Part I Business Aerpio Pharmaceuticals focuses on developing first-in-class ocular disease treatments, with lead candidate AKB-9778 for NPDR and POAG, supported by third-party manufacturing and strategic collaborations * Aerpio is a biopharmaceutical company focused on advancing first-in-class treatments for ocular disease, with its lead product candidate, AKB-9778, being developed for non-proliferative diabetic retinopathy (NPDR)6 * The company's strategy is to become a leader in Tie2-targeted therapeutics by advancing AKB-9778 for diabetic retinopathy and other indications like primary open angle glaucoma (POAG), and exploring strategic collaborations91012 * In June 2018, Aerpio licensed AKB-4924 to Gossamer Bio, Inc. for an upfront payment of $20 million, with potential for up to $400 million in future milestone payments and tiered royalties85556 * The company relies on third-party contract manufacturers for the production of its product candidates and does not own or operate manufacturing facilities62 Product Pipeline The company's pipeline is led by AKB-9778, a Tie2 activator in Phase 2b for NPDR and planned Phase 1b for POAG, alongside preclinical assets and a licensed candidate * AKB-9778 for NPDR: A Phase 2b trial (TIME-2b) has enrolled 167 patients to evaluate improvement in Diabetic Retinopathy Severity Score (DRSS), with top-line results expected in March 2019635 * AKB-9778 for POAG: A topical formulation is planned for a Phase 1b clinical trial in Q2 2019 to evaluate its potential in reducing intraocular pressure81052 * ARP-1536: A humanized monoclonal antibody targeting VE-PTP is in preclinical development for diabetic vascular complications853 * AKB-4924 (GB004): Licensed to Gossamer Bio for inflammatory bowel disease (IBD), with Gossamer responsible for all further development and commercialization85455 Intellectual Property and Competition The company holds numerous patents for its lead candidates, expiring in 2027, and faces significant competition from major pharmaceutical companies with established products for diabetic eye diseases * The company's patent portfolio includes 23 U.S. patents and 199 foreign patents directed toward AKB-9778, with composition of matter patents set to expire in 202757 * Key competitors in the diabetic retinopathy (DR) and diabetic macular edema (DME) space include large pharmaceutical companies such as Roche/Genentech and Regeneron, with products like Lucentis and Eylea5860 Government Regulation The company's operations are subject to extensive FDA and international regulations, encompassing multi-phase clinical trials, manufacturing compliance, lengthy approval processes, and ongoing post-market oversight, including pricing and reimbursement rules * The FDA approval process for new drugs is extensive, requiring nonclinical studies, an Investigational New Drug (IND) application, and multi-phase human clinical trials (Phase 1, 2, 3) to establish safety and efficacy6669 * Manufacturing facilities are subject to FDA inspection for compliance with current Good Manufacturing Practices (cGMP), and clinical sites are inspected for Good Clinical Practices (GCP)73 * The company is subject to various healthcare laws, including the federal Anti-Kickback Statute, False Claims Act, and the Physician Payment Sunshine Act, which regulate interactions with healthcare providers100 * Sales of approved products will depend on coverage and reimbursement from third-party payors, who are increasingly challenging prices and examining cost-effectiveness96 Risk Factors The company faces substantial risks including financial losses, dependence on lead candidate AKB-9778, reliance on third parties, intellectual property challenges, intense competition, market acceptance hurdles, and significant stockholder influence * The company has a history of significant net losses, including $10.4 million in 2018, and an accumulated deficit of $119.0 million as of December 31, 2018, requiring substantial additional financing106108 * The business is heavily dependent on the success of its lead product candidate, AKB-9778, which is in Phase 2 development and faces a lengthy and uncertain path to potential regulatory approval and commercialization114 * Aerpio relies on third-party CROs to conduct clinical trials and on third-party manufacturers, which reduces control over these critical activities and introduces risks related to performance, compliance, and supply125127 * The company faces risks of intellectual property infringement claims and challenges to the validity of its patents, with composition-of-matter patents for its lead candidates expiring in 2027132138143 * Commercial success is uncertain and depends on market acceptance, establishing sales and marketing capabilities, and securing adequate coverage and reimbursement from payors, which is increasingly difficult due to cost-containment pressures149151152 * As of December 31, 2018, executive officers, directors, and principal stockholders owned approximately 44.7% of the company's common stock, allowing them to exert significant influence over corporate matters178 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission * None Properties The company does not own any real estate and leases all its facilities, including its corporate headquarters in Cincinnati, Ohio, and smaller offices in Massachusetts and Michigan * The company leases three properties: 7,580 sq ft in Cincinnati, OH (lease expires July 2021), 4,000 sq ft in Lexington, MA (lease expires Dec 2021), and 687 sq ft in Dexter, MI (lease expires Oct 2019)190 Legal Proceedings As of the filing date of this report, Aerpio is not involved in any material legal proceedings * The company is not currently involved in any material legal proceedings191 Mine Safety Disclosures This item is not applicable to the company * Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on Nasdaq in June 2018, with 222 stockholders of record as of March 2019, and has never paid cash dividends, nor made stock repurchases in 2018 * The company's common stock was uplisted to the Nasdaq Capital Market on June 26, 2018, under the symbol "ARPO"194 Stock Price Performance | Period | High ($) | Low ($) | | :--- | :--- | :--- | | 2018 | | | | Q1 | 5.25 | 4.00 | | Q2 | 5.00 | 3.29 | | Q3 | 4.35 | 3.00 | | Q4 | 3.17 | 1.56 | | 2017 | | | | Q3 | 6.75 | 5.90 | | Q4 | 6.60 | 4.00 | * As of March 1, 2019, there were 222 stockholders of record196 * The company has never declared or paid cash dividends and does not intend to in the foreseeable future197 Selected Financial Data This item is not applicable to the company * Not applicable Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, Aerpio recognized $20.2 million in license revenue, reducing its net loss to $10.4 million, while increasing R&D and G&A expenses, and significantly improving liquidity to $62.6 million, sufficient to fund operations into Q2 2020 Results of Operations (2018 vs. 2017) For 2018, the company reported $20.2 million in license revenue, a 47.0% increase in R&D expenses to $17.9 million, and a 45.9% increase in G&A expenses to $13.5 million, resulting in a reduced net loss of $10.4 million Key Financial Performance (2018 vs. 2017) | Metric | 2018 ($) | 2017 ($) | Change (%) | | :--- | :--- | :--- | :--- | | License Revenue | 20,157,430 | 0 | N/A | | R&D Expenses | 17,852,756 | 12,147,132 | +47.0% | | G&A Expenses | 13,485,918 | 9,241,411 | +45.9% | | Loss from Operations | (11,181,244) | (21,388,543) | -47.7% | | Net Loss | (10,396,635) | (21,400,606) | -51.4% | * The increase in R&D expense was primarily attributed to the ongoing activity for the TIME-2b clinical trial for AKB-9778, initiated in Q2 2017216 * The increase in G&A expense was mainly due to a $2.8 million increase in stock-based compensation and a $1.4 million increase in personnel-related expenses216 Liquidity and Capital Resources As of December 31, 2018, the company's cash and cash equivalents significantly increased to $62.6 million, driven by a $48.1 million public offering and a $20.0 million upfront payment from the Gossamer license, with current cash projected to fund operations into Q2 2020 * Cash and cash equivalents were $62.6 million at December 31, 2018221 * In June/July 2018, the company received net proceeds of approximately $48.1 million from an underwritten public offering221227 * In June 2018, the company received a $20.0 million upfront payment from the Gossamer License agreement221 Cash Flow Summary | Cash Flow Activity | Year Ended Dec 31, 2018 ($) | Year Ended Dec 31, 2017 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | (5,808,046) | (18,883,535) | | Net cash (used in)/provided by investing activities | (37,912) | 41,104 | | Net cash provided by financing activities | 48,195,859 | 37,496,846 | * Management believes existing cash will fund operations at least into Q2 2020203221 Critical Accounting Policies and Estimates The company's critical accounting policies include Revenue Recognition (applying a five-step model), Prepaid and Accrued Research and Development Expenses (estimating third-party costs), and Stock-Based Compensation (using Black-Scholes with subjective assumptions) * Revenue Recognition: The company adopted ASC 606 on January 1, 2018, using a five-step model to recognize revenue from contracts, including identifying performance obligations and allocating transaction price234272 * Prepaid and Accrued R&D Expenses: The company estimates expenses for services performed by third parties (like CROs) but not yet invoiced, based on contract terms and vendor communication237 * Stock-Based Compensation: The company uses the Black-Scholes model to estimate the fair value of stock options, requiring subjective inputs, with stock-based compensation expense at $3.4 million in 2018240 Quantitative and Qualitative Disclosures About Market Risk The company's market risk is minimal, as its cash and cash equivalents are held in short-term investments with minimal exposure to interest rate fluctuations * The company's cash and cash equivalents consist of funds in short-term investments with maturities of three months or less, resulting in minimal interest rate risk244 Consolidated Financial Statements and Supplementary Data The audited consolidated financial statements for 2018 and 2017, reported by Ernst & Young LLP, show a significant increase in cash and assets in 2018, and a reduced net loss of $10.4 million due to license revenue Consolidated Balance Sheet Data (as of Dec 31) | Metric | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | 62,614,010 | 20,264,109 | | Total Assets | 64,123,492 | 21,027,653 | | Total Liabilities | 5,456,917 | 3,592,164 | | Total Stockholders' Equity | 58,666,575 | 17,435,489 | Consolidated Statement of Operations Data (for year ended Dec 31) | Metric | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | License revenue, and other | 20,157,430 | 0 | | Research and development | 17,852,756 | 12,147,132 | | General and administrative | 13,485,918 | 9,241,411 | | Net and comprehensive loss | (10,396,635) | (21,400,606) | Consolidated Statement of Cash Flows Data (for year ended Dec 31) | Metric | 2018 ($) | 2017 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | (5,808,046) | (18,883,535) | | Net cash provided by financing activities | 48,195,859 | 37,496,846 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles, practices, or financial disclosure * None Controls and Procedures As of December 31, 2018, management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective * Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2018335 * Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO 2013 framework336 Other Information The company reports no other information for this item * None Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 proxy statement * Information is incorporated by reference from the Definitive Proxy Statement338 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 proxy statement * Information is incorporated by reference from the Definitive Proxy Statement339 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2019 proxy statement * Information is incorporated by reference from the Definitive Proxy Statement339 Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2019 proxy statement * Information is incorporated by reference from the Definitive Proxy Statement340 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2019 proxy statement * Information is incorporated by reference from the Definitive Proxy Statement340 Part IV Exhibits, Financial Statement Schedules This section lists the financial statements included in the report and provides an index of all exhibits filed with the Form 10-K, including key agreements and plans * This section contains the consolidated financial statements and a list of all exhibits filed with the report343 * Key exhibits listed include the License Agreement with Gossamer Bio, Inc., the 2017 Stock Option and Incentive Plan, and various executive employment agreements345346
Aerpio Pharmaceuticals(AADI) - 2018 Q4 - Annual Report