates, potential products or proprietary technologies or grant licenses on terms that are not favorable to Molecular;

 

    collaborators may cease to devote resources to the development or commercialization of Molecular’s product candidates if the collaborators view its product candidates as competitive with their own products or product candidates;

 

    disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the course of development, might cause delays or termination of the development or commercialization of product candidates, and might result in legal proceedings, which would be time consuming, distracting and expensive;

 

95


Table of Contents
    collaborators may be impacted by changes in their strategic focus or available funding, or business combinations involving them, which could cause them to divert resources away from the collaboration;

 

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

 

    the collaborations may not result in Molecular achieving revenues sufficient to justify such transactions; and

 

    collaborations may be terminated and, if terminated, may result in a need for Molecular to raise additional capital to pursue further development or commercialization of the applicable product candidate.

As a result, a collaboration may not result in the successful development or commercialization of Molecular’s product candidates.

Molecular enters into various contracts in the normal course of its business in which Molecular indemnifies the other party to the contract. In the event Molecular has to perform under these indemnification provisions, it could have a material adverse effect on its business, financial condition and results of operations.

In the normal course of business, Molecular periodically enters into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification provisions. With respect to Molecular’s academic and other research agreements, Molecular typically indemnifies the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which Molecular has secured licenses, and from claims arising from Molecular’s or its sublicensees’ exercise of rights under the agreement. With respect to Molecular’s collaboration agreements, Molecular indemnifies its collaborators from any third-party product liability claims that could result from the production, use or consumption of the product, as well as for alleged infringements of any patent or other intellectual property right owned by a third party. With respect to consultants, Molecular indemnifies them from claims arising from the good faith performance of their services.

If Molecular’s obligations under an indemnification provision exceed applicable insurance coverage or if Molecular were denied insurance coverage, Molecular’s business, financial condition and results of operations could be adversely affected. Similarly, if Molecular is relying on a collaborator to indemnify Molecular and the collaborator is denied insurance coverage or the indemnification obligation exceeds the applicable insurance coverage, and if the collaborator does not have other assets available to indemnify Molecular, its business, financial condition and results of operations could be adversely affected.

Risks Related to Commercialization of Molecular’s Product Candidates

Molecular currently has limited marketing and sales experience. If Molecular is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its product candidates, Molecular may be unable to generate any revenue.

Although some of its employees may have marketed, launched and sold other pharmaceutical products in the past while employed at other companies, Molecular has no experience selling and marketing its product candidates, and Molecular currently has no marketing or sales organization. To successfully commercialize any products that may result from its development programs, Molecular will need to find one or more collaborators to commercialize its products or invest in and develop these capabilities, either on its own or with others, which would be expensive, difficult and time consuming. Any failure or delay in the timely development of Molecular’s internal commercialization capabilities could adversely impact the potential for success of its products.

If commercialization collaborators do not commit sufficient resources to commercialize Molecular’s future products and Molecular is unable to develop the necessary marketing and sales capabilities on its own, Molecular

 

96


Table of Contents

will be unable to generate sufficient product revenue to sustain or grow its business. Molecular may be competing with companies that currently have extensive and well-funded marketing and sales operations, particularly in the markets its product candidates are intended to address. Without appropriate capabilities, whether directly or through third-party collaborators, Molecular may be unable to compete successfully against these more established companies.

Molecular may attempt to form collaborations in the future with respect to its product candidates, but it may not be able to do so, which may cause it to alter its development and commercialization plans.

Molecular may attempt to form strategic collaborations, create joint ventures or enter into licensing arrangements with third parties with respect to its programs that it believes will complement or augment its existing business. Molecular may face significant competition in seeking appropriate strategic collaborators, and the negotiation process to secure appropriate terms is time consuming and complex. Molecular may not be successful in its efforts to establish such a strategic collaboration for any product candidates and programs on terms that are acceptable to it, or at all. This may be because Molecular’s product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort, its research and development pipeline may be viewed as insufficient, the competitive or intellectual property landscape may be viewed as too intense or risky, and/or third parties may not view its product candidates and programs as having sufficient potential for commercialization, including the likelihood of an adequate safety and efficacy profile.

Any delays in identifying suitable collaborators and entering into agreements to develop and/or commercialize Molecular’s product candidates could delay the development or commercialization of its product candidates, which may reduce their competitiveness even if they reach the market. Absent a strategic collaborator, Molecular would need to undertake development and/or commercialization activities at its own expense. If Molecular elects to fund and undertake development and/or commercialization activities on its own, it may need to obtain additional expertise and additional capital, which may not be available to it on acceptable terms or at all. If Molecular is unable to do so, it may not be able to develop its product candidates or bring them to market and its business may be materially and adversely affected.

If the market opportunities for its product candidates are smaller than Molecular believes they are, Molecular may not meet its revenue expectations and, assuming approval of a product candidate, its business may suffer. Because the patient populations in the market for its product candidates may be small, Molecular must be able to successfully identify patients and acquire a significant market share to achieve profitability and growth.

Molecular’s estimates for the addressable patient population and its estimates for the prices it can charge for its product candidates may differ significantly from the actual market addressable by its product candidates. For instance, Molecular’s Phase I clinical trial of MT-3724 is focused on non-Hodgkin’s lymphoma. The estimated prevalence of non-Hodgkin’s B-cell lymphoma is that an estimated 72,580 new cases and 20,150 deaths will be attributable to the disease in the United States in 2016, only a subset of which may benefit from treatment with MT-3724. Molecular’s projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with its product candidates, are based on its beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, patient foundations or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be lower than expected. Additionally, while Molecular believes that the data in its Phase I clinical trials for MT-3724 are supportive of application to other indications, there can be no assurance that its clinical trials will successfully address any additional indications. Likewise, the potentially addressable patient population for each of its product candidates may be limited or may not be amenable to treatment with its product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect its business, financial condition, results of operations and prospects.

 

97


Table of Contents

Molecular faces substantial competition and its competitors may discover, develop or commercialize products faster or more successfully than Molecular.

The development and commercialization of new drug products is highly competitive. Molecular faces competition from major pharmaceutical companies, specialty pharmaceutical companies, biotechnology companies, universities and other research institutions worldwide with respect to MT-3724 and the other product candidates that it may seek to develop or commercialize in the future. Molecular is aware that the following companies have therapeutics marketed or in development that could compete with ETBs: Roche, Genentech, Bayer, Takeda, AbbVie, Celgene, Seattle Genetics, Immunogen, Morphosys, Genmab, Bristol Myers Squibb, Novartis, Regeneron, Janssen, Xencor, Amgen, Macrogenics, Astra Zeneca, Lilly, Merck KGaA, Pfizer, Merus, Sanofi, Mentrik Biotech, Merrimack Pharmaceuticals, Spectrum Pharmaceuticals and F-Star. Molecular’s competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective or less costly than MT-3724 or any other product candidates that Molecular is currently developing or that it may develop, which could render its product candidates obsolete and noncompetitive.

Many of Molecular’s competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than it does. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in its competitors. Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with Molecular’s competitors.

If Molecular’s competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than Molecular does, it could result in Molecular’s competitors establishing a strong market position before Molecular is able to enter the market. Third-party payors, including governmental and private insurers, also may encourage the use of generic products. For example, if MT-3724 is ultimately approved, it may be priced at a significant premium over other competitive products. This may make it difficult for MT-3724 or any other future products to compete with these products. Failure of MT-3724 or other product candidates to effectively compete against established treatment options or in the future with new products currently in development would harm Molecular’s business, financial condition, results of operations and prospects.

The commercial success of any of Molecular’s current or future product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors, and others in the medical community.

Even with the approvals from the FDA and comparable foreign regulatory authorities, the commercial success of Molecular’s products will depend in part on the health care providers, patients and third-party payors accepting its product candidates as medically useful, cost-effective and safe. Any product that Molecular brings to the market may not gain market acceptance by physicians, patients and third-party payors. The degree of market acceptance of any of Molecular’s products will depend on a number of factors, including but not limited to:

 

    the efficacy of the product as demonstrated in clinical trials and potential advantages over competing treatments;

 

    the prevalence and severity of the disease and any side effects;

 

    the clinical indications for which approval is granted, including any limitations or warnings contained in a product’s approved labeling;

 

    the convenience and ease of administration;

 

    the cost of treatment;

 

    the willingness of the patients and physicians to accept these therapies;

 

98


Table of Contents
    the perceived ratio of risk and benefit of these therapies by physicians and the willingness of physicians to recommend these therapies to patients based on such risks and benefits;

 

    the marketing, sales and distribution support for the product;

 

    the publicity concerning its products or competing products and treatments; and

 

    the pricing and availability of third-party insurance coverage and reimbursement.

Even if a product displays a favorable efficacy and safety profile upon approval, market acceptance of the product remains uncertain. Efforts to educate the medical community and third-party payors on the benefits of the products may require significant investment and resources and may never be successful. If its products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors and other health care providers, Molecular will not be able to generate sufficient revenue to become or remain profitable.

Molecular may not be successful in any efforts to identify, license, discover, develop or commercialize additional product candidates.

Although a substantial amount of Molecular’s effort will focus on the continued clinical testing, potential approval and commercialization of its existing product candidates, the success of Molecular’s business is also expected to depend in part upon its ability to identify, license, discover, develop or commercialize additional product candidates. Research programs to identify new product candidates require substantial technical, financial and human resources. Molecular may focus its efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful. Molecular’s research programs or licensing efforts may fail to yield additional product candidates for clinical development and commercialization for a number of reasons, including but not limited to the following:

 

    Molecular’s research or business development methodology or search criteria and process may be unsuccessful in identifying potential product candidates;

 

    Molecular may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates;

 

    its product candidates may not succeed in preclinical or clinical testing;

 

    its potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval;

 

    competitors may develop alternatives that render Molecular’s product candidates obsolete or less attractive;

 

    product candidates Molecular develops may be covered by third parties’ patents or other exclusive rights;

 

    the market for a product candidate may change during Molecular’s program so that such a product may become unreasonable to continue to develop;

 

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

 

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

If any of these events occur, Molecular may be forced to abandon its development efforts for a program or programs, or Molecular may not be able to identify, license, discover, develop or commercialize additional product candidates, which would have a material adverse effect on its business, financial condition or results of operations and could potentially cause Molecular to cease operations.

 

99


Table of Contents

Failure to obtain or maintain adequate reimbursement or insurance coverage for products, if any, could limit Molecular’s ability to market those products and decrease its ability to generate revenue.

The pricing, coverage, and reimbursement of Molecular’s approved products, if any, must be sufficient to support its commercial efforts and other development programs, and the availability and adequacy of coverage and reimbursement by third-party payors, including governmental and private insurers, are essential for most patients to be able to afford expensive treatments. Sales of Molecular’s approved products, if any, will depend substantially, both domestically and abroad, on the extent to which the costs of its approved products, if any, will be paid for or reimbursed by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or government payors and private payors. If coverage and reimbursement are not available, or are available only in limited amounts, Molecular may have to subsidize or provide products for free or Molecular may not be able to successfully commercialize its products.

In addition, there is significant uncertainty related to the insurance coverage and reimbursement for newly approved products. In the United States, the principal decisions about coverage and reimbursement for new drugs are typically made by the CMS, an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel product candidates such as Molecular’s and what reimbursement codes its product candidates may receive if approved.

Outside the United States, international operations are generally subject to extensive governmental price controls and other price-restrictive regulations, and Molecular believes the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing and usage of products. In many countries, the prices of products are subject to varying price control mechanisms as part of national health systems. Price controls or other changes in pricing regulation could restrict the amount that Molecular is able to charge for its products, if any. Accordingly, in markets outside the United States, the potential revenue may be insufficient to generate commercially reasonable revenue and profits.

Moreover, increasing efforts by governmental and private payors in the United States and abroad to limit or reduce healthcare costs may result in restrictions on coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for its products. Molecular expects to experience pricing pressures in connection with products due to the increasing trend toward managed healthcare, including the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, and prescription drugs in particular, has and is expected to continue to increase in the future. As a result, profitability of Molecular’s products, if any, may be more difficult to achieve even if they receive regulatory approval.

Risks Related to Molecular’s Business Operations

Molecular’s future success depends in part on its ability to retain its Chief Executive Officer and Chief Scientific Officer and to attract, retain, and motivate other qualified personnel.

Molecular is highly dependent on Eric E. Poma, Ph.D., its Chief Executive Officer and Chief Scientific Officer, the loss of whose services may adversely impact the achievement of its objectives. Dr. Poma could leave Molecular’s employment at any time, as he is an “at will” employee. Recruiting and retaining other qualified employees, consultants and advisors for Molecular’s business, including scientific and technical personnel, will also be crucial to Molecular’s success. There is currently a shortage of highly qualified personnel in Molecular’s industry, which is likely to continue. Additionally, this shortage of highly qualified personnel is particularly acute in the area where Molecular is located. As a result, competition for personnel is intense and the turnover rate can be high. Molecular may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. In addition, failure to succeed in development and commercialization of Molecular’s product candidates may make it more

 

100


Table of Contents

challenging to recruit and retain qualified personnel. The inability to recruit and retain qualified personnel, or the loss of the services of Dr. Poma may impede the progress of Molecular’s research, development and commercialization objectives and would negatively impact Molecular’s ability to succeed in its product development strategy.

Molecular will need to expand its organization, and Molecular may experience difficulties in managing this growth, which could disrupt its operations.

As of December 31, 2016, Molecular had 24 full-time employees. As Molecular’s development and commercialization plans and strategies develop, Molecular expects to need additional managerial, operational, sales, marketing, financial, legal and other resources. Molecular’s management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these growth activities. Molecular may not be able to effectively manage the expansion of its operations, which may result in weaknesses in its infrastructure, operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Molecular’s expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If Molecular’s management is unable to effectively manage its growth, its expenses may increase more than expected, its ability to generate and/or grow revenue could be reduced and it may not be able to implement its business strategy. Molecular’s future financial performance and its ability to commercialize product candidates and compete effectively will depend, in part, on its ability to effectively manage any future growth.

Failure in Molecular’s information technology and storage systems could significantly disrupt the operation of Molecular’s business.

Molecular’s ability to execute its business plan and maintain operations depends on the continued and uninterrupted performance of its information technology, or IT, systems. IT systems are vulnerable to risks and damages from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of Molecular’s and its vendors’ servers are potentially vulnerable to physical or electronic break-ins, including cyber-attacks, computer viruses and similar disruptive problems. These events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, Molecular may not be able to address these techniques proactively or implement adequate preventative measures. If Molecular’s computer systems are compromised, it could be subject to fines, damages, litigation and enforcement actions, and it could lose trade secrets, the occurrence of which could harm its business. Despite precautionary measures to prevent unanticipated problems that could affect its IT systems, sustained or repeated system failures that interrupt Molecular’s ability to generate and maintain data could adversely affect its ability to operate its business.

Risks Related to the Combined Company

In determining whether you should approve the merger, the issuance of shares of Threshold common stock and other matters related to the merger, as applicable, you should carefully read the following risk factors in addition to the risks described above.

The market price of the combined company’s common stock is expected to be volatile, and the market price of the common stock may drop following the merger.

The market price of the combined company’s common stock following the merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life

 

101


Table of Contents

sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the Threshold common stock to fluctuate include:

 

    the ability of the combined company to obtain regulatory approvals for MT-3724 or other product candidates, and delays or failures to obtain such approvals;

 

    failure of any of the combined company’s product candidates, if approved, to achieve commercial success;

 

    failure by the combined company to maintain its existing third-party license and supply agreements;

 

    failure by the combined company or its licensors to prosecute, maintain, or enforce its intellectual property rights;

 

    changes in laws or regulations applicable to the combined company’s product candidates;

 

    any inability to obtain adequate supply of the combined company’s product candidates or the inability to do so at acceptable prices;

 

    adverse regulatory authority decisions;

 

    introduction of new products, services or technologies by the combined company’s competitors;

 

    failure to meet or exceed financial and development projections the combined company may provide to the public;

 

    failure to meet or exceed the financial and development projections of the investment community;

 

    the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

    announcements of significant acquisitions, strategic collaborations, joint ventures or capital commitments by the combined company or its competitors;

 

    disputes or other developments relating to proprietary rights, including patents, litigation matters, and the combined company’s ability to obtain patent protection for its technologies;

 

    additions or departures of key personnel;

 

    significant lawsuits, including patent or stockholder litigation;

 

    if securities or industry analysts do not publish research or reports about the combined company’s business, or if they issue an adverse or misleading opinions regarding its business and stock;

 

    changes in the market valuations of similar companies;

 

    general market or macroeconomic conditions;

 

    sales of its common stock by the combined company or its stockholders in the future;

 

    trading volume of the combined company’s common stock;

 

    announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

    adverse publicity relating to ETB therapeutics generally, including with respect to other products and potential products in such markets;

 

    the introduction of technological innovations or new therapies that compete with potential products of the combined company;

 

    changes in the structure of health care payment systems; and

 

    period-to-period fluctuations in the combined company’s financial results.

 

102


Table of Contents

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined company’s profitability and reputation.

Additionally, a decrease in the stock price of the combined company may cause the combined company’s common stock to no longer satisfy the continued listing standards of The NASDAQ Capital Market. If the combined company is not able to maintain the requirements for listing on The NASDAQ Capital Market, it could be delisted, which could have a materially adverse effect on its ability to raise additional funds as well as the price and liquidity of its common stock.

The combined company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

The combined company will incur significant legal, accounting and other expenses that Molecular did not incur as a private company, including costs associated with public company reporting requirements. The combined company will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new implemented by the SEC and NASDAQ. These rules and regulations are expected to increase the combined company’s legal and financial compliance costs and to make some activities more time consuming and costly. For example, the combined company’s management team will consist of the executive officers of Molecular prior to the merger, some of whom have not previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations also may make it difficult and expensive for the combined company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the combined company to attract and retain qualified individuals to serve on the combined company’s board of directors or as executive officers of the combined company, which may adversely affect investor confidence in the combined company and could cause the combined company’s business or stock price to suffer.

Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.

Provisions in the combined company’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a prohibition on actions by written consent of the combined company’s stockholders, a staggered board and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined company. Although Threshold and Molecular believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

 

103


Table of Contents

The bylaws of the combined company will provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between the combined company and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers or other employees.

The bylaws of the combined company will provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on the combined company’s behalf, any action asserting a breach of fiduciary duty owed by any of its directors, officers or other employees to the combined company or its stockholders, any action asserting a claim against it arising pursuant to any provisions of the DGCL, its certificate of incorporation or its bylaws, or any action asserting a claim against it that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees. If a court were to find the choice of forum provision contained in the bylaws to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions.

Threshold and Molecular do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is that the combined company will retain its future earnings, if any, to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the common stock of the combined company will be your sole source of gain, if any, for the foreseeable future.

An active trading market for the combined company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the merger, there had been no public market for Molecular common stock. An active trading market for the combined company’s shares of common stock may never develop or be sustained. If an active market for its common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares at an attractive price or at all.

Future sales of shares by existing stockholders could cause the combined company’s stock price to decline.

If existing stockholders of Threshold and Molecular sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after legal restrictions on resale discussed in this proxy statement/prospectus/information statement lapse, the trading price of the common stock of the combined company could decline. Based on shares outstanding as of                 , 2017, shares expected to be issued upon completion of the merger, and assuming completion of the concurrent financing in connection with the merger, the combined company is expected to have outstanding a total of approximately      million shares of common stock immediately following the completion of the merger, without giving effect to the reverse stock split. Of the      million shares of common stock,      million shares, without giving effect to the reverse stock split, will be available for sale in the public market beginning 180 days after the closing of the merger as a result of the expiration of lock-up or similar agreements between Threshold and Molecular on the one hand and certain stockholders and Threshold and Molecular on the other hand. All other outstanding shares of common stock will be freely tradable, without restriction, in the public market. In addition, shares of common stock that are subject to outstanding options of Molecular will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act. If these shares are sold, the trading price of the combined company’s common stock could decline.

 

104


Table of Contents

After completion of the merger, Molecular’s executive officers, directors and principal stockholders will have the ability to control or significantly influence all matters submitted to the combined company’s stockholders for approval.

Upon the completion of the merger and concurrent financing, it is anticipated that Molecular’s executive officers, directors and principal stockholders will, in the aggregate, beneficially own approximately     % of the combined company’s outstanding shares of common stock. As a result, if these stockholders were to choose to act togeth