Table of Contents

 

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to         

 

Commission File Number: 001-37686

 


 

BEIGENE, LTD.

(Exact name of registrant as specified in its charter)

 


 

Cayman Islands
(State or other jurisdiction of
incorporation or organization)

98-1209416
(I.R.S. Employer
Identification No.)

 

 

 

 

c/o Mourant Ozannes Corporate Services
(Cayman) Limited
94 Solaris Avenue, Camana Bay
Grand Cayman
Cayman Islands

(Address of principal executive offices)

KY1-1108

(Zip Code)

 

 

+1 (345) 949 4123
(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No o

 

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

 

Large accelerated filer

o

 

Accelerated Filer

o

 

 

 

 

 

Non-accelerated filer

x(Do not check if a smaller reporting

company)

 

Smaller reporting company

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of November 7, 2016, 429,494,031 ordinary shares, par value $0.0001 per share, were outstanding, of which 151,076,341 ordinary shares were held in the form of 11,621,257 American Depositary Shares, each representing 13 ordinary shares.

 

 

 



Table of Contents

 

BeiGene, Ltd.
Quarterly Report on Form 10-Q

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

2

 

 

 

Item 1.

Financial Statements

2

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

PART II.

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

105

 

 

 

Item 3.

Defaults Upon Senior Securities

105

 

 

 

Item 4.

Mine Safety Disclosures

105

 

 

 

Item 5.

Other Information

105

 

 

 

Item 6.

Exhibits

105

 

 

 

SIGNATURES

106

 

i



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.                                 Financial Statements

 

BEIGENE, LTD.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Amounts in thousands of U.S. Dollar (“$”), except for number of shares and per share data)

 

 

 

 

 

As of

 

 

 

Note

 

December 31,
2015

 

September 30,
2016

 

 

 

 

 

$

 

$

 

 

 

 

 

(audited)

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

17,869

 

85,532

 

Short-term investments

 

3

 

82,617

 

118,086

 

Prepaid expenses and other current assets

 

 

 

5,783

 

6,335

 

Total current assets

 

 

 

106,269

 

209,953

 

Property and equipment, net

 

4

 

6,612

 

16,554

 

Other non-current assets

 

 

 

3,883

 

8,918

 

Total non-current assets

 

 

 

10,495

 

25,472

 

Total assets

 

 

 

116,764

 

235,425

 

Liabilities and shareholders’ deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

 

 

8,980

 

7,307

 

Advances from customers

 

 

 

1,070

 

 

Accrued expenses and other payables

 

6

 

8,351

 

21,715

 

Senior Promissory Note

 

9

 

14,598

 

 

Warrant and option liabilities

 

7

 

2,173

 

 

Tax payable

 

 

 

 

294

 

Total current liabilities

 

 

 

35,172

 

29,316

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term bank loan

 

8

 

6,188

 

18,030

 

Deferred rental

 

 

 

980

 

 

Other long-term liabilities

 

 

 

105

 

247

 

Total non-current liabilities

 

 

 

7,273

 

18,277

 

Total liabilities

 

 

 

42,445

 

47,593

 

Commitments and contingencies

 

18

 

 

 

Convertible preferred shares

 

10

 

176,084

 

 

Series A (par value US$0.0001 per share; 120,000,000 shares authorized; 116,785,517 shares issued and outstanding as of December 31, 2015) and Series A-2 (par value US$0.0001 per share; 100,000,000 shares authorized; 83,205,124 shares issued and outstanding as of December 31, 2015)

 

 

 

 

 

 

 

Total mezzanine equity

 

 

 

176,084

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

Ordinary shares (par value of US$0.0001 per share; 9,500,000,000 shares authorized; 428,519,031 shares issued and outstanding as of September 30, 2016 (December 31, 2015: 116,174,094 shares))

 

 

 

12

 

43

 

Additional paid-in capital

 

 

 

18,227

 

388,568

 

Accumulated other comprehensive loss

 

15

 

(1,809

)

(965

)

Accumulated deficit

 

 

 

(118,195

)

(199,814

)

Total shareholders’ (deficit) equity

 

16

 

(101,765

)

187,832

 

Total liabilities, mezzanine equity and shareholders’ (deficit) equity

 

 

 

116,764

 

235,425

 

 

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

 

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Table of Contents

 

BEIGENE, LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Amounts in thousands of U.S. Dollar (“$”), except for number of shares and per share data)

 

(Unaudited)

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

Note

 

2015

 

2016

 

2015

 

2016

 

 

 

 

 

$

 

$

 

$

 

$

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

 

 

 

1,380

 

 

4,139

 

1,070

 

Total revenue

 

 

 

1,380

 

 

4,139

 

1,070

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

 

(13,351

)

(30,106

)

(30,147

)

(69,100

)

General and administrative

 

 

 

(2,021

)

(4,722

)

(4,361

)

(11,760

)

Total operating expenses

 

 

 

(15,372

)

(34,828

)

(34,508

)

(80,860

)

Loss from operations

 

 

 

(13,992

)

(34,828

)

(30,369

)

(79,790

)

Interest income

 

 

 

760

 

209

 

1,286

 

965

 

Interest expense

 

 

 

(300

)

(284

)

(840

)

(629

)

Changes in fair value of financial instruments

 

7

 

(300

)

 

(502

)

(1,514

)

Disposal loss on available-for-sale securities

 

 

 

(241

)

(137

)

(298

)

(1,077

)

Other income

 

 

 

187

 

198

 

996

 

1,261

 

Other expense

 

 

 

(113

)

(525

)

(125

)

(529

)

Loss before income tax expense

 

 

 

(13,999

)

(35,367

)

(29,852

)

(81,313

)

Income tax expense

 

5

 

 

(127

)

 

(306

)

Net loss

 

 

 

(13,999

)

(35,494

)

(29,852

)

(81,619

)

Loss per share

 

13

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

(0.13

)

(0.08

)

(0.28

)

(0.21

)

Weighted-average number of ordinary shares used in net loss per share calculation

 

13

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

109,104,674

 

428,137,509

 

107,015,707

 

383,472,372

 

Loss per ADS

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

(1.67

)

(1.08

)

(3.63

)

(2.77

)

 

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

 

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BEIGENE, LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Amounts in thousands of U.S. Dollar (“$”), except for number of shares and per share data)

 

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2016

 

2015

 

2016

 

 

 

$

 

$

 

$

 

$

 

Net loss

 

(13,999

)

(35,494

)

(29,852

)

(81,619

)

Other comprehensive (loss) income, net of tax of nil:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(428

)

377

 

(509

)

(13

)

Unrealized holding (loss) gain, net

 

(303

)

121

 

(724

)

857

 

Comprehensive loss

 

(14,730

)

(34,996

)

(31,085

)

(80,775

)

 

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

 

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BEIGENE, LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Amounts in thousands of U.S. Dollar (“$”), except for number of shares and per share data)

 

(Unaudited)

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

Note

 

2015

 

2016

 

 

 

 

 

$

 

$

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

 

 

(29,852

)

(81,619

)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation expenses

 

4

 

1,127

 

1,436

 

Share-based compensation expenses

 

14

 

8,043

 

6,678

 

Loss on disposal of property and equipment

 

 

 

3

 

 

Changes in fair value of financial instruments

 

 

 

502

 

1,514

 

Disposal loss on available-for-sale securities

 

 

 

298

 

1,077

 

Interest expense

 

 

 

833

 

118

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

 

(4,074

)

(2,183

)

Other non-current assets

 

 

 

(354

)

(1,281

)

Accounts payable

 

 

 

1,507

 

(1,839

)

Advances from customers

 

 

 

(4,141

)

(1,070

)

Accrued expenses and other payables

 

 

 

3,085

 

13,360

 

Tax payable

 

 

 

 

294

 

Other long-term liabilities

 

 

 

(58

)

142

 

Net cash used in operating activities

 

 

 

(23,081

)

(63,373

)

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

(1,892

)

(15,440

)

Purchase of available-for-sale securities

 

 

 

(103,292

)

(193,996

)

Proceeds from disposal of available-for-sale securities

 

 

 

38,973

 

158,307

 

Proceeds from disposal of property and equipment

 

 

 

3

 

 

Net cash used in investing activities

 

 

 

(66,208

)

(51,129

)

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares, net of initial public offering costs

 

 

 

 

167,931

 

Proceeds from issuance of preferred shares

 

 

 

97,350

 

 

Payment of convertible preferred shares issuance cost

 

 

 

(75

)

 

Repayment of short-term loan

 

 

 

(322

)

 

Proceeds from long-term loan

 

 

 

6,294

 

12,161

 

Proceeds from exercise of warrants and options

 

 

 

77

 

2,118

 

Net cash provided by financing activities

 

 

 

103,324

 

182,210

 

Effect of foreign exchange rate changes, net

 

 

 

(483

)

(45

)

Net increase in cash and cash equivalents

 

 

 

13,552

 

67,663

 

Cash and cash equivalents at beginning of period

 

 

 

13,898

 

17,869

 

Cash and cash equivalents at end of period

 

 

 

27,450

 

85,532

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

Income taxes paid

 

 

 

 

25

 

Interest expense paid

 

 

 

7

 

510

 

Non-cash activities:

 

 

 

 

 

 

 

Conversion of Senior Promissory Note

 

 

 

 

14,693

 

Conversion of deferred rental

 

 

 

 

980

 

Conversion of convertible preferred shares

 

 

 

 

176,084

 

Conversion of warrant and option liabilities

 

 

 

 

3,687

 

Initial public offering costs accrued in accrued expenses and other payables 

 

 

 

 

166

 

Acquisitions of equipment included in accounts payable

 

 

 

91

 

319

 

 

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

 

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Table of Contents

 

BEIGENE, LTD.

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands of U.S. Dollar (“$”), except for number of shares and per share data)

 

(Unaudited)

 

1. Organization

 

BeiGene, Ltd. (the “Company”) is a globally focused, clinical-stage biopharmaceutical company with the goal of becoming a leader in the discovery and development of innovative, molecularly targeted and immuno-oncology drugs for the treatment of cancer. The Company’s development strategy is based on a novel translational platform that combines its unique access to internal patient-derived biopsies with strong oncology biology. The Company was incorporated under the laws of the Cayman Islands as an exempted company with limited liability on October 28, 2010.

 

On February 8, 2016, the Company completed its initial public offering (“IPO”) on the NASDAQ Global Select Market. 6,600,000 ADSs representing 85,800,000 ordinary shares were sold at $24.00 per ADS, or $1.85 per share (the “IPO Price”). Additionally, the underwriters exercised their options to purchase an additional 12,870,000 ordinary shares in the form of 990,000 ADSs. Net proceeds from the IPO including underwriter options after deducting underwriting discount and offering expenses were $166,197. The deferred IPO costs were recorded as a reduction of the proceeds received from the IPO in the shareholders’ equity.

 

As at September 30, 2016, the Company’s wholly-owned subsidiaries are as follows:

 

Name of Company

 

Place of
Incorporation

 

Date of
Incorporation

 

Percentage of
Ownership by the
Company

 

Principal Activities

BeiGene (Hong Kong) Co., Limited.

 

Hong Kong

 

November 22, 2010

 

100

%

Investment holding

 

 

 

 

 

 

 

 

 

BeiGene (Beijing) Co., Ltd. (“BeiGene Beijing”)

 

The People’s Republic of China (“PRC” or “China”)

 

January 24, 2011

 

100

%

Medical and pharmaceutical research

 

 

 

 

 

 

 

 

 

BeiGene AUS Pty Ltd.

 

Australia

 

July 15, 2013

 

100

%

Clinical trial activities

 

 

 

 

 

 

 

 

 

BeiGene 101 Ltd.

 

Cayman Islands

 

August 30, 2012

 

100

%

Medical and pharmaceutical research

 

 

 

 

 

 

 

 

 

BeiGene (Suzhou) Co., Ltd. (“BeiGene (Suzhou)”)

 

PRC

 

April 9, 2015

 

100

%

Medical and pharmaceutical research

 

 

 

 

 

 

 

 

 

BeiGene USA, Inc.

 

United States

 

July 8, 2015

 

100

%

Clinical trial activities

 

 

 

 

 

 

 

 

 

BeiGene (Shanghai) Co., Ltd. (“BeiGene (Shanghai)”)

 

PRC

 

September 11, 2015

 

100

%

Medical and pharmaceutical research

 

2.  Summary of significant accounting policies

 

Basis of presentation and principles of consolidation

 

The accompanying condensed consolidated balance sheet as of September 30, 2016, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended

 

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Table of Contents

 

September 30, 2015 and 2016, the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2016, and the related footnote disclosures are unaudited. The accompanying unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), including guidance with respect to interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

The unaudited condensed consolidated interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all normal recurring adjustments, necessary to present a fair statement of the results for the interim periods presented. Results of the operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full fiscal year or for any future annual or interim period.

 

The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries, which are all wholly-owned by the Company. All significant intercompany transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.

 

Use of estimates

 

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, identifying separate accounting units and estimating the best estimate selling price of each deliverable in the Company’s revenue arrangements, assessing the impairment of long-lived assets, share-based compensation expenses, realizability of deferred tax assets and the fair value of the financial instruments. Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. The Company considers all highly liquid investments with an original maturity date of three months or less at the date of purchase to be cash equivalents. Cash equivalents which consist primarily of money market funds are stated at fair value.

 

Fair value measurements

 

Fair value of financial instruments

 

Financial instruments of the Company primarily include cash and cash equivalents, short-term investments, long-term bank loan, accounts payable, Senior Promissory Note, convertible preferred shares, and warrant and option liabilities. As of December 31, 2015 and September 30, 2016, the carrying values of cash and cash equivalents, and accounts payable approximated their fair values due to the short-term maturity of these instruments. The Company measures the fair value of money market funds based on quoted prices in active markets for identical assets. The short-term investments represented the available-for-sale debt securities which are recorded at fair value based on quoted prices in active markets with unrealized gain or loss recorded in other comprehensive income/loss. The long-term bank loan approximates its fair value due to the fact that the related interest rate approximates the rate currently offered by financial institutions for similar debt instruments of comparable maturities. The warrant and option liabilities were recorded at fair value as determined on the respective issuance dates and subsequently adjusted to the fair value at each reporting date. The Senior Promissory Note and

 

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Table of Contents

 

convertible preferred shares were initially recorded at issue price net of issuance costs. Prior to the exercise dates, the Company determined the fair values of the warrant and option liabilities with the assistance of an independent third party valuation firm. On the exercise dates, the Company determined the fair values of the warrant and option liabilities using the intrinsic value, which equals to the difference between the share price at the IPO closing date and the exercise price, as the exercise dates were immediately prior to or very close to the IPO closing date.

 

The Company applies ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

 

Level 3 - Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

Financial instruments measured at fair value on a recurring basis

 

The following tables set forth assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and September 30, 2016:

 

As of December 31, 2015

 

Quoted Price
in Active
Market for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

$

 

$

 

$

 

Available-for-sale securities (note 3):

 

 

 

 

 

 

 

Corporate fixed income bonds

 

69,255

 

 

 

U.S. Treasury securities

 

8,000

 

 

 

Municipal Bonds

 

5,362

 

 

 

Option to purchase shares by rental deferral (note 7)

 

 

 

1,388

 

Warrants in connection with the convertible promissory notes (note 7)

 

 

 

785

 

 

As of September 30, 2016

 

Quoted Price
in Active
Market for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

$

 

$

 

$

 

Available-for-sale securities (note 3):

 

 

 

 

 

 

 

Corporate fixed income bonds

 

6,942

 

 

 

U.S. Treasury securities

 

111,144

 

 

 

Cash equivalents

 

 

 

 

 

 

 

Money market funds

 

43,813

 

 

 

 

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The Company has measured the option to purchase shares by rental deferral and the warrants in connection with the convertible promissory notes at fair values on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2015. The option and warrants have been exercised as of September 30, 2016. The Company determined the exercise date fair value of the warrants and option using significant other observable inputs (Level 2).

 

The following tables present a reconciliation of the option and warrant liabilities for the nine months ended September 30, 2016.

 

 

 

Warrant and
Option
Liabilities

 

 

 

$

 

Balance as of December 31, 2015

 

2,173

 

Recognized

 

 

Unrealized loss

 

1,514

 

Settlement

 

(3,687

)

Balance as of September 30, 2016

 

 

The amount of total unrealized loss for the nine months ended September 30, 2016 included in losses

 

1,514

 

 

Realized and unrealized gain or loss for the three and nine months ended September 30, 2015 and 2016 was recorded as “Changes in fair value of financial instruments” in the condensed consolidated statements of operations.

 

Recent accounting pronouncements

 

In August 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-14, Revenue from Contracts with Customers-Deferral of the effective date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU No. 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”), issued in May 2014. According to the amendments in ASU 2015-14, the new revenue guidance ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers Principal versus Agent Considerations (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with CustomersIdentifying Performance Obligations and Licensing (“ASU 2016-10”), which clarify guidance related to identifying performance obligations and licensing implementation guidance contained in ASU No. 2014-09. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with CustomersNarrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and provides practical expedients for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date for the amendment in ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as the effective date of ASU No. 2014-09. The Company is currently evaluating the method of adoption to be utilized and it cannot currently estimate the financial statement impact of adoption.

 

In February, 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize assets and liabilities related to lease arrangements longer than 12 months on the balance sheet. This standard also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The recognition, measurement, and presentation of expenses and

 

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cash flows arising from a lease by a lessee have not significantly changed from previous GAAP.  The Company is currently evaluating the impact on its financial statements of adopting this guidance.

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the method of adoption to be utilized and it cannot currently estimate the financial statement impact of adoption.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”). The amendments in ASU 2016-13 update guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities that are U.S. SEC filers, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the method of adoption to be utilized and it cannot currently estimate the financial statement impact of adoption.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of cash flowsClassification of Certain Cash Receipts (“ASU 2016-15”). The amendments in ASU 2016-15 addresses eight specific cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)), distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. For public business entities that are U.S. SEC filers, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the method of adoption to be utilized and it cannot currently estimate the financial statement impact of adoption.

 

3.  Short-term investments

 

Short-term investments as of December 31, 2015 consisted of the following available-for-sale exchange-traded debt securities:

 

 

 

Amortized
Cost

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value
(Net Carrying
Amount)

 

 

 

$

 

$

 

$

 

$

 

Corporate fixed income bonds

 

70,383

 

 

1,128

 

69,255

 

U.S. Treasury securities

 

7,999

 

1

 

 

8,000

 

Municipal Bonds

 

5,441

 

 

79

 

5,362

 

Total

 

83,823

 

1

 

1,207

 

82,617

 

 

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Short-term investments as of September 30, 2016 consisted of the following available-for-sale exchange-traded debt securities:

 

 

 

Amortized
Cost

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value
(Net Carrying
Amount)

 

 

 

$

 

$

 

$

 

$

 

Corporate fixed income bonds

 

7,194

 

 

 

252

 

6,942

 

U.S. treasury securities

 

111,241

 

12

 

109

 

111,144

 

Total

 

118,435

 

12

 

361

 

118,086

 

 

Contractual maturities of all debt securities as of September 30, 2016 were within one year. The Company does not intend to sell the debt securities and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity. Therefore, the Company does not consider the debt securities to be other-than-temporarily impaired at September 30, 2016.

 

4. Property and equipment

 

Property and equipment consisted of the following as of December 31, 2015 and September 30, 2016:

 

 

 

As of

 

 

 

December 31,
2015

 

September 30,
2016

 

 

 

$

 

$

 

Office equipment

 

213

 

224

 

Electronic equipment

 

424

 

609

 

Laboratory equipment

 

5,919

 

7,275

 

Computer software

 

186

 

330

 

Leasehold improvements

 

5,954

 

6,826

 

Property and equipment, at cost

 

12,696

 

15,264

 

Less accumulated depreciation and amortization

 

(6,084

)

(7,327

)

Construction in progress

 

 

8,617

 

Property and equipment, net

 

6,612

 

16,554

 

 

Depreciation expenses for the three and nine months ended September 30, 2015 were $402 and $1,127, respectively. Depreciation expenses for the three and nine months ended September 30, 2016 were $505 and $1,436, respectively.

 

5.  Income taxes

 

Income tax expense was $127 and $306, respectively, for the three and nine months ended September 30, 2016 compared with nil for both the three and nine months ended September 30, 2015. Current year income tax expense was attributable to BeiGene USA, Inc., a wholly owned subsidiary, which was established in July 2015 and provided general management services and strategic advisory services to the Company. The Company and its other subsidiaries were in a cumulative loss position for the three and nine months ended September 30, 2015 and 2016.

 

The Company recorded a full valuation allowance against deferred tax assets for all periods presented.  No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.

 

6.  Accrued expenses and other payables

 

 

 

As of

 

 

 

December 31,
2015

 

September 30,
2016

 

 

 

$

 

$

 

Payroll payables

 

275

 

205

 

Accrued operating expenses

 

5,513

 

17,392

 

Other payables

 

2,563

 

4,118

 

Total accrued expenses and other payables

 

8,351

 

21,715

 

 

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7.  Warrant and option liabilities

 

 

 

As of

 

 

 

December 31,
2015

 

September 30,
2016

 

 

 

$

 

$

 

Option to purchase shares by rental deferral

 

1,388

 

 

Warrants in connection with the promissory notes

 

785

 

 

Total

 

2,173

 

 

 

Option to purchase shares by rental deferral

 

On September 1, 2012, in conjunction with a lease agreement of one of its premises, the Company granted the landlord an option to purchase the Company’s ordinary shares (the “Option”) in exchange for the deferral of the payment of one year’s rental expense. The Option is a freestanding instrument and is recorded as liability in accordance with ASC480, Distinguishing Liabilities from Equity. The Option was initially recognized at fair value with subsequent changes in fair value recorded in losses. Prior to the Company’s IPO, the Company determined the fair value of the Option with the assistance of an independent third party valuation firm. On February 8, 2016, immediately prior to the Company’s IPO, the landlord exercised the Option to purchase 1,451,586 ordinary shares of the Company. As the exercise date was the IPO closing date, the exercise date fair value of the Option of $2,540 was determined based on its intrinsic value, which equals to the difference between the share price at the IPO closing date and the exercise price of such purchased ordinary shares. During the three and nine months ended September 30, 2015, the Company recognized a loss from the increase in fair value of the Option of $240 and $352, respectively.  During the three and nine months ended September 30, 2016, the Company recognized a loss from the increase in fair value of the Option of nil and $1,151, respectively.

 

Warrants in connection with the promissory notes

 

During the years ended December 31, 2012 and 2014, the Company entered into agreements with several investors to issue convertible promissory notes, and related warrants to purchase the Company’s preferred shares up to 10% of the convertible promissory notes’ principal amount concurrently for an aggregate principal amount of $2,410. The warrants were freestanding instruments and were recorded as liabilities in accordance with ASC480. The warrants were initially recognized at fair value with subsequent changes in fair value recorded in losses. In January and February, 2016, the warrants issued in connection with the promissory notes were exercised for 621,637 Preferred Shares, which shares were converted into 621,637 ordinary shares. As the exercise dates were very close to the IPO closing date, the respective exercise date fair value of the warrants of $1,148 was determined based on the intrinsic value, which equals to the difference between the share price at the IPO closing date and the exercise price of the issued warrants.

 

For the three and nine months ended September 30, 2015, the Company recognized loss from the increase in fair value of the warrants of $60 and $150, respectively. For the three and nine months ended September 30, 2016, the Company recognized loss from the increase in fair value of the warrants of nil and $363, respectively.

 

8.  Long-term bank loan

 

On September 2, 2015, BeiGene Suzhou entered into a loan agreement with Suzhou Industrial Park Biotech Development Co., Ltd. and China Construction Bank, to borrow $17,995 at a 7% fixed annual interest rate. As of September 30, 2016, the Company has drawn down $17,995 which is secured by BeiGene Suzhou’s future equipment purchases and the Company’s rights to a PRC patent on a drug candidate. The loan amounts of $8,998 and $8,997 are repayable on September 30, 2018 and 2019,

 

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respectively. Interest expense recognized for the three and nine months ended September 30, 2016 amounted to $284 and $534, respectively.

 

9.  Senior Promissory Note

 

On January 26, 2016, the Company entered into a note amendment and exchange agreement with Merck Sharp & Dohme Research GmbH (“MSD”), pursuant to which, the maturity date of the Senior Promissory Note was extended to May 2, 2016 from February 2, 2016. In addition, if the IPO occurred on or prior to May 2, 2016, subject to certain limitations, the outstanding unpaid principal and interest of the Senior Promissory Note as of the effectiveness date of the Company’s IPO (the “Exchanged Balance”) would be automatically exchanged, effective immediately prior to the closing of the IPO, into up to a number of the Company’s ordinary shares equal to the quotient of (1) the Exchanged Balance divided by (2) the per ordinary share public offering price in the IPO. The amendments and subsequent extinguishment of the Senior Promissory Note did not result in any gain or loss since the conversion rate was set at the IPO Price.

 

On February 8, 2016, the outstanding unpaid principal and interest of the Senior Promissory Note of carrying value of $14,693 were exchanged into 7,942,314 ordinary shares, computed at the IPO Price of $1.85 per ordinary share.

 

10.  Convertible preferred shares

 

In October 2014, the Company issued 52,592,590 Series A convertible preferred shares (the “Series A Preferred Shares”) with a par value of $0.0001 per share for cash consideration of $35,500 or $0.68 per share. At the same time, the previously issued subordinated convertible promissory note, convertible promissory notes, secured guaranteed convertible promissory notes, advances and convertible promissory notes due to a related party were automatically converted into 64,192,927 Series A Preferred Shares in aggregate.

 

On April 21, 2015, the Company issued 83,205,124 Series A-2 convertible preferred shares (the “Series A-2 Preferred Shares”) with a par value of $0.0001 per share for cash consideration of $97,350 or $1.17 per share.

 

The Series A Preferred Shares and the Series A-2 Preferred Shares are collectively referred to as the “Preferred Shares.”

 

The significant terms of the Preferred Shares are summarized below.

 

Dividends

 

The holders of the Preferred Shares shall be entitled to receive dividends accruing at the rate of 8% per annum. In addition, holders of the Preferred Shares shall also be entitled to dividends on the Company’s ordinary shares on an as if converted basis.

 

Voting rights

 

Each holder of Preferred Shares shall have the right to vote the number of votes per ordinary share into which their Preferred Shares could be converted, and shall vote along with the ordinary shares, on all matters in respect to which the holders of ordinary shares are entitled to vote.

 

Liquidation preference

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any deemed liquidation event as defined in the Preferred Shares agreements (“Liquidation Transaction”), the holders of Preferred Shares then outstanding are entitled to be paid out of the assets of the Company available for distribution to its members before any payment shall be made to the holders of any other class of shares by reason of their ownership thereof, an amount per share equal to the greater of (i) the original issue price, plus accrued but unpaid dividends; or (ii) such amount per share as would have been

 

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payable had all Preferred Shares been converted into ordinary shares immediately prior to such liquidation, dissolution, winding up or deemed liquidation event.

 

Conversion rights

 

(i)             Optional conversion: Each Preferred Share shall be convertible into the Company’s ordinary shares at the option of the holder at any time after the issuance date by dividing the original issue price by the conversion price, which is initially equal to the original issue price. Upon conversion of the Preferred Shares, all unpaid, cumulative dividends on the Preferred Shares shall no longer be payable.

 

(ii)          Automatic conversion: All outstanding Preferred Shares shall automatically be converted into ordinary shares at the then effective Preferred Shares conversion price upon (i) the closing of a Qualified IPO; or (ii) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 80.63% of the then-outstanding Preferred Shares. Upon conversion of the Preferred Shares, all unpaid cumulative dividends on the Preferred Shares shall no longer be payable.

 

Drag-along right

 

In the event that each of (i) (A) entities affiliated with Baker Bros. Advisors LP (collectively, “Baker Bros.”) or (B) Hillhouse BGN Holdings Limited (“Hillhouse”) and CB Biotech Investment Limited (“CITIC PE”) jointly; (ii) a majority of the Board of Directors; and (iii) the holders of more than 66.66% of the then-outstanding ordinary shares (other than those issued or issuable upon conversion of the Preferred Shares and any other derivative securities) approve a sale of the Company in writing, then each preferred shareholder agrees to certain joint actions to be taken to ensure such sale of the Company could be completed.

 

Accounting for preferred shares

 

The Preferred Shares are classified as mezzanine equity as these convertible preferred shares are redeemable upon the occurrence of a conditional event (i.e., a Liquidation Transaction). The holders of the Preferred Shares have a liquidation preference and will not receive the same form of consideration upon the occurrence of the conditional event as the holders of the ordinary shares would. The initial carrying amount of the Series A Preferred Shares of $78,809 is the issue price at the date of issuance of $78,889 net of issuance costs of $80. The initial carrying amount of the Series A-2 Preferred Shares of $97,275 is the issue price at the date of issuance of $97,350 net of issuance costs of $75.The holders of the Preferred Shares have the ability to convert the instrument into the Company’s ordinary shares. The conversion option of the convertible preferred shares do not qualify for bifurcation accounting because the conversion option is clearly and closely related to the host instrument and the underlying ordinary shares are not publicly traded nor readily convertible into cash. The contingent redemption options of the convertible preferred shares do not qualify for bifurcation accounting because the underlying ordinary shares are neither publicly traded nor readily convertible into cash. There are no other embedded derivatives that are required to be bifurcated.

 

Beneficial conversion features exist when the conversion price of the convertible preferred shares is lower than the fair value of the ordinary shares at the commitment date, which is the issuance date in the Company’s case. When a beneficial conversion feature exists as of the commitment date, its intrinsic value is bifurcated from the carrying value of the convertible preferred shares as a contribution to additional paid-in capital. On the commitment date of Series A Preferred Shares and Series A-2 Preferred Shares, the most favorable conversion price used to measure the beneficial conversion feature were $0.68 and $1.17, respectively. No beneficial conversion feature was recognized for the Series A Preferred Shares and Series A-2 Preferred Shares as the fair value per ordinary share at the commitment date were $0.28 and $0.47, respectively, which was less than the most favorable conversion price. The Company determined the fair value of ordinary shares with the assistance of an independent third party valuation firm.

 

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The Company concluded that the Preferred Shares were not redeemable, and it was not probable that the Preferred Shares would become redeemable because the likelihood of a Liquidation Transaction was remote. Therefore, no adjustment has been made to the initial carrying amount of the Preferred Shares.

 

On February 8, 2016, in connection with the completion of the IPO, all outstanding Preferred Shares were converted into 199,990,641 ordinary shares.

 

11.  Related party balances and transactions

 

During the three and nine months ended September 30, 2015, a shareholder provided consulting services to the Company at a fee of $25 and $75, respectively. During the three and nine months ended September 30, 2016, a shareholder, who is also a director, provided consulting services to the Company at a fee of $25 and $75, respectively.

 

12.  Research and development collaborative arrangements

 

The Company did not enter into any new collaborative arrangements during the three or nine months ended September 30, 2015 and 2016.

 

The following table summarizes total collaboration revenue recognized for the three and nine months ended September 30, 2015 and 2016:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2016

 

2015

 

2016

 

 

 

$

 

$

 

$

 

$

 

License revenue

 

 

 

 

 

Research and development revenue

 

1,380

 

 

4,139

 

1,070

 

Total

 

1,380

 

 

4,139

 

1,070

 

 

The Company recorded advances from customers related to the research and development collaboration arrangement with Merck KGaA of approximately $1,070 and nil at December 31, 2015 and September 30, 2016, respectively.

 

13.  Loss per share

 

Loss per share was calculated as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2016

 

2015

 

2016

 

 

 

$

 

$

 

$

 

$

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to ordinary shareholders for computing basic and diluted loss per ordinary share

 

(13,999

)

(35,494

)

(29,852

)

(81,619

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average number of ordinary shares outstanding for computing basic and diluted loss per ordinary share

 

109,104,674

 

428,137,509

 

107,015,707

 

383,472,372

 

Basic and diluted loss per share

 

(0.13

)

(0.08

)

(0.28

)

(0.21

)

 

For the three and nine months ended September 30, 2015 and 2016, the computation of basic loss per share using the two-class method was not applicable as the Company was in a net loss position.

 

The effects of all convertible preferred shares, share options, restricted shares, warrants and option to purchase ordinary or preferred shares were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive during the three months ended September 30, 2015 and the

 

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nine months ended September 30, 2015 and 2016. The effects of all share options and restricted shares were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive during the three months ended September 30, 2016.

 

14.  Share-based compensation

 

2016 share option and incentive plan

 

On January 14, 2016, in connection with the IPO, the board of directors and shareholders of the Company approved a new equity compensation plan, the 2016 Share Option and Incentive Plan, or 2016 Plan, which became effective on February 2, 2016. The Company initially reserved 65,029,595 ordinary shares for the issuance of awards under the 2016 Plan plus any shares available under the 2011 Plan and not subject to any outstanding options as of the effective date of the 2016 Plan. The 2016 Plan provides that the number of ordinary shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2017, by 5% of the outstanding number of ordinary shares on the immediately preceding December 31 or such lesser number of ordinary shares as determined by the board of directors or the  compensation committee. This number is subject to adjustment in the event of a share split, share dividend or other change in the Company’s capitalization. In addition, shares not needed to fulfill any obligations under the 2011 Plan will also be available for issuance under the 2016 Plan.

 

In January 2016, the Company granted 2,417,152 options with an exercise price of $1.85 per ordinary share under the 2011 Plan.

 

On February 8, 2016, the Company granted 460,626 options with an exercise price of $2.43 per ordinary share under the 2016 Plan.

 

On May 3, 2016, the Company granted 2,376,000 options with an exercise price of $2.05 per ordinary share and 475,000 restricted ordinary shares under the 2016 Plan.

 

During the three months ended September 30, 2016, the Company granted an aggregate of 19,935,531 options to employees, 2,872,080 options to consultants, and 600,000 restricted ordinary shares to employees under the 2016 plan. For options granted, exercise price per ordinary share equals to 1/13 of the closing price of the Company’s ADS quoted on the NASDAQ Stock Exchange on the applicable grant date.

 

Generally, options have a contractual term of 10 years and vest over a three- to five-year period, with the first tranche vesting one calendar year after the grant date or the service relationship start date and the remainder of the awards vesting on a monthly basis thereafter.

 

The restricted ordinary shares vest evenly over a four-year period on a yearly basis.

 

Modification

 

Upon the completion of the Company’s IPO on February 8, 2016 (“Date of the Change in Employment Status”), a consultant (the “Consultant”) became a member of the Company’s board of directors and his compensation is now treated as employee compensation. The fair value of the options granted by the Company to the Consultant has been re-measured as of the Date of the Change in Employment Status and compensation charges have been accounted for prospectively over the remaining vesting period. There were no other modifications to the Company’s share option arrangements for the periods presented.

 

The following table summarizes total share-based compensation expense recognized for the three and nine months ended September 30, 2015 and 2016:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2016

 

2015

 

2016

 

 

 

$

 

$

 

$

 

$

 

Research and development

 

4,580

 

2,135

 

7,765

 

5,178

 

General and administrative

 

239

 

644

 

278

 

1,500

 

Total

 

4,819

 

2,779

 

8,043

 

6,678

 

 

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15.  Accumulated other comprehensive loss

 

The movement of accumulated other comprehensive loss was as follows:

 

 

 

Foreign Currency
Translation
Adjustments

 

Unrealized
Gains
(Losses) on available-for-sale securities

 

Total

 

 

 

$

 

$

 

$

 

Balance as of December 31, 2015

 

(602

)

(1,207

)

(1,809

)

Other comprehensive income before reclassifications

 

(13

)

(220

)

(233

)

Amounts reclassified from accumulated other comprehensive loss

 

 

1,077

 

1,077

 

Net-current period other comprehensive loss

 

(13

)

857

 

844

 

Balance as of September 30, 2016

 

(615

)

(350

)

(965

)

 

16. Shareholders’ equity

 

Conversion of Preferred Shares and Senior Promissory Note

 

Upon completion of the IPO, all outstanding Preferred Shares were converted into 199,990,641 ordinary shares and the related carrying value of $176,084 was reclassified from mezzanine equity to shareholders’ equity. The outstanding unpaid principal and interest of the Senior Promissory Note were converted into 7,942,314 ordinary shares, computed at the initial public offering price of $1.85 per ordinary share and the related carrying value of $14,693 was reclassified from current liability to shareholders’ equity.

 

Exercise of the option and warrants

 

In January 2016 and February 2016, certain warrants in connection with the convertible promissory notes and short term notes were exercised to purchase 621,637 Preferred Shares, which shares were converted into 621,637 ordinary shares. On the IPO closing date, (i) the Company’s landlord exercised its option to purchase 1,451,586 ordinary shares of the Company; (ii) Baker Bros. exercised their warrants to purchase 2,592,593 ordinary shares at an exercise price of $0.68 per share; and (iii) a senior executive exercised warrants to purchase 57,777 Preferred Shares at an exercise price of $0.68 per share, which were converted into 57,777 ordinary shares. Upon the exercise of the aforementioned option and warrants, except for Baker Bros.’ warrants, which were initially classified in equity, the related carrying value totaling $3,687 was reclassified from current liabilities to shareholders’ equity.

 

17.  Restricted net assets

 

As a result of PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company. As of December 31, 2015 and September 30, 2016, amounts restricted were the net assets of the Company’s PRC subsidiaries, which amounted to $3,383 and $2,581, respectively.

 

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18.  Commitments and contingencies

 

Operating lease commitments

 

The Company leases office facilities under non-cancelable operating leases expiring on different dates. Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, contingent rent, renewal, or purchase options.

 

There are no restrictions placed upon the Company by entering into these leases. Total expenses under these operating leases were $279 and $830 for the three and nine months ended September 30, 2015, respectively. Total expenses under these operating leases were $748 and $1,373 for the three and nine months ended September 30, 2016, respectively.

 

Future minimum payments under non-cancelable operating leases consist of the following as of September 30, 2016

 

 

 

$

 

Three months ending December 31, 2016

 

656

 

Year ending December 31, 2017

 

2,512

 

Year ending December 31, 2018

 

2,279

 

Year ending December 31, 2019

 

1,832

 

Year ending December 31, 2020

 

1,670

 

Year ending December 31, 2021 and thereafter

 

481

 

Total

 

9,430

 

 

On April 10, 2016, the Company entered into a Lease Agreement with Suzhou Industrial Park Biotech Development Co., Ltd. for an approximately 11,000 square meter facility for research and manufacturing use in Suzhou, China. The lease commenced on April 18, 2016 and will expire on July 17, 2021. The initial rent, the payment of which commenced on July 18, 2016, is RMB 280,650 per month, plus service charges of RMB 65,485 per month and other fees for use of the premises, including water costs and electricity. The service charges will remain unchanged for the first three years and the increasing range thereafter will not exceed 5% of the previous yearly service charges. Suzhou Industrial Park Administrative Committee will pay full monthly rent for the first three years and 50% of the monthly rent for the following two years.

 

Capital commitments

 

The Company had capital commitments amounting to $9,587 for the acquisition of property, plant and equipment as of September 30, 2016.

 

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Item 2.                                 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements (unaudited) and related notes included in the section of this Quarterly Report on Form 10-Q, or this Quarterly Report, titled “Item 1—Financial Statements.” This Quarterly Report contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. These forward-looking statements, include, but are not limited to, statements regarding: the initiation, timing, progress and results of our preclinical studies and clinical trials and our research and development programs; our ability to advance our drug candidates into, and successfully complete, clinical trials; the ability of our drug candidates to be granted or to maintain Category 1 designation with the China Food and Drug Administration, or CFDA; our reliance on the success of our clinical-stage drug candidates BGB-3111, BGB-A317, BGB-290 and BGB-283 and certain other drug candidates, as monotherapies and in combination with our internally discovered drug candidates and third-party agents; the timing or likelihood of regulatory filings and approvals; the commercialization of our drug candidates, if approved; our ability to develop sales and marketing capabilities; the pricing and reimbursement of our drug candidates, if approved; the implementation of our business model, strategic plans for our business, drug candidates and technology; the scope of protection we are able to establish and maintain for intellectual property rights covering our drug candidates and technology; our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties; cost associated with defending against intellectual property infringement, product liability and other claims; regulatory developments in the United States, China, the United Kingdom, the European Union and other jurisdictions; the accuracy of our estimates regarding expenses, future revenues, capital requirements and our need for additional financing; the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements; our ability to maintain and establish collaborations or obtain additional grant funding; the rate and degree of market acceptance of our drug candidates; developments relating to our competitors and our industry, including competing therapies; the size of the potential markets for our drug candidates and our ability to serve those markets; our ability to effectively manage our anticipated growth; our ability to attract and retain qualified employees and key personnel; our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and share performance; the future trading price of the American Depositary Shares, or ADSs, and impact of securities analysts’ reports on these prices; and other risks and uncertainties, including those listed under “Part II—Item 1A—Risk Factors.” These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described in “Part II—Item 1A—Risk Factors” of this Quarterly Report. These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. Unless the context requires otherwise, in this Quarterly Report, the terms “BeiGene,” the “Company,” “we,” “us” and “our” refer to BeiGene, Ltd. and its subsidiaries, on a consolidated basis.

 

Overview

 

We are a globally focused, clinical-stage biopharmaceutical company dedicated to becoming a leader in the discovery and development of innovative, molecularly targeted and immuno-oncology drugs for the treatment of cancer. We believe the next generation of cancer treatment will utilize therapeutics both as

 

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monotherapies and in combination to attack multiple underlying mechanisms of cancer cell growth and survival. We further believe that discovery of next-generation cancer therapies requires new research tools. To that end, we have developed a proprietary cancer biology platform that addresses the importance of tumor-immune system interactions and the value of primary biopsies in developing new models to support our drug discovery effort. Our strategy is to develop a pipeline of drug candidates with the potential to be best-in-class monotherapies and also important components of multiple-agent combination regimens.

 

We have used our cancer biology platform to develop four clinical-stage drug candidates that we believe have the potential to be best-in-class or first-in-class. In addition, we believe that each has the potential to be an important component of a drug combination addressing major unmet medical needs. Our clinical-stage drug candidates include three molecularly targeted agents, BGB-3111, BGB-290 and BGB-283 and one immuno-oncology agent, BGB-A317. BGB-3111 is a potent and highly selective small molecule inhibitor of BTK. BGB-290 is a molecularly targeted, orally available, potent and highly selective inhibitor of PARP1 and PARP2. BGB-283 is a small molecule inhibitor of both the monomer and dimer forms of the RAF kinase. For each of our molecularly targeted drug candidates, we have achieved proof-of-concept by demonstrating objective responses in the defined patient populations. BGB-3111 received orphan drug designation from the U.S. Food and Drug Administration, or FDA, for chronic lymphocytic leukemia, mantle cell lymphoma and Waldenström’s macroglobulinemia. Our clinical-stage immuno-oncology agent, BGB-A317, is an investigational humanized monoclonal antibody against the immune checkpoint receptor, PD-1. We have Investigational New Drug Applications in effect for our BTK, PD-1 and PARP inhibitors with the FDA. We have also received approval of our Clinical Trial Applications for each of our four clinical-stage drug candidates from the China Food and Drug Administration, or CFDA. In addition to our clinical-stage drug candidates, we have a robust pipeline of preclinical programs and are planning to advance one or more of these programs into the clinic in the next 12 months. We have licensed the ex-China rights of BGB-283 to Merck KGaA. We retain full global rights for all of our other clinical and preclinical drug candidates and programs.

 

Since our inception on October 28, 2010, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting preclinical studies and clinical trials. We do not have any drug candidates approved for sale and have not generated any revenue from product sales. We have financed operations through a combination of debt and equity financings and private and public grants and contracts, including the net proceeds from the issuance of a senior note and a convertible promissory note to Merck Sharp & Dohme Research GmbH, or MSD, an affiliate of Merck Sharp & Dohme Corp., the private placements of our Series A preferred shares and Series A-2 preferred shares, and our collaboration with Merck KGaA, or Merck KGaA Collaboration. Since our inception in 2010, we have raised $170 million in private equity financing from our dedicated group of investors, including leading healthcare-focused funds, major mutual funds, China-based funds and our founders, and additionally received $37 million from the Merck KGaA Collaboration to fund our operations. On February 8, 2016, we completed our initial public offering and received net proceeds of $166.2 million, after deducting underwriting discounts and offering expenses. Although it is difficult to predict our liquidity requirements, based upon our current operating plan and the successful completion of our initial public offering, we believe we have sufficient cash to meet our projected operating requirements for at least the next 12 months. See “—Liquidity and capital resources.”

 

Since inception, we have incurred significant operating losses. As of September 30, 2016, we had an accumulated deficit of $199.8 million. In the future, we may generate revenue from product sales, collaboration agreements, strategic alliances and licensing arrangements, or a combination of these. Substantially all of our losses have resulted from funding our research and development programs and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

 

·                  continue investment in our cancer biology platform;

 

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·                  continue preclinical and clinical development of our programs;

 

·                  continue investment in our manufacturing facilities;

 

·                  hire additional research, development and business personnel;

 

·                  maintain, expand and protect our intellectual property portfolio; and

 

·                  incur additional costs associated with operating as a public company.

 

We expect that any revenue we generate will fluctuate from quarter to quarter and year to year as a result of the timing and amount of license fees, milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized. If we fail to complete the development of our drug candidates in a timely manner or obtain regulatory approval of them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

 

Cash used in operations were $23.1 million and $63.4 million, respectively, for the nine months ended September 30, 2015 and 2016. As of September 30, 2016, we had cash, cash equivalents and short-term investments of $203.6 million, compared with $100.5 million as of December 31, 2015.

 

Components of operating results

 

Revenue

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future.

 

We have licensed BGB-283 to Merck KGaA for markets outside China, but we still own the worldwide rights to our other drug candidates and retain exclusive rights to BGB-283 in China. We also have a limited collaboration with Merck KGaA on BGB-290.

 

On May 24, 2013, we entered into license agreements with Merck KGaA, which we amended and restated on December 10, 2013, and further amended on October 1, 2015 and December 3, 2015, pursuant to which (1) we granted to Merck KGaA an exclusive license under certain of our intellectual property rights to develop and manufacture, and, if Merck KGaA exercises its continuation option, to commercialize and manufacture our compound BGB-283, and any other compound covered by the same existing patent rights with primary activity to inhibit wildtype or certain mutant BRAF, in all countries of the world excluding The People’s Republic of China, which we refer to as the Ex-PRC Territory, and (2) Merck KGaA granted us an exclusive license under certain of its intellectual property rights to develop, manufacture and commercialize the RAF dimer inhibitor in The People’s Republic of China, which we refer to as the PRC Territory, subject to certain non-compete restrictions. Under these agreements, we received $13 million in non-refundable payments in 2013 following their execution, $5 million in milestone payments in 2014 and $4 million in milestone payments in 2015. We are eligible to receive up to $32 million, $33 million and $145 million in payments upon the successful achievement of pre-specified clinical, regulatory and commercial milestones in the Ex-PRC Territory, respectively, and another $14 million in payments upon the successful achievement of pre-specified clinical milestones in the PRC Territory. Merck KGaA also is required to pay us tiered royalties ranging from the mid single-digit to the low-teens, on a country-by-country and licensed product-by-licensed product basis, on aggregate net sales of licensed products in the Ex-PRC Territory. In consideration for the licenses Merck KGaA grants to us, we are required to pay Merck KGaA a high single-digit royalty on aggregate net sales of licensed BRAF gene inhibitors in the PRC Territory.

 

On October 28, 2013, we entered into license agreements with Merck KGaA, pursuant to which (1) we granted to Merck KGaA an exclusive license under certain of our intellectual property rights to develop and manufacture, and, if Merck KGaA exercises a certain continuation option, to commercialize and manufacture our compound BGB-290 and any other compound covered by the same existing patent

 

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rights with primary activity to inhibit PARP 1, 2 or 3 enzymes in the Ex-PRC Territory, and (2) Merck KGaA granted us an exclusive license under certain of its intellectual property rights to develop, manufacture and commercialize the licensed PARP inhibitors in the PRC Territory. Under these license agreements, we received $6 million in non-refundable payments in November 2013 following their execution and $9 million in milestone payments in 2014. We are eligible to receive up to $7 million and $2.5 million, in payments upon the successful achievement of pre-specified clinical and regulatory milestones in the PRC Territory respectively. On October 1, 2015, pursuant to a purchase of rights agreement, we repurchased all of Merck KGaA’s worldwide rights under the ex-PRC license agreement, in consideration for, among other things, a one-time payment of $10 million and reduction of future milestone payments that we are eligible to receive under the PRC license agreement. In connection with such repurchase, the ex-PRC license agreement terminated except for certain provisions therein. The remaining $3 million of deferred revenue related to PARP as of October 1, 2015 was netted against the $10 million repurchase consideration. In addition, if Merck KGaA exercises its PRC commercialization option, Merck KGaA is required to pay us a $50 million non-refundable payment upon such exercise, and we are eligible for a $12.5 million milestone payment upon the successful achievement of a certain additional regulatory event in the PRC Territory. In consideration for the licenses granted to us, we are required to pay Merck KGaA a high single-digit royalty on aggregate net sales of licensed products in the PRC Territory.

 

For more information on our collaborations with Merck KGaA, see “Part I—Item 1—Business—Collaboration with Merck KGaA” of our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC, on March 30, 2016, or our Annual Report.

 

We recognized $1.4 million and $4.1 million of collaboration revenue from the Merck KGaA Collaboration for the three and nine months ended September 30, 2015, respectively. We recognized nil and $1.1 million of collaboration revenue from the Merck KGaA Collaboration for the three and nine months ended September 30, 2016, respectively. The following table summarizes the revenue recognition schedule of an aggregate of $34.0 million in revenue from our collaboration agreements with Merck KGaA, comprised of an aggregate of $22.0 million related to BGB-283 and $12.0 million related to BGB-290. The revenue consists of an upfront non-refundable license fee, Phase 1 research and development fees, and a development based target payment related to the collaborative arrangements for BRAF, excluding the $3 million in deferred revenue that was netted against the $10 million repurchase consideration relating to the PARP inhibitors under the ex-PRC license agreement. In accordance with our revenue recognition policy, we recognize these amounts as shown in the table below:

 

 

 

BGB-283

 

BGB-290

 

Total

 

 

 

(in thousands)

 

2013

 

$

8,317

 

$

2,823

 

$

11,140

 

2014

 

5,906

 

7,048

 

12,954

 

2015

 

6,707

 

2,109

 

8,816

 

2016

 

1,070

 

 

1,070

 

Total

 

$

22,000

 

$

11,980

 

$

33,980

 

 

For the three and nine months ended September 30, 2015 and 2016, substantially all of our revenue was generated solely from Merck KGaA. For the foreseeable future, we expect substantially all of our revenue will be generated from the Merck KGaA Collaboration, and any other strategic relationships we may enter into. If our development efforts are successful, we may also generate revenue from product sales.

 

Operating expenses

 

Research and development expenses

 

Research and development expenses consist of the costs associated with our research and development activities, conducting preclinical studies and clinical trials and activities related to regulatory filings. Our research and development expenses consist of:

 

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·                  employee-related expenses, including salaries, benefits, travel and share-based compensation expense for research and development personnel;

 

·                  expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, and consultants that conduct and support clinical trials and preclinical studies;

 

·                  costs associated with preclinical activities and development activities;

 

·                  costs associated with regulatory operations; and

 

·                  other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in research and development activities.

 

Our current research and development activities mainly relate to the clinical development of the following programs:

 

·                  BGB-3111, a potent and highly selective small molecule inhibitor of BTK;

 

·                  BGB-A317, an investigational humanized monoclonal antibody against PD-1;

 

·                  BGB-290, a molecularly targeted, orally available, potent and highly selective inhibitor of PARP1 and PARP2; and

 

·                  BGB-283, a small molecule inhibitor of both the monomer and dimer forms of RAF.

 

We expense research and development costs when we incur them. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information our vendors provide to us. We do not allocate employee-related costs, depreciation, rental and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under research and development and, as such, are separately classified as unallocated research and development expenses.

 

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of our drug candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our drug candidates. This is due to the numerous risks and uncertainties associated with developing such drug candidates, including the uncertainty of:

 

·                  successful enrollment in and completion of clinical trials;

 

·                  establishing an appropriate safety profile;

 

·                  establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

·                  receipt of marketing approvals from applicable regulatory authorities;

 

·                  commercializing our drug candidates, if and when approved, whether alone or in collaboration with our internally discovered drug candidates or third-party agents;

 

·                  obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our drug candidates;

 

·                  continued acceptable safety profiles of the products following approval; and

 

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·                  retention of key research and development personnel.

 

A change in the outcome of any of these variables with respect to the development of any of our drug candidates would significantly change the costs, timing and viability associated with the development of that drug candidate.

 

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our development programs progress, including as we continue to support the clinical trials of BGB-3111, BGB-A317, BGB-290 and BGB-283 as a treatment for various cancers and move such drug candidates into additional clinical trials. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

 

General and administrative expenses

 

General and administrative expenses consist primarily of salaries and related benefit costs, including share-based compensation for general and administrative personnel. Other general and administrative expenses include professional fees for legal, consulting, auditing and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities. We anticipate that our general and administrative expenses will increase in future periods to support increases in our research and development activities, including the continuation of the clinical trials of BGB-3111, BGB-A317, BGB-290 and BGB-283 as a treatment for various cancers and the initiation of our clinical trials for our other drug candidates. These increases will likely include increased headcount, increased share-based compensation charges, expanded infrastructure and increased costs for insurance. We also anticipate increased legal, compliance, accounting and investor and public relations expenses associated with being a public company.

 

Interest income, net

 

Interest income

 

Interest income consists primarily of interest generated from our short-term investments in treasury securities, municipal bonds and corporate fixed income bonds.

 

Interest expense

 

Interest expense consists primarily of interest on our Senior Promissory Note and long-term bank loan.

 

In 2011, we issued $10 million 8% Senior Promissory Note to MSD. In February 2016, in connection with the closing of our initial public offering, the outstanding unpaid principal and interest of the MSD Senior Promissory Note was automatically exchanged into 7,942,314 of our ordinary shares.

 

On September 2, 2015, BeiGene Suzhou entered into a loan agreement with Suzhou Industrial Park Biotech Development Co., Ltd. and China Construction Bank, to borrow $18.0 million at a 7% fixed annual interest rate. As of September 30, 2016, we have drawn down $18.0 million, which is secured by BeiGene Suzhou’s future equipment purchases and our rights to a PRC patent on a drug candidate. The loan amounts of $9.0 million and $9.0 million are repayable on September 30, 2018 and 2019, respectively.

 

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Results of operations

 

The following table summarizes our results of operations for the three and nine months ended September 30, 2015 and 2016:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2016

 

Change

 

2015

 

2016

 

Change

 

 

 

(in thousands)

 

Collaboration revenue

 

$

1,380

 

$

 

$

(1,380

)

$

4,139

 

$

1,070

 

$

(3,069

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

(13,351

)

(30,106

)

(16,755

)

(30,147

)

(69,100

)

(38,953

)

General and administrative

 

(2,021

)

(4,722

)

(2,701

)

(4,361

)

(11,760

)

(7,399

)

Total operating expenses

 

(15,372

)

(34,828

)

(19,456

)

(34,508

)

(80,860

)

(46,352

)

Loss from operations

 

(13,992

)

(34,828

)

(20,836

)

(30,369

)

(79,790

)

(49,421

)

Net interest income (expense)

 

460

 

(75

)

(535

)

446

 

336

 

(110

)

Changes in fair value of financial instruments

 

(300

)

 

300

 

(502

)

(1,514

)

(1,012

)

Disposal loss on available-for-sale securities

 

(241

)

(137

)

104

 

(298

)

(1,077

)

(779

)

Net other income (expense)

 

74

 

(327

)

(401

)

871

 

732

 

(139

)

Loss before income tax expense

 

(13,999

)

(35,367

)

(21,368

)

(29,852

)

(81,313

)

(51,461

)

Income tax expense

 

 

(127

)

(127

)

 

(306

)

(306

)

Net loss

 

$

(13,999

)

$

(35,494

)

$

(21,495

)

$

(29,852

)

$

(81,619

)

$

(51,767

)

 

Comparison of the three months ended September 30, 2015 and September 30, 2016

 

Revenue

 

Revenue from the Merck KGaA Collaboration decreased by $1.4 million to nil for the three months ended September 30, 2016 from $1.4 million for the three months ended September 30, 2015. The decrease was primarily attributable to revenue that was no longer being recognized for BGB-290 for the third quarter in 2016 after we repurchased its ex-PRC right from Merck KGaA in October 2015.

 

Research and development expense

 

Research and development expense increased by $16.7 million to $30.1 million for the three months ended September 30, 2016 from $13.4 million for the three months ended September 30, 2015. The following table summarizes our research and development expense by program and stage of development for the three months ended September 30, 2015 and 2016, respectively:

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2016

 

 

 

(in thousands)

 

External cost of clinical-stage programs

 

$

3,599

 

$

15,151

 

External cost of preclinical-stage programs

 

1,493

 

3,264

 

Internal research and development expenses

 

8,259

 

11,691

 

Total research and development expenses

 

$

13,351

 

$

30,106

 

 

The increase in external research and development expense was primarily attributable to the advancement of our clinical and preclinical pipeline, and included the following:

 

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Increases of approximately $7.3 million, $3.7 million and $0.9 million, respectively, for BGB-3111, BGB-A317 and BGB-283, offset by decrease of approximately $0.4 million for BGB-290.

 

The increase in internal research and development expense was primarily attributable to the expansion of our development organization and our pipeline, and included the following:

 

·                  $2.8 million increase of employee salary and benefits, which was primarily attributable to hiring of more development personnel during the three months ended September 30, 2016;

 

·                  $2.7 million increase of materials and reagent expenses, mainly in connection with in-house manufacture of drugs used for clinical purpose which was previously outsourced and recorded as external cost;

 

·                  $0.2 million increase of consulting fees, which was mainly attributable to increased scientific, regulatory and development consulting activities, in connection with the advancement of our pipeline;

 

·                  $0.2 million increase of facilities, office expense, rental fee and other expenses; and

 

·                  Offset by $2.5 million decrease of stock option expenses ($2.1 million in the three months ended September 30, 2016 compared to $4.6 million in the three months ended September 30, 2015).

 

General and administrative expense

 

General and administrative expense increased by $2.7 million to $4.7 million for the three months ended September 30, 2016 from $2.0 million for the three months ended September 30, 2015. The increase was primarily attributable to the following:

 

·                  $0.7 million increase of employee salary and benefits, which was primarily attributable to hiring of more personnel during the three months ended September 30, 2016;

 

·                  $0.8 million increase of professional fees for audit, consulting, recruiting and legal services, mainly in connection with the preparation of our periodic reports, consulting activities, recruiting services and patent prosecution activities;

 

·                  $0.4 million increase of stock option expense ($0.6 million in the three months ended September 30, 2016 compared to $0.2 million in the three months ended September 30, 2015); and

 

·                  $0.8 million increase of travel, office, leasing and other administrative expenses, mainly in connection with the global expansion of our company.

 

Interest income and expense, net

 

Interest income (net) decreased by $535,000 to interest expense (net) of $75,000 for the three months ended September 30, 2016 from interest income (net) of $460,000 for the three months ended September 30, 2015. The decrease in interest income (net) was primarily attributable to decrease of interest income, mainly generated from short-term investments in treasury securities, municipal bonds and fixed income bonds.

 

Changes in fair value of financial instruments

 

Loss from changes in fair value of financial instruments was nil for the three months ended September 30, 2016, compared with $0.3 million for the three months ended September 30, 2015. The decrease in loss from changes in fair value of financial instruments was primarily attributable to the exercise of warrants and options in January 2016 and February 2016.

 

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Disposal loss on available-for-sale securities

 

The $0.1 million disposal loss on available-for-sale securities was recorded for the three months ended September 30, 2016 following the disposal of the available-for-sale securities.

 

Other income, net

 

Other income (net) decreased by $401,000 to other expense (net) of $327,000 for the three months ended September 30, 2016 from other income (net) of $74,000 for the three months ended September 30, 2015. Other income (net) primarily consisted of government grants received and foreign currency exchange gain/loss.

 

Income tax expense

 

Income tax expense was $0.1 million for the three months ended September 30, 2016 compared with nil for the three months ended September 30, 2015. Current-year income tax expense was attributable to BeiGene USA, Inc., a wholly owned subsidiary, which was established in July 2015 and provided general management services and strategic advisory services to BeiGene, Ltd. BeiGene, Ltd. and its other subsidiaries were in a cumulative loss position for the three months ended September 30, 2015 and 2016.

 

Comparison of the nine months ended September 30, 2015 and September 30, 2016

 

Revenue

 

Revenue from the Merck KGaA Collaboration decreased by $3.0 million to $1.1 million for the nine months ended September 30, 2016 from $4.1 million for the nine months ended September 30, 2015. The decrease was primarily attributable to revenue that was no longer being recognized for BGB-290 for the nine months ended September 30, 2016 after we repurchased its ex-PRC right from Merck KGaA in October 2015.

 

Research and development expense

 

Research and development expense increased by $39.0 million to $69.1 million for the nine months ended September 30, 2016 from $30.1 million for the nine months ended September 30, 2015. The following table summarizes our research and development expense by program and stage of development for the nine months ended September 30, 2015 and 2016, respectively:

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2016

 

 

 

(in thousands)

 

External cost of clinical-stage programs

 

$

9,407

 

$

37,221

 

External cost of preclinical-stage programs

 

3,264

 

5,150

 

Internal research and development expenses

 

17,476

 

26,729

 

Total research and development expenses

 

$

30,147

 

$

69,100

 

 

The increase in external research and development expense was primarily attributable to the advancement of our clinical and preclinical pipeline, and included the following:

 

Increases of approximately $14.3 million, $10.0 million, $2.4 million and $1.1 million, respectively, for BGB-3111, BGB-A317, BGB-283 and BGB-290.

 

The increase in internal research and development expense was primarily attributable to the expansion of our development organization and our pipeline, and included the following:

 

·                  $6.6 million increase of employee salary and benefits, which was primarily attributable to hiring of more development personnel during the nine months ended September 30, 2016;

 

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·                  $2.8 million increase of materials and reagent expenses, mainly in connection with in-house manufacture of drugs used for clinical purpose which was previously outsourced and recorded as external cost;

 

·                  $1.0 million increase of consulting fees, which was mainly attributable to increased scientific, regulatory and development consulting activities, in connection with the advancement of our pipeline;

 

·                  $1.4 million increase of facilities, office expense, rental fee and other expenses; and

 

·                  Offset by $2.6 million decrease of stock option expenses ($5.2 million in the nine months ended September 30, 2016 compared to $7.8 million in the nine months ended September 30, 2015).

 

General and administrative expense

 

General and administrative expense increased by $7.4 million to $11.8 million for the nine months ended September 30, 2016 from $4.4 million for the nine months ended September 30, 2015. The increase was primarily attributable to the following:

 

·                  $2.8 million increase of professional fees for audit, consulting, recruiting and legal services, mainly in connection with the preparation of our periodic reports, consulting activities, recruiting services and patent prosecution activities;

 

·                  $2.2 million increase of employee salary and benefits, which was primarily attributable to hiring of more personnel during the nine months ended September 30, 2016;

 

·                  $1.2 million increase of stock option expense ($1.5 million in the nine months ended September 30, 2016 compared to $0.3 million in the nine months ended September 30, 2015); and

 

·                  $1.2 million increase of travel, office, leasing and other administrative expenses, mainly in connection with the global expansion of our company.

 

Interest income and expense, net

 

Interest income (net) decreased by $110,000 to $336,000 for the nine months ended September 30, 2016 from $446,000 for the nine months ended September 30, 2015. The decrease in interest income (net) was primarily attributable to decrease of interest income, mainly generated from short-term investments in treasury securities, municipal bonds and fixed income bonds.

 

Changes in fair value of financial instruments

 

Loss from changes in fair value of financial instruments increased by $1.0 million to $1.5 million for the nine months ended September 30, 2016 from $0.5 million for the nine months ended September 30, 2015. The increase in loss from changes in fair value of financial instruments was primarily attributable to the fair value change of warrants and options.

 

Disposal loss on available-for-sale securities

 

The $1.1 million disposal loss on available-for-sale securities was recorded for the nine months ended September 30, 2016 following the disposal of the available-for-sale securities.

 

Other income, net

 

Other income (net) decreased by $139,000 to $732,000 for the nine months ended September 30, 2016 from $871,000 for the nine months ended September 30, 2015. Other income (net) primarily consisted of government grants received and foreign currency exchange gain/loss.

 

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Income tax expense

 

Income tax expense was $0.3 million for the nine months ended September 30, 2016 compared with nil for the nine months ended September 30, 2015. Current-year income tax expense was attributable to BeiGene USA, Inc., a wholly owned subsidiary, which was established in July 2015 and provided general management services and strategic advisory services to BeiGene, Ltd. BeiGene, Ltd. and its other subsidiaries were in a cumulative loss position for the nine months ended September 30, 2015 and 2016.

 

Liquidity and capital resources

 

Since inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses have resulted from funding our research and development programs and general and administrative costs associated with our operations. We incurred net losses of $14.0 million and $29.9 million, respectively, for the three and nine months ended September 30, 2015, and $35.5 million and $81.6 million, respectively, for the three and nine months ended September 30, 2016. As of September 30, 2016, we had an accumulated deficit of $199.8 million. Our primary use of cash is to fund research and development costs. Our operating activities used $23.1 million and $63.4 million of cash flows during the nine months ended September 30, 2015 and 2016, respectively. Historically, we have financed our operations principally through proceeds from private placements of preferred shares, promissory notes and convertible notes of $184.4 million and proceeds from the Merck KGaA Collaboration of $37 million. On February 8, 2016, we completed our initial public offering and received net proceeds of $166.2 million, after deducting underwriting discounts and offering expenses. At September 30, 2016, we had cash, cash equivalents and short-term investments of $203.6 million.

 

The following table provides information regarding our cash flows for the nine months ended September 30, 2015 and 2016:

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2016

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(23,081

)

$

(63,373

)

Net cash used in investing activities

 

(66,208

)

(51,129

)

Net cash provided by financing activities

 

103,324

 

182,210

 

Net effect of foreign exchange rate changes

 

(483

)

(45

)

Net increase in cash and cash equivalents

 

$

13,552

 

$

67,663

 

 

Net cash used in operating activities

 

The use of cash in all periods presented resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. The primary use of our cash in all periods presented was to fund the development of our research and development, regulatory and other clinical trial costs, and related supporting administration. Our prepaid expenses and other current assets, accounts payable and accrued expense balances in all periods presented were affected by the timing of vendor invoicing and payments.

 

During the nine months ended September 30, 2016, operating activities used $63.4 million of cash, which resulted principally from our net loss of $81.6 million, adjusting for non-cash charges of $10.7 million and interest expense of $0.1 million, and by cash provided by our operating assets and liabilities of $7.4 million. Our net non-cash charges during the nine months ended September 30, 2016 primarily consisted of a $1.4 million depreciation charge, a $6.7 million share-based compensation expense, a $1.1 million disposal loss on available-for-sale securities and a $1.5 million loss from changes in the fair value of financial instruments.

 

During the nine months ended September 30, 2015, our operating activities used $23.1 million of cash, which resulted principally from our net loss of $29.9 million, adjusted for non-cash charges of $10.0 million and interest expense of $0.8 million, and by cash used in our operating assets and liabilities of $4.0 million. Our net non-cash charges during the nine months ended September 30, 2015 primarily consisted of $1.1 million of depreciation expense, $8.0 million of share-based compensation expense, a

 

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$0.3 million disposal loss on available-for-sale securities and a $0.5 million loss from changes in fair value of financial instruments.

 

Net cash used in investing activities

 

Net cash used in investing activities was $51.1 million for the nine months ended September 30, 2016 compared to $66.2 million for the nine months ended September 30, 2015. The increase in cash used in investing activities was primarily due to $35.7 million net purchase of available-for-sale securities and $15.4 million paid to purchase property and equipment.

 

Net cash provided by financing activities

 

Net cash provided by financing activities was $182.2 million for the nine months ended September 30, 2016 compared to $103.3 million for the nine months ended September 30, 2015. The increase was primarily due to proceeds of $167.9 million from our initial public offering, net of offering costs, proceeds of $12.2 million from long-term loan and proceeds of $2.1 million from exercise of warrants.

 

Operating capital requirements

 

We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future drug candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our drug candidates and begin to commercialize any approved products. As a newly public company, we have incurred and will continue to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our drug candidates, we expect to incur significant commercialization expenses for product sales, marketing and manufacturing. Accordingly, we anticipate that we will need substantial additional funding in connection with our continuing operations.

 

Based on our current operating plan, we expect that our existing cash, cash equivalents and short-term investments as of September 30, 2016, will enable us to fund our operating expenses and capital expenditures requirements for at least the next 12 months. In that time, we expect that our expenses will increase substantially as we fund clinical development of BGB-3111, BGB-A317, BGB-290 and BGB-283 as monotherapies and in combination, fund new and ongoing research and development activities and working capital and other general corporate purposes. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development and commercialization of our drug candidates.

 

Our future capital requirements will depend on many factors, including:

 

·                  the costs, timing and outcome of regulatory reviews and approvals;

 

·                  the ability of our drug candidates to progress through clinical development successfully;

 

·                  the initiation, progress, timings, costs and results of non-clinical studies and clinical trials for our other programs and potential drug candidates;

 

·                  the number and characteristics of the drug candidates we pursue;

 

·                  the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending against intellectual property-related claims;

 

·                  the extent to which we acquire or in-license other products and technologies; and

 

·                  our ability to maintain and establish collaboration arrangements on favorable terms, if at all.

 

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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and government grants. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights of holders of ADSs or ordinary shares. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interest of holders of ADSs or ordinary shares. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or research programs or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or drug candidates that we would otherwise prefer to develop and market ourselves.

 

Contractual obligations and commitments

 

The following table summarizes our significant contractual obligations as of payment due date by period at September 30, 2016:

 

 

 

Payments Due by Period

 

 

 

Total

 

Less Than 1 
Year

 

1–3 Years

 

3–5 Years

 

More Than 
5 Years

 

 

 

(in thousands)

 

Contractual obligations

 

 

 

 

 

 

 

 

 

 

 

Operating lease commitments

 

$

9,430

 

$

2,540

 

$

4,313

 

$

2,577

 

 

Long-term debt obligation

 

$

18,030

 

 

$

18,030

 

 

 

Capital commitments

 

$

9,587

 

$

9,587

 

 

 

 

Total

 

$

37,047

 

$

12,127

 

$

22,343

 

$

2,577

 

 

 

Operating lease commitments

 

We lease office facilities in Beijing, PRC under non-cancelable operating leases expiring on different dates. Payments under operating leases are expensed on a straight-line basis over the periods of the respective leases, and the terms of the leases do not contain rent escalation, contingent rent, renewal or purchase options. The future minimum payments under these non-cancelable operating leases are summarized in the table above. In addition, we lease office facilities in the Greater Boston area and New Jersey, United States.

 

On April 10, 2016, we entered into a Lease Agreement with Suzhou Industrial Park Biotech Development Co., Ltd. for an approximately 11,000 square meter facility for research and manufacturing use in Suzhou, China. The lease commenced on April 18, 2016 and will expire on July 17, 2021. The initial rent, the payment of which commenced on July 18, 2016, is RMB 280,650 per month, plus service charges of RMB 65,485 per month and other fees for use of the premises, including water costs and electricity. The service charges will remain unchanged for the first three years and the increasing range thereafter will not exceed 5% of the previous yearly service charges. Suzhou Industrial Park Administrative Committee will pay our full monthly rent for the first three years and 50% of the monthly rent for the following two years. The lease contains customary covenants, insurance and indemnification obligations, and termination provisions.

 

Long-term debt obligation

 

On September 2, 2015, BeiGene Suzhou entered into a loan agreement with Suzhou Industrial Park Biotech Development Co., Ltd. and China Construction Bank, to borrow $18.0 million at a 7% fixed annual interest rate. As of September 30, 2016, we have drawn down $18.0 million, which is secured by BeiGene Suzhou’s future equipment purchases and our rights to a PRC patent on a drug candidate. The

 

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loan amounts of $9.0 million and $9.0 million are repayable on September 30, 2018 and 2019, respectively. As of September 30, 2016, the outstanding unpaid principal and interest of this bank loan was $18.0 million.

 

Capital commitments

 

We had capital commitments amounting to $9.6 million for the acquisition of property, plant and equipment as of September 30, 2016.

 

Other business agreements

 

We enter into agreements in the normal course of business with CROs and institutions to license intellectual property. We have not included these future payments in the table of contractual obligations above since the contracts are cancelable at any time by us with prior written notice.

 

Off-balance sheet arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.

 

Critical accounting policies and significant judgments and estimates

 

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the periods. We evaluate our estimates and judgments on an ongoing basis, including but not limited to, estimating the useful lives of long-lived assets, identifying separate accounting units and estimating the best estimate selling price of each deliverable in our revenue arrangements, assessing the impairment of long-lived assets, share-based compensation expenses, realizability of deferred tax assets and the fair value of warrant and option liabilities. We base our estimates on historical experience, known trends and events, contractual milestones and other various factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

There have been no material changes to our critical accounting policies from those described in the section titled “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.

 

Recent accounting pronouncements

 

See Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for information regarding new accounting pronouncements.

 

JOBS Act

 

Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, we will adopt new or revised accounting standards at the same time as other public companies that are not emerging growth companies. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an

 

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emerging growth company, we are exempt from Sections 14A(a) and (b) of the Exchange Act which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “golden parachutes;” and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer’s compensation to our median employee compensation. We also rely on an exemption from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and the rule requiring us to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will continue to remain an “emerging growth company” until the earliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of our initial public offering, (2) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1 billion, (3) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years, or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

 

Item 3.                                 Quantitative and Qualitative Disclosures About Market Risk.

 

Interest and credit risk

 

Financial instruments that are potentially subject to credit risk consist of cash and cash equivalents and short-term investments. The carrying amounts of cash and cash equivalents and short-term investments represent the maximum amount of loss due to credit risk. We had cash and cash equivalents of $17.9 million and $85.5 million and short-term investments of $82.6 million and $118.1 million at December 31, 2015 and September 30, 2016, respectively. At September 30, 2016, our cash and cash equivalents were deposited with various major reputable financial institutions located in the PRC and international financial institutions outside of the PRC. The deposits placed with these financial institutions are not protected by statutory or commercial insurance. In the event of bankruptcy of one of these financial institutions, we may be unlikely to claim our deposits back in full. We believe that these financial institutions are of high credit quality, and we continually monitor the credit worthiness of these financial institutions. At September 30, 2016, our short-term investments consisted primarily of high credit quality corporate fixed income bonds and U.S. Treasury securities. We believe that the corporate bonds and the U.S. Treasury securities are of high credit quality and will continually monitor the credit worthiness of these institutions.

 

The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significant increasing risk. Our primary exposure to market risk relates to fluctuations in the interest rates which are affected by changes in the general level of PRC and U.S. interest rates. Given the short-term nature of our cash equivalents, we believe that a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operation.

 

We do not believe that our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future investments will not be subject to adverse changes in market value.

 

Foreign currency exchange rate risk

 

We are exposed to foreign exchange risk arising from various currency exposures. Our functional currency is U.S. dollar, but a portion of our operating transactions and assets and liabilities are in other currencies, such as RMB, Australian dollar and Euro. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk.

 

RMB is not freely convertible into foreign currencies for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s

 

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political and economic conditions and China’s foreign exchange prices. From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For the RMB against U.S. dollars, there was depreciation of approximately 4.4% in the year ended December 31, 2015, and depreciation of approximately 2.1% in the nine months ended September 30, 2016. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purpose, appreciation of RMB against U.S. dollars would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares, strategic acquisitions or investments or other business purposes, appreciation of U.S. dollars against RMB would have a negative effect on the U.S. dollar amount available to us.

 

In addition, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings or losses.

 

Currency convertibility risk

 

A majority of our expenses and a significant portion of our assets and liabilities are denominated in RMB. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China, or PBOC. However, the unification of exchange rates does not imply that the RMB may be readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by the PBOC or other institutions require submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

 

Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

 

Item 4.                                 Controls and Procedures.

 

Evaluation of disclosure controls and procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Material weakness and remediation of material weakness

 

In connection with the audit of our condensed consolidated financial statements for the years ended December 31, 2013, 2014 and 2015, we identified a material weakness in our internal control over

 

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financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness related to having an insufficient number of financial reporting personnel with an appropriate level of knowledge, experience and training in application of GAAP and SEC rules and regulations commensurate with our reporting requirements. Prior to the completion of our initial public offering, we were a private company with limited accounting personnel to adequately execute our accounting processes and other supervisory resources with which to address our internal control over financial reporting.

 

We are implementing measures designed to improve our internal control over financial reporting to remediate this material weakness, including the following:

 

·                  hiring additional financial professionals with appropriate accounting and SEC reporting experience;

 

·                  increasing the number of qualified financial reporting personnel;

 

·                  improving the capabilities of existing financial reporting personnel through training and education in the accounting and reporting requirements under GAAP and SEC rules and regulations;

 

·                  developing, communicating and implementing an accounting policy manual for our financial reporting personnel for recurring transactions and period-end closing processes; and

 

·                  establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of our condensed consolidated financial statements and related disclosures.

 

The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring companies that file reports with the SEC to include a management report on such company’s internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm may be required to attest to our internal control over financial reporting. Management will be required to provide an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016. Our independent registered public accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company” under the JOBS Act. We are in the process of improving the internal control over financial reporting required to comply with this obligation. However, there is no guarantee that our efforts will result in management’s ability to conclude, or, if required, our independent registered public accounting firm to attest, that our internal control over financial reporting is effective as of December 31, 2016.

 

Changes in internal control over financial reporting

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.                                 Legal Proceedings.

 

From time to time, we may become involved in litigation relating to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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Item 1A.                        Risk Factors.

 

The following section includes the most significant factors that may adversely affect our business and operations. You should carefully consider the risks and uncertainties described below and all information contained in this Quarterly Report, including our financial statements and the related notes and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in the ADSs. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of the ADSs could decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

 

The risk factors denoted with a “*” are newly added or have been materially updated from our Annual Report.

 

Risks related to our financial position and need for additional capital

 

We are a globally focused biopharmaceutical company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

 

We are a globally focused biopharmaceutical company formed in October 2010. Our operations to date have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting preclinical studies and clinical trials of our current drug candidates, such as BGB-3111, BGB-A317, BGB-290 and BGB-283. We have not yet demonstrated ability to initiate or successfully complete large-scale, pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale drug, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. We have not yet obtained regulatory approval for, or demonstrated an ability to commercialize, any of our drug candidates. We have no products approved for commercial sale and have not generated any revenue from product sales. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.

 

We are focused on the discovery and development of innovative, molecularly targeted and immuno-oncology drugs for the treatment of cancers. Our limited operating history, particularly in light of the rapidly evolving cancer treatment field, may make it difficult to evaluate our current business and predict our future performance. Our short history makes any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving fields as we seek to transition to a company capable of supporting commercial activities. If we do not address these risks and difficulties successfully, our business will suffer.

 

*We have incurred net losses in each period since our inception and anticipate that we will continue to incur net losses for the foreseeable future.

 

Investment in pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that a drug candidate will fail to gain regulatory approval or become commercially viable. We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. We have not generated any revenue from product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2010. We reported a net loss of $14.0 million and $29.9 million, respectively, for the three and nine months ended September 30, 2015, and $35.5 million and $81.6 million, respectively, for the three and nine months ended September 30, 2016.  As of September 30, 2016, we had a deficit accumulated of $199.8 million. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

 

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We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our drug candidates, and begin to commercialize approved drugs, if any. Typically, it takes many years to develop one new drug from the time it is discovered to when it is available for treating patients. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, our ability to generate revenues and the timing and amount of milestones and other required payments to third parties in connection with our potential future arrangements with third parties. If any of our drug candidates fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our shareholders’ equity and working capital.

 

We expect our research and development expenses to continue to be significant in connection with our continued investment in our cancer biology platform and our ongoing and planned clinical trials for our drug candidates, such as BGB-3111, BGB-A317, BGB-290 and BGB-283. Furthermore, if we obtain regulatory approval for our drug candidates, we expect to incur increased sales and marketing expenses. In addition, we will incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have a material adverse effect on our shareholders’ deficit, financial position, cash flows and working capital.

 

We currently do not generate revenue from product sales and may never become profitable.

 

Our ability to generate revenue and become profitable depends upon our ability to successfully complete the development of, and obtain the necessary regulatory approvals for, our drug candidates, such as BGB-3111, BGB-A317, BGB-290 and BGB-283, as we do not currently have any drugs that are available for commercial sale. We expect to continue to incur substantial and increasing losses through the projected commercialization of our drug candidates. None of our drug candidates have been approved for marketing in the United States, the European Union, the People’s Republic of China, or PRC, or any other jurisdiction and may never receive such approval. Our ability to achieve revenue and profitability is dependent on our ability to complete the development of our drug candidates, obtain necessary regulatory approvals, and have our drugs manufactured and successfully marketed.

 

Even if we receive regulatory approval of our drug candidates for commercial sale, we do not know when they will generate revenue, if at all. Our ability to generate product sales revenue depends on a number of factors, including our ability to continue:

 

·                  completing research regarding, and non-clinical and clinical development of, our drug candidates;

 

·                  obtaining regulatory approvals and marketing authorizations for drug candidates for which we complete clinical trials;

 

·                  obtaining adequate reimbursement from third-party payors, including government payors;

 

·                  developing a sustainable and scalable manufacturing process for our drug candidates, including establishing and maintaining commercially viable supply relationships with third parties and establishing our own manufacturing capabilities and infrastructure;

 

·                  launching and commercializing drug candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;

 

·                  obtaining market acceptance of our drug candidates as viable treatment options;

 

·                  identifying, assessing, acquiring and/or developing new drug candidates;

 

·                  addressing any competing technological and market developments;

 

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·                  negotiating and maintaining favorable terms in any collaboration, licensing or other arrangements into which we may enter, such as our collaboration arrangements with Merck KGaA;

 

·                  maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and

 

·                  attracting, hiring and retaining qualified personnel.

 

In addition, because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we are required by the U.S. Food and Drug Administration; the China Food and Drug Administration; the European Medicines Agency, or EMA; or other comparable regulatory authorities to perform studies in addition to those that we currently anticipate. Even if our drug candidates are approved for commercial sale, we anticipate incurring significant costs associated with the commercial launch of these drugs.

 

Our ability to become and remain profitable depends on our ability to generate revenue. Even if we are able to generate revenues from the sale of our potential drugs, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business or continue our operations. Failure to become and remain profitable may adversely affect the market price of the ADSs and our ability to raise capital and continue operations.

 

*We will need to obtain additional financing to fund our operations, and if we are unable to obtain such financing, we may be unable to complete the development and commercialization of our primary drug candidates.

 

We have financed our operations with a combination of equity and debt offerings, contracts, and private and public grants. Through September 30, 2016, we raised approximately $170 million in private equity financing and $10 million in non-convertible debt financings. To date, we have received a total of $37 million in upfront payments and milestone payments through our collaboration arrangements with Merck KGaA for BGB-283 and BGB-290. On February 8, 2016, we completed our initial public offering of the ADSs and received net proceeds of $166.2 million, after deducting underwriting discount and offering expenses. Our drug candidates will require the completion of regulatory review, significant marketing efforts and substantial investment before they can provide us with any product sales revenue.

 

Our operations have consumed substantial amounts of cash since inception. Our operating activities used $23.1 million and $63.4 million of net cash during the nine months ended September 30, 2015 and 2016, respectively. We expect to continue to spend substantial amounts on drug discovery advancing the clinical development of our drug candidates, and launching and commercializing any drug candidates for which we receive regulatory approval, including building our own commercial organizations to address certain markets.

 

We will need to obtain additional financing to fund our future operations, including completing the development and commercialization of our primary drug candidates: BGB-3111, BGB-A317, BGB-290 and BGB-283. We will need to obtain additional financing to conduct additional clinical trials for the approval of our drug candidates if requested by regulatory bodies, and completing the development of any additional drug candidates we might discover. Moreover, our fixed expenses such as rent, interest expense and other contractual commitments are substantial and are expected to increase in the future.

 

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize

 

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our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including, but not limited to:

 

·                  the progress, timing, scope and costs of our clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;

 

·                  the outcome, timing and cost of regulatory approvals by the FDA, CFDA, EMA and comparable regulatory authorities, including the potential that the FDA, CFDA, EMA or comparable regulatory authorities may require that we perform more studies than those that we currently expect;

 

·                  the number and characteristics of drug candidates that we may in-license and develop;

 

·                  our ability to successfully commercialize our drug candidates;

 

·                  the amount of sales and other revenues from drug candidates that we may commercialize, if any, including the selling prices for such potential products and the availability of adequate third-party reimbursement;

 

·                  the amount and timing of the milestone and royalty payments we receive from our collaborators under our licensing arrangements, such as our collaboration with Merck KGaA;

 

·                  the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

·                  selling and marketing costs associated with our potential products, including the cost and timing of expanding our marketing and sales capabilities;

 

·                  the terms and timing of any potential future collaborations, licensing or other arrangements that we may establish;

 

·                  cash requirements of any future acquisitions and/or the development of other drug candidates;

 

·                  the costs of operating as a public company;

 

·                  the cost and timing of completion of commercial-scale outsourced manufacturing activities;

 

·                  the time and cost necessary to respond to technological and market developments; and

 

·                  the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

 

Until we can generate a sufficient amount of revenue, we may finance future cash needs through public or private equity offerings, license agreements, debt financings, collaborations, strategic alliances and marketing or distribution arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. General market conditions or the market price of the ADSs may not support capital raising transactions such as an additional public or private offering of the ADSs or other securities. In addition, our ability to raise additional capital may be dependent upon the ADSs being quoted on the NASDAQ or upon obtaining shareholder approval. There can be no assurance that we will be able to satisfy the criteria for continued listing on the NASDAQ or that we will be able to obtain shareholder approval if it is necessary. If adequate funds are not available, we may be required to delay or reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. In addition, if we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or drug candidates or to grant licenses on terms that may not be favorable to us.

 

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We believe that the net proceeds from our initial public offering, together with our existing cash and cash equivalents, will not be sufficient to enable us to complete all necessary global development or commercially launch our current drug candidates. Accordingly, we will require further funding through other public or private offerings, debt financing, collaboration and licensing arrangements or other sources. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. Our inability to obtain additional funding when we need it could seriously harm our business.

 

Raising additional capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.

 

We may seek additional funding through a combination of equity offerings, debt financings, collaborations and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of the ADSs or our ordinary shares. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of the ADSs to decline. In the event that we enter into collaborations or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights to technologies or drug candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable terms.

 

Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.

 

We incur portions of our expenses, and may in the future derive revenues, in currencies other than the U.S. dollar, in particular, the RMB and Australian dollars. As a result, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. For example, a significant portion of our clinical trial activities are conducted outside of the United States, and associated costs may be incurred in the local currency of the country in which the trial is being conducted, which costs could be subject to fluctuations in currency exchange rates. We currently do not engage in hedging transactions to protect against uncertainty in future exchange rates between particular foreign currencies and the U.S. dollar. A decline in the value of the U.S. dollar against currencies in countries in which we conduct clinical trials could have a negative impact on our research and development costs. We cannot predict the impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our financial condition, results of operations and cash flows.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC, Australia and other non-U.S. governments. Specifically in the PRC, on July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. In April 2012, the PRC government announced that it would allow more RMB exchange rate fluctuation. On August 11, 2015, China’s central bank executed a 2% devaluation in the RMB. Over the following two days, Chinese currency fell 3.5% against the dollar. However, it remains unclear what further fluctuations may occur or what impact this will have on the currency.

 

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It is difficult to predict how market forces or PRC, Australian, U.S. or other government policies may impact the exchange rate between the Australian dollar, RMB, U.S. dollar and other currencies in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. Substantially all of our revenues are denominated in U.S. dollars and our costs are denominated in U.S. dollars, Australian dollars and RMB, and a large portion of our financial assets and a significant portion of our debt is denominated in U.S. dollars. Any significant revaluation of the RMB may materially reduce any dividends payable on the ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount we would receive.

 

*Our investments are subject to risks that could result in losses.

 

We had cash and cash equivalents of $17.9 million and $85.5 million and short-term investments of $82.6 million and $118.1 million at December 31, 2015 and September 30, 2016, respectively. At September 30, 2016, our short-term investments mainly consisted of high credit quality corporate fixed income bonds and U.S. Treasury securities. On February 8, 2016, we completed our initial public offering of the ADSs and received net proceeds of $166.2 million, after deducting underwriting discount and offering expenses. We may invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment grade corporate bonds, including commercial paper and money market instruments, which may not yield a favorable return to our shareholders. All of these investments are subject to credit, liquidity, market and interest rate risk. Such risks, including the failure or severe financial distress of the financial institutions that hold our cash, cash equivalents and investments, may result in a loss of liquidity, impairment to our investments, realization of substantial future losses, or a complete loss of the investments in the long-term, which may have a material adverse effect on our business, results of operations, liquidity and financial condition. Our primary exposure to market risk relates to fluctuations in the interest rates of the PRC and the United States. In order to manage the risk to our investments, we maintain an investment policy that, among other things, limits the amount that we may invest in any one issue or any single issuer and requires us to only invest in high credit quality securities. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future investments will not be subject to adverse changes in market value.

 

Risks related to clinical development of our drug candidates

 

*We depend substantially on the success of our drug candidates, particularly BGB-3111, BGB-A317, BGB-290 and BGB-283, which are in clinical development. Clinical trials of our drug candidates may not be successful. If we are unable to commercialize our drug candidates, or experience significant delays in doing so, our business will be materially harmed.

 

Our business and the ability to generate revenue related to product sales, if ever, will depend on the successful development, regulatory approval and commercialization of our drug candidates for the treatment of patients with cancer, particularly BGB-3111, BGB-A317, BGB-290 and BGB-283, which are still in development, and other drugs we may develop. We have invested a significant portion of our efforts and financial resources in the development of our existing drug candidates. The success of our drug candidates, including BGB-3111, BGB-A317, BGB-290 and BGB-283, will depend on several factors, including:

 

·                  successful enrollment in, and completion of, preclinical studies and clinical trials;

 

·                  receipt of regulatory approvals from the FDA, CFDA, EMA and other comparable regulatory authorities for our drug candidates, including our companion diagnostics;

 

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·                  establishing commercial manufacturing capabilities, either by building facilities ourselves or making arrangements with third-party manufacturers;

 

·                  relying on third parties to conduct our clinical trials safely and efficiently;

 

·                  obtaining and maintaining patent, trade secret and other intellectual property protection and regulatory exclusivity;

 

·                  protecting our rights in our intellectual property;

 

·                  ensuring we do not infringe, misappropriate or otherwise violate the patent, trade secret or other intellectual property rights of third parties;

 

·                  launching commercial sales of our drug candidates, if and when approved;

 

·                  obtaining reimbursement from third-party payors for drug candidates, if and when approved;

 

·                  competition with other drug candidates and drugs;

 

·                  continued acceptable safety profile for our drug candidates following regulatory approval, if and when received; and

 

·                  obtaining sufficient supplies of any competitor drug products that may be necessary for use in clinical trials for evaluation of our drug candidates.

 

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays in our ability to obtain approval for and/or to successfully commercialize our drug candidates, which would materially harm our business and we may not be able to generate sufficient revenues and cash flows to continue our operations.

 

We may not be successful in our efforts to identify or discover additional drug candidates. Due to our limited resources and access to capital, we must and have in the past decided to prioritize development of certain drug candidates; these decisions may prove to have been wrong and may adversely affect our business.

 

Although we intend to explore other therapeutic opportunities with our cancer biology platform in addition to the drug candidates that we are currently developing, we may fail to identify other drug candidates for clinical development for a number of reasons. For example, our research methodology may be unsuccessful in identifying potential drug candidates or those we identify may be shown to have harmful side effects or other characteristics that make them unmarketable or unlikely to receive regulatory approval. Specifically, we have focused on developing our cancer biology platform, which enables us to test a large panel of tumor models for sensitivity to the drug candidates we generated, identify targets to pursue, identify drug-resistance mechanisms, explore combination strategies and regimens, and improve our understanding of the contributions of tumor micro, or macro-environment in cancer treatments. If our cancer biology platform fails to identify potential drug candidates, our business could be materially harmed.

 

Research programs to pursue the development of our drug candidates for additional indications and to identify new drug candidates and disease targets require substantial technical, financial and human resources whether or not we ultimately are successful. Our research programs may initially show promise in identifying potential indications and/or drug candidates, yet fail to yield results for clinical development for a number of reasons, including:

 

·                  the research methodology used may not be successful in identifying potential indications and/or drug candidates;

 

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·                  potential drug candidates may, after further study, be shown to have harmful adverse effects or other characteristics that indicate they are unlikely to be effective drugs; or

 

·                  it may take greater human and financial resources to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs than we will possess, thereby limiting our ability to diversify and expand our drug portfolio.

 

Because we have limited financial and managerial resources, we focus on research programs and drug candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other drug candidates or for other indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.

 

Accordingly, there can be no assurance that we will ever be able to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs, which could materially adversely affect our future growth and prospects. We may focus our efforts and resources on potential drug candidates or other potential programs that ultimately prove to be unsuccessful.

 

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

 

The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons, including:

 

·                  the size and nature of the patient population;

 

·                  the patient eligibility criteria defined in the protocol;

 

·                  the size of the study population required for analysis of the trial’s primary endpoints;

 

·                  the proximity of patients to trial sites;

 

·                  the design of the trial;

 

·                  our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

·                  competing clinical trials for similar therapies or other new therapeutics;

 

·                  clinicians’ and patients’ perceptions as to the potential advantages and side effects of the drug candidate being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating;

 

·                  our ability to obtain and maintain patient consents;

 

·                  the risk that patients enrolled in clinical trials will not complete a clinical trial; and

 

·                  the availability of approved therapies that are similar in mechanism to our drug candidates.

 

In addition, our clinical trials will compete with other clinical trials for drug candidates that are in the same therapeutic areas as our drug candidates, such as BGB-3111, BGB-A317, BGB-290 and BGB-283, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites.

 

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Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our drug candidates.

 

Some of our drug candidates represent a novel approach to cancer treatment that could result in delays in clinical development, heightened regulatory scrutiny, or delays in our ability to achieve regulatory approval or commercialization of our drug candidates.

 

Some of our drug candidates represent a departure from more commonly used methods for cancer treatment, and therefore represent a novel approach that carries inherent development risks. The need to further develop or modify in any way the protocols related to our drug candidates to demonstrate safety or efficacy may delay the clinical program, regulatory approval or commercialization, if approved. In addition, potential patients and their doctors may be inclined to use conventional standard-of-care treatments rather than enroll patients in any future clinical trial. This may have a material impact on our ability to generate revenues from our drug candidates. Further, given the novelty of our drug candidates, the end users and medical personnel may require a substantial amount of education and training.

 

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

 

Clinical testing is expensive and can take many years to complete, and its 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 our drug candidates may not be predictive of the results of later-stage clinical trials. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same drug candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, including genetic differences, patient adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. In the case of any trials we conduct, results may differ from earlier trials due to the larger number of clinical trial sites and additional countries and languages involved in such trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be favorable.

 

If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA, CFDA, EMA or other comparable regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our drug candidates.

 

Before obtaining regulatory approval for the sale of our drug candidates, such as BGB-3111, BGB-A317, BGB-290 and BGB-283, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our drug candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and successful interim results of a clinical trial do not necessarily predict successful final results.

 

We may experience numerous unexpected events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates, including:

 

·                  regulators, institutional review boards, or IRBs, or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

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·                  clinical trials of our drug candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs;

 

·                  the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment may be insufficient or slower than we anticipate or patients may drop out at a higher rate than we anticipate;

 

·                  our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

·                  we might have to suspend or terminate clinical trials of our drug candidates for various reasons, including a finding of a lack of clinical response or a finding that participants are being exposed to unacceptable health risks;

 

·                  regulators, IRBs or ethics committees may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

·                  the cost of clinical trials of our drug candidates may be greater than we anticipate;

 

·                  the supply or quality of our drug candidates, companion diagnostics or other materials necessary to conduct clinical trials of our drug candidates may be insufficient or inadequate; and

 

·                  our drug candidates may cause adverse events, have undesirable side effects or other unexpected characteristics, causing us or our investigators to suspend or terminate the trials.

 

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

 

·                  be delayed in obtaining regulatory approval for our drug candidates;

 

·                  not obtain regulatory approval at all;

 

·                  obtain approval for indications that are not as broad as intended;

 

·                  have the drug removed from the market after obtaining regulatory approval;

 

·                  be subject to additional post-marketing testing requirements;

 

·                  be subject to restrictions on how the drug is distributed or used; or

 

·                  be unable to obtain reimbursement for use of the drug.

 

Delays in testing or approvals may result in increases in our drug development costs. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all.

 

Significant clinical trial delays also could shorten any periods during which we have the exclusive right to commercialize our drug candidates or allow our competitors to bring drugs to market before we do and impair our ability to commercialize our drug candidates and may harm our business and results of operations.

 

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Risks related to obtaining regulatory approval for our drug candidates

 

The regulatory approval processes of the FDA, CFDA, EMA and other comparable regulatory authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our drug candidates, our business will be substantially harmed.

 

The time required to obtain approval by the FDA, CFDA, EMA and other comparable regulatory authorities is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a drug candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any drug candidate, and it is possible that none of our existing drug candidates or any drug candidates we may discover, in-license or acquire and seek to develop in the future will ever obtain regulatory approval.

 

Our drug candidates could fail to receive regulatory approval from the FDA, CFDA, EMA or a comparable regulatory authority for many reasons, including:

 

·                  disagreement with the design or implementation of our clinical trials;

 

·                  failure to demonstrate that a drug candidate is safe and effective or that a biologic drug candidate is safe, pure, and potent for its proposed indication;

 

·                  failure of clinical trial results to meet the level of statistical significance required for approval;

 

·                  failure to demonstrate that a drug candidate’s clinical and other benefits outweigh its safety risks;

 

·                  disagreement with our interpretation of data from preclinical studies or clinical trials;

 

·                  the insufficiency of data collected from clinical trials of our drug candidates to support the submission and filing of a new drug application, or NDA; biologics license application, or BLA; or other submission or to obtain regulatory approval;

 

·                  the FDA, CFDA, EMA or comparable regulatory authority’s finding of deficiencies related to the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; and

 

·                  changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.

 

The FDA, CFDA, EMA or a comparable regulatory authority may require more information, including additional preclinical or clinical data, to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a drug candidate with a label that is not desirable for the successful commercialization of that drug candidate. In addition, if our drug candidate produces undesirable side effects or safety issues, the FDA may require the establishment of a Risk Evaluation Mitigation Strategy, or REMS, or the CFDA, EMA or a comparable regulatory authority may require the establishment of a similar strategy, that may, for instance, restrict distribution of our drugs and impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm the commercial prospects of our drug candidates.

 

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Regulatory approval may be substantially delayed or may not be obtained for one or all of our drug candidates if regulatory authorities require additional time or studies to assess the safety and efficacy of our drug candidates.

 

We may be unable to initiate or complete development of our drug candidates, such as BGB-3111, BGB-A317, BGB-290 and BGB-283, on schedule, if at all. The timing for the completion of the studies for our drug candidates will require funding beyond the proceeds of our initial public offering. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of our drug candidates, we may not have or be able to obtain adequate funding to complete the necessary steps for approval for any or all of our drug candidates. Preclinical studies and clinical trials required to demonstrate the safety and efficacy of our drug candidates are time consuming and expensive and together take several years or more to complete. Delays in clinical trials, regulatory approvals or rejections of applications for regulatory approval in the United States, Australia, New Zealand, the PRC, Europe or other markets may result from many factors, including:

 

·                  our inability to obtain sufficient funds required for a clinical trial;

 

·                  regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;

 

·                  regulatory questions regarding interpretations of data and results and the emergence of new information regarding our drug candidates or other products;

 

·                  clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;

 

·                  failure to reach agreement with the FDA, CFDA, EMA or other regulators regarding the scope or design of our clinical trials;

 

·                  delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

 

·                  our inability to enroll a sufficient number of patients who meet the inclusion and exclusion criteria in a clinical trial;

 

·                  our inability to conduct a clinical trial in accordance with regulatory requirements or our clinical trial protocols;

 

·                  clinical sites and investigators deviating from a trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

·                  withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

 

·                  inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication;

 

·                  failure of our third-party clinical research organizations to satisfy their contractual duties or meet expected deadlines;

 

·                  delay or failure in adding new clinical trial sites;

 

·                  ambiguous or negative interim results, or results that are inconsistent with earlier results;

 

·                  unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding effectiveness of drug candidates during clinical trials;

 

·                  feedback from the FDA, CFDA, EMA, an IRB, data safety monitoring boards, or comparable entities, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol;

 

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·                  unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;

 

·                  decision by the FDA, CFDA, EMA, an IRB, comparable entities, or us, or recommendation by a data safety monitoring board or comparable regulatory entity, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

·                  failure to demonstrate a benefit from using a drug or biologic;

 

·                  lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions;

 

·                  our inability to reach agreements on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·                  our inability to obtain approval from IRBs or ethics committees to conduct clinical trials at their respective sites;

 

·                  manufacturing issues, including problems with manufacturing or timely obtaining from third parties sufficient quantities of a drug candidate for use in a clinical trial; and

 

·                  difficulty in maintaining contact with patients after treatment, resulting in incomplete data.

 

Changes in regulatory requirements and guidance may also occur, and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethics committees for re-examination, which may impact the costs, timing or successful completion of a clinical trial.

 

If we experience delays in the completion of, or the termination of, a clinical trial, of any of our drug candidates, the commercial prospects of our drug candidates will be harmed, and our ability to generate product sales revenues from any of those drug candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.

 

If we are required to conduct additional clinical trials or other studies with respect to any of our drug candidates beyond those that we initially contemplated, if we are unable to successfully complete our clinical trials or other studies or if the results of these studies are not positive or are only modestly positive, we may be delayed in obtaining regulatory approval for that drug candidate, we may not be able to obtain regulatory approval at all or we may obtain approval for indications that are not as broad as intended. Our drug development costs will also increase if we experience delays in testing or approvals, and we may not have sufficient funding to complete the testing and approval process. Significant clinical trial delays could allow our competitors to bring drugs to market before we do and impair our ability to commercialize our drugs, if and when approved. If any of this occurs, our business will be materially harmed.

 

Failure to successfully validate, develop and obtain regulatory approval for companion diagnostics could harm our drug development strategy.

 

As one of the key elements of our clinical development strategy, we seek to identify patient subsets within a disease category who may derive selective and meaningful benefit from the drug candidates we are developing. In collaboration with partners, we plan to develop companion diagnostics to help us to more accurately identify patients within a particular subset, both during our clinical trials and in connection with the commercialization of our drug candidates. Companion diagnostics are subject to regulation by the FDA, CFDA, EMA and other comparable regulatory authorities and require separate regulatory approval

 

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or clearance prior to commercialization. We do not develop companion diagnostics internally, and thus we are dependent on the sustained cooperation and effort of our third-party collaborators in developing and obtaining approval or clearance for these companion diagnostics. We and our collaborators may encounter difficulties in developing and obtaining approval or clearance of the companion diagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility or clinical validation. Any delay or failure by our collaborators to develop or obtain regulatory approval or clearance of the companion diagnostics could delay or prevent approval of our drug candidates. In addition, our collaborators may encounter production difficulties that could constrain the supply of the companion diagnostics, and both they and we may have difficulties gaining acceptance of the use of the companion diagnostics in the clinical community. A failure of such companion diagnostics to gain market acceptance would have an adverse effect on our ability to derive revenues from sales of our drugs. In addition, the diagnostic company with whom we contract may decide to discontinue selling or manufacturing the diagnostic we anticipate using in connection with development and commercialization of our drug candidates or our relationship with such diagnostic company may otherwise terminate. We may not be able to enter into arrangements with another diagnostic company to obtain supplies of an alternative diagnostic test for use in connection with the development and commercialization of our drug candidates or do so on commercially reasonable terms, which could adversely affect and/or delay the development or commercialization of our drug candidates.

 

*Our drug candidates may cause undesirable adverse events or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any regulatory approval.

 

Undesirable adverse events caused by our drug candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, CFDA, EMA or other comparable regulatory authority. Results of our trials could reveal a high and unacceptable severity or prevalence of adverse events. In such an event, our trials could be suspended or terminated and the FDA, CFDA, EMA or other comparable regulatory authorities could order us to cease further development of, or deny approval of, our drug candidates for any or all targeted indications. Undesirable adverse events caused by BGB-3111 may include, but are not limited to, neutropenia, petechiae, purpura (subcutaneous bleeding), bruising, rash, peripheral neuropathy, and fatigue. For example, undesirable adverse events caused by BGB-290 may include, but are not limited to, nausea, vomiting, diarrhea, lethargy, neutropenia, anemia, thrombocytopena, hypophosphataemia, and hot flush. Undesirable adverse events caused by BGB-283 may include, but are not limited to, thrombocytopenia, fatigue, rash, hand-foot syndrome, hypertension, and anorexia. Drug-related adverse events could affect patient recruitment or the ability of enrolled subjects to complete the trial, and could result in potential product liability claims. Any of these occurrences may harm our reputation, business, financial condition and prospects significantly.

 

Additionally if one or more of our drug candidates receives regulatory approval, and we or others later identify undesirable side effects caused by such drugs, a number of potentially significant negative consequences could result, including:

 

·                  we may suspend marketing of the drug;

 

·                  regulatory authorities may withdraw approvals or revoke licenses of the drug;

 

·                  regulatory authorities may require additional warnings on the label;

 

·                  we may be required to develop an REMS for the drug or, if an REMS is already in place, to incorporate additional requirements under the REMS, or to develop a similar strategy as required by a comparable regulatory authority;

 

·                  we may be required to conduct post-market studies;

 

·                  we could be sued and held liable for harm caused to subjects or patients; and

 

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·                  our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug candidate, if approved, and could significantly harm our business, results of operations and prospects.

 

Further, combination therapy, such as using our internally discovered drug candidates as well as third-party agents, involves unique adverse events that could be exacerbated compared to adverse events from monotherapies. These types of adverse events could be caused by our drug candidates and could also cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, CFDA, EMA or other comparable regulatory authority. Results of our trials could reveal a high and unacceptable severity or prevalence of adverse events.

 

A Fast Track Designation by the FDA, even if granted for any of our drug candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our drug candidates will receive regulatory approval.

 

We do not currently have Fast Track Designation for any of our drug candidates but may seek such designation in the future. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for that condition, the drug sponsor may apply for FDA Fast Track Designation. The FDA has broad discretion whether or not to grant this designation. Even if we believe a particular drug candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw a Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program. Many drugs that have received Fast Track Designation have failed to obtain approval from the FDA.

 

A Breakthrough Therapy Designation by the FDA, even if granted for any of our drug candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our drug candidates will receive regulatory approval.

 

We do not currently have Breakthrough Therapy Designation for any of our drug candidates but may seek it in the future. A Breakthrough Therapy is defined as a drug 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 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 that have been designated as Breakthrough Therapies, interaction and communication between the FDA and the sponsor can help to identify the most efficient path for development.

 

Designation as a Breakthrough Therapy is within the discretion of the FDA. Accordingly, even if we believe, after completing early clinical trials, that one of our drug candidates meets the criteria for designation as a Breakthrough Therapy, the FDA may disagree and instead decide not to grant that designation. In any event, the receipt of a Breakthrough Therapy designation for a drug candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our drug candidates qualify as Breakthrough Therapies, the FDA may later decide that such drug candidates no longer meet the conditions for qualification.

 

*We may seek orphan drug exclusivity for some of our drug candidates, and we may be unsuccessful.

 

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is

 

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generally defined as a disease with a patient population of fewer than 200,000 individuals in the United States, or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that costs of research and development of the product for the indication can be recovered by sales of the product in the United States. BGB-3111 received orphan drug designation from the FDA for chronic lymphocytic leukemia, mantle cell lymphoma and Waldenström’s macroglobulinemia in 2016.

 

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

 

Even if we obtain orphan drug exclusivity for a drug candidate, that exclusivity may not effectively protect the drug candidate from competition because different drugs can be approved for the same condition and the same drugs can be approved for a different condition but used off-label for any orphan indication we may obtain. Even after an orphan drug is approved, the FDA can subsequently approve a drug that is otherwise the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

 

*Even if we receive regulatory approval for our drug candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our drug candidates.

 

If our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States and requirements of comparable regulatory authorities.

 

Manufacturers and manufacturers’ facilities are required to comply with extensive FDA, CFDA, EMA and comparable regulatory authority, requirements, including, in the United States, ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practice, or cGMP, regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA or BLA, other marketing application, and previous responses to inspection observations. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

 

Any regulatory approvals that we receive for our drug candidates may be subject to limitations on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the drug candidate. The FDA may also require a REMS program as a condition of approval of our drug candidates, which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA, CFDA, EMA or a comparable regulatory authority approves our drug candidates, we will have to comply with requirements including, for example, submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and Good Clinical Practice, or GCPs, for any clinical trials that we conduct post-approval.

 

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The FDA may seek to impose a consent decree or withdraw marketing approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the drug reaches the market. Later discovery of previously unknown problems with our drug candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

·                  restrictions on the marketing or manufacturing of our drugs, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

·                  fines, untitled or warning letters, or holds on clinical trials;

 

·                  refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;

 

·                  product seizure or detention, or refusal to permit the import or export of our drug candidates; and

 

·                  injunctions or the imposition of civil or criminal penalties.

 

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for their approved indications and for use in accordance with the provisions of the approved label. The FDA, CFDA, EMA and other regulatory authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. The policies of the FDA, CFDA, EMA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any regulatory approval that we may have obtained and we may not achieve or sustain profitability.

 

In addition, if we were able to obtain accelerated approval of any of our drug candidates, the FDA would require us to conduct a confirmatory study to verify the predicted clinical benefit and additional safety studies. Other comparable regulatory authorities outside the United States, such as the CFDA or EMA, may have similar requirements. The results from the confirmatory study may not support the clinical benefit, which would result in the approval being withdrawn. While operating under accelerated approval, we will be subject to certain restrictions that we would not be subject to upon receiving regular approval.

 

Risks related to commercialization of our drug candidates

 

*If we are not able to obtain, or experience delays in obtaining, required regulatory approvals, we will not be able to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.

 

We currently do not have any drug candidates that have gained regulatory approval for sale in the United States, European Union, China or any other country, and we cannot guarantee that we will ever have marketable drugs. Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize drug candidates in a timely manner. We cannot commercialize drug candidates without first obtaining regulatory approval to market each drug from the FDA, CFDA, EMA and comparable regulatory authorities. BGB-3111, BGB-A317, BGB-290 and BGB-283 are each currently undergoing clinical trials. We cannot predict whether these trials and future trials will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.

 

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Before obtaining regulatory approvals for the commercial sale of any drug candidate for a target indication, we must demonstrate in preclinical studies and well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA, that the drug candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. In the United States, we have not submitted an NDA or BLA for any of our drug candidates. An NDA or BLA must include extensive preclinical and clinical data and supporting information to establish, in the case of an NDA, the drug candidate’s safety and effectiveness or, in the case of a BLA, safety, purity and potency for each desired indication. The NDA or BLA must also include significant information regarding the chemistry, manufacturing and controls for the drug. Obtaining approval of an NDA or BLA is a lengthy, expensive and uncertain process, and approval may not be obtained. If we submit an NDA or BLA to the FDA, the FDA decides whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA.

 

Regulatory authorities outside of the United States, such as the EMA or regulatory authorities in Australia and New Zealand and in emerging markets, such as in the PRC, also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our drug candidates. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking non-U.S. regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time consuming. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain non-U.S. regulatory approvals on a timely basis, if at all.

 

Specifically, in China, the CFDA categorizes domestically manufactured innovative drug applications as Category 1 and imported innovative drug applications as Category 3. To date, most of local companies’ domestically manufactured drug applications are filed in Category 1 if the drug has not already been approved by the FDA or EMA. Most multinational pharmaceutical companies’ drug registration applications are filed in Category 3. These two categories have distinct approval pathways, as described in the section of our Annual Report titled “Item 1—Business—Regulatory Framework and Structural Advantages of Being a China-Based Research and Development Organization.” We believe the local drug registration pathway, Category 1, is a faster and more efficient path to approval in the Chinese market than Category 3. Companies are required to obtain Clinical Trial Application approval before conducting clinical trials in China. This registration pathway has a fast track review and approval mechanism if the drug candidate is on a national priority list. The imported drug registration pathway, Category 3, is more complex and is evolving. China Category 3 registration applications may only be submitted after a drug has obtained an NDA approval and received the Certificate of Pharmaceutical Product granted by a major drug regulatory authority, such as the FDA or EMA.

 

Further, in August 2015, the Chinese State Council, or State Council, issued a statement, Opinions on reforming the review and approval process for pharmaceutical products and medical devices, that contained several potential policy changes that could benefit the pharmaceutical industry:

 

·                  A plan to accelerate innovative drug approval with a special review and approval process, with a focus on areas of high unmet medical needs, including drugs for HIV, cancer, serious infectious diseases and orphan diseases, drugs on national priority lists.

 

·                  A plan to adopt a policy which would allow companies to act as the marketing authorization holder and to hire contract manufacturing organizations to produce drug products.

 

·                  A plan to improve the review and approval of clinical trials, and to allow companies to conduct clinical trials at the same time as they are being conducted in other countries and encourage local clinical trial organizations to participate in international multi-center clinical trials.

 

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In November 2015, the CFDA released the Circular Concerning Several Policies on Drug Registration Review and Approval, which further clarified the following policies potentially simplifying and accelerating the approval process of clinical trials:

 

·                  A one-time umbrella approval procedure allowing approval of all phases of a new drug’s clinical trials at once, rather than the current phase-by-phase approval procedure, will be adopted for new drugs’ clinical trial applications.

 

·                  A fast track drug registration or clinical trial approval pathway will be available for the following applications: (1) registration of innovative new drugs treating HIV, cancer, serious infectious diseases and orphan diseases; (2) registration of pediatric drugs; (3) registration of geriatric drugs and drugs treating China-prevalent diseases in elders; (4) registration of drugs sponsored by national science and technology grants; (5) registration of innovative drugs using advanced technology, using innovative treatment methods, or having distinctive clinical benefits; (6) registration of foreign innovative drugs to be manufactured locally in China; and (7) concurrent applications for new drug clinical trials which are already approved in the United States or European Union or concurrent drug registration applications for drugs which have applied for marketing authorization and passed onsite inspections in the United States or European Union and are manufactured using the same production line in China; and (8) clinical trial applications for drugs with urgent clinical need and patent expiry within three years, and marketing authorization applications for drugs with urgent clinical need and patent expiry within one year.

 

In February 2016, the CFDA released the Opinions on Priority Review and Approval for Resolving Drug Registration Applications Backlog, which further clarified the following policies potentially accelerating the approval process of certain clinical trials or drug registrations which may benefit us:

 

·                  A fast track drug registration or clinical trial approval pathway will be available for the following drug registration applications with distinctive clinical benefits: (1) registration application of innovative drugs not sold within or outside China; (2) registration application of innovative drug transferred to be manufactured in China; (3) registration application of drugs using advanced technology, using innovative treatment methods, or having distinctive treatment advantages; (4) clinical trial applications for drugs with patent expiry within three years, and marketing authorization applications for drugs with patent expiry within one year; (5) concurrent applications for new drug clinical trials which are already approved in the United States or European Union, or concurrent drug registration applications for drugs which have applied for marketing authorization and passed onsite inspections in the United States or European Union and are manufactured using the same production line in China; (6) traditional Chinese medicines (including ethnic medicines) with clear clinical position in prevention and treatment of serious diseases; and (7) registration application of new drugs sponsored by national key technology projects or national key development projects.

 

·                  A fast track drug registration approval pathway will be available for drug registration applications with distinctive clinical benefits for prevention and treatment of HIV, phthisis, viral hepatitis, orphan diseases, malignant neoplasms, children’s diseases, and geriatrics.

 

In March 2016, the CFDA released a circular, CFDA Announcement on Reforms of Pharmaceutical Registration Classification, which outlined the re-classifications of drug applications. Under the new categorization, innovative drugs that have not been marketing either within or outside China remain Category 1, while drugs marketed outside China seeking marketing approval in China are now Category 5.

 

However, since these laws and regulations in relation to such above-mentioned fast track clinical trial approval and drug registration pathway, and were newly issued, there remains uncertainty with respect to their implementation. We expect that the CFDA review and approval process will improve over time. However, how and when this approval process will be changed is still subject to further policies to be issued by the CFDA and is currently uncertain.

 

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The process to develop, obtain regulatory approval for and commercialize drug candidates is long, complex and costly both inside and outside the United States and China, and approval is never guaranteed. Even if our drug candidates were to successfully obtain approval from the regulatory authorities, any approval might significantly limit the approved indications for use, or require that precautions, contraindications or warnings be included on the product labeling, or require expensive and time-consuming post-approval clinical studies or surveillance as conditions of approval. Following any approval for commercial sale of our drug candidates, certain changes to the drug, such as changes in manufacturing processes and additional labeling claims, may be subject to additional review and approval by the FDA, CFDA and EMA and comparable regulatory authorities. Also, regulatory approval for any of our drug candidates may be withdrawn. If we are unable to obtain regulatory approval for our drug candidates in one or more jurisdictions, or any approval contains significant limitations, our target market will be reduced and our ability to realize the full market potential of our drug candidates will be harmed. Furthermore, we may not be able to obtain sufficient funding or generate sufficient revenue and cash flows to continue the development of any other drug candidate in the future.

 

A Category 1 designation by the CFDA may be revoked or may not be granted for any of our drug candidates or may not lead to faster development or regulatory review or approval process and does not increase the likelihood that our drug candidates will receive regulatory approval.

 

We believe the local drug registration pathway, Category 1, is a faster and more efficient path to approval in the Chinese market than the drug registration pathway for imported drugs under Category 3. Companies are required to obtain Clinical Trial Application approval before conducting clinical trials in China. This registration pathway has a fast track review and approval mechanism if the drug candidate is on a national priority list. Imported drug candidates under Category 3 cannot qualify for the national priority list to benefit from fast track reviews. Our drug candidates are all new therapeutic agents and we have built both research and development, clinical trial capacities, and commercial manufacturing facilities in China. As a result, we expect all of our current drug candidates to fall within the Category 1 application process, but cannot be sure we will be granted or be able to maintain Category 1 designation.

 

Even if any of our drug candidates receives regulatory approval, they may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

 

If any of our drug candidates receives regulatory approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments like chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these treatments to the exclusion of our drug candidates, such as BGB-A317, BGB-3111, BGB-290 and BGB-283. In addition, physicians, patients and third-party payors may prefer other novel products to ours. If our drug candidates do not achieve an adequate level of acceptance, we may not generate significant product sales revenues and we may not become profitable. The degree of market acceptance of our drug candidates, if approved for commercial sale, will depend on a number of factors, including:

 

·</